Attached files
file | filename |
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EX-2.1 - China Electronics Holdings, Inc. | v191075_ex2-1.htm |
EX-4.3 - China Electronics Holdings, Inc. | v191075_ex4-3.htm |
EX-4.2 - China Electronics Holdings, Inc. | v191075_ex4-2.htm |
EX-4.1 - China Electronics Holdings, Inc. | v191075_ex4-1.htm |
EX-10.2 - China Electronics Holdings, Inc. | v191075_ex10-2.htm |
EX-10.1 - China Electronics Holdings, Inc. | v191075_ex10-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of
1934
Date of
Report (Date of earliest event reported): July 15, 2010
Commission
File Number: 333- 152535
Buyonate, Inc.
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(Exact
name of registrant as specified in its
charter)
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Nevada
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98-
0550385
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(State
or other jurisdiction of incorporation)
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(IRS
Employer Identification Number)
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Building
3, Binhe District, Longhe East Road, Lu’an City, Anhui Province, PRC
237000
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(Address
of principal executive offices)
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011-86-564-3224888
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(Registrant’s
telephone number, including area code)
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#
803-5348 Vegas Drive, Las Vegas, NV
89108
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(Former
name or former address if changed since the last report)
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
o
|
Written
communication pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
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o
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Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|
o
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act
(17 CFR 240.14d-2(b))
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o
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Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act
(17 CFR 240.13e-4(c))
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EXPLANATORY
NOTE
This
Current Report on Form 8-K is being filed by Buyonate, Inc. We are
reporting the acquisition of a new business and providing a description of this
business and its audited financials below. In addition, on July 15, 2010 we
consummated a private placement to 27 investors for an aggregate gross purchase
price of $3,278,397 ($10.56 per unit) of 310,454 units, each unit
consisting of four shares of our Common Stock, par value $0.0001 per
share (“Stock”), a three-year warrant to purchase one shares of our Common Stock
for $3.70 per share and a three-year warrant to purchase one share of
our Common Stock for $4.75 per share pursuant to a Subscription Agreement (the
“Subscription Agreement”) with such investors (the “Private
Placement”).
USE
OF DEFINED TERMS
Except as
otherwise indicated by the context, references in this Report to:
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·
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"Buyonate," "the Company," "we,"
"us," or "our," are references to the combined business of Buyonate, Inc,
and its subsidiary, China Electronic Holdings, Inc., and China Electronic
Holdings, Inc.’s direct and indirect
subsidiaries;
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|
·
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"China Electronic" refers to
China Electronic Holdings, Inc., a Delaware corporation and our direct,
wholly owned subsidiary, and/or its direct and indirect subsidiaries, as
the case may be;
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·
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“Guoying”
refers to Lu’an Guoying Electronic Sales Co., Ltd., a PRC
corporation;
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·
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"China," "Chinese" and "PRC,"
refer to the People’s Republic of
China;
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·
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"RMB" refers to Renminbi, the
legal currency of China; Based on the exchange rate as of June 30, 2010, 1
U.S. dollar equals to RMB
6.8;
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·
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"U.S. dollar," "$" and "US$"
refer to the legal currency of the United
States;
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·
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"Securities Act" refers to the
Securities Act of 1933, as amended;
and
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·
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"Exchange Act" refers to the
Securities Exchange Act of 1934, as
amended.
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ITEM
1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
Share
Exchange Agreement
On July
15, 2010, we entered into a Share Exchange Agreement, dated as of July 9, 2010
(the “Share Exchange Agreement”) with China Electronic and certain stockholders
and warrantholders of China Electronic (the “CEH Stockholders”). Pursuant
to the Share Exchange Agreement, on July 15, 2010, 10 CEH Stockholders
transferred 100% of the outstanding shares of common stock and preferred stock
and 100% of the warrants to purchase common stock of China Electronic held by
them, in exchange for an aggregate of 13,785,902 newly issued shares of our
Common Stock and warrants to purchase an aggregate of 1,628,570 shares of our
Common Stock. The shares of our common stock acquired by the CEH Stockholders in
such transactions constitute approximately 86% of our issued and outstanding
Common Stock giving effect to the share and warrant exchange and the sale of our
Common Stock pursuant to the Subscription Agreement discussed below, but not
including any outstanding purchase warrants to purchase shares of our common
stock, including the warrants issued pursuant to the Subscription Agreement. In
connection with the closing of the Share Exchange Agreement, China Electronic
purchased from the former principal stockholder of Buyonate an aggregate of 4
million shares of our common stock and then agreed to the cancellation of such
shares.
