f10k2013_chinaauto.htm

10-K 1 f10k2013_chinaauto.htm ANNUAL REPORT f10k2013_chinaauto.htm

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

x Annual Report PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2013

o 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.)

Floor 1 FTZ International Auto Mall 86 Tianbao Avenue, Free Trade Zone

Tianjin Province, The People’s Republic of China 300461

(Address of Principal Executive Offices, Zip Code)

(86) 22-2576-2771

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:	Common Stock, par value $0.001 per share traded on the NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act:	None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x

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 x No ¨

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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 x

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

As of June 30, 2013, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $5,790,899 based on the closing price as reported on the NASDAQ Global Market.

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 April 7, 2014
Common Stock, $.001 par value per share		4,034,394 shares

PART I

ITEM 1.

BUSINESS.

Introduction

On November 10, 2008 (the “Closing”), China Auto Logistics Inc. (formerly known as Fresh Ideas Media, Inc.) (“USCo” or the “Company”)) entered into a Share Exchange Agreement (the “Exchange Agreement”) with Ever Auspicious International Limited, a Hong Kong company (“HKCo”) and Bright Praise Enterprises Limited, a British Virgin Islands company and the sole shareholder of HKCo (the “Stockholder”), pursuant to which USCo acquired all of the issued and outstanding capital stock of HKCo, an inactive holding company, from the Stockholder in exchange for 1,950,000 (pre reverse split of 11,700,000) newly-issued shares of USCo’s common stock, representing approximately 64.64% of USCo’s issued and outstanding common stock (the “Exchange”). The closing of the Exchange Agreement occurred on the same day, immediately following the cancellation of an aggregate of 189,167 (pre reverse split of 1,135,000) shares of USCo’s common stock held by Phillip E. Ray and Ruth Daily, USCo’s principal stockholders immediately prior to the Closing, which was a condition of the Closing. As a result of the Exchange, HKCo became USCo’s wholly owned subsidiary. USCo’s primary business operations are those of HKCo. Shortly after the closing, USCo changed its name to China Auto Logistics Inc. (the “Company”).

On November 1, 2010, the Company acquired all of the outstanding shares of Chongqing Qizhong Technology Development Co., Ltd for $4.47 million which consisted of $1.01 million in cash, net of cash acquired and the issuance of 177,238 (pre reverse split of 1,063,427) shares of common stock valued at $3.46 million. During 2012, the Company deregistered the wholly owned subsidiaries of Qizhong, including Beijing Goodcar, Xiamen Goodcar, Wuhan Youlu, Chengdu Haoche, Tianjin Goodcar and Kaizhi. All of these subsidiaries’ operations have been assumed by their parent company, Qizhong. The Company disposed of a majority of the assets of these subsidiaries and transferred the remaining net assets to our other subsidiaries. During 2013, the Company deregistered Qizhong and completely discontinued its operations.

As discussed in greater detail below in “History and Organizational Structure,” in November 2013 the Company acquired Tianjin Zhonghe Auto Sales Service Co., Ltd. (“Zhonghe”), which owns and operates a 26,000 square meter automobile mall facility on a 68,000 square meter land parcel located in the Tianjin Airport Economic Area (the “Airport International Auto Mall”). Upon completion of the acquisition of Zhonghe, the Company entered into a joint venture, Tianjin Car King Used Car Trading Company Ltd. (“Car King Tianjin”) with Car King (China) Used Car Trading Co., Ltd. (“Car King China”) to operate a used car business at the Airport International Auto Mall.

The following is disclosure regarding the Company, its wholly owned and majority owned operating subsidiaries, including Tianjin Binhai Shisheng Trading Group Co., Ltd., (“Shisheng”) Tianjin Hengjia Port Logistics Corp. (“Hengjia”), Tianjin Ganghui Information Technology Corp. (“Ganghui”), Tianjin Zhengji International Trading Corp. (“Zhengji”) and Zhonghe.

During 2012 and 2013, the Company deregistered Chongqing Qizhong Technology Co., Ltd. (“Qizhong”), Beijing Goodcar Technology Development Co., Ltd. (“Beijing Goodcar”), Xiamen Goodcar Network Technology Co., Ltd. (“Xiamen Goodcar”), Wuhan Youlu Network Technology Co., Ltd. (“Wuhan Youlu”), Chengdu Haoche Technology Development Co., Ltd (“Chengdu Haoche”), Tianjin Goodcar Technology Development Co., Ltd. (“Tianjin Goodcar”) and Chongqing Kaizhi Technology Co., Ltd. (“Kaizhi”), and discontinued their operations.

Each of these subsidiaries is formed under the laws of the People’s Republic of China (the “PRC” or “China”) and conducts business in the PRC.

Except as otherwise indicated by the context, references in this report to “we,” “us,” “our,” or the “Company” are to the consolidated business of the Company, Shisheng, Hengjia, Ganghui, Zhengji, Zhonghe, Qizhong, Beijing Goodcar, Xiamen Goodcar, Wuhan Youlu, Chengdu Haoche, Tianjin Goodcar and Kaizhi, except such terms, when used with reference to the audited consolidated financial statements and related notes contained elsewhere in this report or “Management’s Discussion and Analysis of Financial Condition and Results of Operations” Section, are to the consolidated business of Shisheng, Hengjia, Ganghui, Zhengji, Zhonghe, Qizhong, Beijing Goodcar, Xiamen Goodcar, Wuhan Youlu, Chengdu Haoche, Tianjin Goodcar and Kaizhi.

General

Our primary business is to provide a high quality comprehensive imported automobile sales and trading service and a web-based automobile sales and trading information platform to our customers. Shisheng, together with its majority owned subsidiaries Zhengji, Hengjia and Zhonghe, sells imported automobiles (“Sales of Automobiles”), which consisted of approximately 98% of our revenue generated in the last full fiscal year. Additionally, Shisheng provides customized services such as financing services (“Financing Services”), airport auto mall automotive services (“Airport Auto Mall Automotive Services”), and management services to auto mall operators (“Auto Mall Management Services”); provides, through its majority owned subsidiaries Hengjia and Ganghui, customs clearance, storage, nationwide delivery services, provision of information and discounted services relating to automobiles (“Automobile Value Added Services”) to imported automobile distributors and agents as well as individual customers in China; operates, through its majority owned subsidiaries Ganghui and Hengjia, two websites which provide subscribers with up to date sales and trading information for imported and domestically manufactured automobiles and information about automobiles and auto-related products and service (“Web-based Advertising Services”); and, through its wholly owned subsidiary Zhonghe, provides a used car business and other automotive services at the Airport International Auto Mall. Our mission is to be a one-stop shop for our customers in providing valuable pre- and post-sale services and information for imported and domestically manufactured automobiles.

We are currently the only one-stop service provider in Tianjin for Financing Services and Automobile Value Added Services. We also offer two websites: (a) www.at160.com (formerly www.1365car.com), which provides quotes and other information on domestically manufactured automobiles in Tianjin and (b) www.at188.com, which provides information on imported automobiles for the industry and individuals and boasts a fee-based membership of more than 90% of the automobile dealers and agents in Tianjin.

History and Organizational Structure

In September 1995, Shisheng was founded by Mr. Tong Shiping and his family as a private company under the name “Tianjin Tariff-Free Zone Shisheng Property Management Corp.” Its core business was selling the domestically manufactured automobile model CHARADE, which had 10% of the automobile market share in China between 1995 and 2000. With the increased popularity of imported cars and the maturation of the Internet, Shisheng switched its core business to the sale of imported automobiles and was subsequently renamed “Tianjin Shisheng Investment Group Co. Ltd.”

In August 2001, Shisheng formed Ganghui to provide web-based, real-time information on imported automobiles. Ganghui was 80% owned by Shisheng and 20% was owned by Bian Guiying.

In September 2003, Shisheng formed Hengjia to provide Financing Services and Automobile Value Added Services to wholesalers and distributors in the imported vehicle sales and trading industry. Hengjia is 80% owned by Shisheng, with the remainder of Hengjia’s equity interest owned by Yang Jitian, Cheng Beiting, and Qian Lige.

In February 2005, Shisheng and three other founders formed Zhengji to enhance our presence in the imported automobile sales and trading industry. In January 2007, Shisheng injected additional capital of $1,024,498 (equivalent to RMB 8,000,000) into Zhengji; consequently, Shisheng’s equity interest in Zhengji increased from 32% to 86.4%, and Zhengji’s financial results were consolidated into those of Shisheng effective January 1, 2007. The remainder of Zhengji’s equity interests was owned by Yang Bin (a former Senior Vice President and director of the Company), Qian Shuqing and Zhou Shanglan.

On October 17, 2007, HKCo, a wholly owned subsidiary of Bright Praise Enterprises Limited, was incorporated in Hong Kong to act as a holding company for Shisheng. On November 1, 2007, HKCo entered into a Share Exchange Agreement with Cheng Weihong, Xia Qiming, and Qian Yuxi (collectively, the “Sellers”), pursuant to which the Sellers transferred their interest in Shisheng to HKCo for an aggregate purchase price of $12,067,254 (RMB 95,000,000). As a result of this transaction, HKCo owns all of the capital stock of Shisheng. In connection with this transaction, Shisheng changed its name from “Tianjin Shisheng Investment Group Co. Ltd.” to “Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd.”

On July 23, 2009, Shisheng entered into Share Transfer Agreements to acquire additional ownership interests from other noncontrolling interest shareholders to increase its ownership interests in Ganghui, Hengjia and Zhengji to 98% each for an aggregate purchase price of $444,120.

Bright Praise Enterprises Limited is 100% owned by Mr. Choi Chun Leung Robert as trustee for the benefit of Tong Shiping (the Company’s President and CEO) and Cheng Weihong (a director of the Company and the wife of Mr. Tong). Mr. Choi is not involved in the management of Shisheng.

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, together with its wholly owned subsidiaries, Beijing Goodcar, Xiamen Goodcar, Wuhan Youlu, Chengdu Haoche, Tianjin Goodcar, Kaizhi, (collectively, “Goodcar”) 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.

On November 22, 2013, the Company, through its wholly-owned subsidiary, Zhonghe, entered into a Cooperation Framework Agreement with Car King China, with respect to the establishment of Car King Tianjin, a joint venture that will own and operate a used car business. The establishment of the joint venture was contingent upon the successful completion by the Company of the acquisition of Zhonghe which owns the Airport International Auto Mall, where the used car business will be operated. Upon the acquisition of Zhonghe on November 30, 2013, the joint venture was established in accordance with the terms of the Cooperation Framework Agreement. Pursuant to the terms of the Articles of Association of Car King Tianjin, Zhonghe and Car King China will make capital contributions totaling RMB 8,000,000 and RMB 12,000,000, respectively, to Car King Tianjin, which will have total registered capital of RMB 20,000,000. Prior to being acquired by the Company, Zhonghe made an initial capital contribution of RMB 4,000,000 to Car King Tianjin in November 2013. The Company is entitled to 40% of Car King Tianjin’s net profit or loss.

On November 30, 2013, Shisheng signed the Auto Mall Acquisition Agreement with Hezhong (Tianjin) International Development Ltd. Co. (“Hezhong”) to purchase 100% of the equity of Zhonghe, which owns and operates the Airport International Auto Mall. Under the terms of the Auto Mall Acquisition Agreement, Shisheng will pay RMB 559,768,000 (approximately $91.4 million) to Hezhong, in four annual installments with an annualized rate of interest of 6%. The initial payment of RMB 240,000,000 (approximately $39.2 million) was paid within 5 business days after the signing of the Agreement. Upon the payment by Shisheng of this first installment, Hezhong transferred control of Zhonghe to Shisheng. Failure by Shisheng to pay the remaining installments may result in the termination of the Auto Mall Acquisition Agreement, as well as a penalty of 10% of the total transfer price.

Industry Overview

China’s auto industry growth has been driven by rising domestic demand stemming from rising incomes and expanding middle and upper-middle classes. For the middle and upper-middle classes, automobiles serve not only as modes of transportation but also as status symbols. As a result, imported automobiles, particularly luxury automobiles like Mercedes Benz, BMW, Lexus and Land Rover, are in high demand. The expansion of China’s roads and highway network, coupled with the expanding middle and upper-middle classes, are expected to lead to robust auto sales in the years to come.

In November 2001, China became a member of the World Trade Organization (the “WTO”). Due to the Chinese government’s trade restrictions, imported automobiles did not flood into the Chinese market, thereby creating an opportunity for the development and growth of the domestic automobile manufacturing industry. The result has been a steady increase in the sales of Chinese manufactured automobiles, not only to the domestic market, but also into the international market.

China experienced significant economic growth and overtook the US as the world’s largest automobile market in 2011, despite challenging global economic conditions that have had a significant negative impact on the global automobile industry. According to data issued by the China Association of Automobile Manufacturers, China’s automobile sales volumes for passenger cars were 17.9 million units in 2013, representing a growth of 15.8% over 2012. Passenger cars include sedans, multipurpose vehicles and sport-utility vehicles. Foreign brands (including both imported and domestically manufactured automobiles) continued to show growth in 2013 with a growth rate of 18.99% over 2012. China’s foreign brand passenger automobile sales volume reached 10.7 million units in 2013.

Our Competitive Strengths

We are committed to keeping our competitive edge by constantly evaluating and responding to market demand and providing new products and services. Our goals are to establish successful and long-term partnerships with our customers, employees and suppliers and to provide high quality services and products. In particular, we believe the following strengths differentiate our business:

●

We are headquartered in Tianjin, which is the largest port city among the top 5 port cities in China for imported automobiles. Tianjin has a strong established presence in the imported automobile market in China, which provides us with first-hand knowledge of product information and developing industry trends.

●

We have a unique business model that combines Sales of Automobiles, Financing Services, Automobile Value Added Services, an Internet-based information platform, Airport Auto Mall Automotive Service, and Auto Mall Management Services, which enhances our ability to be a one-stop service provider for all of our customers’ needs with respect to imported automobiles in the PRC. On March 14, 2014, the Company announced that the Cooperation Agreement dated March 1, 2013, by and between the Company and Tianjin Prominent Hero International Logistics Co., Ltd, to manage the International Auto Mall in Tianjin, China, had not been renewed. As a result, the Company can better allocate our resources to manage our other segments including the Airport Auto Mall Automotive Services segment that the Company has recently entered into following the acquisition of the Airport International Auto Mall and the creation of Car King Tianjin.

●	We have continued to grow and maintain a referral network with all major automobile distributors and agents in the PRC.

●

We maintain close relationships with many major commercial banks in the PRC, including Agricultural Bank of China, China Construction Bank, Pudong Development Bank, China Merchants Bank, China Zheshang Bank, Industrial and Commercial Bank of China, Shengjing Bank and China Minsheng Bank, which give us a competitive advantage over our competitors in providing Financing Services. As of April 7, 2014, the Company had aggregate credit lines of $159 million (RMB970 million) with its banks.

●	Our key personnel each have more than ten years of Chinese automobile industry experience.

Our Growth Strategy

We intend to pursue the following key elements to our growth strategy:

●

Create New Services. Through the acquisition of Zhonghe and the establishment of Car King Tianjin in November 2013, we will enter into the used car sales market in 2014. We believe that there is a strong market for used car sales in China and this joint venture will provide us with opportunities for long-term growth. We are also considering expanding into the retail automobile sales market, which may generate higher overall gross margins than our current service offerings, by selling imported automobiles out of the Airport International Auto Mall.

●

Emphasize Service and Support. We will continue to build on our menu of established business offerings as a clear and viable alternative to price-only selling. We will also aim to expand our existing banking relationships and explore other cooperative relationships with major commercial banks to increase our lines of credit to provide additional Financing Services to our customers.

●

Build a Relationship-Oriented Business. We have a history of building long-term relationships with clients rather than focusing on single-transactions. To that end, we aim to capitalize on our existing client base by establishing a national automobile dealer network for faster information exchange and closer coordination. We will also continue to place an emphasis on obtaining authorized agent licenses with large international automobile manufacturers.

●	Build Brand Recognition. We will build brand name recognition through diverse marketing channels such as online advertising, public relations and trade-show participation.

Our Business Lines and Products

Sale of Automobiles

We conduct our sales operations of imported automobiles primarily through Shisheng, Hengjia, Zhengji and Zhonghe. We are a general agent and wholesaler authorized by the Chinese government to import vehicles into the PRC. We sell our vehicles to authorized dealers like Ford or Lexus, as they are not able to import all models directly, free traders or wholesalers located in inland China or non-port cities and individual customers. We have the core competencies within our network to sell all makes and models of imported vehicles. Our sales network penetrates to agents and dealers in more than 100 cities. We have close working relationships with some of the largest automobile dealers in China.

Our revenues from the sale of imported automobiles and related activities were $209.8 million for fiscal year 2009 (97.52% of all revenues), $248.0 million for fiscal year 2010 (96.03% of all revenues), $439.0 million for fiscal year 2011 (97.08% of all revenues), $581.2 million for fiscal year 2012 (98.30% of all revenues), and $450,143,413 for the fiscal year 2013 (98.03%) representing a 22.56% decrease from the prior fiscal year.

Financing Services

Many of our customers, including both authorized agents and general dealers, contend with a shortage of working capital. The imported automobile service industry has developed to address these barriers by providing short-term financing services in connection with the importation of automobiles. These service providers are located in the port cities of Dalin, Tianjin, Shanghai and Guangzhou.

Our Financing Services include letter of credit issuance services, purchase deposit financing, and import duty advance services. Our competitive advantage comes from relationships with major Chinese commercial banks, including Agricultural Bank of China, Pudong Development Bank, China Merchants Bank and China Zheshang Bank. As of April 7, 2014, the Company had aggregate credit lines of $159 million (RMB970 million). We are currently negotiating a number of new credit lines with various banks and the Company is optimistic that it will be able to obtain financing on an as-needed basis that will be sufficient for us to provide Financing Services to our customers.

The Company provides Financing Services to its customers using its facility lines of credit with its banks. The Company earns a service fee for drawing its facility lines related to customers’ purchases of automobiles and payment of import taxes. The customers bear all the interest and fees charged by the banks and prepay such amounts upon the execution of their service contracts with the Company. The customers are also required to make a deposit in the range of 10% to 15% of the purchase price of the automobile with the Company. The banks are granted a security interest in automobiles until the borrowings are fully paid.

Our revenues from Financing Services were $1,217,727 for fiscal year 2009 (0.57% of all revenues), $2,332,013 for fiscal year 2010 (0.90% of total revenues), $4,102,254 for fiscal year 2011 (0.91% of total revenues), $7,085,357 for fiscal year 2012 (1.20% of total revenues) and $6,893,985 for fiscal year 2013 (1.50% of total revenues) representing a decrease of 2.70% from the prior fiscal year.

Automobile Value Added Services

In addition to a shortage of working capital, all automobile dealers in China, whether they are authorized agents or general dealers, contend with cumbersome procedures related to the import business. The imported automobile service industry has developed to address these barriers by providing customs clearance and storage and delivery services for dealers and agents. These service providers are located in the port cities of Dalin, Tianjin, Shanghai and Guangzhou. Our efficient customs clearance service allows us to complete all vehicle import-related procedures in just three to five days. Once vehicles are cleared through customs, we offer a value-added delivery service to inland China (by air, by sea or by truck).

Our revenues from Automobile Value Added Services were $667,565 for fiscal year 2009 (0.31% of all revenues), $1,159,340 for fiscal year 2010 (0.45% of total revenues) and $1,951,056 for fiscal year 2011 (0.43% of all revenues), $1,178,274 for fiscal year 2012 (0.20% of all revenues) and $740,338 for fiscal year 2013 (0.16% of total revenues) representing a decrease of 37.17% from the prior fiscal year.

Web-based Advertising Services

We have experienced strong competition in the web-based advertising arena which continues to drive the pricing of advertising revenue down. Starting in 2012, we began to shift our focus of our websites from generating advertising revenue to providing automotive information to our website visitors. We are targeting to create a platform which allows our customers and potential customers to have access to our products including Automobile Sales, Automobile Value Added Services, and Financing Services. Through offering extensive automotive information and news, we hope to attract more potential customers to visit our websites. We believe our business strategy of using our websites as a platform to expand our reach to our customers and potential customers will benefit us in the long term.

www.cali.com.cn - China Auto Living Internet Portal

www.cali.com.cn integrated the Company’s websites to provide a single portal serving a broad spectrum of China’s “auto living” public with information about auto and auto-related products and services. We operated this site in Tianjin. In response to intensified competition in the online advertising markets in China and our revised plan of focusing our business on imported automobiles and related services, we discontinued operating this website during 2013.

www.at188.com - Imported Automobiles

With the continuous development of network technology and the growing popularization of the Internet, value-added Internet-based businesses are experiencing rapid growth in China. Accompanying the growth of the automobile markets in China, there is a strong demand for timely information regarding demand changes, market status and competitors’ quotations. www.at188.com was established by the Company in August 2000 to provide subscribers easily accessible and accurate sales and trading information about imported automobiles. In addition to imported automobile sales and trading and new model information, www.at188.com also provides parts and components information. After years of development and operation, www.at188.com has linked automobile wholesalers and retailers in China and also cooperates with major media outlets such as newspapers and television and radio stations in major cities in China.

www.at188.com charges subscribers an annual membership fee and generates revenue from on-line advertisements and web-based listing services, in addition to subscription revenues.

www.at160.com (formerly www.1365car.tj.cn) - Domestic Automobiles

To provide real-time price comparison and sales and trading information directly to the domestic automobile market, we launched the website www.at160.com, formerly www.1365car.tj.cn, in 2005. This website is a platform that connects manufacturers, regional distributors and end users of domestically manufactured cars, providing them with a compelling source of information about domestic vehicles and serving as a timelier alternative to traditional magazines and television. www.at160.com currently provides real-time price comparison and sales and trading information in the PRC markets with respect to domestically manufactured automobiles.

www.at160.com targets customers interested in purchasing vehicles, and it generates revenues from subscriptions and advertisements. Most domestic automobile purchases are made from “4S” shops which offer sales, service, spare parts and survey. In addition to providing customers with online information directly through the website, the Company is considering offering value-added services including automobile insurance, automobile financing, after-sale service and used car quotations.

Since 2012, due to our revised business plan focusing on imported automobiles and related services, we gradually moved away from promoting this website which provides information on the domestic automobile market. As a result, revenue generated from this website declined substantially starting in 2012, which decline has continued in 2013.

Our revenues from our websites were $3,459,098 for fiscal year 2009 (1.61% of all revenues), $5,962,493 for fiscal year 2010 (2.31% of total revenues), $6,192,644 for fiscal year 2011 (1.37% of all revenues), $819,344 for fiscal year 2012 (0.14% of all revenues) and $471,277 for fiscal year 2013 (0.10% of all revenues) representing a decrease of 42.48% from the prior fiscal year.

Airport Auto Mall Automotive Services

As a result of our acquisition of Zhonghe, which owns and operates the Airport International Auto Mall, we intend to operate two new businesses including (i) selling used cars through Car King Tianjin; and (ii) leasing a portion of the Airport International Auto Mall facility. We are also considering directly targeting retail customers by selling new imported automobiles out of this facility. We are currently finalizing our operation plans to determine the best and most profitable uses for this facility, and we expect this facility will not be fully operational until the second half of 2014. Because we are still in the initial stages of operations, and have had only one month of operations since the acquisition, our revenues from Airport Auto Mall Automotive Services were $15,788 (0.00% of all revenues) for the fiscal year 2013.

Auto Mall Management Services

We entered a management service agreement in March 2010 to manage (“Auto Mall Management Services”) the Tianjin FTZ International Automobile Exhibition and Sales Center (the “International Auto Mall”) for a 1-year term. In March 2011, 2012 and 2013, the management services agreement was renewed for an additional one-year period. On March 14, 2014, the Company announced that the Cooperation Agreement dated March 1, 2013, by and between the Company and Tianjin Prominent Hero International Logistics Co., Ltd, to manage the International Auto Mall had not been renewed. The Cooperation Agreement expired according to its terms on February 28, 2014. We plan to focus on managing the recently acquired Airport International Auto Mall and growing our other business segments.

Our revenues from Auto Mall Management Services were $800,050 for fiscal year 2010 (0.31% of total revenues), $945,277 for fiscal year 2011 (0.21% of all revenues), $939,760 for fiscal year 2012 (0.16% of all revenues) and $970,255 for fiscal year 2013 (0.21% of all revenues), representing an increase of 3.24% from the prior fiscal year.