The Share
Exchange Agreement contains representations and warranties by us, China
Electronic and the CEH Stockholders which are customary for transactions of this
type such as, with respect to Buyonate, Inc.: organization, good standing and
qualification to do business; capitalization; subsidiaries, authorization and
enforceability of the transaction and transaction documents, consents being
obtained or not required to consummate the transaction; with respect to China
Electronics: authorization, capitalization and no conflicts or
violations resulting from executing, delivering and performing the transaction
documents and with respect to the CEH Stockholders: investment representations
regarding the Buyonate securities to be acquired by them in the exchange and no
broker’s fees except as disclosed.
The
foregoing description of the terms of the Share Exchange Agreement is qualified
in its entirety by reference to the provisions of the Share Exchange Agreement
which is included as Exhibit 2.1 of this Current Report and is incorporated by
reference herein.
Subscription
Agreement
On July
15, 2010 we consummated transactions under a Subscription Agreement, dated as of
July 9, 2010 (the “Subscription Agreement”) with 27 investors pursuant to which
the investors agreed to and purchased for an aggregate of
$3,278,397 an aggregate of (a) 1,241,817 shares of our common
stock, (b) three year warrants (“Series C Warrants”) to purchase an aggregate of
310,454 shares of our common stock for $3.70 per share and (c) three year
warrants (“Series D Warrants”) to purchase an aggregate of 310,454 shares of our
Common Stock for $4.75 per share.
Representations
and Warranties; Indemnification : The Subscription Agreement
contains representations and warranties by us and the investors which are
customary for transactions of this type such as, with respect to the Company:
organization, good standing and qualification to do business; capitalization;
authorization and enforceability of the transaction and transaction documents;
no conflicts or violations resulting from executing, delivering and performing
the transaction documents; financial statements; valid issuance of stock,
governmental being obtained or not required to consummate the transaction;
litigation; no market manipulation; no defaults; no undisclosed liabilities or
events, no general solicitation; full disclosure; environmental compliance;
quotation of Buyonate’s shares on the OTC Bulletin Board; no foreign corrupt
practices related party transactions; representations concerning employees and
no brokers used, and with respect to the investors: authorization,
investment intent and no conflicts arising as a result of execution, delivery
and performance of the transaction documents. The Company has agreed to
indemnify the investors and their affiliates against claims, costs, losses,
damages, expenses and obligations arising out of or based on material
misrepresentations by the Company made in the Subscription Agreement and
breaches by the Company of material covenants in the Subscription
Agreement.
Covenants:
The Subscription Agreement contains certain covenants on our part, including the
following:
Registration:
we must file a registration statement covering the resale by the investors of
100% of our shares of Common Stock issuable to the investors upon the exercise
of all of the Series C Warrants and the Series D Warrants (the “Resale
Registration Statement”). The Resale Registration Statement must be filed with
the SEC within 60 days after the final closing date of sales of our securities
pursuant to the Subscription Agreement and cause the registration statement to
be declared effective within 180 days after the final closing date). The
Subscription Agreement provides for liquidated damages of .5% per month of the
purchase price of the securities purchased by the investors (with a cap of
5% of the purchase price in the aggregate) if the filing or effectiveness
of the registration statement is delayed beyond the required deadlines or if
after effectiveness is declared by the SEC, effectiveness of the Resale
Registration Statement is not maintained or if the Company shall fail for any
reason to satisfy the current public information requirement under Rule
144.
Listing:
we have agreed to maintain the quotation or listing of our common stock on the
American Stock Exchange, Nasdaq Capital Market, Nasdaq Global Market, Nasdaq
Global Select Market, OTC Bulletin Board, or New York Stock Exchange use our
best efforts to list our Common Stock on the American Stock Exchange, Nasdaq
Capital Market, Nasdaq Global Market, Nasdaq Global Select Market or New York
Stock Exchange and comply in all respects with the Company’s reporting, filing
and other obligations under the bylaws or rules of the applicable principal
market on which the common stock is traded or quoted as long as any Purchased
Securities are outstanding. We have also agreed to complete an uplisting of our
common stock to the Nasdaq Capital Market, Nasdaq Global Market, Nasdaq Global
Select Market or NYSE Amex Equities.