Products Under Development

The further development of our websites may be an attractive means for us to develop our business due to the relatively low cost of operation, the global reach of the medium, and the security enhancements that have been and will be put in place. The business model could be expanded to combine Internet commerce and traditional sales. The success of the Internet business can help us build brand name recognition and awareness in the automobile sales and trading industry and increase our automobile sales volume.

We operate our domestic automobile website in the city of Tianjin. In response to the intensified competition in the online advertising markets in China and our revised plan of focusing our business on imported automobiles and related services, we are currently reviewing our website portals’ future geographical coverage in China.

In the coming years, we will continue to shift the business focus of the Company from a traditional automobile trader to a more diversified automotive service provider. Through the acquisition of Zhonghe, which owns and operates the Airport International Auto Mall, we intend to offer additional automotive related services to strengthen and further diversify our revenue stream. We plan to dedicate a substantial portion of this facility to the operation of a used car business. The remaining portion of the facility will be leased out. We are also considering directly targeting retail customers by selling imported automobiles out of this facility.

Although we expect sales of imported automobile to continue to represent a considerable percentage of our revenues, we expect the percentage of our net profit generated from imported automobile sales to be low. While we intend to maintain our position as one of the leading imported automobile traders in Tianjin, we do not anticipate that revenues generated by automobile sales will maintain the same growth rate as in the past, though we do expect the percentage of our net profits generated from Financing Services and Automobile Value Added Services to increase.

Major Suppliers and Customers

We have stable relationships with both Chinese domestic and foreign international manufacturers. We derive a significant portion of our revenues on an aggregate basis from our top five customers, and we make a significant portion of our purchases from our top five suppliers. Sales to the Company’s top five customers, each of which is a car dealer, accounted for 35.8% and 39.0% of the Company’s net revenues during 2013 and 2012, respectively. Purchases from the Company’s top five suppliers accounted for 36.8% and 34.2% of the Company’s total net purchases during 2013 and 2012, respectively.

The following table sets out our major customers who individually accounted for over 10% of our total net sales for the years ended December 31, 2013 and 2012.

	As a Percentage of Our Total Net Revenues
	Fiscal Year Ended December 31,
	2013			2012
Tianjin Binhai International Automobile Mall Co., Ltd.		**	%	16.19	%
Nanjing Guang Xin Shun Industrial Co., Ltd. and affiliate		15.00	%	**	%

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

The following table sets out our major suppliers who individually accounted for more than 10% of our total net purchases for the years ended December 31, 2013 and 2012.

	As a Percentage of Our Total Net Purchases
	Fiscal Year Ended December 31,
	2013			2012
Tianjin Tian Ming Automobile Trading Co., Ltd.		15.61	%	10.70%

Some of our clients are both our customers and suppliers. None of the activities transacted between the Company and clients who are both customers and suppliers involved any commitments between the parties to repurchase the identical automobiles. We maintain close working relationships with our top customers and suppliers although we also continue to diversify our customers and suppliers. We do not believe that the loss of any one major customer or supplier in and of itself would have a material adverse effect on our financial condition or results of operations.

Intellectual Property

Our websites, www.at188.com and www.at160.com, have registered domain names expiring in June 2014 and July 2019, respectively. These registrations, together with registrations for other sub-websites of the Company, will be renewed in the ordinary course of our business. We are currently contemplating expansion into additional cities through websites that will expand our geographical coverage and improve our brand recognition nationwide.

Competition and Pricing

Tianjin is a major entry port in China. Many of the vehicles imported into Tianjin are imported by general dealers such as Toyota, Honda, Nissan, Ford, BMW and Mercedes-Benz. We purchase our inventories through our suppliers who import vehicles directly from the foreign countries in which they are manufactured. Competition has increased in recent years due to an increase in the number of smaller shops entering this market. For the specialized services market related to Automobile Value Added Services and Financing Services, we believe we have secured a substantial share of the market for such services in Tianjin. Although there are a few other companies in the Tianjin market that provide Financing Services or some Automobile Value Added Services (such as storage or delivery services), we are the only one-stop service provider in Tianjin. With respect to our Automobile Value Added Services businesses, we do not presently have any major competitors.

Competitive threats may come from any company that is able to provide the services offered by us at a lower price and better quality. We charge appropriately for the high-end, high-quality services and products we offer, and we do not aspire to be the lowest cost provider of our services. Rather, we aim to distinguish ourselves from our competitors by providing the highest value to our customers.

Costs and Effects of Compliance with Environmental Laws; Government Regulation

Our products and operations are currently in compliance with all Chinese laws and environmental standards. We are not aware of any other governmental approvals required for any of our products or operations.

Research and Development

We spent $0 and $0 on research and development activities for fiscal year 2013 and fiscal year 2012, respectively. None of these costs were borne directly by our customers.

Employees

We currently employ 81 employees, of which all are full-time employees. None of our employees are unionized.

Geographical Area of the Company’s Business

All of our revenue is derived from operations within the PRC, and all of our assets are located in the PRC. For risks relating to our operations in the PRC, see discussions in the section entitled “Risk Factors” below.

ITEM 1A

RISK FACTORS

You should carefully consider the following risks and the other information set forth elsewhere in this current report. If any of these risks occur, our business, financial condition and results of operations could be adversely affected. As a result, the trading price of our common stock could decline, perhaps significantly.

RISKS RELATING TO OUR COMPANY

Our business may adversely change due to the cyclical nature of the automotive industry. If the Chinese luxury automotive market does not grow as we expect or grows at a slower rate than we expect, our sales and profitability may be materially and adversely affected.

Our financial performance depends, in large part, on the varying conditions in the automotive markets, specifically the market for imported luxury automobiles in China. The volume of automobile production in Asia, North America, Europe and the rest of the world has fluctuated, sometimes significantly, from year to year, and such fluctuations often are in response to overall economic conditions and factors such as changes in interest rate levels, vehicle manufacturer incentive programs, fuel costs, consumer spending and confidence, and environmental issues. If the automotive market experiences a downturn, our results of operations and business will suffer.

We derive most of our sales revenue from sales of imported automobiles and related services in China. The continued development of our business depends, in large part, on continued growth in the luxury automotive market in China and the increase in disposable income among the Chinese population. Although China’s luxury automotive market has grown rapidly in the past, it may not continue to grow at the same rate in the future or at all. However, the developments in our market are, to a large extent, outside of our control and any reduced demand for imported automobiles or related services, or any other downturn or other adverse changes in China’s economy that impacts the disposable income of ultimate luxury car purchasers could severely harm our business.

A disproportionate amount of our income from operations is derived from the sale of imported automobiles and related services, and a disruption in, or compromise of, our sale operations or our ability to provide Automobile Value Added Services and Financing Services could adversely impact our financial condition and results of operations.

In 2013, we derived approximately 5.76% of our income from operations from the sale of imported automobiles, approximately 63.21% of our income from operations from Financing Services, approximately 10.48% of our income from operations from Automobile Value Added Services, approximately 6.32% of our income from operations from our websites, approximately 0.23% of our income from operations from airport mall automotive services and 14.00% of our income from operations from Auto Mall Management Services. We view our Financing Services and our Automobile Value Added Services to be integrally related, as our business model emphasizes our ability to be a “one-stop” services provider for all such services. A disruption in, or compromise of, our sales operations or our ability to provide Automobile Value Added Services and/or Financing Services to our customers could have a material adverse effect on our financial condition and results of operations.

We derive a significant amount of our revenue from a limited number of customers and purchase a significant portion of our inventories from a limited number of suppliers. Certain of our major customers are also major suppliers, and therefore the loss of such customers or suppliers could adversely impact our financial condition and results of operations.

We derived a significant portion of our revenues on an aggregate basis from our top five customers, and a significant portion of our purchases come from our top five suppliers. Some of our customers are also our suppliers. We maintain close working relationships with our top customers and suppliers and continue to reduce the business concentration of our revenues and purchases among our top customers and suppliers. While we do not believe that the loss of any one major customer or supplier in and of itself would have a material adverse effect on our financial condition or results of operation, the loss of more than one such major customer or supplier, or our failure to replace such customer or supplier with other customers and suppliers, could have a material adverse effect on our financial condition and our results of operations.

The imported automobile sales and services market in Tianjin is competitive; failure to maintain our current relationships with various Chinese banks or to renew existing credit lines or enter into new credit lines may hamper our growth and negatively affect our results.

As the only one-stop service provider in Tianjin, our market share in the combined Financing Services and Automobile Value Added Services maintained its leading position in Tianjin. However, in the future we anticipate increasing pressure on our business from competitors, and failure to maintain our relationships with various Chinese banks in Tianjin may adversely affect our ability to provide Financing Services to our customers and to be a “one-stop” service provider for Automobile Value Added Services and Financing Services. In addition, if our competitors are able to establish similar relationships with these banks or other financial institutions in Tianjin or our future markets, we will no longer enjoy our current competitive advantage.

As of April 7, 2014, the Company had aggregate credit lines of $159 million (RMB970 million). We are currently negotiating a number of new credit lines with various banks, although there can be no guarantee that we will be successful in doing so. If we are unable to renew existing credit lines or enter into new credit lines on a consistent basis that allows us to meet the requirements of our business or the demand of our customers for Financing Services, our business, operating margins, financial condition, cash flows and profitability could be adversely affected.

We face competition from other companies, which could force us to lower our prices, thereby adversely affecting our operating margins, financial condition, cash flows and profitability.

The markets in which we operate are highly competitive, and this competition could harm our business, results of operations, cash flow and financial condition. We believe that one significant competitive factor for our products is selling price. Although we do not aspire to be the lowest cost provider but rather the highest value provider to our customers, we could be subject to adverse results caused by our competitors’ pricing decisions. The average selling prices for our automobiles have been on a downward trend in recent years and our gross margins have continued to decline due to stiff competition in the automobile industry which has resulted in lower net profits. If we do not compete successfully, our business, operating margins, financial condition, cash flows and profitability could be adversely affected.

Concerns about security of e-commerce transactions and confidentiality of information on the Internet may reduce the use of our websites and impede our growth, and our Internet operations may be vulnerable to hacking, viruses and other disruptions.

A significant barrier to e-commerce and confidential communications over the Internet has been the need for security. Internet usage could decline if any well-publicized compromise of security occurred. We may incur significant costs to protect against the threat of security breaches or to alleviate problems caused by these breaches. If unauthorized persons are able to penetrate our network security, they could misappropriate proprietary information or cause interruptions in our services. As a result, we may be required to expend capital and resources to protect against or to alleviate these problems. Security breaches could have a material adverse effect on our business, financial condition and results of operations.

We cannot assure you that our organic growth strategy will be successful.

One of our growth strategies is to grow organically through increasing the distribution and sales of our products, increasing our market share and entering new geographical markets in the PRC. However, many obstacles to increasing our market share and entering such new markets exist, including, but not limited to, costs associated with entering into such markets and attendant marketing efforts. We cannot therefore assure you that we will be able to successfully overcome such obstacles and establish our products in any additional markets. Our inability to implement this organic growth strategy successfully may have a negative impact on our ability to grow and on our future financial condition, results of operations or cash flows.

If we are not able to implement our strategies in achieving our business objectives, our business operations and financial performance may be adversely affected.

Our business plan is based on circumstances currently prevailing and the bases and assumptions that certain circumstances will or will not occur, as well as the inherent risks and uncertainties involved in various stages of development. However, there is no assurance that we will be successful in implementing our strategies or that our strategies, even if implemented, will lead to the successful achievement of our objectives. If we are not able to successfully implement our strategies, our business operations and financial performance may be adversely affected.

We may not be able to manage our expanding operations effectively, which could harm our business.

We anticipate expanding our business as we address growth in our customer base and market opportunities. In addition, the geographic dispersion of our operations as a result of overall internal growth requires significant management resources that our locally-based competitors do not need to devote to their operations. In order to manage the expected growth of our operations and personnel, we will be required to improve and implement operational and financial systems, procedures and controls, and expand, train and manage our growing employee base. Further, our management will be required to maintain and expand our strategic relationships necessary to our business. We cannot assure you that our current and planned personnel, systems, procedures and controls will be adequate to support our future operations. If we are not successful in establishing, maintaining and managing our personnel, systems, procedures and controls, our business will be materially and adversely affected.

Our business and growth could suffer if we are unable to retain our key executives.

We depend upon the continued contributions of our senior management and other key executives, many of whom are difficult to replace. In particular, our future success is heavily dependent upon the continued service of Mr. Tong Shiping, Ms. Wang Xinwei, Mr. Yang Bin, and Ms. Cheng Weihong. If one or more of our key executives are unable or unwilling to continue in their present positions, we may not be able to easily replace them, and our business, financial condition and results of operations may be materially and adversely affected. In addition, if any of these key executives joins a competitor or forms a competing company, we may lose customers and suppliers and incur additional expenses to recruit and train personnel. Each of our executive officers has entered into standard employment agreements with us (in accordance with the format issued by the Labor and Social Security Administration in Tianjin and Chongqing) but is not subject to specific non-competition or non-solicitation agreements, as such agreements are not standard in China. We also do not maintain key-man life insurance for any of our key executives.

We face a competitive labor market in China for skilled personnel and therefore are highly dependent on the skills and services of our existing key skilled personnel and our ability to hire additional skilled employees.

Competition for highly-skilled software design, technical, managerial, finance, marketing, sales and customer service personnel is intense in China. Failure to attract, assimilate or retain qualified personnel to fulfill our current or future needs could impair our growth. Limitations on our ability to hire and train a sufficient number of personnel at all levels would limit our ability to undertake projects in the future and could cause us to lose market share. We may need to increase the levels of our employee compensation more rapidly than in the past in order to remain competitive. These additional costs could reduce our profitability and cause losses.

If we need additional capital to fund our growing operations, we may not be able to obtain sufficient capital and may be forced to limit the scope of our operations.

As we implement our growth strategies, we may experience increased capital needs and we may not have enough capital to fund our future operations without additional capital investments. Our capital needs will depend on numerous factors, including: (i) our profitability; (ii) the release of competitive products by our competition; (iii) the level of our investment in research and development; and (iv) the amount of our capital expenditures. We cannot assure you that we will be able to obtain capital in the future to meet our needs.

If we cannot obtain additional funding, we may be required to limit our marketing efforts and decrease or eliminate capital expenditures.

Such reductions could materially and adversely affect our business and our ability to compete. Even if we do find a source of additional capital, we may not be able to negotiate terms and conditions for receiving the additional capital that are acceptable to us. Any future capital investments could dilute or otherwise materially and adversely affect the holdings or rights of investors in our common stock. We cannot give you any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us.

We have limited insurance coverage and do not carry any business interruption or third party liability insurance or insurance that covers the risk of loss of automobiles in shipment.

Operation of our facilities involves many risks, including natural disasters, power outages, labor disturbances and other business interruptions. We do not carry any business interruption insurance or third-party liability insurance for accidents on our property or damage relating to our operations. In addition, our existing insurance coverage may not be sufficient to cover all risks associated with our business. As a result, we may be required to pay for financial and other losses, damages and liabilities, including those caused by natural disasters and other events beyond our control, out of our own funds, which could have a material adverse effect on our business, financial condition and results of operations.

Our efforts in protecting our intellectual property rights from infringement may not be sufficient, and our failure to adequately protect our intellectual property rights may undermine our competitive position.

We regard our domain name registrations and other intellectual property as critical to our success. Our domain names for our websites are currently registered domain names. However, no assurance can be given that such registrations and licenses will not be challenged, invalidated, infringed or circumvented or that such intellectual property rights will provide a competitive advantage to us.

Currently we sell our products only in China. China will remain our primary market for the foreseeable future. To date, no trademark filings have been made. Therefore, the measures we take to protect our proprietary rights may be inadequate and we cannot give you any assurance that our competitors will not independently develop formulations and processes (including websites similar to www.at188.com and www.at160.com) that are substantially equivalent or superior to our own or copy our products.

Intellectual property related laws in China may not be effective in protecting our intellectual property rights, and litigation to protect our intellectual property rights may be costly.

We strive to strengthen and differentiate our product portfolio by developing new and innovative products and product improvements. As a result, we believe that the protection of our intellectual property will become increasingly important to our business. Implementation and enforcement of intellectual property-related laws in China has historically been lacking due primarily to ambiguities in PRC intellectual property law. Accordingly, protection of intellectual property and proprietary rights in China may not be as effective as in the United States or other countries. As a result, third parties may use the technologies and proprietary processes that we have developed and compete with us, which could negatively affect any competitive advantage we enjoy, dilute our brand and harm our operating results.

In addition, policing the unauthorized use of our proprietary technology can be difficult and expensive. Litigation may be necessary to enforce our intellectual property rights, and given the relative unpredictability of China’s legal system and potential difficulties enforcing a court judgment in China, there is no guarantee litigation would result in an outcome favorable to us. Furthermore, any such litigation may be costly and may divert management attention away from our core business. An adverse determination in any lawsuit involving our intellectual property is likely to jeopardize our business prospects and reputation. We have no insurance coverage against litigation costs so we would be forced to bear all litigation costs if we cannot recover them from other parties. All of the foregoing factors could harm our business and financial condition.

We may be exposed to infringement claims by third parties, which, if successful, could cause us to pay significant damage awards.

Third parties may initiate litigation against us alleging infringement of their proprietary rights. In the event of a successful claim of infringement and our failure or inability to develop non-infringing technology or license the infringed or similar technology on a timely basis, our business could be harmed. In addition, even if we are able to license the infringed or similar technology, license fees could be substantial and may adversely affect our results of operations.

Unexpected network interruptions caused by system failures may result in reduced visitor traffic, reduced revenue and harm to our reputation.

As the number of Chinese websites and the amount of Chinese Internet traffic increases, we cannot assure you that we will be able to increase the scale of our systems proportionately. We are also dependent upon web browsers, Internet service providers, content providers and other website operators in China, which have experienced significant system failures and system outages in the past. Any system failure or inadequacy that causes interruptions in the availability of our services, or increases the response time of our services, as a result of increased traffic or otherwise, could reduce our user satisfaction, future traffic and our attractiveness to users and advertisers.

In addition, we have limited backup systems and redundancy and we have experienced system failures and electrical outages from time to time in the past which have disrupted our operations. We do not have a disaster recovery plan in the event of damage from fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins and similar events. If any of the foregoing occurs, we may experience a complete system shut-down. We do not carry any business interruption insurance. To improve the performance and to prevent disruption of our services, we may have to make substantial investments to deploy additional servers or one or more copies of our websites to mirror our online resources. To the extent we do not address the capacity restraints and redundancy described above, such constraints could have a material adverse effect on our business, financial condition and results of operations.

Acquisitions could have negative consequences, which could harm our business.

In 2010 we acquired all of the outstanding shares of Qizhong and its subsidiaries, a group of companies engaging in the development and operation of the website www.goodcar.cn and the business of providing consumers with information and discounted services relating to automobiles. During the fourth quarter of 2012, we revised our business plan and downsized Goodcar’s operations. Due to the closing of Goodcar’s advertising operations, we recorded goodwill impairment charges of $3,735,091 and impairment charges of $926,110 (net of deferred taxes of $314,094) related to the goodwill and intangible assets acquired in the acquisition of Goodcar in the fiscal 2012. We completely discontinued the operations of Goodcar during the fiscal year 2013.

On November 30, 2013, we signed the Auto Mall Acquisition Agreement to purchase 100% of the equity of Zhonghe, which owns and operates the Airport International Auto Mall. Under the terms of the Auto Mall Acquisition Agreement, Shisheng will pay RMB 559,768,000 (approximately $91.4 million) to Hezhong, in four annual installments with an annualized rate of interest of 6%. The initial payment of RMB 240,000,000 (approximately $39.2 million) was paid within 5 business days after the signing of the Agreement. We plan to operate a used car business as a joint venture with Car King China at the Airport International Auto Mall. We believe that there is a strong market for used car sales in China and this joint venture will provide us with opportunities for long-term growth. In addition, we are considering using this facility to expand into the retail automobile sales market, which may generate overall higher gross margins. However, it is uncertain that these plans will be successfully implemented and will generate any profits.

Additional acquisitions could require significant capital infusions and could involve many risks including, but not limited to, the following:

●	Difficulty integrating the acquired company’s personnel, products, product roadmaps, technologies, systems, processes and operations, including product delivery, order management, and information systems;

●	Difficulty in forming the acquired company’s financial policies and practices to our policies and practices and in implementing and maintaining adequate internal systems and controls over financial reporting and information systems of the acquired company;

●	Diversion of management’s attention and disruption of ongoing business;

●	Difficulty in combining service and technology offerings and entering into new markets or geographical areas in which we have no or limited direct experience and where our competitors may have stronger market positions;

●	Loss of management, sales, technical or other key personnel;

●	Revenue from the acquired companies not meeting our expectations, and the potential loss of the acquired companies’ customers, distributors, resellers, suppliers, or other partners;

●

Delays or difficulties and the attendant expense in evaluating, coordinating, and combining administrative, sales, research and development and other operations, facilities, and relationships with third parties in accordance with local laws and other obligations while maintaining adequate standards, controls and procedures, including financial controls and controls over information systems;

●	Incurring amortization expense related to intangible assets and recording goodwill and non-amortizable assets that will be subject to impairment testing and possible impairment charges;

●	Dilution of existing stockholders as a result of issuing equity securities, including the assumption of any stock options or other equity awards issued by the acquired company;

●	Overpayment for any acquisition or investment or unanticipated costs or liabilities;

●	Responsibility for the liabilities of the acquired company, including any potential intellectual property infringement claims or other litigation; and

●	Incurring substantial write-offs, restructuring charges, and transactional expenses.

Our failure to manage these risks and challenges could materially harm our business, financial condition, and results of operations. Further, if we do not successfully address these challenges in a timely manner, we may not fully realize all of the anticipated benefits or synergies on which the value of a transaction was based. Future transactions could cause our financial results to differ from expectations of market analysts or investors for any given quarter, which could, in turn, cause a decline in our stock price.

We may require additional capital in the future, which may not be available on favorable terms or at all.

Our future capital requirements will depend on many factors, including industry and market conditions, our ability to successfully implement new business plan and marketing initiatives. We have to remit a total of approximately $58.8 million (RMB 360,000,000) including principal and interest or $19.6 million in each November of 2014, 2015 and 2016. We anticipate that we may need to raise additional funds in order to grow our business, implement our business strategy and fund the future payments of the payable related to the acquisition of Zhonghe. We anticipate that any such additional funds may be raised through equity or debt financings. Any equity or debt financing, if available at all, may be on terms that are not favorable to us. Even if we are able to raise capital through equity or debt financings, as to which there can be no assurance, the interest of existing shareholders in our company may be diluted, and the securities we issue may have rights, preferences and privileges that are senior to those of our common stock or may otherwise materially and adversely affect the holdings or rights of our existing shareholders. If we cannot obtain adequate capital, we may not be able to fully implement our business strategy and may not make the payments due to the banks or to the seller of Zhonghe, and our business, results of operations and financial condition could be adversely affected. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

We may be required to write down our real estate property and a significant impairment charge would adversely affect our operating results.

At December 31, 2013, we had approximately $72.6 million for the carrying value of the Airport International Auto Mall on our consolidated balance sheet. The fair market value of this property is affected by the condition of the real estate market in China, especially in Tianjin. Even though the real estate market has been on an upward trend in recent years, it is uncertain that this trend will continue. If the Chinese real estate market declines, the market value of our real estate property may decline below its carrying value on our consolidated balance sheet. As a result, we may be required to record a significant amount of impairment charge which will adversely affect our operating results and financial condition.

If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings.

We review our goodwill and intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be evaluated for impairment at least annually. Factors that may be considered are changes in circumstances indicating that the carrying value of our goodwill or intangible assets may not be recoverable, which include a decline in stock price and market capitalization, a decrease in future cash flows, and slower growth rates in our industry. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or intangible assets is determined, resulting in an impact on our results of operations.

We incur significant costs ensuring compliance with US corporate governance and accounting requirements.

We incur significant legal and financial compliance costs associated with our public company reporting requirements, costs associated with applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the SEC. We also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our Board of Directors (the “Board”) or as executive officers. We are currently evaluating and monitoring developments with respect to these applicable rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

The staff of our accounting department lack training and experience in U.S. accounting principles, which may result in accounting errors in the financial statements that we file with the Securities and Exchange Commission (the “SEC”).

Our executive offices are located in Tianjin in the PRC. Our entire bookkeeping and accounting staff is located there. Our books and records are maintained in Chinese, using Chinese accounting principles. Chinese accounting principles vary in many important respects from US accounting principles. To file our Company’s financial statements with the SEC, our accounting staff must convert the financial statements from Chinese accounting principles to US accounting principles. However, none of the members of our accounting staff has extensive experience or training in the preparation of financial statements under accounting principles generally accepted in the United States (“US GAAP”). Neither do we have any employee who has previous experience in accounting for a US public company. This situation creates a risk that the financial statements we file with the SEC will fail to present our financial condition and/or results of operations as required by SEC rules and the principles of accounting generally applied in the United States.

RISKS RELATING TO THE PEOPLE’S REPUBLIC OF CHINA

Political and economic policies of the PRC government could affect our business; PRC economic reform policies or nationalization could result in a total investment loss in our common stock.

All of our business, assets and operations are located in China, and all of our revenues are derived from our operations in China. Accordingly, our business, financial condition and results of operations are affected to a significant degree by economic, political and legal developments in China. Changes in political, economic and social conditions in China, adjustments in PRC government policies or changes in laws and regulations could adversely affect our business, financial condition and results of operations. The economy of China differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development in a number of respects, including:

●	structure;

●	level of government involvement;

●	level of development;

●	level of capital reinvestment;

●	growth rate;

●	control of foreign exchange; and

●	methods of allocating resources.

Since 1949, China has primarily been a planned economy subject to a system of macroeconomic management. Although the Chinese government still owns the majority of productive assets in China, economic reform policies since the late 1970s have emphasized decentralization, autonomous enterprises and the utilization of market mechanisms. Because many reforms are unprecedented or experimental, they are expected to be refined and improved. Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or in the disparities in per capita wealth between regions within China, could lead to further readjustment of the reform measures. This refining and readjustment process may negatively affect our operations.

If the PRC imposes restrictions to reduce inflation, future economic growth in the PRC could be severely affected.

China’s economy registered a high rate of growth in the decade ending in 2010. Even though the growth rate began to slow starting in 2011, it continues to grow at a rate in the high single digits since 2011. However, China’s growth rate has not been evenly spread among all sectors of the economy, nor have all geographical regions of the country experienced the same levels of growth. Furthermore, the type of rapid growth that China is currently experiencing is often related to an increased risk of inflation. If the need arises to control inflation, the Chinese government may take similar measures as it has done in the past, including restrictions on the availability of domestic credit, reductions of the purchasing capability of certain of our customers, and limited re-centralization of the approval process for purchases of some foreign products. If similar restrictions are imposed, it may lead to a slowing of economic growth and reduce credit to finance the purchase of vehicles.

The PRC government exerts substantial influence over the manner in which we must conduct our business activities.

The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, land use rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.

Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.

The recent nature and uncertain application of many PRC laws applicable to us create an uncertain environment for business operations and they could have a negative effect on us.

The PRC legal system is a civil law system. Unlike the common law system, the civil law system is based on written statutes in which decided legal cases have little value as precedent. Furthermore, although China has made considerable progress in introducing new laws and regulations concerning foreign investment, corporate organization and governance, commerce and trade and taxation, these laws and regulations are relatively new, and the interpretation and enforcement of these laws involve significant uncertainties. Furthermore, the promulgation of new laws, changes of existing laws and the abrogation of local regulations by national laws could have a negative impact on our business and business prospects. In addition, as these laws, regulations and legal requirements are relatively recent, their interpretation and enforcement involve significant uncertainty.

Currency conversion and exchange rate volatility could adversely affect our financial condition.

The PRC government imposes control over the conversion of Renminbi (“RMB”) into foreign currencies. Under the current unified floating exchange rate system, the People’s Bank of China publishes an exchange rate (the “PBOC exchange rate”), based on the previous day’s dealings in the inter-bank foreign exchange market. Financial institutions authorized to deal in foreign currency may enter into foreign exchange transactions at exchange rates within an authorized range above or below the PBOC exchange rate according to market conditions.

Enterprises in the PRC that require foreign exchange for transactions relating to current account items, may, without approval of the State Administration of Foreign Exchange (“SAFE”), effect payment from their foreign exchange account or convert and pay at the designated foreign exchange banks by providing valid receipts and proofs.

Convertibility of foreign exchange in respect of capital account items, such as direct investment and capital contribution, is still subject to certain restrictions, and prior approval from the SAFE or its relevant branches must be sought.

In 2005, the Chinese government announced that they would begin pegging the exchange rate of the RMB against a number of currencies, rather than just the United States dollar. Under the new policy, RMB has fluctuated within a narrow and managed band against a basket of certain foreign currencies. As our operations are located in China, any significant revaluation of the RMB may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert United States dollars into RMB for our operations, appreciation of this currency against the United States dollar could have a material adverse effect on our business, financial condition and results of operations. Conversely, if we decide to convert RMB into United States dollars for other business purposes and the United States dollar appreciates against this currency, the United States dollar equivalent of the RMB we convert would be reduced.

Laws and regulations applicable to the Internet in China remain unsettled and could have a material adverse effect on Internet’s growth and thereby have a material adverse effect on our business.

Growth of the Internet in China could be materially and adversely affected by governmental regulation of the industry. Due to the increasing popularity and use of the Internet and other online services, it is possible that regulations may be adopted with respect to the Internet or other services covering issues such as user privacy, pricing, content, copyrights, distribution, antitrust and characteristics and quality of products and services. Furthermore, the growth and development of the market for electronic commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on companies conducting business online. The adoption of additional laws or regulations may slow the growth of the Internet or other services, which could in turn lead to reduced Internet traffic and increase our cost of doing business. While we are not aware of any existing or proposed regulations that have a significant direct adverse effect on our business, a restrictive regulatory policy regarding the Chinese Internet industry would have a material adverse effect on us by slowing the industry’s growth in China.

We may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us.

We conduct our operations in China and all of our assets are located in China. In addition, most of our directors and executive officers reside within China, and substantially all of the assets of these persons are located within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon those directors or executive officers, including with respect to matters arising under US federal securities laws or applicable state securities laws. Moreover, our Chinese counsel has advised us that China does not have treaties with the US and many other countries that provide for the reciprocal recognition and enforcement of judgment of courts. As a result, recognition and enforcement in China of judgments of a court of the US or any other jurisdiction in relation to any matter may be difficult or impossible.

Restrictions on paying dividends or making other payments to us bind our subsidiaries in China.

We are a holding company and do not have any assets or conduct any business operations in China other than our investments in our subsidiaries in China. As a result, our ability to pay dividends and to finance any debt we may incur depends upon dividends paid by our PRC subsidiaries. If our PRC subsidiaries or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our PRC subsidiaries are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC laws and regulations, our PRC subsidiaries are required to allocate at least 10% of their after-tax profits each year, if any, to PRC statutory reserves before distributing dividends until the balance of such fund has reached 50% of its registered capital. Our PRC subsidiaries with foreign investment are also required to further set aside a portion of its after-tax profits to fund the employee welfare fund at the discretion of the board. Although PRC statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of our PRC subsidiaries, the reserve funds are not distributable as cash dividends except in the event of liquidation of any of our PRC subsidiaries.

The Chinese government also imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency. If we or any of our subsidiaries are unable to receive all of the revenues from our operations through these arrangements, we may be unable to effectively finance our operations or pay dividends on our common stock.

Our significant amount of deposits in certain banks in China may be at risk if these banks go bankrupt during our deposit period, and the risk of bankruptcy of the banks with which we have lines of credit may adversely affect our ability to provide financial services to our customers.

As of December 31, 2013, we have approximately $15.0 million of cash deposited in banks, such as time deposits and bank notes, and $29.7 million of restricted cash, which constitute substantially all of our total cash and cash equivalents (both unrestricted and restricted) as of December 31, 2013. The terms of these deposits are, in general, up to twelve months. Historically, deposits in Chinese banks are secure due to the state policy on protecting depositors’ interests. However, China promulgated a new Bankruptcy Law in August 2006, which came into effect on June 1, 2007, which contains a separate article expressly stating that the State Council may promulgate implementation measures for the bankruptcy of Chinese banks based on the Bankruptcy Law. Under the new Bankruptcy Law, a Chinese bank may go bankrupt. In addition, since China’s accession to the WTO, foreign banks have been gradually permitted to operate in China and have been competitors against Chinese banks in many aspects, especially since the opening of Chinese business to foreign banks in late 2006. Therefore, the risk of bankruptcy of those banks in which we have deposits has increased. In the event of bankruptcy of one of the banks which holds our deposits, we are unlikely to claim our deposits back in full since we are unlikely to be classified as a secured creditor based on PRC laws. In the event that one or more of our banks files for bankruptcy protection, our ability to offer Financing Services to our customers may be materially and adversely impacted, thereby having a material adverse effect on our operations and profitability.

PRC regulations relating to acquisitions of PRC companies by foreign entities may create regulatory uncertainties that could restrict or limit our ability to operate

On August 8, 2006, six PRC regulatory agencies namely, the PRC Ministry of Commerce, the State Assets Supervision and Administration Commission (“SASAC”), the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission (“CSRC”), and the State Administration of Foreign Exchange (“SAFE”), jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “M&A Rules”), which became effective on September 8, 2006, as amended on June 22, 2009. The M&A Rules significantly revised China’s regulatory framework governing onshore-to-offshore restructurings and foreign acquisitions of domestic enterprises. The M&A Rules signify greater PRC government attention to cross-border merger, acquisition and other investment activities, by confirming MOFCOM as a key regulator for issues related to mergers and acquisitions in China and requiring MOFCOM approval of a broad range of merger, acquisition and investment transactions. Further, the M&A Rules establish reporting requirements for acquisition of control by foreigners of companies in key industries, and reinforce the ability of the Chinese government to monitor and prohibit foreign control transactions in key industries. Among other things, the M&A Rules include new provisions that purport to require that an offshore special purpose vehicle, or SPV, formed for listing purposes and controlled directly or indirectly by PRC companies or individuals must obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange. However, the application of this PRC regulation remains unclear regarding the scope and applicability of the CSRC approval requirement.

We are committed to complying with and to ensuring that our beneficial owners who are subject to the M&A Rules will comply with the relevant rules. However, we cannot assure you that all of our current or future beneficial owners who are PRC residents will comply with our request to make or obtain any applicable registrations or comply with these rules. Any failure by any of our current or future beneficial owners to comply with relevant requirements under this regulation could subject us to fines or sanctions imposed by the PRC government, including restrictions on our PRC subsidiaries’ ability to pay dividends or make distributions to us and our ability to increase our investment in our PRC subsidiaries.

RISKS RELATING TO OUR COMMON STOCK

The market price for shares of our common stock could be volatile; the sale of material amounts of our common stock could reduce the price of our common stock and encourage short sales.

The market price for the shares of our common stock may fluctuate in response to a number of factors, many of which are beyond our control. Such factors may include, without limitation, the general economic and monetary environment, quarter-to-quarter variations in our anticipated and actual operating results, future financing activities and the open-market trading of our shares in particular.

From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act of 1933, as amended, subject to certain limitations. In general, pursuant to Rule 144, a stockholder (or stockholders whose shares are aggregated) who has satisfied a six month holding period may, under certain circumstances, sell within any three-month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading volume of the class during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of securities, without any limitations, by a non-affiliate of our Company that has satisfied a one year holding period. Any substantial sale of common stock pursuant to Rule 144 may have an adverse effect on the market price of our common stock.

One stockholder exercises significant control over matters requiring stockholder approval.

Bright Praise Enterprises Limited has voting power equal to approximately 40.85% of our voting securities. As a result, Bright Praise Enterprises Limited, through such stock ownership, exercises significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership in Bright Praise Enterprises Limited may also have the effect of delaying or preventing a change in control of us that may be otherwise viewed as beneficial by stockholders other than Bright Praise Enterprises Limited.

If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results and prevent fraud. As a result, current and potential stockholders could lose confidence in our financial statements, which would harm the trading price of our common stock.

Companies that file reports with the SEC, including us, are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404. SOX 404 requires management to establish and maintain a system of internal control over financial reporting and annual reports on Form 10-K filed under the Exchange Act to contain a report from management assessing the effectiveness of a company’s internal control over financial reporting. Separately, under SOX 404, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, public companies that are large accelerated or accelerated filers must include in their annual reports on Form 10-K an attestation report of their regular auditors attesting to and reporting on management’s assessment of internal control over financial reporting. Non-accelerated filers and smaller reporting companies are not required to include an attestation report of their auditors in annual reports.

A report of our management is included under Item 9A “Controls and Procedures” of this report. We are a smaller reporting company and, consequently, are not required to include an attestation report of our auditor in this annual report. However, if and when we become subject to the auditor attestation requirements under SOX 404, we can provide no assurance that we will receive an unqualified report from our independent auditors.

During its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2013, management identified a material weakness relating to our lack of sufficient accounting personnel with an appropriate understanding of US GAAP and SEC reporting requirements.

We are undertaking remedial measures, which measures will take time to implement and test, to address this material weakness. There can be no assurance that such measures will be sufficient to remedy the material weakness identified or that additional material weaknesses or other control or significant deficiencies will not be identified in the future. If we continue to experience material weaknesses in our internal controls or fail to maintain or implement required new or improved controls, such circumstances could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements, or adversely affect the results of periodic management evaluations and, if required, annual auditor attestation reports. Each of the foregoing results could cause investors to lose confidence in our reported financial information and lead to a decline in our stock price. See Item 9A “Controls and Procedures” for more information.

We do not foresee paying cash dividends in the foreseeable future.

We have not paid cash dividends on our stock, and we do not plan to pay cash dividends on our stock in the foreseeable future.

We may be required to raise additional financing by issuing new securities with terms or rights superior to those of our shares of common stock, which could adversely affect the market price of our shares of common stock.

We may require additional financing to fund future operations, including expansion in current and new markets, programming development and acquisition, capital costs and the costs of any necessary implementation of technological innovations or alternative technologies. We may not be able to obtain financing on favorable terms, if at all. If we raise additional funds by issuing equity securities, the percentage ownership of our current stockholders will be reduced, and the holders of the new equity securities may have rights superior to those of the holders of shares of our common stock, which could adversely affect the market price and the voting power of shares of our common stock. If we raise additional funds by issuing debt securities, the holders of these debt securities would similarly have some rights senior to those of the holders of shares of common stock, and the terms of these debt securities could impose restrictions on operations and create a significant interest expense for us.

We may have difficulty raising necessary capital to fund operations as a result of market price volatility for our shares of common stock.

In recent years, the securities markets in the United States have experienced a high level of price and volume volatility, and the market price of securities of many companies have experienced wide fluctuations that have not necessarily been related to the operations, performances, underlying asset values or prospects of such companies. For these reasons, our shares of common stock can also be expected to be subject to volatility resulting from purely market forces over which we will have no control. If our business development plans are successful, we may require additional financing to continue to develop and exploit existing and new technologies and to expand into new markets. The exploitation of our technologies may, therefore, be dependent upon our ability to obtain financing through debt and equity or other means.

We are responsible for the indemnification of our officers and directors which could result in substantial expenditures, which we may be unable to recoup.

Our Articles of Incorporation and Bylaws provide for the indemnification of our directors and officers, under certain circumstances, against attorney’s fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of us. This indemnification policy could result in substantial expenditures, which we may be unable to recoup.

We rely on our PRC subsidiaries for the distribution of any dividends to our shareholders.

We are a company incorporated in the United States and our cash flow depends on dividends from our PRC subsidiaries. In order for us to distribute any dividends to our shareholders, we will rely on dividends distributed by our PRC subsidiaries. PRC regulations currently permit payment of dividends only out of accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. Under current PRC laws and regulations, our PRC subsidiaries are required, where applicable, to allocate a portion of their net profits to PRC statutory reserves before distributing dividends, including at least 10% of their net profit to PRC statutory reserves until the balance of such fund has reached 50% of their registered capital. These reserves can only be used for specific purposes, including making-up cumulative losses of previous years, conversion to our equity capital, and application to business expansion, and are not distributable as dividends. Further, if our PRC subsidiaries incur debt in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. Our PRC subsidiaries’ restricted net assets as of December 31, 2013 amounted to approximately $3,790,000.

Techniques employed by short sellers may drive down the market price of the Company’s common stock.

Short selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller’s best interests for the price of the stock to decline, many short sellers publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a stock short. These short attacks have, in the past, led to selling of shares in the market.

Recently, public companies that have substantially all of their operations in China have been the subject of short selling. Much of the scrutiny and negative publicity has centered around allegations of a lack of effective internal control over financial reporting resulting in financial and accounting irregularities and mistakes, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result, many of these companies are now conducting internal and external investigations into the allegations and, in the interim, are subject to shareholder lawsuits and/or SEC enforcement actions.

It is not clear what effect such negative publicity would have on the Company, if any. If the Company were to become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, the Company could have to expend a significant amount of resources to investigate such allegations and/or defend itself. While the Company would strongly defend against any such short seller attacks, the Company may be constrained in the manner in which it can proceed against the relevant short seller by principles of freedom of speech, applicable state law or issues of commercial confidentiality. Such a situation could be costly and time-consuming, and could distract the Company’s management from growing the Company. Even if such allegations are ultimately proven to be groundless, allegations against the Company could severely impact its business operations and stockholders equity, and any investment in the Company’s stock could be greatly reduced or rendered worthless.

ITEM 1B.

UNRESOLVED STAFF COMMENTS.

Not applicable.

ITEM 2.

PROPERTIES.

Our main offices are located at Floor 1 FTZ International Auto Mall, 86 Tianbao, Tianjin Province, PRC. The lease relating to our main offices has a 1-year term which expires on December 31, 2013 which was renewed in December 2013 for term through December 31, 2014. The annual rent for the office is approximately $19,000 (RMB 120,000).

Additional office and show room space is located at Floor 1 FTZ International Auto Mall, 86 Tianbao, Tianjin Province, PRC. The lease relating to our main offices has a 1-year term which expired on November 30, 2013. A revised lease was entered into for less space with an annual rent of $21,000 (RMB 127,845) for a 1-year term which expires on November 30, 2014.

The Company owns a 26,000 square meter airport automobile mall facility on a 68,000 square meter land parcel located at 8 Huanhe W. Road, Tianjin, China. The land use right of this property expires in November 2044.

We believe that all our properties and equipment have been adequately maintained, are generally in good condition, and are suitable and adequate for our business.

ITEM 3.

LEGAL PROCEEDINGS.

As of the date of this filing, neither the Registrant nor any of its subsidiaries are a party to any legal proceeding that could reasonably be expected to have material impact on its operations or finances.

ITEM 4.

MINE SAFETY DISCLOSURES.

Not applicable

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Since January 8, 2010, the Company’s common stock has been listed on the NASDAQ Global Market under the ticker symbol “CALI”. The following table sets forth the quarterly average high and low bid prices per share for our common stock for the two most recently completed fiscal years in the period that ended on December 31, 2013. Where applicable, the prices set forth below give retroactive effect to our one-for-six reverse stock split which became effective on October 9, 2012.

Fiscal Year Ended	Common Stock
	High		Low
December 31, 2013
First Quarter	$	5.21	$	2.45
Second Quarter	$	4.45	$	2.80
Third Quarter	$	3.41	$	2.05
Fourth Quarter	$	4.30	$	2.18

December 31, 2012
First Quarter	$	6.66	$	5.04
Second Quarter	$	5.76	$	2.17
Third Quarter	$	2.34	$	1.13
Fourth Quarter	$	5.66	$	1.23

The source for the high and low closing bids quotations is the www.finance.yahoo.com website and does not reflect inter-dealer prices. Such quotations are without retail mark-ups, mark-downs or commissions, and may not represent actual transactions.

As of April 7, 2014, we had 14 holders of record of our common stock, and our common stock had a closing bid price of $3.32 per share.

Outstanding Options, Conversions, and Planned Issuance of Common Stock.

As of December 31, 2013, there were no warrants or options outstanding to acquire any shares of our common stock.

Dividends and Related Policy

We presently intend to retain all earnings, if any, for use in our business operations and accordingly, the Board of Directors (the “Board”) does not anticipate declaring any cash dividends for the foreseeable future. Any future determination to pay dividends will be at the discretion of the Board and will be contingent upon our financial condition, results of operations, current and anticipated cash needs, restrictions contained in current or future financing instruments, plans for expansion and such other factors as the Board deems relevant. We have not paid any cash dividends on our common stock.

PRC regulations currently permit payment of dividends only out of accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. Under current PRC laws and regulations, each of our PRC subsidiaries is required, where applicable, to allocate a portion of its respective net profits to PRC statutory reserves before distributing dividends, including at least 10% of its respective net profits to PRC statutory reserves until the balance of such fund has reached 50% of its respective registered capital. These reserves can only be used for specific purposes, including making-up cumulative losses of previous years, conversion to our equity capital, and application to business expansion, and are not distributable as dividends. Further, if any of our PRC subsidiaries incur debt in the future, the instruments governing the debt may restrict such Subsidiary’s ability to pay dividends or make other distributions to us. For risks associated with the restrictions that limit our ability to pay dividends on common stock, see “Risk factors- We rely on our PRC subsidiaries for the distribution of any dividends to our shareholders.”

Transfer Agent and Registrar

Our transfer agent is Corporate Stock Transfer, located at 3200 Cherry Creek Drive South, Suite 430, Denver, Colorado 80209. Their telephone number is (303) 282-4800.

Recent Sales of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

None.

ITEM 6.

SELECTED FINANCIAL DATA.

Not applicable.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

Forward Looking Statements

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 consolidated financial statements, as well as information relating to the plans of our current management and should be read in conjunction with the accompanying financial statements and their related notes included in this Report. References in this section to “we,” “us,” “our,” or the “Company” are to the consolidated business of China Auto Logistics Inc. and its wholly owned and majority owned subsidiaries.

This Report contains forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expects,” “intends,” “estimates,” “continues,” 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. 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.

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 its 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 the Exchange Agreement (“Exchange”) with a Hong Kong corporation, Ever Auspicious International Limited (“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 1,950,000 (pre reverse split of 11,700,000) newly-issued shares of our common stock. The closing of the Exchange (“Closing”) occurred on the same day, immediately following the cancellation of an aggregate of 189,167 (pre reverse split 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% of the issued and outstanding common stock of Fresh Ideas Media, Inc., respectively. As of the Closing, HKCo beneficially owns 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 from Fresh Ideas Media, Inc. to China Auto Logistics Inc. (the “Company”).

In connection with the consummation of the Exchange, Fresh Ideas Media, Inc. agreed to consummate 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 and would be consummated upon the satisfactory resolution of all of the SEC’s comments to the Form 10 registration statement relating to Community Alliance’s common stock and such registration statement’s effectiveness. Upon the consummation of the spin-off, the business and operations of HKCo were 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 (“PRC”), became a wholly-owned foreign enterprise of HKCo and this arrangement was approved by relevant ministries of the PRC government.

Upon the completion of the 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 are classified as a recapitalization of Shisheng and the historical financial statements of Shisheng are reported as the Company’s historical financial statements.

On November 1, 2010, Shisheng acquired all issued and outstanding stocks of Qizhong and completed the acquisition simultaneously. As a result, Qizhong became a wholly-owned subsidiary group of the Company and was included in the Company’s consolidated financial statements from the date of acquisition.

On March 15, 2011, the Company entered into a Memorandum of Understanding with the former owners of Qizhong and agreed that the remaining cash consideration totaling $2.09 million and the consideration share of 177,238 (pre reverse split of 1,063,427) shares of common stock of the Company should be paid to the former owners of Qizhong no later than June 30, 2011.

Pursuant to the Agreement and the 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 177,238 (pre reverse split of 1,063,427) shares of common stock valued at approximately $3.46 million. The value of common stock was determined based on $19.50 (pre reverse split of $3.25) per share, the per share price of the Company’s common stock on the acquisition date. The Company remitted approximately $600,000 and the remaining balance of the cash consideration in fiscal years 2010 and 2011, respectively. The 177,238 (pre reverse split of 1,063,427) shares of the Company’s common stock was to be unconditionally issued and was included in the Company’s equity as of December 31, 2010; the Company issued these shares during fiscal year 2011.

On November 22, 2013, the Company, through its wholly-owned subsidiary, Zhonghe, entered into a Cooperation Framework Agreement with Car King China, with respect to the establishment of a joint venture that will own and operate a used car business. The establishment of this joint venture was contingent upon the successful completion by the Company of the acquisition of Zhonghe which owns and operates a 26,000 square meter automobile mall facility on a 68,000 square meter land parcel located in the Tianjin Airport Economic Area (the “Airport International Auto Mall”), where the used car business will be operated. Upon the acquisition of Zhonghe on November 30, 2013, Tianjin Car King Used Car Trading Company Ltd (the “Joint Venture”) was established in accordance with the terms of the Cooperation Framework Agreement. Pursuant to the terms of the Articles of Association of Car King Tianjin, Zhonghe and Car King China will make capital contributions totaling RMB 8,000,000 and RMB 12,000,000, respectivley, to Car King Tianjin, which will have total registered capital of RMB 20,000,000. Prior to being acquired by the Company, Zhonghe made an initial capital contribution of RMB 4,000,000 to Car King Tianjin in November 2013. The Company is entitled to 40% of Car King Tianjin’s net profit or loss.

On November 30, 2013, Shisheng signed an agreement (the “Auto Mall Acquisition Agreement”) with Hezhong to purchase 100% of the equity of Zhonghe, which owns and operates the Airport International Auto Mall. Under the terms of the Auto Mall Acquisition Agreement, Shisheng will pay RMB 559,768,000 (approximately $91.4 million) to Hezhong, in four annual installments with an annualized rate of interest of 6%. The initial payment of RMB 240,000,000 (approximately $39.2 million) was paid within 5 business days after the signing of the Agreement. Upon the payment by Shisheng of this first installment, Hezhong transferred control of Zhonghe to Shisheng. Failure by Shisheng to pay the remaining installments may result in the termination of the Auto Mall Acquisition Agreement, as well as a penalty of 10% of the total transfer price.

Current Business of the Company

The Company provides individual and business customers with services in relation to automobile sales, financing services, custom clearance, storage, national transportation, quotation platform, and information relating to automotive services and products, through its websites (www.at188.com, www.at160.com), Also, the Company sells imported automobiles, manages an auto mall for customers, and as the only one-stop service provider in Tianjin provides dealer financing to our customers. Through the acquisition of Zhonghe and a joint venture with Car King China established in November 2013, we entered into the used car sales market. We believe that there is a strong market for used car sales in China and this joint venture will provide us with opportunities for long term growth. In addition, we intend to use the Tianjin Airport International Auto Mall which was acquired through the acquisition of Zhonghe, to expand into the retail automobile sales market which may generate higher overall gross margins.

Critical Accounting Policies, Estimates and Assumptions

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. These 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 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 valuation 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 provision 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-K reflect the more significant judgments and estimates used in preparation of our 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.

Airport Auto Mall Automotive Services include (i) the rental of the Airport International Auto Mall, and (ii) equity income (loss) derived from Car King Tianjin. Rental income from the Airport International Auto Mall is recognized based on the monthly rent agreed upon with our tenants. The equity income (loss) derived from Car King Tianjin is recognized based on the Company’s ownership share in Car King Tianjin’s net income (loss).

The Company recognizes revenue from Automobile Value Added Services when such services are performed.

Value Added Taxes represent amount collected on behalf of specific regulatory agencies that require remittance by a specified date. These amounts are collected at the time of sale and are detailed on invoice 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 represent 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 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 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 December 31, 2013, the deferred tax assets totaled $48,345 and deferred tax liabilities totaled $13,026,255.

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 $32.6 million as of December 31, 2013. 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 December 31, 2013 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 December 31, 2013, 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 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 fourth quarter of 2012, we revised our business plan and downsized Goodcar’s operations. The Company reviewed Goodcar’s advertising operations and decided to cease such operations to generate advertising revenue. We evaluated the projected revenue and profit and costs involved to operate Goodcar’s advertising operations and concluded that it would be in the Company’s best interests to cease its operations in order for us to better focus on our core of Automobile Sales, Automobile Value Added Services, Auto Mall Management, and Financing Services. Due to the closing of Goodcar’s advertising operations, we recorded goodwill impairment charges of $3,735,091 and impairment charges of $926,110 (net of deferred taxes of $314,094) related to the goodwill and intangible assets acquired in the acquisition of Goodcar.

In December 2012, the Company negotiated with these former owners of Qizhong with regard to the outstanding balance of these loans payable. As a result of the negotiations, these loans were forgiven by these former owners of Qizhong due to the fact that certain key executives left Goodcar after the purchase and Goodcar’s operations had not been performing the way it was expected. The formers owners were willing to forgive this debt since the actual performance of Qizhong after the acquisition was far below the performance forecast provided to the Company prior to the acquisition. The Company recorded a gain on debt forgiveness in the amount of $1,139,861 (including outstanding debt balance of $1,084,905 and foreign currency translation adjustment of $54,956) as other income in the consolidated statements of income for the year ended December 31, 2012.

In November 2013, the Company recorded goodwill in the amount of $20,107,700 as a result of the Zhonghe acquisition. As of December 31, 2013, no indication of goodwill impairment existed.

New Accounting Pronouncements

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

Results of Operations for the Fiscal Year Ended December 31, 2013 Compared To the Fiscal Year Ended December 31, 2012

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

	Year ended December 31,								Change in
	2013				2012				%
Net revenue	$	459,235,057	100.00	%	$	591,315,104	100.00	%		(22.34	)%
Cost of revenue		452,379,416	98.51	%		580,057,718	98.10	%		(22.01	)%
Gross profit		6,855,641	1.49	%		11,257,386	1.90	%		(39.10	)%
Operating expenses		3,925,894	0.85	%		7,675,192	1.29	%		(48.85	)%
Income from operations		2,929,747	0.64	%		3,582,194	0.61	%		(18.21	)%
Other income (loss)		(778,572)	(0.17	)%		594,511	0.10	%		(230.96	)%
Income before income taxes and non controlling interests		2,151,175	0.47	%		4,176,705	0.71	%		(48.50	)%
Net income		516,657	0.11	%		2,580,526	0.44	%		(79.98	)%
Net income attributable to shareholders of China Auto Logistics Inc.	$	524,260	0.11	%	$	2,567,087	0.43	%		(79.58	)%

Our net revenue decreased 22.34% in 2013 to $459,235,057 from $591,315,104 in 2012, and our cost of revenue decreased 22.01% in 2013 to $452,379,416 from $580,057,718 in 2012. Our gross profit margin decreased from 1.90% in 2012 to 1.49% in 2013. As compared to 2012, our gross profit, income from operations, net income and net income attributable to shareholders of China Auto Logistics Inc. in 2013 decreased 39.10% to $6,855,641, decreased 18.21% to $2,929,747, decreased 79.98% to $516,657, and decreased 79.58% to $524,260, respectively, primarily due to the decline of Sales of Automobiles, Web-based Advertising Services, and Automobile Value Added Services.

Net Revenue

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

	Year ended December 31,								Change in
	2013				2012				%
Net revenue	$	459,235,057	100.00	%	$	591,315,104	100.00	%		(22.34	)%
- Sales of Automobiles		450,143,413	98.03	%		581,292,369	98.30	%		(22.56	)%
- Financing Services		6,893,986	1.50	%		7,085,357	1.20	%		(2.70	)%
- Web-based Advertising Services		471,277	0.10	%		819,344	0.14	%		(42.48	)%
- Automobile Value Added Services		740,338	0.16	%		1,178,274	0.20	%		(37.17	)%
- Airport Auto Mall Automotive Services		15,788	0.00	%		-	-	%		-	%
- Auto Mall Management Services		970,255	0.21	%		939,760	0.16	%		3.24	%

Sales of Automobiles

Net revenue from sales of automobiles decreased 22.56% to $450,143,413 in 2013 from $581,292,369 in 2012. During 2013 and 2012, the Company sold 4,837 automobiles and 6,588 automobiles, respectively, representing a decrease of 26.58% in volume. After a long decline in the average selling price of our automobiles, the average unit selling price per automobile increased in 2013 by 6.82% to approximately $94,000 from approximately $88,000 in 2012. According to a forecast report issued by IHS Automotive (“IHS”) on April 28, 2012, it is expected that the growth rates for the high-end automobile market in China 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.

Even though the average selling price rebounded in 2013, our profit margin percentage continued to decline due to strong competition in the automobile industry, especially in major cities. The Company will continue its focus on the marketing of higher-end luxury automobiles.

The causes of the decrease in sales of automobiles during 2013 as compared to 2012 are summarized as follows:

Beginning in the second quarter of 2013, the PRC customs department implemented unified standards to complete its inspection process for imported automobiles. This prolonged our purchasing cycles and caused our available inventories to be insufficient to meet the demands of our customers. We have been working closely with our suppliers who improved the inventory delivery process during the third quarter of 2013. As a result, our inventory level gradually increased to a more stable level during the third quarter of 2013.

Beginning in March 2013, the PRC motor registration office began strictly enforcing rules requiring imported automobiles that are not purchased through “4S” shops to meet certain specifications in order to obtain registration permits. As a result, certain alterations to imported automobiles may be needed in order to be in compliance with the PRC regulations. Due to the additional costs faced by end users (including our customers) for these alterations, and the delays caused by the registration approval process, the demand for our automobiles dropped in the second quarter of 2013. We have provided advice to our customers in terms of the alteration requirements at each province’s motor registration office in order to minimize their alteration costs, which we believe will ease the concerns of some customers.

3.	The PRC economy slowed down during 2013, which has decreased the demand for luxury automobiles.

We have experienced increased competition as more companies enter the imported automobile market. While we remain one of the leaders in the import automobile market, we continue to reduce our gross profit margin in order to expand our market share and maintain our market leader status. In addition, we have experienced higher demand for lower end models of our top selling brands, Toyota, BMW and Mercedes Benz since the first quarter of 2012, and this trend has continued in 2013. Lower end models of luxury automobiles generate lower gross margins as the consumers have a larger variety of automobiles in the market from which to choose. There were mixed trends with respect to the average selling prices for our top three selling brands as we started seeing stronger demand for the higher end models of Mercedes Benz which resulted in the increase of its average selling prices during 2013 by 9%, as compared to 2012. Average selling prices for BMW and Toyota models continued to decline at rates of 8% and 10%, respectively, in 2013 as compared to 2012. Total sales for these top three brands accounted for approximately 73% and 81% of our total automobile sales for the year ended December 31, 2013 and 2012, respectively. Our gross margin for sales of automobiles decreased from 0.90% in 2012 to 0.09% in 2013.

In order to continue to expand our market share and maintain our leading position in the competitive luxury automobile market, we have continued to offer better prices to our customers compared to our competitors. We have achieved this in part by decreasing our gross margin for automobiles throughout 2013. We believe this approach will prevent our competitors from being able to match our selling prices. We expect our gross margin to stabilize in 2014.

Sales to the Company’s top five customers, each of which is a car dealer, accounted for 35.83% and 38.97% of the Company’s sales during 2013 and 2012, 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 actively looking for new customers to enlarge its customer base.

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 from its customers for drawing its facility lines of credit 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 decreased 2.70% in 2013 to $6,893,986 from $7,085,357 in 2012. The Company had an aggregate amount of credit lines of approximately $142 million as of December 31, 2013. Our Financing Services income and related cost of revenue are affected by the interest rate charged by banks. In June and July 2012, the China benchmark interest rate decreased by a total of 50 basis points. We also obtained lower rates from certain banks on draws on our credit lines. Our Financing Services revenue consists of two portions: interest income and fee income. The revenue from the fee income portion of our Financing Services increased during the year ended December 31, 2013. The ratio of the revenue from our interest income portion to our net Financing Services revenue was lower during the year ended December 31, 2013 due to the effects of the lower average interest rates during the year ended December 31, 2013 as compared to those during 2012. Excluding revenue from the interest income portion of $2,537,905 and $3,374,466 in the year ended December 31, 2013 and 2012, respectively, the revenue from the fee income portion of our Financing Services increased 17.39% to $4,356,061 for the year ended December 31, 2013 from $3,710,891 in 2012. The gross margin for our Financing Services segment increased to 62.87% for the year ended December 31, 2013 from 51.13% in 2012. Even though the growth of our Financing Services was impacted by the unified standards imposed by the customs department and the enforcement rules at the motor registration office, we were still able to maintain stable income from operations in 2013 as compared to 2012, which demonstrated the continued moderate growth of our Financing Services segment.

We continue to take advantage of the credit lines granted by our banks to expand our Financing Services operations. As a result, we were able to continue to grow the fee income portion of our Financing Services segment. Future revenue growth from Financing Services is heavily dependent on overall industry growth and the economic conditions of the market in the PRC. We have established reputable credit with most major commercial banks and, although the enormous decrease or the simultaneous expiration of credit lines or other bank facilities may temporarily reduce our capacity to provide Financing Services and affect our purchasing power, we have not experienced difficulties accessing credit lines and other bank facilities in the past. We therefore do not foresee any difficulty at this time in obtaining credit lines and loan facilities from our banks in the future. However as banks in China continue to reduce their credit risks and improve the quality of their outstanding loans, we continue to experience more requirements for obtaining bank lines and loans such as requiring personal guarantees by our executives and directors, and guarantees by our major customers and suppliers.

We provide Financing Services to our customers with our lines of credit with major commercial banks in the PRC, including Agricultural Bank of China, China Merchants Bank, and Pudong Development Bank, and China Zheshang Bank. We continue to strengthen our relationship with these banks and aim to negotiate with more banks for higher lines of credit at more favorable terms. Based on the Company’s business relationships with some 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 April 7, 2014, the Company had aggregate credit lines of $159 million (RMB 970 million). Although all of our lines of credit have maturities of less than one year 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

Revenue from Web-Based Advertising Services was generated by subscription fees and advertisements. In 2012, we revised our business plan and downsized Goodcar’s operations. In 2013, we discontinued operating our Goodcar website and changed the Company’s focus to Automobile Sales, Automobile Value Added Services, Auto Mall Management, Financing Services, the newly developed used car business through Car King Tianjin, and any other potential opportunities that may arise as a result of the Company’s ownership of the Airport International Auto Mall.

Revenue from Web-based Advertising Services decreased 42.48% to $471,277 in 2013 from $819,344 in 2012. We have experienced stiff competition in the web-based advertising arena which continues to drive the pricing of advertising revenue down. Starting in 2012, we have shifted our focus of our websites from generating advertising revenue to providing automotive information to our website visitors. We are targeting to create a platform that allows our customers and potential customers to have access to our products including Automobile Sales, Automobile Value Added Services, and Financing Services. By offering extensive automotive information and news, we hope to attract more potential customers to our websites. We are therefore willing to sacrifice advertising revenue in the near term in an attempt to create opportunities for higher potential growth of our other service products in the long term.

Automobile Value Added Services

Revenue from our Automobile Value Added Services segment, which includes services such as assistance with customs clearance, storage and nationwide delivery services decreased 37.17%, to $740,338 in 2013 from $1,178,274 in 2012. We expect our Automobile Value Added Services revenue to fluctuate from time to time depending on our customers’ needs.

Airport Auto Mall Automotive Services

Through the acquisition of Zhonghe, which owns and operates the Airport International Auto Mall, we intend to operate two new business including (i) selling used cars through Car King Tianjin; and (ii) leasing a portion of the Airport International Auto Mall facility. We are also considering directly targeting retail customers by selling imported automobiles out of this facility. We are currently finalizing our operation plans to determine the best and most profitable uses for this facility, and we expect this facility will not be fully operational until the second half of 2014. Because we are still in the initial setup stages of operations, and had only one month of operations since the acquisition, our revenues from Airport Auto Mall Automotive Services were $15,788 (0.00% of all revenues) for the fiscal year 2013.

Auto Mall Management Services

Pursuant to a services agreement between the Company and Tianjin Prominent Hero International Logistics Co., Ltd., dated March 1, 2011, the Company agreed to provide services to manage the International Auto Mall for a one-year period for an aggregate consideration of $1,009,612 (RMB 6,250,000). The related services fee is recognized ratably over the service period and included as revenue from Auto Mall Management Services. On March 1, 2012, the services agreement was renewed for a term of 1 year for an aggregate consideration of $1,009,612 (RMB 6,250,000).

On March 14, 2014, the Company announced that the Cooperation Agreement dated March 1, 2013, by and between the Company and Tianjin Prominent Hero International Logistics Co., Ltd, to manage the International Auto Mall had not been renewed. The Cooperation Agreement expired according to its terms on February 28, 2014. The Company plans to focus on managing the recently acquired Airport International Auto Mall and growing its other business segments.

Our Auto Mall Management Services revenue in 2013 and 2012 was $970,255 and $939,760, respectively.

Cost of Revenue

	Year ended December 31,								Change in
	2013				2012				%
Net revenue	$	459,235,057	100.00	%	$	591,315,104	100.00	%		(22.34	)%
Cost of revenue		452,379,416	98.51	%		580,057,718	98.10	%		(22.01	)%
Gross profit		6,855,641	1.49	%		11,257,386	1.90	%		(39.10	)%

Our cost of revenue in 2013 consisted primarily of the cost of automobiles purchased and certain direct labor and overhead costs related to our Financing Services, Web-based Advertising Services, Automobile Value Added Services, Airport Auto Mall Automotive Services and Auto Mall Management Services. Our cost of revenue decreased 22.01%, from $580,057,718 in 2012 to $452,379,416 in 2013. The decrease was primarily due to the decrease in the sales volume of imported automobiles in the year, which is consistent with the decline of our net revenue.

Because our cost of revenue consists primarily of the purchase price of imported automobiles, we have limited influence on such costs. The prices of imported automobiles are determined solely by suppliers and are dependent upon the 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.

Gross profit decreased 39.10% from $11,257,386 in 2012 to $6,855,641 in 2013, due to revenue declining at a higher rate than the decrease in the cost of revenue. We have experienced increased competition from our competitors which drove down the sales prices of our imported automobiles.

Operating Expenses

	Year ended December 31,								Change in
	2013				2012				%
Operating expenses
- Selling and marketing	$	751,114	19.13	%	$	977,555	12.74	%		(23.16	)%
- General and administrative		3,174,780	80.87	%		2,036,436	26.53	%		55.90	%
- Impairment loss of goodwill and intangible assets		-	-	%		4,661,201	60.73	%		(100.00	)%
Total		3,925,894	100.00	%		7,675,192	100.00	%		(48.85	)%

Operating expenses decreased 48.85%, from $7,675,192 in 2012 to $3,925,894 in 2013. This decrease was primarily due to the impairment loss of goodwill and intangible assets on Goodcar, which amounted to $4,661,201 in 2012; we did not incur any impairment loss in 2013. In addition, our selling and marketing expense decreased 23.16% from $977,555 in 2012 to $751,114 in 2013. These decreases were partially offset by a 55.9% increase of general and administrative expense from $2,036,436 in 2012 to $3,174,780 in 2013.

Selling and Marketing Expenses

Selling and marketing expenses decreased 23.05% in 2013. The following table sets forth a breakdown of the primary selling and marketing expenses of the Company:

	Year Ended December, 31				Change in
	2013		2012		%
Primary selling and marketing expenses
- Office allowance	$	33,581	$	49,757		(32.51	)%
- Payroll		134,527		153,262		(12.22	)%
- Staff related costs		60,824		80,154		(24.12	)%
- Advertising and promotion		34,699		14,445		140.21	%
- Entertainment		106,018		77,101		37.51	%
- Rent		122,691		221,687		(44.66	)%

Payroll costs decreased 12.22% to $134,527 in 2013 as we incurred payroll expenses for certain Goodcar employees in the first half of 2012 but had no such expenses in 2013. Payroll related costs decreased 24.12% to $60,824 in 2013 as we incurred severance costs for terminating our Goodcar employees in 2012. Advertising and promotion expenses increased by 140.21% during 2013 as we incurred advertising expenses for certain web advertisements to promote our services. Entertainment expense fluctuates from time to time depending on the event activities we conducted. Rental expenses decreased 44.66% primarily due to the rent savings as a result of termination of an exhibition show room in November 2012.

General and Administrative Expenses

The following table sets forth a breakdown of the primary general and administrative expenses of the Company:

	Year Ended December, 31				Change in
	2013		2012		%
Primary general and administrative expenses
- Depreciation	$	275,837	$	159,484		(18.40	)%
- Entertainment		159,484		87,945		79.75	%
- Payroll		293,866		360,140		(18.40	)%
- Staff related costs		86,491		152,961		(43.46	)%
- Legal and professional fees		1,693,241		911,669		85.73	%

Depreciation expenses increased as we incurred additional depreciation expenses following the acquisition of Zhonghe in November 2013. Payroll costs decreased 18.40% to $293,866 as we incurred payroll expenses for certain Goodcar employees in the first half of 2012, but had no such expenses in 2013. Staff related costs decreased 43.46% to $86,491 in 2013 as we incurred severance costs for terminating our Goodcar employees in 2012. Legal and professional fees increased 85.73% to $1,693,241 in 2013 from $911,669 in 2012 as we incurred additional professional fees and the value of common stock issuance as acquisition costs related to the Zhonghe acquisition.

Impairment Loss of Goodwill and Intangible Assets

We recorded impairment losses of $4,661,201in respect of our goodwill and intangible assets as a result of discontinuing the Goodcar operations in 2012. We did not incur any impairment losses during the year ended December 31, 2013.

Income from Operations

Income from operations decreased 18.21% to $2,929,747 in 2013 from $3,582,194 in 2012. Excluding the impairment charge of goodwill and intangible assets of $4,661,201 in 2012, our income from operations decreased 64.46% to $2,929,747 in 2013 from $8,243,395 in 2012. The decrease was primarily due to the continuing decline of our gross profit margin on the sales of automobiles from 0.90% in 2012 to 0.09% in 2013. We believe we will continue to maintain our leadership in the imported luxury automobiles industry in the current slow economy and competitive automobile industry.

Other Income (Expenses), Net

Other income (expenses) primarily consists of interest income related to bank deposits, interest expense related to bank borrowings and payable relate to the Zhonghe acquisition, loss on disposal of property and equipment, equity loss – sale of investee company losses and gain on forgiveness of debt. We recorded a net other expenses of $778,572 for fiscal year 2013 and a net other income of $594,511 for fiscal year 2012, primarily due to the interest expense incurred related to the payable related to the Zhonghe acquisition and foreign exchange loss of $217,764 during 2013 compared to a gain on forgiveness of debt to the former shareholders of Goodcar in the amount of $1,139,861 during 2012.

Income Tax

Income tax expense for the year ended December 31, 2013 was $1,634,518, an increase from $1,596,179 for the year ended December 31, 2012. We incurred certain expenses which were not tax deductible including $986,000 for the issuance of common stock to consultants related to the Zhonghe acquisition which was partially offset by the decline of our income from operations.

Acquisition of Zhonghe

On November 30, 2013, Shisheng signed the Auto Mall Acquisition Agreement with Hezhong to purchase 100% of the equity of Zhonghe, which owns and operates the Airport International Auto Mall.

Under the terms of the Auto Mall Acquisition Agreement, Shisheng will pay RMB 559,768,000 (approximately $91.4 million) to Hezhong, in four annual installments with an annualized rate of interest of 6%. A substantial portion of the purchase price was related to the acquisition of the Airport International Auto Mall which was valued at $72,640,016. Apart from the other identified net assets in the amount of $10,075,231 and deferred tax liabilities related to the book and tax basis differences on the real estate and intangible assets in the amount of $11,448,664, the excess of purchase price over the identified assets and liabilities was allocated to goodwill in the amount of $20,107,700. We believe the goodwill valuation represents: (i) expected appreciation in the value of the Airport International Auto Mall property, (ii) expected synergies and economies of scale from the integration of our business with Zhonghe and the newly formed Car King Tianjin used car business, (iii) the expectation that owning the Airport International Auto Mall will create other business opportunities in the future and will provide more resources to capture these potential opportunities, (iv) a defensive strategy to prevent our competitors from acquiring the Airport International Auto Mall, and (v) Zhonghe’s historical business. We believe that the purchase price paid represents the fair value of the assets acquired.

The fair market value of the Airport International Auto Mall property is affected by the condition of the real estate market in China, especially in Tianjin. Even though the real estate market has been on an upward trend in recent years, it is uncertain that this trend will continue. If the Chinese real estate market declines, the market value of our real estate property may decline below its carrying value on our consolidated balance sheet. As a result, we may be required to record a significant impairment charge which will adversely affect our operating results and financial condition.

Inflation

We believe that inflation had a negligible effect on operations for the fiscal years 2013 and 2012. 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 and short-term borrowings from banks. During the reporting periods, we arranged a number of bank loans to satisfy our financing needs. As of the date of this Form 10-K, 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 normal course of business and repaying our bank loans when they come due.

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 us 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 us.

The following table sets forth a summary of our cash flows for the fiscal years ended December 31, 2013 and 2012.

	Year Ended December, 31
	2013			2012
Net cash provided by (used in) operating activities	$	35,479,835		$	(15,351,117	)
Net cash used in investing activities		(31,478,219	)		(6,058	)
Net cash provided by financing activities		1,948,299			16,061,147
Effect on exchange rate change on cash		202,841			(16	)
Cash and cash equivalents at beginning of year		8,888,749			8,184,793
Cash and cash equivalents at end of year		15,041,505			8,888,749

Operating Activities

During the fiscal year 2013, we had net cash provided by operating activities of $35,479,835, as compared to net cash used in operating activities of $15,351,117 in fiscal year 2012.

During the year ended December 31, 2013, the increase in net cash provided by operating activities was primarily a result of a decrease in inventories in the amount of $13,899,728, a decrease in advances to suppliers in the amount of $9,450,667, and an increase in customer deposits in the amount of $15,266,991, which was partially offset by the increase in restricted cash in the amount of $13,792,120.

During the year ended December 31, 2012, the decrease in net cash used for operating activities is primarily a result of the net effects of reduction in net income, increase in impairment loss on goodwill and intangible assets, gain on forgiveness of debt, increase in restricted cash, decrease in advances from suppliers, increase in notes payable to suppliers, and decrease in customer deposits.

Investing Activities

During fiscal years 2013 and 2012, we used net cash flows in investing activities of $31,478,219 and of $6,058, respectively. Under the terms of the Auto Mall Acquisition Agreement, entered into on November 30, 2013, Shisheng will pay RMB 559,768,000 (approximately $91.4 million) to Hezhong, in four annual installments with an annualized rate of interest of 6%. We paid approximately $38.8 million initial payment related to this acquisition in fiscal year 2013.

We purchased property and equipment in the amount of $14,842 in 2013 as compared to $6,058 in 2012. In addition, we received a repayment of loan receivable in the amount of $7,111,260 from the former owner of Zhonghe

Financing Activities

During fiscal years 2013 and 2012, net cash provided by financing activities was $1,948,299 and $16,061,147, respectively. We entered into an overdraft agreement with a bank, which allowed us to draw $2,407,865 during the year ended December 31, 2013. We had net short-term borrowings repayments of $14,028,128 in 2013 as compared to net short-term borrowings of $15,561,407 in 2012. We received loans from a director in the amount of $862,200 in 2013 and $852,075 in 2012, and repaid $755,921 in 2013 and $352,335 in 2012. We repaid loans to the former Qizhong shareholders in the amount of $2,754,479 during 2012.

Our total cash and cash equivalents increased to $15,041,505 as of December 31, 2013, as compared to $8,888,749 as of December 31, 2012.

Working Capital

As of December 31, 2013, the Company had working capital of $16,012,695 compared to $59,162,436 as of December 31, 2012.

The Company’s cash is used to finance the purchases of inventory, payments for advances from suppliers, and restricted cash as requirements for our financing service operations, lines of credit related to Financing Services and short-term borrowings. As of December 31, 2013, the decrease of working capital was primarily attributable to initial payments made related to the Zhonghe acquisition in the amount of $38.6 million (net of cash received of $0.2 million).

The Company has aggregate outstanding balance of lines of credit related to Financing Services of $66,173,312 and $51,528,018 as of December 31, 2013 and 2012, respectively, and outstanding balances of short-term borrowings of $6,259,598 and $19,673,128 as of December 31, 2013 and 2012, respectively. In addition, we had a bank overdraft with a balance of $2,439,429 as of December 31, 2013.

As of December 31, 2013, we have the following payable related to the Zhonghe acquisition:

Outstanding debt balance	$	51,012,804
Less current portion		(15,706,581	)
Outstanding debt balance less current portion	$	35,306,223

Under the terms of the Auto Mall Acquisition Agreement, we have to remit approximately $19.6 million, including principal and interest in each November of 2014, 2015 and 2016. We plan to finance these installment payments through our operating cash flows and bank loans. We expect that we will not have sufficient cash flow to remit these payments without obtaining outside financing. We believe we will be able to obtain sufficient bank loans at reasonable terms to finance our operations and these payment installments. However no assurance can be given that we will be successful in obtaining any loans on terms acceptable to us.

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

Capital Expenditures

We had property and equipment, net of $72,977,985 as of December 31, 2013 and $314,126 as of December 31, 2012. The increase in fiscal year 2013 was mainly due to the properties acquired through the acquisition of Zhonghe in the amount of $72,640,016 which was partially offset by the depreciation expense of $304,859.

The following table sets forth a summary of our property and equipment for the fiscal years ended December 31, 2013 and 2012

	Year Ended December, 31				Change in
	2013		2012		%
Buildings and land use rights	$	72,826,656	$	-		-	%
Computers		217,717		126,474		72.14	%
Office equipment, furniture and fixtures		109,898		75,286		45.97	%
Leasehold improvements		34,368		33,328		3.12	%
Automobiles		1,117,383		1,058,949		5.5	%
Total		74,306,022		1,294,037		4,668.38	%
Accumulated depreciation and amortization		1,328,037		979,911		32.07	%
Property and equipment, net	$	72,977,985	$	314,126		19,131.26	%

Foreign Cash

As of December 31, 2013 and 2012, the Company had cash deposits of $14,997,279 and $8,851,507 placed with several banks and a financial institution in the People’s Republic of China, where there is currently no rule or regulation in place for obligatory insurance of accounts with banks and financial institutions.

If the foreign cash and cash equivalents are expatriated to finance any needs of our operations in the U.S., we may need to accrue and pay U.S. taxes. Currently, we have not provided for U.S. income and foreign withholding taxes on undistributed earnings of our PRC subsidiaries since we intend to reinvest our earnings to further expand our businesses in mainland China and do not intend to declare dividends to our U.S. holding company in the foreseeable future.

Indebtedness

We entered into several banking facilities with Agricultural Bank of China, China Merchants Bank, Pudong Development Bank, and China Zheshang Bank. As of December 31, 2013 and 2012, the Company had aggregate credit lines of $142 million (RMB870,000,000) and $135 million (RMB850 million), respectively, had outstanding balances under these credit lines amounted to $66 million and $52 million, respectively. In February 2014, we obtained a facility from Industrial and Commercial Bank of China to borrow up to $16,365,541 (RMB100,000,000). As of April 7, 2014, the Company had aggregate credit lines of $159 million (RMB970 million) with its banks.

As of December 31, 2013 and 2012, we had an aggregate outstanding loan balance of $6,259,598 and $19,673,128, respectively, related to certain short-term loan agreements with Agricultural Bank of China and China Zheshang Bank. These loans carried interest at rates ranging from 0.92% to 5.6% per annum and maturity dates between six months to one year from the original loan agreement dates. These loans were used for our working capital. We continue to take advantage of the low interest rate environment and our excellent relationships with the major banks to secure loans at attractive terms. In order to expand our revenues on sales of automobiles, we are required to have a significant amount of working capital since our suppliers require deposits for orders. As we continue to see growth in our automobile sales business, we expect to continue to use short term loans to finance our business expansion.

We had an overdraft of $2,439,429 with Pudong Development Bank as of December 31, 2013.

Under the terms of the Auto Mall Acquisition Agreement, Shisheng will pay RMB 559,768,000 (approximately $91.4 million) to Hezhong, in four annual installments with an annualized rate of interest of 6%. The initial payment of approximately $39.2 million (RMB 240,000,000) was paid within 5 business days after the signing of the Agreement. As of December 31, 2013, we had an outstanding debt balance of $51,012,804.

Debt Forgiveness

In connection with the Goodcar acquisition, we assumed the balances due to former owners of Qizhong of $1,084,905. Upon completion of the share issuance, these former owners of Qizhong then became shareholders of the Company. In December 2012, we negotiated with these former owners of Qizhong with regard to the outstanding balance of these loans payable. As a result of the negotiations, these loans were forgiven by these former owners of Qizhong due to the fact that certain key executives left Goodcar after the purchase and Goodcar’s operations had not been performing the way it was expected. The formers owners were willing to forgive this debt since the actual performance of Qizhong after the acquisition was far below the performance forecast provided to the Company prior to the acquisition. We recorded a gain on debt forgiveness in the amount of $1,139,861 (including outstanding debt balance of $1,084,905 and foreign currency translation adjustment of $54,956) as other income in the consolidated statements of income for the year ended December 31, 2012.

Trend Information

Other than as disclosed elsewhere in this Form 10-K, we are not aware of any trends, uncertainties, demands, commitments or events for the periods discussed in this section that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, nor any that caused the disclosed financial information to not necessarily be indicative of future operating results or financial conditions.

Off-Balance Sheet Arrangements

We do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts. Furthermore, we do 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. We do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to pages F-1 through F-28 comprising a portion of this annual report on Form 10-K.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A.

CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls or procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues are instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2013, the end of the annual period covered by this report. The evaluation of our disclosure controls and procedures included a review of the disclosure controls’ and procedures’ objectives, design, implementation and the effect of the controls and procedures on the information generated for use in this report. In the course of our evaluation, we sought to identify errors, control problems or acts of fraud and to confirm the appropriate corrective actions, including process improvements, were being undertaken. Our Chief Executive Officer and Chief Financial Officer have concluded that the Company had a material weakness in its internal control over financial reporting as of December 31, 2013 because the Company’s accounting department personnel had limited knowledge and experience in U.S. GAAP and SEC reporting requirements as of December 31, 2013.

Based on the foregoing, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective as of December 31, 2013.

Internal Control Over Financial Reporting

(a) Management’s Annual Report on Internal Control Over Financial Reporting.

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company has conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2013, based on the 1992 framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As permitted by SEC guidance, management excluded from its assessment the internal control over financial reporting of Zhonghe’s business which was acquired on November 30, 2013, as described in Note 3 to the Consolidated Financial Statements. Zhonghe’s financial statements accounted for approximately 41.2% of total assets, and 0.9% of net sales and (48.2)% of net income attributable to shareholders of China Auto Logistics Inc. of the consolidated financial statement amounts as of December 31, 2013 and for the year then ended.

During this evaluation, the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, has identified one material weakness in the control environment of the Company. The material weaknesses are related to

●	the Company’s accounting department personnel have limited knowledge and experience in US GAAP and SEC Reporting.

A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis. As a result of the material weakness identified above, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2013.

To remediate the material weakness identified in internal control over financial reporting of the Company, we have done the following:

●	continued our efforts to recruit additional personnel with sufficient knowledge and experience in US GAAP; and
●	continued our efforts to provide ongoing training courses in US GAAP to existing personnel, including our Chief Financial Officer and the Financial Controller.

The Company believes that the consolidated financial statements fairly present, in all material respects, the Company’s consolidated balance sheets as of December 31, 2013 and 2012 and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years ended December 31, 2013 and 2012, in conformity with accounting principles generally accepted in the US, notwithstanding the material weakness we identified.

This Annual Report on Form 10-K does not include an attestation report of the Registrant's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Registrant's registered public accounting firm pursuant to Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act that permit the Registrant to provide only management's report in this Annual Report.

(b) Changes in Internal Control Over Financial Reporting.

During the fiscal year 2013, except for the integration of the internal controls over financial reporting for Zhonghe, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

ITEM 9B.

OTHER INFORMATION.

None

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Our current directors were elected at the last annual meeting, which occurred on November 19, 2013, and will serve until the next annual meeting. As of December 31, 2013, our current directors and executive officers were as follows:

Name	Age	Position Held	Experience
Tong, Shiping	54	Chief Executive Officer, President and Chairman of the Board	Mr. Tong has served as President and Chief Executive Officer of the Company since 1995, when the Company’s wholly owned operating subsidiary Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd. (formerly Tianjin Shisheng Investment Group Co. Ltd.) was founded. He earned his Bachelor degree in computer science from the China Air Force Engineering University. Mr. Tong is also a director of the Tianjin Car Logistics Association. The Board believes that Mr. Tong has the experience, qualifications, attributes and skills necessary to serve on the Board because of his over 17 years of experience in the China auto industry, his having provided leadership and strategic direction to the Company as its founder, and his unparalleled understanding of the Company’s operations and products.

Jin, Yan	48	Chief Operating Officer	Mr. Yan has served as Chief Operating Officer of the Company since July of 2012. From 2007 to 2010, he served as Managing Director of Madeleine Gourmet Restaurant which operated a series of chain restaurants. Prior to his appointment as COO, he served as General Manager of Sales for the Company since 2011. He also earned an MBA from Tianjin Nankai University.

Cheng, Weihong	52	Senior Vice President (Head of Human Resources and General Administration) and Director	Ms. Cheng has served as Senior Vice President (Head of Human Resources and General Administration) of the Company since 1995. She earned her Bachelor degree from Shijazhuang Military Medical University. Ms. Cheng is also a co-founder of Shisheng and has served as the Chairwoman of Shisheng since 1995. The Board believes that Ms. Cheng has the experience, qualifications, attributes and skills necessary to serve on the Board because of her over 18 years of experience in the China auto industry as Secretary and Senior VP of the Company.

Wang, Xinwei	57	Chief Financial Officer, Treasurer, Vice President and Director	Ms. Wang has served as the Chief Financial Officer, Treasurer and Vice President of the Company since joining Shisheng in 2001. She earned her Bachelor degree in industry accounting from Tianjin Radio and TV University. Ms. Wang is a qualified Chinese certified public accountant. The Board believes that Ms. Wang has the experience, qualifications, attributes and skills necessary to serve on the Board because of her extensive executive leadership and financial expertise as CFO, Treasurer and VP of the Company.

Name	Age	Position Held	Experience
Barth, Howard S.	62	Director	Mr. Barth has operated his own public accounting firm in Toronto, Canada since 1985, and has over 30 years of experience as a chartered accountant. Currently he is also director and chairman of the Audit Committee of Guanwei Recycling Corp. (a Nasdaq-listed company) since November 2008 and a director of Yukon Gold Corp. (an OTCBB-listed company). From 2005 until May 2008, he served as a director of Yukon Gold Corp. and from May 2008 to December 2008 he served as President and C.E.O. ( at the time, dual listed on the OTCBB and TSX). He has also been a director and chairman of the Audit Committee from December 2005 until June 2009 for Nuinsco Resources Limited (a TSX listed company). He was also a director of Offshore Petroleum Corp. and Uranium Hunter Corporation (an OTCBB listed company). He is a member of the Canadian Institute of Chartered Accountants and the Ontario Institute of Chartered Accountants. He earned his B.A. and M.B.A. at York University. The Board believes that Mr. Barth has the experience, qualifications, attributes and skills necessary to serve on the Board because of his extensive experience and financial expertise in public companies.

Wang, Wei	36	Director	Mr. Wang has served as the General Manager of Sales of Vcanland Holding Group since 2007, where he has successfully operated a number of real estate development projects and has dealt with accounting issues. He also received a bachelor degree from the Tianjin Institute of Urban Construction. The Board believes that Mr. Wang has the experience, qualifications, attributes and skills necessary to serve on the Board because of his successful management experience and familiarity with accounting issues.

Yang, Lili	55	Director	Ms. Yang has served as the accounting director of Tianbao International Trade & Exhibition Ltd. since 2005, where she obtained years of experience in providing customers with commercial financing services. The Board believes that Ms. Yang has the experience, qualifications, attributes and skills necessary to serve on the Board because of her extensive experience in accounting.

Zou, Baoying	70	Director	Mr. Zou retired in 2004 from a long career in the education sector. He has been a member of the China Association for Promoting Democracy since 1984, a highly respected and influential organization. Due to such membership, Mr. Zou has established a wide network with local governmental authorities, which will be very helpful in furthering the Company’s business development. The Board believes that Mr. Zou has the experience, qualifications, attributes and skills necessary to serve on the Board because of his distinguished career and political affiliations.

Certain Significant Employees

None.

Family Relationships

Ms. Cheng Weihong, our Senior Vice President (Head of Human Resources and General Administration) and a director, is the wife of Mr. Tong Shiping, our President, Chief Executive Officer and Chairman of the Board.

Involvement in Legal Proceedings

None of our directors, persons nominated to become a director, executive officers or control persons have been involved in any of the following events during the past 10 years:

●	Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of bankruptcy or within two years prior to that time; or

●	Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); or

●	Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or

●	Being found by a court of competent jurisdiction (in a civil violation), the SEC or the Commodity Future Trading Commission to have violated a federal or state securities or commodity law, and the judgment has not been reversed, suspended, or vacated; or

●

Being the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: any Federal or State securities or commodities law or regulation; or any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity. This violation does not apply to any settlement of a civil proceeding among private litigants; or

●

Being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

Board of Directors Meetings and Committees

The Board held one meetings during the fiscal year ended December 31, 2013. Each Director attended, either in person or telephonically, at least 75% of the aggregate Board of Directors meetings and meetings of committees on which he served during his tenure as a director or committee member.

On December 12, 2008, the Board approved and authorized the establishment of three new committees: the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee. Howard S. Barth (Chair, Financial Expert), Wang Wei and Yang Lili were appointed to the Audit Committee. Yang Lili (Chair), Wang Wei and Zou Baoying were appointed to the Compensation Committee. Wang Wei (Chair), Yang Lili and Zou Baoying were appointed to the Nominating and Corporate Governance Committee. The charter of each committee is also available in print to any stockholder who requests it.

Audit Committee

The Audit Committee is currently comprised of Howard S. Barth (Chair), Wang Wei and Yang Lili, each of whom are “independent” as independence is currently defined in applicable Securities and Exchange Commission’s (the “SEC”) rules. The Board has determined that Howard S. Barth qualifies as an “Audit Committee financial expert,” as defined in applicable SEC rules implementing Section 407 of the Sarbanes-Oxley Act of 2002. The Board made a qualitative assessment of Mr. Barth’s level of knowledge and experience based on a number of factors, including his formal education and experience.

The Audit Committee is responsible for overseeing the Company’s corporate accounting, financial reporting practices, audits of financial statements and the quality and integrity of the Company’s financial statements and reports. In addition, the Audit Committee oversees the qualifications, independence and performance of the Company’s independent auditors. In furtherance of these responsibilities, the Audit Committee’s duties include the following: evaluating the performance of and assessing the qualifications of the independent auditors; determining and approving the engagement of the independent auditors to perform audit, reviewing and attesting to services and performing any proposed permissible non-audit services; evaluating employment by the Company of individuals formerly employed by the independent auditors and engaged on the Company’s account and any conflicts or disagreements between the independent auditors and management regarding financial reporting, accounting practices or policies; discussing with management and the independent auditors the results of the annual audit; reviewing the financial statements proposed to be included in the Company’s annual report on Form 10-K; discussing with management and the independent auditors the results of the auditors’ review of the Company’s quarterly financial statements; conferring with management and the independent auditors regarding the scope, adequacy and effectiveness of internal auditing and financial reporting controls and procedures; and establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting control and auditing matters and the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters. The Audit Committee operates under the written Audit Committee Charter adopted by the Board in December of 2007, a copy of which may be obtained by writing the Secretary of the Company at Floor 1 FTZ International Auto Mall, 86 Tianbao Avenue, Free Trade Zone, Tianjin Province, The People’s Republic of China 300461 and is available on the Company’s website at http://www.chinaautologisticsinc.com.

Nominating/Corporate Governance Committee

The Nominating and Corporate Governance Committee (the “Nominating Committee”) is responsible for preparing a list of candidates to fill the expiring terms of directors serving on our Board. The Nominating Committee submits the list of candidates to the Board who determines which candidates will be nominated to serve on the Board. The names of nominees are then submitted for election at our Annual Meeting of Stockholders. The Nominating Committee also submits to the entire Board a list of nominees to fill any interim vacancies on the Board resulting from the departure of a member of the Board for any reason prior to the expiration of his term. In recommending nominees to the Board, the Nominating Committee keeps in mind the functions of this body. The Nominating Committee considers various criteria, including general business experience, general financial experience, knowledge of the Company’s industry (including past industry experience), education, and demonstrated character and judgment. The Nominating Committee will consider director nominees recommended by a stockholder if the stockholder mails timely notice to the Secretary of the Company at its principal offices, which notice includes (i) the name, age and business address of such nominee, (ii) the principal occupation of such nominee, (iii) a brief statement as to such nominee’s qualifications, (iv) a statement that such nominee consents to his or her nomination and will serve as a director if elected, (v) whether such nominee meets the definition of an “independent” director under the applicable SEC rules and (vi) the name, address, class and number of shares of capital stock of the Company held by the nominating stockholder. Any person nominated by a stockholder for election to the Board will be evaluated based on the same criteria as all other nominees. The Nominating Committee also oversees our adherence to our corporate governance standards. Although not part of any formal policy, the goal of the Nominating Committee is a balanced and diverse Board, with members whose skills, viewpoint, background and experience complement each other and, together, contribute to the Board’s effectiveness as a whole. The members of the Nominating Committee are Wang Wei (Chair), Yang Lili and Zou Baoying, each of whom is “independent” as defined by the Company Guide of the American Stock Exchange. The Nominating Committee operates under the written Nominating Committee Charter adopted by the Board in December of 2008, a copy of which may be obtained by writing the Secretary of the Company at Floor 1 FTZ International Auto Mall, 86 Tianbao Avenue, Free Trade Zone, Tianjin Province, The People’s Republic of China 300461 and is available on the Company’s website at http://www.chinaautologisticsinc.com.

During the fiscal year ended December 31, 2013, there were no changes to the procedures by which holders of our common stock may recommend nominees to the Board.

Compensation Committee

The Compensation Committee is currently comprised of the following Directors of the Company: Yang Lili (Chair), Wang Wei and Zou Baoying, each of whom is “independent” as defined by the applicable SEC rules. The Compensation Committee reviews and, as it deems appropriate, recommends to the Board’s policies, practices and procedures relating to the compensation of the officers and other managerial employees and the establishment and administration of employee benefit plans. It advises and consults with the officers of the Company as may be requested regarding managerial personnel policies. The Compensation Committee also has such additional powers as may be conferred upon it from time to time by the Board. The Compensation Committee operates under the written Compensation Committee Charter adopted by the Board in December of 2008, a copy of which may be obtained by writing the Secretary of the Company at Floor 1 FTZ International Auto Mall, 86 Tianbao Avenue, Free Trade Zone, Tianjin Province, The People’s Republic of China 300461 and is available on the Company’s website at http://www.chinaautologisticsinc.com.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors, executive officers and persons who own more than 10% of a registered class of the Company’s equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Directors, officers and greater than 10% shareholders are required to furnish the Company with copies of all Section 16(a) forms they file.

To the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company, with respect to the fiscal year ended December 31, 2013, the officers, directors and beneficial owners of more than 10% of our common stock have filed their initial statements of ownership on Form 3 on a timely basis, and the officers, directors and beneficial owners of more than 10% of our common stock have also filed the required Forms 4 or 5 on a timely basis.

Code of Ethics

On December 12, 2008, the Board approved a Code of Business Conduct and Ethics (the “Code”). This Code applies to all directors, officers and employees. A copy of the Code may be obtained by writing the Secretary of the Company at Floor 1 FTZ International Auto Mall 86 Tianbao Avenue, Free Trade Zone Tianjin Province, the People’s Republic of China, 300461.

ITEM 11.

EXECUTIVE COMPENSATION.

Name and Principal Position	Year	Salary ($)		Bonus ($)		Stock Awards ($)		Option Awards ($)		Non-Equity Incentive Plan Compensation ($)		Nonqualified Deferred Compensation Earnings ($)		All Other Compensation ($)			Total ($)
Tong, Shiping,	2013	$	58,154		-0-		-0-		-0-		-0-		-0-		-0-	(1)	$	58,154
CEO and President	2012	$	57,112		-0-		-0-		-0-		-0-		-0-		-0-		$	57,112

Wang, Xinwei,	2013	$	38,769		-0-		-0-		-0-		-0-		-0-		-0-	(2)	$	38,769
CFO, Treasurer and VP	2012	$	38,075		-0-		-0-		-0-		-0-		-0-		-0-		$	38,075

Yang, Bin, Former Senior VP	2013	$	-0-		-0-		-0-		-0-		-0-		-0-		-0-	(3)	$	-0-
(GM, Head of Sales)	2012	$	16,658		-0-		-0-		-0-		-0-		-0-		-0-		$	16,658

Cheng, Weihong,	2013	$	38,769		-0-		-0-		-0-		-0-		-0-		-0-	(4)	$	38,769
Senior VP (Head of HR and Admin)	2012	$	38,075		-0-		-0-		-0-		-0-		-0-		-0-		$	38,075

Jin, Yan	2013	$	9,692		-0-		-0-		-0-		-0-		-0-		-0-	(5)	$	9,692
COO	2012		4,759		-0-		-0-		-0-		-0-		-0-		-0-		$	4,759

Li, Yangqian,	2013	$	-0-		-0-		-0-		-0-		-0-		-0-		-0-	(6)	$	-0-
Former COO and VP	2012	$	15,864		-0-		-0-		-0-		-0-		-0-		-0-		$	15,864

(1)	Mr. Tong Shiping’s total compensation for the fiscal year ended December 31, 2013 is $58,154 (RMB360,000) (based on the weighted average rate of RMB to U.S. dollars during the year 2013).
(2)	Ms. Wang Xinwei’s total compensation for the fiscal year ended December 31, 2013 is $38,769 (RMB240,000) (based on the weighted average rate of RMB to U.S. dollars during the year 2013).
(3)	Mr. Yang Bin’s total compensation for the fiscal year ended December 31, 2012 is $16,658 (RMB105,000) (based on the weighted average rate of RMB to U.S. dollars during the year 2013). Mr. Yang Bin resigned from his positions effective July 17, 2012.
(4)	Ms. Cheng Weihong’s total compensation for the fiscal year ended December 31, 2013 is $38,769 (RMB240,000) (based on the weighted average rate of RMB to U.S. dollars during the year 2013).
(5)	Mr. Jin Yan’s total compensation for the fiscal year ending December 31, 2013 is $9,692 (RMB60,000) (based on the weighted average rate of RMB to U.S. dollars during the year 2013).
(6)	Mr. Li Yangqian’s total compensation for the fiscal year ending December 31, 2012 is $15,864 (RMB100,000) (based on the weighted average rate of RMB to U.S. dollars during the year 2013). Mr. Li Yangqian resigned from his positions effective July 17, 2012.

As of December 31, 2013, the Company did not have any “Grants of Plan-Based Awards”, “Outstanding Equity Awards”, “Option Exercises and Stock Vested”, “Pension Benefits”, “Nonqualified Defined Contribution and Other Nonqualified Deferred Compensation Plans”, or “Potential Payments Upon Termination or Change in Control” to report.

Each of the executive officers of the Company have entered into standard employment contracts with Shisheng, a form of which is attached as an exhibit to this Report. The contracts have one-year terms and are otherwise consistent with the standard form prescribed by the Tianjin Labor and Social Security Administration. None of the employment contracts provide for annual total compensation payments in excess of $100,000. The amounts listed in the table above were paid by Shisheng.

The 2010 Omnibus Long-Term Incentive Plan (the “Plan”) assists the Company in attracting, retaining, and rewarding high-quality executives, employees, directors and other persons who provide services to the Company, enabling such persons to acquire or increase a proprietary interest in the Company, strengthening the mutuality of interests between such persons and the Company, and providing annual and long-term incentives for such persons expend maximum efforts in the creation of stockholder value. The Plan is administered by the Compensation Committee, such other committee as determined by the Board of Directors, or a subcommittee consisting solely of non-employee, outside directors. The Plan does not limit the availability of awards to any particular class or classes of eligible employees. Awards granted under the Plan are not transferable, except in the event of the participant's death. Under the Plan, 362,000 shares (reflected a one-for-six reverse split of the Company’s issued and outstanding shares of common stock on October 6, 2012) are currently reserved and available for delivery in connection with awards under the Plan.

The Plan was approved by our stockholders at the Annual Meeting on November 18, 2010. As of April 7, 2014, no awards have been granted under the Plan.

Compensation Discussion and Analysis

The Company’s compensation program is designed to provide our executive officers with competitive remuneration and to reward their efforts and contributions to the Company. Elements of compensation for our executive officers include base salary and cash bonuses.

Before we set the base salary for our executive officers each year, we research the market compensation in Tianjin for executives in similar positions with similar qualifications and relevant experience, and add a 10%-15% premium as an incentive to attract high-level employees. Company performance does not play a significant role in the determination of base salary.

Cash bonuses may also be awarded to our executives on a discretionary basis at any time. Cash bonuses are also awarded to executive officers upon the achievement of specified performance targets, including annual revenue targets for the Company.

Director Compensation

Name	Fees earned or paid in cash ($)		Stock awards ($)		Option awards ($)		Non-equity incentive plan compensation ($)		All other compensation ($)		Total ($)
Howard S. Barth	$	24,000		-0-		-0-		-0-		-0-	$	24,000
Yang Lili		-0-		-0-		-0-		-0-		-0-		-0-
Wang Wei		-0-		-0-		-0-		-0-		-0-		-0-
Zou Baoying		-0-		-0-		-0-		-0-		-0-		-0-

In fiscal year 2013 the Company paid an annual compensation of $24,000 to Howard S. Barth, our audit committee chair/director. Other than these payments to Mr. Barth, the Company did not provide any compensation to its directors in the fiscal year ended December 31, 2013. The Company may establish certain other compensation plans (e.g. options, cash for attending meetings, etc.) with respect to directors in the future.

Compensation Committee Interlocks and Insider Participation in Compensation Decisions

During the last fiscal year, none of the Company’s executive officers served on the board of directors or compensation committee of any other entity whose executive officers served either the Company’s Board or Compensation Committee.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth information regarding the beneficial ownership of our common stock as of March 27, 2013 for each person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock. Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them.

Name and Address of Beneficial Owner*	Amount of Beneficial Ownership		Percentage of Class
Bright Praise Enterprises Limited		1,648,140		40.85	%
Choi Chun Leung Robert**		1,648,140		40.85	%

* Unless otherwise noted, the address is that of the Company’s.

** Choi Chun Leung Robert is the beneficial owner of 1,648,140 shares of our common stock through his 100% ownership of Bright Praise Enterprises Limited and through his position as the sole director of Bright Praise Enterprises Limited.

Security Ownership of Management Directors and Officers

The following table sets forth the ownership interest in our common stock of all directors and officers individually and as a group as of April 7, 2014. Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them.

Name and Address of Beneficial Owner*	Amount of Beneficial Ownership		Percentage of Class
Tong Shiping, Chief Executive Officer, President and Chairman of the Board**		-0-		0	%
Jin Yan, Chief Operating Officer		-0-		0	%
Wang Xinwei, Chief Financial Officer, Treasurer, Vice President and Director		-0-		0	%
Cheng Weihong, Senior Vice President (Head of Human Resources and General Administration) and Director**		-0-		0	%
Howard S. Barth, Director		-0-		0	%
Wang Wei, Director		-0-		0	%
Yang Lili, Director		-0-		0	%
Zou Baoying, Director		-0-		0	%
All Directors and Officers as a Group (8 persons)		-0-		0	%

* Unless otherwise noted, the address is that of the Company’s.

** Choi Chun Leung Robert holds 100% ownership of Bright Praise Enterprises Limited as trustee for the benefit of Tong Shiping and Cheng Weihong

Securities Authorized for Issuance Under Equity Compensation Plans.

As of the fiscal year ended December 31, 2013:

Plan category

Number of

securities to

be issued upon

exercise

of outstanding

options,

warrants and

rights

Weighted-average

exercise

price of

outstanding

options,

warrants

and rights

Number of

securities

remaining

available for

future issuance

under equity

compensation

plans

(excluding

securities

reflected at

left)

Equity compensation plans approved by security holders

None

(1)

None

362,000

Equity compensation plans not approved by security holders

None

Total

362,000

(1)	As of April 7, 2014, no options, warrants or rights to purchase securities had been issued under the 2010 Omnibus Long-Term Incentive Plan.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Ms. Cheng Weihong (the Senior Vice President and Chairwoman of Shisheng and wife of China Auto’s President and Chief Executive Officer, Mr. Tong Shiping) made non-interest bearing loans to the Company from time to time to meet working capital needs of the Company. For the years ended December 31, 2013 and 2012, the Company made aggregate borrowings from Ms. Cheng Weihong of $862,200 and $852,075, respectively, and made repayments of $755,921 and $352,335 to Ms. Cheng Weihong. As of December 31, 2013 and 2012, the outstanding balances due to Ms. Cheng Weihong were $597,393 and $512,023, respectively.

One of the Company’s former shareholders, Sino Peace Limited, paid accrued expenses of $0 and $0 on behalf of the Company during the years ended December 31, 2013 and 2012. The amounts of $2,223,458 and $2,156,166 were outstanding as due to this shareholder on the consolidated balance sheet as of December 31, 2013 and 2012.

Mr. Tong, Shiping and Ms. Cheng Weihong personally guarantee borrowings on various lines of credit related to our financing services and short-term borrowings.

Director Independence

All members of the Company’s Board, excluding Tong Shiping, Cheng Weihong and Wang Xinwei, are independent directors of the Company, and as such, they satisfy the definition of independence in accordance with SEC rules and NASDAQ listing standards.

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES.

Our independent accountant is Marcum LLP. Set forth below are aggregate fees billed by Marcum LLP for professional services rendered for the audit of the Company’s annual financial statements for the year ended December 31, 2013 and 2012.

Audit Fees

During the fiscal year ended December 31, 2013 and 2012, the fees for Marcum LLP were $348,330 and $289,305, respectively. The fees for the year ended December 31, 2013 included $88,344 related to the audit and review of the financial statements of Zhonghe, which were attached as an exhibit to the Form 8K/A filed by the Company on February 13, 2014.

Audit Related Fees

During the fiscal year ended December 31, 2013, our principal accountants did not render assurance and related services reasonably related to the performance of the audit or review of financial statements. During the fiscal year ended December 31, 2012, the fees for Marcum LLP were $15,953 related to agreed-upon procedures related to a cash verification request from the NASDAQ Stock Market.

Tax Fees

During the fiscal year ended December 31, 2013 and December 31, 2012, our principal accountant did not render services to us for tax compliance, tax advice and tax planning.

All Other Fees

During the fiscal years ended December 31, 2013 and December 31, 2012, there were no fees billed for products and services provided by the principal accountants other than those set forth above.

The Audit Committee has reviewed the above fees for non-audit services and believes such fees are compatible with the independent registered public accountants’ independence.

Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Accountant

The policy of the Audit Committee, and the Board acting as a whole prior to the establishment of the Audit Committee, is to pre-approve all audit and non-audit services provided by the independent accountants. These services may include audit services, audit-related services, tax fees, and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is subject to a specific budget. The Audit Committee, and the Board acting as a whole prior to the establishment of the Audit Committee, has delegated pre-approval authority to certain committee members when expedition of services is necessary. The independent accountants and management are required to periodically report to the full Audit Committee, and the Board acting as a whole prior to the establishment of the Audit Committee, regarding the extent of services provided by the independent accountants in accordance with this pre-approval delegation, and the fees for the services performed to date. None of the fees paid to the independent accountants during fiscal years ended December 31, 2013 and 2012, under the categories Audit-Related and All Other fees described above were approved by the Audit Committee, and the Board acting as a whole prior to the establishment of the Audit Committee, after services were rendered pursuant to the de minimis exception established by the SEC. All work is preapproved.

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Financial Statements.

Our financial statements as set forth in the Index to Financial Statements attached hereto commencing on page F-1 are hereby incorporated by reference.

(b) 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:

Exhibit Number		Exhibit Description
3.1 (1)		Amended Articles of Incorporation of the Company
3.2 (2)		Amended and Restated Bylaws of the Company
10.1(3)		Pursuant to that certain Contract on Import L/C Issuing Limits, dated as of September 13, 2012, by and between Tianjin Binhai Shisheng Business and Trade Group Co., Ltd. and the Agricultural Bank of China Tianjin Heping Sub-branch
10.2(3)		Termination Agreement, dated as of November 30, 2012, by and between Tianjin Shimao Auto Logistics Center Co., Ltd and Tianjin Binhai Shisheng Trading Group Co., Ltd.
10.3 (3)		Office Tenancy Contract, effective as of December 1, 2012, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Zhengji International Trade Co., Ltd.
10.4 (3)		Office Tenancy Contract, effective as of December 1, 2012, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Zhengji International Trade Co., Ltd.
10.5 (3)		Office Tenancy Contract, effective as of January 1, 2013, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Binhai Shisheng Trading Group Co., Ltd.
10.6*		Contract on Import L/C Issuing Limits, dated as of September 26, 2013, by and between Tianjin Binhai Shisheng Business and Trade Group Co., Ltd. and the Agricultural Bank of China Tianjin Heping Sub-branch
10.7*		Office Tenancy Contract, effective as of December 1, 2013, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Zhengji International Trade Co., Ltd.
10.8*		Office Tenancy Contract, effective as of January 1, 2014, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Binhai Shisheng Trading Group Co., Ltd.
14.1 (4)		Code of Business Conduct and Ethics
21.1*		Subsidiaries
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 the Chief Executive Officer and 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.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Labels Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

(1)	Incorporated by reference to the Company’s Form SB2 filed with the Securities and Exchange Commission on March 7, 2006, Definitive Schedule 14C Information Statement filed on December 5, 2008 and Form 8-K filed on October 9, 2012.

(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 10-K, filed with the Securities and Exchanges Commission on April 1, 2013.

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

*	Attached hereto

CHINA AUTO LOGISTICS INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

YEAR ENDED DECEMBER 31, 2013

	Page

Report of Independent Registered Public Accounting Firm	F-2

Consolidated Balance Sheets	F-3 - F-4

Consolidated Statements of Income	F-5

Consolidated Statements of Comprehensive Income	F-6

Consolidated Statements of Shareholders’ Equity	F-7

Consolidated Statements of Cash Flows	F-8 - F-9

Notes to Consolidated Financial Statements	F-10 - F-28

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors

China Auto Logistics Inc.

We have audited the accompanying consolidated balance sheets of China Auto Logistics Inc. and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of China Auto Logistics Inc. and subsidiaries, as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Marcum LLP

Los Angeles, California

April 10, 2014

F-2

CHINA AUTO LOGISTICS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31,
	2013		2012
ASSETS:
Current assets:
Cash and cash equivalents	$	15,041,505	$	8,888,749
Restricted cash		29,665,536		27,015,351
Receivable related to auto mall management fees		255,712		-
Receivable related to financing services		68,568,562		57,134,815
Notes receivable		-		1,587,024
Inventories		15,343,671		27,141,004
Advances to suppliers		38,074,096		43,019,343
Prepaid expenses		12,311		19,071
Value added tax receivable		283,478		338,513
Deferred tax assets		48,345		714,161
Total current assets		167,293,216		165,858,031

Property, plant, and equipment, net		72,977,985		314,126
Ownership interest in Car King Tianjin		577,904		-
Goodwill		20,159,365		-
Intangible assets, net		547,155		-
Other assets		-		23,559
Total assets	$	261,555,625	$	166,195,716

LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
Bank overdraft	$	2,439,429	$	-
Lines of credit related to financing services		66,173,312		51,528,018
Short term borrowings		6,259,598		19,673,128
Notes payable to suppliers		21,275,203		12,696,196
Accrued expenses		236,599		356,114
Customer deposits		35,205,567		19,131,420
Deferred revenue		202,428		241,598
Payable related to acquisition of Zhonghe – current portion, net		15,706,581		-
Due to shareholders		2,223,458		2,156,166
Due to director		597,393		512,023
Income tax payable		174,540		400,932
Deferred tax liability		786,413		-
Total current liabilities		151,280,521		106,695,595

Payable related to acquisition of Zhonghe, excluding current portion, net		35,306,223		-
Deferred tax liability		12,239,842		-
Total liabilities		198,826,586		106,695,595

Commitments and contingencies (Note 17)

F-3

CHINA AUTO LOGISTICS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Continued)

	December 31,
	2013		2012

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, 4,034,394 shares and 3,694,394 shares issued and outstanding as of December 31, 2013 and 2012, respectively		4,034		3,694
Additional paid-in capital		22,979,734		21,994,074
Accumulated other comprehensive income		7,642,886		5,923,398
Retained earnings		31,530,669		31,006,409
Total China Auto Logistics Inc. shareholders’ equity		62,157,323		58,927,575
Noncontrolling interests		571,716		572,546
Total equity		62,729,039		59,500,121

Total liabilities and shareholders’ equity	$	261,555,625	$	166,195,716

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

F-4

CHINA AUTO LOGISTICS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

	Year Ended December 31,
	2013			2012

Net revenue	$	459,235,057		$	591,315,104
Cost of revenue		452,379,416			580,057,718
Gross profit		6,855,641			11,257,386

Operating expenses:
Selling and marketing		751,114			977,555
General and administrative		3,174,780			2,036,436
Impairment loss of goodwill and intangible assets		-			4,661,201
Total operating expenses		3,925,894			7,675,192

Income from operations		2,929,747			3,582,194

Other income (expenses):
Interest income		515,212			230,916
Interest expense		(999,360	)		(531,301	)
Loss on disposal of property and equipment		-			(172,043	)
Gain on forgiveness of debt		-			1,139,861
Foreign exchange loss		(217,764	)		-
Equity loss – share of investee company loss		(76,660	)		-
Miscellaneous		-			(72,922	)
Total other income (loss)		(778,572	)		594,511

Income before income taxes		2,151,175			4,176,705

Income taxes		1,634,518			1,596,179

Net income		516,657			2,580,526

Less: Net income (loss) attributable to noncontrolling interests		(7,603	)		13,439

Net income attributable to shareholders of China Auto Logistics Inc.	$	524,260		$	2,567,087

Earnings per share attributable to shareholders of China Auto Logistics Inc.
- basic and diluted	$	0.14		$	0.69

Weighted average number of common shares outstanding
- basic and diluted		3,723,271			3,694,394

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

F-5

CHINA AUTO LOGISTICS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Year Ended December 31,
	2013			2012

Net income	$	516,657		$	2,580,526

Other comprehensive income
- Foreign currency translation adjustments		1,726,261			224,181

Comprehensive income		2,242,918			2,804,707

Less: Comprehensive income (loss) attributable to noncontrolling Interests		(830	)		13,666

Comprehensive income attributable to shareholders of China Auto Logistics Inc.	$	2,243,748		$	2,791,041

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

F-6

CHINA AUTO LOGISTICS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	Common Stock				Additional Paid-in		Accumulated Other Comprehensive		Retained		Non- controlling		Total
	Shares		Amount		Capital		Income		Earnings		Interests		Equity

Balance as of January 1, 2012		3,694,394		3,694		21,994,074		5,699,444		28,439,322		558,880		56,695,414
Foreign currency translation adjustments		-		-		-		223,954		-		227		224,181
Net income		-		-		-		-		2,567,087		13,439		2,580,526

Balance as of December 31, 2012		3,694,394		3,694		21,994,074		5,923,398		31,006,409		572,546		59,500,121
Issuance of shares (Note 3)		340,000		340		985,660		-		-		-		986,000
Foreign currency translation adjustments		-		-		-		1,719,488		-		6,773		1,726,261
Net income		-		-		-		-		524,260		(7,603)		516,657
Balance as of December 31, 2013		4,034,394	$	4,034	$	22,979,734	$	7,642,886	$	31,530,669	$	571,716	$	62,729,039

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

F-7

CHINA AUTO LOGISTICS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2013			2012

Cash flows from operating activities:
Net income	$	516,657		$	2,580,526

Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation and amortization		314,126			341,483
Loss on disposal of property and equipment		5,816			172,043
Impairment loss of goodwill and intangible assets		-			4,661,201
Gain on forgiveness of debt		-			(1,139,861	)
Equity loss – share of investee company loss		76,660			-
Stock issuance related to Zhonghe acquisition		986,000			-
Change of deferred tax liabilities		(32,418	)		(45,106	)
Inventory reserve		190,877			-

Changes in operating assets and liabilities:
Restricted cash		(13,792,120	)		(8,207,076	)
Accounts receivable - trade		-			107,894
Receivable related to auto mall management fees		(252,403	)		-
Receivables related to financing services		(9,955,175	)		32,524,609
Notes receivable		1,615,378			3,172,891
Inventories		13,708,851			1,559,629
Advances to suppliers		9,450,667			1,725,410
Prepaid expenses, other current assets and other assets		33,003			136,617
Value added tax receivable		305,993			287,087
Deferred tax assets		679,201			(713,900	)
Accounts payable		-			(1,565	)
Lines of credit related to financing services		13,297,886			(36,588,686	)
Notes payable		3,230,757			12,691,563
Accrued expenses		(137,505	)		(54,205	)
Accrued interest on payable related to Zhonghe acquisition		258,273			-
Customer deposits		15,266,991			(27,722,918	)
Deferred revenue		(51,867	)		(78,336	)
Income tax payable		(235,813	)		(760,417	)
Net cash provided by (used in) operating activities		35,479,835			(15,351,117	)

Cash flows from investing activities:
Acquisition of Zhonghe, net of cash received of $194,445		(38,574,637	)		-
Repayments of receivable from former owner of Zhonghe		7,111,260			-
Purchase of property and equipment		(14,842	)		(6,058	)
Net cash used in investing activities		(31,478,219	)		(6,058	)

Cash flows from financing activities:
Bank overdraft		2,407,865			-
Proceeds from short-term borrowings		28,444,740			32,464,014
Repayments of short-term borrowings		(42,472,868	)		(16,902,607	)
Decrease of restricted cash related to short-term borrowings		13,462,283			-
Proceeds from a director		862,200			852,075
Repayment of amount due to director		(755,921	)		(352,335	)
Net cash flows provided by financing activities		1,948,299			16,061,147

F-8

CHINA AUTO LOGISTICS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Continued)

	Year Ended December 31,
	2013		2012

Effect of exchange rate change on cash		202,841		(16	)

Net increase in cash and cash equivalents		6,152,756		703,956

Cash and cash equivalents at the beginning of year		8,888,749		8,184,793
Cash and cash equivalents at the end of year	$	15,041,505	$	8,888,749

Supplemental disclosure of cash flow information:
Interest paid	$	3,650,929	$	3,905,767
Income taxes paid	$	1,062,331	$	3,115,602

Non cash investing activities:
Payable related to the acquisition of Zhonghe	$	52,197,645	$	-

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

F-9

CHINA AUTO LOGISTICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)	Organization and Nature of Business

The consolidated financial statements consist of the financial statements of China Auto Logistics Inc. (the “Company” or “China Auto”, and the following wholly owned and majority owned subsidiaries of the Company:

●	Ever Auspicious International Limited (“HKCo”),

●	Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd. (“Shisheng”),

●	Tianjin Ganghui Information Technology Corp. (“Ganghui”),

●	Tianjin Hengjia Port Logistics Corp. (“Hengjia”),

●	Zhengji International Trading Corp. (“Zhengji”),

●	Tianjin Zhonghe Auto Sales Service Co., Ltd. (“Zhonghe”).

On November 10, 2008, China Auto, formerly Fresh Ideas Media, Inc. (“Fresh Ideas”), incorporated on February 22, 2005 in the State of Nevada, entered into a Share Exchange Agreement with HKCo. Under the Share Exchange Agreement, China Auto issued 1,950,000 (pre reverse split of 11,700,000) shares of its common stock to acquire all the issued and outstanding capital stock of HKCo. The closing of the Share Exchange Agreement occurred on the same day, immediately following the cancellation of an aggregate of 189,167 (pre reverse split of 1,135,000) shares of the Company’s common stock held by Phillip E. Ray and Ruth Daily, the Company’s principal stockholders immediately prior to the Closing, which was a condition of the Closing. Prior to the closing of the Share Exchange and the cancellation of shares stated above, the Company had a total of 1,255,833 (pre reverse split of 7,535,000) shares of common stock issued and outstanding. As a result of the Exchange, HKCo became the Company’s wholly-owned subsidiary. Upon the closing of this transaction, the Company’s primary business operations are those of HKCo. Shortly after the closing, Fresh Ideas changed its name to China Auto Logistics Inc.

HKCo was incorporated in Hong Kong on October 17, 2007. Prior to December 25, 2007, HKCo had minimal assets and no operations. On November 1, 2007, HKCo entered into a share exchange agreement with Cheng Weihong, Xia Qiming and Qian Yuxi (the “Seller”), pursuant to which the Sellers transferred their interests in Shisheng to HKCo for an aggregate purchase price of $12,067,254 (RMB95,000,000) which was paid via issuance of equity interests of HKCo. Upon the completion of this transaction on December 25, 2007, Shisheng became a wholly-owned foreign enterprise (“WFOE”) of HKCo and this arrangement was approved by the relevant ministries of the PRC government. As a result of this transaction, the owners and management of Shisheng end up controlling HKCo and thus this transaction was classified as a recapitalization of Shisheng using the purchase method of accounting.

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

Shisheng was incorporated in the People’s Republic of China (“PRC”) on September 1, 1995. Shisheng’s business includes sales of both domestically manufactured automobiles and imported automobiles (“Sales of Automobiles”), providing financing services related to imported automobiles (“Financing Services”), and providing logistic services relating to the automobile importing process and other automobile value added services such as assistance with customs clearance, storage and nationwide delivery services (such services, “Automobile Value Added Services”).

In August 2001, Shisheng formed Ganghui to provide web-based, real-time information on imported automobiles. Ganghui was 80% owned by Shisheng.

In September 2003, Shisheng formed Hengjia to provide Automobile Value Added Services to wholesalers and distributors in the imported vehicle trading industry. Hengjia was 80% owned by Shisheng.

F-10

In February 2005, Shisheng and three other founders formed Zhengji to enhance the imported automobile trading industry. Zhengji was 32% owned by Shisheng since 2005. In January 2007, Shisheng injected additional capital of $1,024,498 (equivalent to RMB 8,000,000) into Zhengji. Consequently, Shisheng's equity interest in Zhengji increased from 32% to 86.4%.

On July 23, 2009, Shisheng entered into Share Transfer Agreements to acquire additional ownership interests from other noncontrolling interest shareholders to increase its ownership interests in its Ganghui, Hengjia and Zhengji to 98% each for an aggregate amount of $444,120.

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 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 automobiles, including discounted gas, car washes, and body-shop repair and car maintenance. Beijing Goodcar Technology Development Co., Ltd. (“Beijing Goodcar”), Xiamen Goodcar Network Technology Co., Ltd. (“Xiamen Goodcar”), Wuhan Youlu Network Technology Co., Ltd (“Wuhan Youlu”), Chengdu Haoche Technology Development Co., Ltd. (“Chengdu Haoche”), Tianjin Goodcar Technology Development Co., Ltd (“Tianjin Goodcar”) and Chongqing Kaizhi Technology Co., Ltd. (“Kaizhi”) are wholly-owned subsidiaries of Qizhong (collectively, “Goodcar”). These services provided by Goodcar were then included in the Company’s segments of web-based advertising services and automobile value added services.

During 2013 and 2012, the Company deregistered Qizhong and its the wholly owned subsidiaries, including Beijing Goodcar, Xiamen Goodcar, Wuhan Youlu, Chengdu Haoche, Tianjin Goodcar and Kaizhi. All of these subsidiaries’ operations have been assumed by their parent company, Qizhong. The Company has disposed of the majority of the assets of these subsidiaries and transferred the remaining net assets to the Company’s other subsidiaries.

On November 22, 2013, the Company, through its wholly-owned subsidiary, Tianjin Zhonghe Auto Sales Service Co., Ltd. (“Zhonghe”), entered into a Cooperation Framework Agreement with Car King (China) Used Car Trading Co., Ltd. (“Car King China”) with respect to the establishment of a joint venture, Tianjin Car King Used Car Trading Company Ltd. (“Car King Tianjin”) that will own and operate a used car business. The establishment of this joint venture was contingent upon the successful completion by the Company of the acquisition of Zhonghe which owns the Tianjin Airport International Auto Mall, where the used car business will be operated. Upon the acquisition of Zhonghe on November 30, 2013, the joint venture was established in accordance with the Cooperation Framework Agreement. Pursuant to the terms of the Articles of Association of Car King Tianjin, Zhonghe and Car King China will make capital contributions totaling RMB 8,000,000 and RMB 12,000,000, respectively, to Car King Tianjin, which will have total registered capital of RMB 20,000,000. Prior to being acquired by the Company, Zhonghe made an initial capital contribution of RMB 4,000,000 to Car King Tianjin in November 2013. The Company is entitled to 40% of Car King Tianjin’s net profit or loss.

On November 30, 2013, Shisheng signed an agreement (the “Auto Mall Acquisition Agreement”) with Hezhong (Tianjin) International Development Co., Ltd. (“Hezhong”) to purchase 100% of the equity of Zhonghe, which owns and operates the Airport International Auto Mall. Under the terms of the Auto Mall Acquisition Agreement, Shisheng will pay RMB 559,768,000 (approximately $91.4 million) to Hezhong, in four annual installments with an annualized rate of interest of 6%. The initial payment of RMB 240,000,000 (approximately $38.8 million) was paid within 5 business days after the signing of the Agreement. Upon the payment by Shisheng of this first installment, Hezhong transferred control of Zhonghe to Shisheng. Failure by Shisheng to pay the remaining installments may result in the termination of the Auto Mall Acquisition Agreement, as well as a penalty of 10% of the total transfer price.

(2)	Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

Reverse Stock Split

On October 9, 2012, the Company filed a Certificate of Amendment of its Articles of Incorporation to effect a one-for-six reverse split of the Company’s issued and outstanding shares of common stock, par value $0.001 per share. The Certificate of Amendment was effective upon filing on October 9, 2012. The Company’s stockholders, at a Special Meeting of Stockholders held on September 4, 2012, had previously authorized the Company’s Board of Directors to effect a reverse stock split at a ratio of up to one-for-six to be determined by the Board of Directors. There was no change to the authorized shares of common stock of the Company as a result of the reverse stock split. Any fraction of a share of common stock that would otherwise have resulted from the reverse split was rounded up to the next whole share. Accordingly, all references to numbers of common shares and per-share data in the accompanying consolidated financial statements and notes have been retroactively adjusted to reflect the effects of the reverse stock split.

F-11

Principles of Consolidation

The 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 consolidated financial statements.

Use of Estimates

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

Currency Reporting

Amounts reported in the consolidated financial statements are stated in US Dollars, unless stated otherwise. Our functional currency is the Renminbi (“RMB”). Foreign currency transactions (outside the PRC) are translated into RMB according to the prevailing exchange rate at the transaction dates. Assets and liabilities denominated in foreign currencies at the balance sheet dates are translated into RMB at period-end exchange rates. For the purpose of preparing the consolidated financial statements, the consolidated balance sheets of our Company have been translated into US dollars at the current rates as of the end of the respective periods and the consolidated statements of income have been translated into US 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 consolidated statements of comprehensive income and as a separate component of the consolidated statements of shareholders’ equity.

Fair Value Disclosures of Financial Instruments

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact its business, and it considers assumptions that market participants would use when pricing the asset or liability.

As a basis for considering such assumptions, a three-tier fair value hierarchy prioritizes the inputs utilized in measuring fair value as follows:

●	Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

●

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

●	Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

The hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company has estimated the fair value amounts of its financial instruments using the available market information and valuation methodologies considered to be appropriate and has determined that the carrying value of the Company’s accounts receivable, receivables related to financing services, notes receivable, value added tax receivable, inventories, prepaid expenses, accounts payable, advances to suppliers, bank overdraft, lines of credit related to financing services, short-term borrowings, notes payable to suppliers, accrued expenses, customer deposits, deferred revenue, due to shareholders, due to director, and income tax payable as of December 31, 2013 and 2012 approximate fair value.

F-12

Other Comprehensive Income

Other comprehensive income consists of other gains and losses affecting shareholders’ equity that, under US GAAP, are excluded from net income. The changes in other comprehensive income of $1,719,488 and $223,954 for the years ended December 31, 2013 and 2012, respectively, are foreign currency translation adjustments.

Concentrations of Credit Risk

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, accounts receivable, notes receivable and receivables related to financing services. The Company places its cash and cash equivalents with reputable financial institutions with high credit ratings.

The Company conducts credit evaluations of customers and generally does not require collateral or other security from customers. The Company establishes an allowance for doubtful accounts primarily based upon the age of the receivables and factors relevant to determining the credit risk of specific customers. The amount of receivables ultimately not collected by the Company has generally been consistent with management's expectations and the allowance established for doubtful accounts.

Major Customers

During the year ended December 31, 2103, one customer accounted for 15.0% of the Company’s net revenue. During the years ended December 31, 2012, one customer accounted for 16.2% of the Company’s net revenue.

Major Suppliers

One supplier accounted for 15.6% of the Company’s purchases during the year ended December 31, 2013. One supplier accounted for 10.7% of the Company’s purchases during the year ended December 31, 2012.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash at banks and on hand and highly liquid investments which are unrestricted as to withdrawal or use, and which have remaining maturities of three months or less when purchased. The Company’s deposits in banks located in the PRC are not protected by any insurance and such uninsured amounts totaled $14,997,279 and $8,850,433 as of December 31, 2013 and 2012, respectively.

Restricted Cash

The Company is required to maintain certain amounts of cash in its banks to secure certain banks’ letters of credit issued to its customers, certain draws on its lines of credit, short-term borrowings and notes payable to suppliers. Restricted cash to secure these bank lines is not protected by any insurance and such restricted cash totaled $29,665,536 and $27,015,351 as of December 31, 2013 and 2012, respectively.

Accounts and Notes Receivable

Accounts and notes receivable are stated at the amount the Company expects to collect. The allowance for doubtful accounts is based on management’s assessment of the collectability of specific customer accounts, the aging of the accounts receivable, historical experience and other currently available evidence. Accounts and notes receivable are charged off against the allowance when collectability is determined to be permanently impaired. As of December 31, 2013 and 2012, the Company had no allowance for doubtful accounts in respect of its accounts receivable; and had no allowance for doubtful accounts in respect of its notes receivable.

Receivables Related to Financing Services

The Company records a receivable related to financing services when cash is loaned to the customers to finance their purchases of automobiles. Upon repayments by the customers, the Company records the amounts as reductions of receivables related to financing services. Receivables related to financing services represent the aggregate outstanding balance of loans from customers related to their purchases of automobiles. The Company charges a fee for providing loan services and such fee is prepaid by the 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 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 receivable related to financing services historically and accordingly did not record any allowance of credit losses as of December 31, 2013 and 2012.

F-13

Inventories

Inventories consist primarily of the purchase cost of automobiles valued at the lower of cost (first-in, first-out) or market. As of December 31, 2013 and 2012, reserve for obsolescence amounted to $193,379 and $0, respectively.

Property and Equipment, net

Property and equipment, net are carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line basis method over the following estimated useful lives:

Buildings and land use rights	31 years
Computers	3 to 5 years
Office equipment, furniture and fixtures	3 to 5 years
Leasehold improvements	5 years
Automobiles	5 years

Long-Lived Assets

Long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable or that the useful lives of those assets are no longer appropriate. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, the Company uses future undiscounted cash flows of the related assets or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. Long-lived assets to be disposed of are reported at the lower of the carrying amount or fair value of asset less disposal costs. The Company determined that there was no impairment of long-lived assets as of December 31, 2013 and 2012.

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.

In evaluating goodwill for impairment using the two-step test to identify any potential impairment and to measure any amount of impairment, the first step is based upon a comparison of the fair value of each of the Company’s reporting units and the carrying value of the reporting unit’s net assets, including goodwill. If the fair value of the reporting unit exceeds its carrying value, goodwill is considered not to be impaired; otherwise, step two is required. Under step two, the implied fair value of goodwill, calculated as the difference between the fair value of the reporting unit and the fair value of the reporting unit’s net assets, is compared with the carrying value of the goodwill. The excess of the carrying value of goodwill over the implied fair value represents the amount impaired.

The Company uses a combination of valuation techniques, primarily using discounted cash flows to determine the fair values of its reporting units and market based multiples as supporting evidence. The variables and assumptions used, all of which are level 3 fair value inputs, including the projections of future revenues and expenses, working capital, terminal values, discount rates and long term growth rates. The market multiples observed in sale transactions are determined separately for each reporting unit are based on the weighted average cost of capital determined for each of the Company’s reporting units. In addition we make certain judgments about the selection of comparable companies used in determining market multiples in valuing our reporting units, as well as certain assumptions to allocate shared assets and liabilities to calculate values for each of our reporting units. The underlying assumptions used are based on historical actual experience and future expectations that are consistent with those used in the Company’s strategic plan. The Company compares the fair value of each of its reporting units to their respective carrying values, including related goodwill. We also compare our book value and the estimates of fair value of the reporting units to our market capitalization as of and at dates near the annual testing date. Management uses this comparison as additional evidence of the fair value of the Company, as our market capitalization may be suppressed by other factors such as the control premium associated with a controlling shareholder, our leverage or general expectations regarding future operating results and cash flows. In situations where the implied value of the Company under the Income or Market Approach is significantly different than our market capitalization, we re-evaluate and adjust, if necessary, the assumptions underlying our Income and Market Approach models. Our estimates of the fair values of these reporting units, and the related goodwill, could change over time based on a variety of factors, including the aggregate market value of the Company’s common stock, actual operating performance of the underlying businesses or the impact of future events on the cost of capital and the related discount rates used.

F-14

In the fourth quarter of 2012, the Company revised its business plan and downsized Goodcar’s operations. The Company reviewed Goodcar’s advertising operations and decided to cease such operations to generate advertising revenue. The Company evaluated the projected revenue and profit and costs involved to operate Goodcar’s advertising operations and concluded that it would be in the Company’s best interest to cease its operations in order for it to better focus on its core business in automobile sales, automobile value added services and financing services. The Company continues to operate Goodcar’s website to promote our products and services in other segments, including automobile sales, automobile valued added services and financing services. Due to the closing of Goodcar’s advertising operations, the Company recorded an impairment charge of $3,735,091 related to the goodwill acquired in the acquisition of Goodcar.

In November 2013, the Company recorded goodwill in the amount of $20,107,700 as a result of the Zhonghe acquisition. As of December 31, 2013, no indication of goodwill impairment existed.

Intangible Assets

As of December 31, 2013, intangible assets consist of customer relations arose from the acquisition of Zhonghe. Amortization is calculated using the straight-line method over five years. Intangible assets are carried at cost less accumulated amortization.

During the fourth quarter of 2012, the Company recorded impairment charge of $926,110 (net of deferred taxes of $314,094) related to intangible assets acquired in the acquisition of Goodcar.

Noncontrolling Interests

Noncontrolling interests represent the noncontrolling interest stockholders’ proportionate share of the equity of Hengjia, Zhengji and Ganghui. The noncontrolling interests in 2013 and 2012 are summarized as below:

	As of December 31,
	2013			2012

Hengjia		2.0	%		2.0	%
Ganghui		2.0	%		2.0	%
Zhengji		2.0	%		2.0	%

The noncontrolling interests in Hengjia, Zhengji and Ganghui that are not owned by the Company are shown as “noncontrolling interests” in the consolidated balance sheets as of December 31, 2013 and 2012 and “net income attributable to noncontrolling interests” in the consolidated statements of income for the years ended December 31, 2013 and 2012.

Long Term Investment

Investee companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method of accounting. Whether or not the Company exercises significant influence with respect to an Investee depends on an evaluation of several factors including, among others, representation on the Investee company’s board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the Investee company. Under the equity method of accounting, an Investee company’s accounts are not reflected within the Company’s consolidated balance sheets and statements of operations; however, the Company’s share of the earnings or losses of the investee company is reflected in the caption ‘‘equity loss—share of investee company losses’’ in the consolidated statements of income. The Company’s carrying value in an equity method investee company is reflected in the caption ‘‘ownership interests in investee company’’ in the Company’s consolidated balance sheets.

When the Company’s carrying value in an equity method Investee company is reduced to zero, no further losses are recorded in the Company’s consolidated financial statements unless the Company guaranteed obligations of the Investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized.

F-15

Deferred Revenue

Deferred revenue includes amounts received from customers for which services revenue recognition is not yet appropriate. All deferred revenue is anticipated to be recognized within the next 12 months from the balance sheet dates.

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, (5) airport auto mall automotive services, and (6) 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.

Airport auto mall automotive services include (i) the rental of the Airport International Auto Mall, and (ii) equity income (loss) derived from Car King Tianjin. Rental income from the Airport International Auto Mall is recognized based on the monthly rent agreed upon with our tenants. The equity income (loss) derived from Car King Tianjin is recognized based on the Company’s ownership share in Car King Tianjin’s net income (loss).

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 sale 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.

Cost of Revenue

Cost of revenue includes the purchase cost of the automobiles, inventory obsolescence, freight-in and all the direct costs related to the sales of the automobiles. All costs related to the Company’s distribution network are included in the cost of revenue.

Operating Expenses

Selling and marketing expenses include salaries and employee benefits, rent, advertising, travel and entertainment and insurance.

General and administrative expenses include management and office salaries and employee benefits, depreciation for office facilities, office equipment and automobiles, travel and entertainment, insurance, legal and accounting, consulting fees, workers’ compensation insurance, and other office expenses.

Advertising

The Company expenses advertising costs when incurred. The Company incurred approximately $35,000 and $14,000 of advertising expenses for the years ended December 31, 2013 and 2012, respectively. Advertising expense is included in the caption “Selling and Marketing” within operating expenses on the consolidated statements of income.

F-16

Income taxes

Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements, 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. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.

The Company recognizes tax benefits that satisfy a greater than 50% probability threshold and provides for the estimated impact of interest and penalties for such tax benefits. The Company did not incur any interest or penalties related to potential underpaid income tax expenses during the years ended December 31, 2013 and 2012.

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 December 31, 2013 and 2012, the Company did not have any common stock equivalents, therefore, the basic earnings per share is the same as the diluted earnings per share.

New Accounting Standards

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

(3) Business Combination

On November 30, 2013, Shisheng signed the Auto Mall Acquisition Agreement with Hezhong to purchase 100% of the equity of Zhonghe, which owns and operates the Airport International Auto Mall.

Under the terms of the Auto Mall Acquisition Agreement, Shisheng will pay RMB 559,768,000 (approximately $91.4 million) to Hezhong, in four annual installments with an annualized rate of interest of 6%. The initial payment of RMB 240,000,000 (approximately $39.2 million) was paid within 5 business days after the signing of the Agreement. Upon the payment by Shisheng of this first installment, Hezhong transferred control of Zhonghe to Shisheng. Failure by Shisheng to pay the remaining installments may result in the termination of the Auto Mall Acquisition Agreement, as well as a penalty of 10% of the total transfer price.

The following table summarizes the amounts of the identified assets acquired and liabilities assumed recognized at the acquisition date, November 30, 2013:

Cash and cash equivalent	$	194,445
Restricted cash		1,469,124
Receivable from former shareholder		7,098,374
Inventories		1,416,386
Advances to suppliers		3,239,908
Value added tax receivable		240,786
Other current assets		1,787
Property, plant and equipment		72,640,016
Ownership interest in Car King Tianjin		652,944
Customer relations		555,002
Goodwill		20,107,700
Accounts payable and accrued expenses		(10,304	)
Notes payable to suppliers		(4,897,080	)
Customer deposits		(9,925	)
Deferred revenue		(5,805	)
Deferred taxes		(11,448,664	)
Purchase price	$	91,374,283

Cash to be remitted upon closing	$	39,176,638
Debt payment installments		52,197,645
Total	$	91,374,283

F-17

Acquisition related costs totaled $1,091,594 were included in general and administrative expenses during the year ended December 31, 2013. Acquisition related costs included $986,000 related to the issuance of 340,000 shares of the Company’s common stock to two consultants for services directly related to this acquisition. The value of these shares was determined based on the closing market price of the Company’s common stock on the acquisition date.

Substantial portion of the purchase price was related to the acquisition of the Airport International Auto Mall which was valued at $72,640,016. Apart from the other identified net assets in the amount of $10,075,231 and deferred tax liabilities related to the book and tax basis differences on the real estate and intangible assets in the amount of $11,448,664, the excess of purchase price over the identified assets and liabilities was allocated to the goodwill in the amount of $20,107,700. The Company believed the goodwill valuation represented (i) expected appreciation in the valuation of Airport International Auto Mall property, (ii) expected synergies and economies of scale from integration of the Company’s business with Zhonghe and newly formed Car King Tianjin in the used car business, (iii) expectation that owning the Airport International Auto Mall will create other business opportunities in the future and will provide more resources to capture these potential opportunities, (iv) defensive strategy to prevent our competitors from acquiring the airport international auto mall, (v) Zhonghe’s historical business. The Company believed that the purchase price paid represented the fair value of the assets acquired.

The amounts of Zhonghe’ s revenue and net loss included in the Company’s consolidated income statement for the year ended December 31, 2013, and the revenue and net loss of the combined entity had the acquisition date been January 1, 2013, or January 1, 2012, are:

	Revenue		Net Loss Attributable to the Company

Actual results of Zhonghe from December 1 to December 31, 2013	$	4,281,047	$	(155,317	)
Supplemental pro forma for the year ended December 31, 2013	$	479,807,952	$	(5,822,120	)
Supplemental pro forma for the year ended December 31, 2012	$	655,080,618	$	(4,861,937	)

(4)	Restricted Cash

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

	As of December 31,
	2013		2012

Collateral for bank’s issuance of letters of credit to the Company’s customers	$	6,630,313	$	4,527,214
Collateral for borrowings on the lines of credit related to financing services		8,733,869		-
Collateral for short-term borrowings		3,004,998		16,140,039
Collateral for notes payable to suppliers		11,296,356		6,348,098
	$	29,665,536	$	27,015,351

F-18

(5)	Notes Receivable

During the year ended December 31, 2012, the Company’s major customer paid for the purchases of the Company’s auto products by issuing notes receivable in an aggregate amount of approximately $1,587,024 (RMB 10,000,000). This note receivable was a short-term promissory note issued by the Bank of Dalian that entitled the Company to receive the full face amount from the bank at maturity, which was three months from the date of issuance in January 2013. This note was fully collected in January 2013.

(6)	Property and Equipment, Net

A summary of property and equipment is as follows:

	As of December 31,
	2013		2012

Buildings and land use rights	$	72,826,656	$	-
Computers		217,717		126,474
Office equipment, furniture and fixtures		109,898		75,286
Leasehold improvements		34,368		33,328
Automobiles		1,117,383		1,058,949
		74,306,022		1,294,037
Less: Accumulated depreciation and amortization		1,328,037		979,911
	$	72,977,985	$	314,126

Depreciation and amortization expense for property and equipment amounted to $304,859 and $162,420 for the years ended December 31, 2013 and 2012, respectively.

(7)

Goodwill

The changes in the carrying amount of goodwill for the years ended December 31, 2013 and 2012 are as follows:

	Reporting Segments
	Sales of Automobiles		Airport Auto Mall Automotive Services		Total

Balance as of January 1, 2013	$	-	$	-	$	-
Acquisition of Zhonghe		4,021,540		16,086,160		20,107,700
Translation adjustment		10,333		41,332		51,665

Balance as of December 31, 2013	$	4,031,873	$	16,127,492	$	20,159,365

During the year ended December 31, 2013, the Company acquired Zhonghe. We recorded a total of $20,107,700 goodwill related to this acquisition. The Company allocated 80% of the goodwill to Sales of Automobiles segment and 20% of the goodwill to Airport Auto Mall Automotive Services based on the Company’s estimated expected present value of future cash flows for each of these segments.

During the fourth quarter of 2012, the Company revised its business plan and downsized Goodcar’s operations. The Company reviewed Goodcar’s advertising operations and decided to cease such operations to generate advertising revenue. The Company evaluated the projected revenue and profit and costs involved to operate Goodcar’s advertising operations and concluded that it would be in the Company’s best interest to cease its operations in order for it to better focus on its core business in automobile sales, automobile value added services and financing services. The Company continues to operate Goodcar’s website to promote our products and services in other segments, including automobile sales, automobile valued added services and financing services. Due to the closing of Goodcar’s advertising operations, the Company recorded an impairment charge of $3,735,091 related to the goodwill acquired in the acquisition of Goodcar.

F-19

(8)	Intangible Assets, Net

The Company’s customer relations acquired in connection with Zhonghe on November 30, 2013. As of December 31, 2013, the customer relations is summarized as follows:

As of December 31, 2013

Life

Cost

Foreign

currency

translation

adjustments

Less:

Accumulated

Impairment

Less:

Accumulated

Amortization

Net Carrying

Amount

Intangible assets subject to amortization -

Customer relations

5 years

555,002

1,426

(9,273)

547,155

During the fourth quarter of 2012, the Company recorded an impairment charge of $926,110 (net of deferred taxes of $314,094) related to intangible assets acquired in the acquisition of Goodcar.

Amortization expense for intangible assets was $9,267 and $179,063 for the year ended December 31, 2013 and 2012, respectively.

Estimated amortization of the intangible assets for the five succeeding years follows:

2014	$	111,286
2015		111,286
2016		111,286
2017		111,286
2018		102,011
	$	547,155

(9)	Equity Investment in Car King Tianjin

On November 22, 2013, Zhonghe entered into a Cooperation Framework Agreement with Car King China with respect to the establishment of a joint venture to own and operate a used car business. The establishment of this joint venture was contingent upon the successful completion by the Company of the acquisition of Zhonghe which owns the Airport International Auto Mall, where the used car business will be operated. Upon the acquisition of Zhonghe on November 30, 2013, the joint venture was established in accordance with the terms of the Cooperation Framework Agreement. Pursuant to the terms of the Articles of Association of Car King Tianjin, Zhonghe and Car King China will make capital contributions totaling RMB 8,000,000 and RMB 12,000,000, respectively, to Car King Tianjin, which will have total registered capital of RMB 20,000,000. Prior to being acquired by the Company, Zhonghe made an initial capital contribution of RMB 4,000,000 to Car King Tianjin in November 2013. The Company is entitled to 40% of Car King Tianjin’s net profit or loss. As of December 31, 2013, the Company’s equity investment balance in Car King Tianjin was $577,904.

The Company’s investments in Car King Tianjin are accounted for using the equity method of accounting. The results of operations and financial position of the Company’s equity basis investments are summarized below:

Condensed income statement information:	Year Ended December 31 2013

Net sales	$	-

Gross profit		-

Net loss		(191,651)

Company’s equity in net loss of investee	$	(76,660)

F-20

Condensed balance sheet information:	As of December 31 2013

Current assets	$	1,554,709

Non current assets		31,244

Total assets	$	1,585,953

Current liabilities	$	141,193

Equity		1,444,760

Current liabilities and equity	$	1,585,953

(10)	Lines of Credit Related to Financing Services

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

Interest charged by the banks for draws on these facility lines of credit is classified as cost of revenue in the consolidated statements of income. Interest expense related to these lines of credit was $2,537,905 and $3,374,466 for the years ended December 31, 2013 and 2012, respectively.

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

China Merchants Bank

In June 2012, 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 $13,092,433 (RMB 80,000,000). The borrowings under the facility line of credit bear interest at rates to be determined upon drawing. During the year ended December 31, 2013, the interest is charged at rates ranging between 1.80% and 5.19% per annum and is repayable within 3 months from the dates of drawing. As of December 31, 2013 and 2012, the Company had an outstanding balance of $3,930,068 and $10,542,205, respectively, under the facility line of credit. The facility line of credit is guaranteed by Ms. Cheng Weihong, a Director and Senior Vice President of the Company, and a non-related entity which is a supplier of the Company, and matured in June 2013 and was renewed for one year through June 2014 with substantially the same terms.

Agricultural Bank of China

In September 2012, the Company entered into a facility line of credit agreement with Agricultural Bank of China. Under the terms of the agreement, the Company could borrow a maximum amount of $85,100,812 (RMB 520,000,000). The facility line of credit is guaranteed by five non-related entities, which are customers, suppliers or both, and one of which is a major customer. During the year ended December 31, 2013, the borrowings under this facility line of credit bore interest at rates ranging from 3.79% to 5.19% per annum and were repayable on the due dates which were determined prior to each draw. As of December 31, 2013 and December 31, 2012, the Company had outstanding balances of $0 and $40,085,271, respectively, under this facility line of credit.

F-21

In September 2013, the Company entered into a facility line of credit agreement with Agricultural Bank of China. Under the terms of the agreement, the Company could borrow a maximum amount of $85,100,812 (RMB 520,000,000). The facility line of credit is guaranteed by five non-related entities, which are customers, suppliers or both, and one of which is a major customer. During the year ended December 31, 2013, the borrowings under this facility line of credit bore interest at rates ranging from 4.06% to 5.89% per annum and were repayable on the due dates which were determined prior to each draw. As of December 31, 2013 and December 31, 2012, the Company had outstanding balances of $55,298,731 and $0, respectively, under this facility line of credit. The outstanding balance was secured by the amount of $8,733,869 and $0 deposited to the bank, which is presented as restricted cash on the consolidated balance sheets as of December 31, 2013 and December 31, 2012.

PuDong Development Bank

In December 2012, 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 $16,365,541 (RMB 100,000,000). During the year ended December 31, 2013, the borrowings under this facility line of credit bore interest at rates ranging from 4.24% to 4.30% per annum. As of December 31, 2013 and December 31, 2012, the Company there were no outstanding balances under the facility line of credit. The facility line of credit was guaranteed by Ms. Cheng Weihong, a Director and Senior Vice President of the Company, and a non-related entity, which is also a supplier and a customer of the Company, and matured in December 2013.

In December 2013, 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 $19,638,649 (RMB 120,000,000). During the year ended December 31, 2013, the borrowings under this facility line of credit bore interest at rates ranging from 4.24% to 4.25% per annum. As of December 31, 2013 and December 31, 2012, the Company had outstanding balances of $553,865 and $0, respectively, under the facility line of credit. The facility line of credit was guaranteed by Ms. Cheng Weihong, a Director and Senior Vice President of the Company, and a non-related entity, which is a supplier of the Company, and matures in December 2014.

China Zheshang Bank

In September 2012, 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 $24,548,311 (RMB 150,000,000). This facility line of credit is guaranteed by Mr. Tong Shiping, the Company’s Chairman, President and CEO, Ms. Cheng Weihong, a Director and Senior Vice President of the Company, and two unrelated parties which are also customers (including one major customer) of the Company, and matured in September 2013.

In September 2013, 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 $24,548,311 (RMB 150,000,000). This facility line of credit is guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International Automall Ltd. Co., a customer, (iv) Zhonghe, the Company’s subsidiary, and (v) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe,. This facility matures in September 2014.

The borrowings under this facility line of credit bear interest at a rate of 5.00% per annum and are repayable within 3 months from the dates of drawing. As of December 31, 2013 and December 31, 2012, the Company had outstanding balances of $6,390,648 and $900,542, respectively, under this facility line of credit.

(11)	Short Term Borrowings

Agricultural Bank of China

The Company entered into a term loan agreement with Agricultural Bank of China to obtain short term financing which is settled in US dollars. The outstanding balance totaled $3,002,182 and $0 of short term foreign currency borrowings with Agricultural Bank of China as of December 31, 2013 and December, 31, 2012. These short term foreign currency borrowings bear interest at rates ranging between 1.73% and 3.34% per annum, mature within six months from the dates of borrowing and are secured by the amount of $3,002,182 (RMB 18,344,534) and $0 deposited to the bank, which is presented as restricted cash on the consolidated balance sheets as of December 31, 2013 and December 31, 2012.

In March, April, June, July, September and October 2012, the Company entered into twelve short term financing agreements with Agricultural Bank of China (“ABC”) for a period of six months. Four of the agreements expired and outstanding amounts were repaid during the year ended December 31, 2012. The total outstanding balance of these agreements was $16,608,604 as of December 31, 2012. Under the terms of the agreements, ABC advanced $16,608,404 to the Company and as conditions of these financing agreements, the Company is required to pledge its notes receivable in the aggregate amount of $1,587,024 (RMB 10,000,000) as guarantees. In addition, the Company is required to maintain a bank deposit of $16,140,039 (RMB 101,700,000) which is classified as restricted cash in the consolidated balance sheet as of December 31, 2012. Based on the preliminary estimates of the bank, these financing loans carry interest at a rate equal to the LIBOR plus a rate between 0.3% and 2.6% (a rate range between 0.92% and 3.33% at December 31, 2012). Upon the repayment dates of these draws, the Company will make final interest payments which could result in the effective interest rate paid to differ from the estimated interest rates provided by the bank prior to the draws. These draws are repayable on various dates between January 2013 and April 2013.

F-22

China Zheshang Bank

In August 2013 and September 2013, the Company entered into four loan agreements with China Zheshang Bank. Under the terms of the agreements, the Company borrowed an aggregate amount of $3,243,615 (RMB 19,904,114). The borrowings under these loan agreements bear interest at a rate of 5.6% for a borrowing period of six months and are guaranteed by Mr. Tong Shiping, the Company’s Chairman, President and CEO, Ms. Cheng Weihong, a Director and Senior Vice President of the Company, a personal friend of Mr. Tong Shiping, and two unrelated parities, which are also customers (including one major customer) of the Company. The total outstanding balance of these agreements was $3,257,416 as of December 31, 2013.

In September 2012, the Company entered into four loan agreements with China Zheshang Bank. Under the terms of the agreements, the Company borrowed an aggregate loan amount of $3,064,524 (RMB 19,309,874). The borrowings under these loan agreements bears interest at a rate of 5.6% for a borrowing period of six months and are guaranteed by Mr. Tong Shiping, Ms. Cheng Weihong, a personal friend of Mr. Tong Shiping, and two unrelated parities, which are also customers (including one major customer) of the Company. Total outstanding balance of these agreements was $3,064,524 as of December 31, 2012.

(12)	Notes Payable to Suppliers

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

As of December 31, 2013 and December 31, 2012, the Company had outstanding notes payable to suppliers in an aggregate amount of $13,092,433 (RMB 80,000,000) and $12,696,196 (RMB 80,000,000), respectively, of which Bank of Jinzhou will guarantee payments to suppliers within the term of these notes for a period of six months. The Company was required to maintain 50% of the notes amounts, or $6,550,349 and $6,348,098 as guaranteed funds, which was classified as restricted cash as of December 31, 2013 and December 31, 2012, respectively.

As of December 31, 2013, the Company had outstanding notes payable to suppliers in an aggregate amount of $3,273,108 (RMB 20,000,000), respectively, of which China Zheshang Bank will guarantee payments to suppliers within the term of these notes for a period of six months. The Company was required to maintain 100% of the notes amounts, or $3,273,108 (RMB 20,000,000) as guaranteed funds, which was classified as restricted cash as of December 31, 2013, respectively.

As of December 31, 2013, the Company had outstanding notes payable to suppliers in an aggregate amount of $4,909,662 (RMB 30,000,000), respectively, of which Agricultural Bank of China will guarantee payments to suppliers within the term of these notes for a period of six months. The Company was required to maintain 30% of the notes amounts, or $1,472,899 (RMB 10,000,000) as guaranteed funds, which was classified as restricted cash as of December 31, 2013, respectively.

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

(13)	Long term debt

The Company has an outstanding debt due to the seller of Zhonghe, which was acquired by the Company on November 30, 2013. The debt carries an interest at a rate of 6% per annum. The debt is due in three installment payments of approximately $19.6 million (RMB120,000,000) each including interest and is secured by the real estate property where the Airport International Auto Mall is located.

Summary of this debt follows:

Outstanding debt balance	$	51,012,804
Less current portion		(15,706,581	)
Outstanding debt balance less current portion	$	35,306,223

F-23

Future maturities of long-term debt, net of discount, are as follows:

2014	$	15,706,581
2015		16,978,146
2016		18,328,077
	$	51,012,804

(14)	Income Taxes

China Auto and HKCo do not generate any income and therefore are not subject to US or Hong Kong income taxes. The Company conducts substantially all of its business through its PRC operating subsidiaries and they are subject to PRC income taxes. The Company’s subsidiaries in the PRC are subject to the standard 25% tax rate in 2013 and 2012.

The Company’s income tax provision amounted to $1,634,518 and $1,596,179, respectively, for the years ended December 31, 2013 and 2012 (an effective rate of 75.98% and 38.22% in 2013 and 2012, respectively). A reconciliation of the provision for income taxes, with amounts determined by applying the statutory US federal income tax rate to income before income taxes, is as follows:

	Year ended December 31,
	2013			2012

Computed tax at US federal statutory rate of 34%	$	731,583		$	1,420,079

Permanent differences:
Meals and entertainment (non-deductible portion)		29,581			44,114
Legal and professional fees (non-deductible portion)		226,520			226,569
Stock issuance in conjunction with Zhonghe acquisition		335,240			-
Gain on forgiveness of loan payable to Qizhong		545,396			-
Impairment of goodwill and intangible assets (non-deductible portion)		-			451,400
Tax rate difference between US and PRC on foreign earnings		(342,306	)		(375,903	)
Loss of Qizhong and its subsidiaries not deducted by other consolidation group entities as separated tax returns were filed		-			342,330
Change in valuation allowance		155,190			(443,726	)
Other		(46,686	)		(68,684	)
	$	1,634,518		$	1,596,179

Details of income taxes	Year ended December 31,
	2013			2012
Current
US Federal	$	-		$	-
PRC		1,779,224			2,310,079
Total current		1,779,224			2,310,079

Deferred
US Federal		-			-
PRC		(144,706	)		(713,900	)
Total deferral		(144,706	)		(713,900	)

Total income taxes	$	1,634,518		$	1,596,179

F-24

	As of December 31,
	2013			2012
Details of deferred taxes
Deferred tax assets:
Impairment loss carryforwards	$	-		$	714,161
Net operating losses carryforwards		155,190			-
Inventory reserve		48,345			-
		203,535			714,161
Valuation allowance		(155,190	)		-
Total deferred tax asset		48,345			714,161

Deferred tax liability:
Debt discount		1,580,616			-
Excess of book basis over tax basis – Airport International Auto Mall property		11,308,850			-
Intangible asset		136,789			-
Total deferred tax liability		13,026,255			-

Net deferred tax liability	$	12,977,910		$	-

Classification on consolidated balance sheets
Deferred tax assets
- Current	$	48,345		$	714,161

Deferred tax liability
- Current	$	786,413		$	-
- Non-current		12,239,842			-
Total deferred tax liabilities	$	13,026,255		$	-

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible or are utilized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon an assessment of the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are tested whether they are deductible or can be utilized, management believes that the deferred tax assets amounting to $155,190 and $0 as of December 31, 2013 and 2012, respectively, are not more likely than not to be realized. Accordingly the Company provided a valuation allowance amounting to $155,190 and $0 against the deferred tax assets as of December 31, 2013 and 2012, respectively. As of December 31, 2013, the Company had unused net operating loss carryforward from its PRC subsidiaries in the amount of approximately $615,000 which may be applied against future taxable income and begins to expire after the year 2018.

The Company is subject to income taxes in the PRC. Tax regulations are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. All tax positions taken, or expected to be taken, continue to be more likely than not ultimately settled at the full amount claimed. The Company’s tax filings are subject to the PRC tax bureau’s examination for a period up to 5 years. The Company is not currently under any examination by the PRC tax bureau

F-25

(15)	Retained Earnings

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

In addition to the general reserve, the Company’s PRC subsidiaries are required to obtain approval from the local PRC government prior to distributing any registered share capital. Accordingly, both the appropriations to general reserve and the registered share capital of the Company’s PRC subsidiary are considered as restricted net assets and are not distributable as cash dividends. As of December 31, 2013 and December 31, 2012, the Company’s statutory reserve fund was approximately $3,790,000 and $3,559,000, respectively.

(16)	Related Party Balances and Transactions

The Company’s former shareholder, Sino Peace Limited, paid certain accrued expenses in the previous years on behalf of the Company. The amounts of $2,223,458 and $2,156,166 were outstanding as due to this former shareholder on the consolidated balance sheet as of December 31, 2013 and 2012, respectively

In connection with the Goodcar acquisition, the Company acquired the balances due to former owners of Qizhong of $1,084,905. Upon completion of the share issuance, these former owners of Qizhong then became shareholders of the Company. In December 2012, the Company negotiated with these former owners of Qizhong with regard to the outstanding balance of these loans payable. As a result of the negotiations, these loans were forgiven by these former owners of Qizhong due to the fact that certain key executives left Goodcar after the purchase and Goodcar’s operations had not been performing the way it was expected. The formers owners were willing to forgive this debt since the actual performance of Qizhong after the acquisition was far below the performance forecast provided to the Company prior to the acquisition. The Company recorded a gain on debt forgiveness in the amount of $1,139,861 (including outstanding debt balance of $1,084,905 and foreign currency translation adjustment of $54,956) as other income in the consolidated statements of income for the year ended December 31, 2012.

The balances as discussed above as of December 31, 2013 and 2012 are interest-free, unsecured and have no fixed term of repayment. During the years ended December 31, 2013 and 2012, there was no imputed interest charged in relation to these balances.

(17)	Commitments

The Company leases certain office and marketing premises under non-cancelable leases. These office leases begin to expire in 2013. Rent expenses under operating leases were $122,691 in 2013 and $240,724 in 2012. The leases expire at various dates through 2014. In the normal course of business, it is expected that these leases will be renewed or replaced by leases on other properties.

Future minimum lease payments under non-cancelable operating leases were as follows:

2014	$	42,909
Thereafter		-
	$	42,909

(18)	Segment Information

The Company has six principal operating segments: (1) sales of automobiles, (2) financing services, (3) web-based advertising, and, (4) automobile value added services, (5) airport auto mall automotive services, and (6) auto mall management services. These operating segments were determined based on the nature of the services offered. Operating segments are defined as components of an enterprise about which separate financial information is available and that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company's chief executive officer and chief operating officer have been identified as the chief operating decision makers. The Company's chief operating decision makers direct the allocation of resources to operating segments based on the profitability and cash flows of each respective segment.

F-26

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:

Year Ended December 31, 2013


					Web-based		Automobile		Airport Auto Mall		Auto Mall
	Sales of		Financing		Advertising		Value Added		Automotive		Management
	Automobiles		Services		Services		Services		Services		Service		Corporate			Total

Net revenue	$	450,143,413	$	6,893,986	$	471,277	$	740,338	$	15,788	$	970,255	$	-		$	459,235,057
Cost of revenue		449,748,338		2,560,052		38,201		22,150		-		10,675		-			452,379,416

Operating expenses
Selling and marketing		43,285		474,832		47,448		78,686		1,730		105,133		-			751,114
General and administrative		91,478		1,003,500		100,277		166,293		3,656		222,186		1,587,390			3,174,780
Total operating expenses		134,763		1,478,332		147,725		244,979		5,386		327,319		1,587,390			3,925,894
Income (loss) from operations	$	260,312	$	2,855,602	$	285,351	$	473,209	$	10,402	$	632,261	$	(1,587,390	)	$	2,929,747

Year Ended December 31, 2012

					Web-based			Automobile		Airport Auto Mall		Auto Mall
	Sales of		Financing		Advertising			Value Added		Automotive		Management
	Automobiles		Services		Services			Services		Services		Service		Corporate			Total

Net revenue	$	581,292,369	$	7,085,357	$	819,344		$	1,178,274	$	-	$	939,760	$	-		$	591,315,104
Cost of revenue		576,062,562		3,462,653		282,044			240,017		-		10,442		-			580,057,718

Operating expenses
Selling and marketing		454,140		314,584		46,657			81,475		-		80,699		-			977,555
General and administrative		473,030		327,670		48,598			84,864		-		84,056		1,018,218			2,036,436
Impairment loss of goodwill and intangible assets		-		-		4,661,201			-		-		-		-			4,661,201
Total operating expenses		927,170		642,254		4,756,456			166,339		-		164,755		1,018,218			7,675,192
Income (loss) from operations	$	4,302,637	$	2,980,450	$	(4,219,156	)	$	771,918	$	-	$	764,563	$	(1,018,218	)	$	3,582,194

Total Assets					Web-based		Automobile		Airport Auto Mall		Auto Mall
	Sales of		Financing		Advertising		Value Added		Automotive		Management
	Automobiles		Services		Services		Services		Services		Service		Corporate		Total

As of December 31, 2013	$	93,650,624	$	96,122,720	$	1,820,264	$	2,815,434	$	65,077,390	$	376,146	$	1,693,047	$	261,555,625

As of December 31, 2012	$	76,548,467	$	87,555,632	$	213,155	$	568,770	$	-	$	86,065	$	1,223,627	$	166,195,716

F-27

(17)	Subsequent Events

On March 14, 2014, the Company announced that the Cooperation Agreement dated March 1, 2013, by and between the Company and Tianjin Prominent Hero International Logistics Co., Ltd, to manage the International Auto Mall in Tianjin, China, had not been renewed. The Cooperation Agreement expired according to its terms on February 28, 2014. The revenue and net income (loss) of the Company had the Cooperation Agreement’s termination date been January 1, 2013, or January 1, 2012, are:

	Revenue		Net Income (Loss) Attributable to the Company

Supplemental pro forma for the year ended December 31, 2013	$	458,264,802	$	(195,438)
Supplemental pro forma for the year ended December 31, 2012	$	590,375,344	$	1,870,098

F-28

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
	Name:	Tong Shiping
	Title:	Chief Executive Officer

	By:	/s/ Wang Xinwei
	Name:	Wang Xinwei
	Title	Chief Financial Officer

Dated: April 10, 2014

POWER OF ATTORNEY

The registrant and each person whose signature appears below hereby appoint Tong Shiping as attorney-in-fact with full power of substitution, severally, to execute in the name and on behalf of the registrant and each such person, individually and in each capacity stated below, one or more amendments to the annual report which amendments may make such changes in the report as the attorney-in-fact acting deems appropriate and to file any such amendment to the report with the US Securities and Exchange Commission.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date

/s/ Tong Shiping	Chief Executive Officer and Director	April 10, 2014
Tong Shiping	(Principal Executive Officer)


/s/ Wang Xinwei	Chief Financial Officer, Treasurer, Vice President and Director	April 10, 2014
Wang Xinwei	(Principal Accounting Officer)

/s/ Cheng Weihong	Senior Vice President (Head of Human Resources and General	April 10, 2014
Cheng Weihong	Administration) and Director

/s/ Howard S. Barth	Director	April 10, 2014
Howard S. Barth

/s/ Wang Wei	Director	April 10, 2014
Wang Wei

/s/ Yang Lili	Director	April 10, 2014
Yang Lili

/s/ Zou Baoying	Director	April 10, 2014
Zou Baoying

Index to Exhibits

Exhibit Number		Exhibit Description
3.1 (1)		Amended Articles of Incorporation of the Company
3.2 (2)		Amended and Restated Bylaws of the Company
10.1(3)		Pursuant to that certain Contract on Import L/C Issuing Limits, dated as of September 13, 2012, by and between Tianjin Binhai Shisheng Business and Trade Group Co., Ltd. and the Agricultural Bank of China Tianjin Heping Sub-branch
10.2(3)		Termination Agreement, dated as of November 30, 2012, by and between Tianjin Shimao Auto Logistics Center Co., Ltd and Tianjin Binhai Shisheng Trading Group Co., Ltd.
10.3 (3)		Office Tenancy Contract, effective as of December 1, 2012, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Zhengji International Trade Co., Ltd.
10.4 (3)		Office Tenancy Contract, effective as of December 1, 2012, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Zhengji International Trade Co., Ltd.
10.5 (3)		Office Tenancy Contract, effective as of January 1, 2013, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Binhai Shisheng Trading Group Co., Ltd.
10.6*		Contract on Import L/C Issuing Limits, dated as of September 26, 2013, by and between Tianjin Binhai Shisheng Business and Trade Group Co., Ltd. and the Agricultural Bank of China Tianjin Heping Sub-branch
10.7*		Office Tenancy Contract, effective as of December 1, 2013, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Zhengji International Trade Co., Ltd.
10.8*		Office Tenancy Contract, effective as of January 1, 2014, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Binhai Shisheng Trading Group Co., Ltd.
14.1 (4)		Code of Business Conduct and Ethics
21.1*		Subsidiaries
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 the Chief Executive Officer and 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.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Labels Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

(1)	Incorporated by reference to the Company’s Form SB2 filed with the Securities and Exchange Commission on March 7, 2006, Definitive Schedule 14C Information Statement filed on December 5, 2008 and Form 8-K filed on October 9, 2012.

(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 10-K, filed with the Securities and Exchanges Commission on April 1, 2013.

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

*	Attached hereto