Filings:
For the later of two years after the final closing date of the sale of
securities pursuant to the Subscription Agreement or until all of the Purchased
Securities can be resold by the investors under Rule 144 the Company will comply
with all of its reporting and filing obligations under the Securities Exchange
Act of 1934 and all of the requirements relating to maintaining the
effectiveness of the Resale Registration Statement within 12 months after the
closing date.
Lockup
Agreement: The Chairman of the Company has agreed that for a period of 18 months
after the final closing date he will not sell any offer, pledge, sell, contract
to sell, sell any option or contract to purchase, lend, transfer or otherwise
dispose of any shares of common stock or any options, warrants or other rights
to purchase shares of common stock or any other security of the Company which he
owns or has a right to acquire as of July 9, 2010.
Right of
Participation: The investors shall have the right to purchase up to 25% of any
subsequent underwritten offering of the Company’s securities before the time the
Company completes an uplisting of its common stock to the Nasdaq Capital Market,
Nasdaq Global Market, Nasdaq Global Select Market or NYSE Amex
Equities.
Most
Favored Nations provision: subject to certain exceptions, if at any time prior
to July 9, 2012, the Company shall issue any common stock or securities
convertible into or exercisable for shares of common stock (or modify the
conversion or exercise price of any of the foregoing which may be outstanding)
to any person or entity at a price per share which shall be less than $3.43,
subject to adjustment for stock dividends, subdivisions and combinations (the
“Lower Price Issuance”), without the consent of the investor, then the Company
shall issue, for each such occasion, additional shares of common stock to the
investors respecting those purchased securities that are then still owned by the
investor at the time of the Lower Price Issuance so that the average per share
purchase price of the purchased securities owned by the investors on the date of
the Lower Price Issuance plus such additional shares issued to investor pursuant
to this provision is equal to such other lower price per share.
Delivery of up to
1,241,817 shares of Common Stock from Based on 2010 Net
Income: If our net income for the year ending December 31, 2010 (“Actual
2010 Net Income”) is less than $12.0 million (“2010 Guaranteed NI”), then the Company shall
issue, for each such occasion, to each investor on a pro-rata basis (determined
by dividing each investor’s consideration paid for the securities purchased by
such investor by the aggregate consideration paid for the securities purchased
by all investors), an additional amount of shares of common stock
(the “Make Good Shares”) equal to, as applicable, a number of shares equal to
the difference between A and the product of A x B, where A is the number of
common shares originally purchased and B equals (2010 Guaranteed
NI minus Actual 2010 Net Income)/2010 Guaranteed NI.
ITEM
2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS
On July
15, 2010, we completed the acquisition of China Electronic pursuant to the
Share Exchange Agreement. The acquisition was accounted for as a
recapitalization effected by a share exchange. China Electronic is considered
the acquirer for accounting and financial reporting purposes. The assets
and liabilities of the acquired entity have been brought forward at their book
value and no goodwill has been recognized.
As a
result of this transaction, the Company ceased being a “shell company” as that
term is defined in Rule 12b-2 under the Securities and Exchange Act of 1934 (the
“Exchange Act”).
Our
Corporate Structure
As set
forth in the following diagram, following our acquisition of China Electronic,
China Electronic became and currently is our direct, wholly-owned
subsidiary.
Organizational
History of China
Electronic Holdings, Inc. and Subsidiaries
China
Electronic Holdings, Inc. was incorporated in Delaware on November 15, 2007.
Pursuant to a Share
Transfer Agreement, dated as of December 31, 2008 (the “December 2008
Agreement”), four shareholders of Lu’an Guoying Electronic Sales Co., Ltd., a
PRC corporation (“Guoying”), transferred 60% of the outstanding shares of
Guoying to China Electronic Holdings Inc. (“China Electronic”) for a
consideration of RMB 600,000 (approximately $ 88,235). Pursuant to a notice
dated February 10, 2010, issued by Anhui Provincial Department of Commerce,
Lu’an Guoying Electronic Sales Co., Ltd. became a wholly foreign-owned
enterprise, or “WFOE,” under the laws of the PRC by virtue of its status as a
wholly-owned subsidiary of China Electronic Holdings, Inc.
Guoying
was formed in the PRC on January 4, 2002 as a limited liability company (a
company solely owned by a natural person). Pursuant to a Share Transfer Agreement,
dated as of December 26, 2008, China Electronic became the owner of 40% of the
outstanding capital stock of Guoying and Guoying became a Sino-foreign joint
venture under the laws of the PRC.
DESCRIPTION
OF BUSINESS
Overview
Through
its subsidiary, China Electronic Holdings Inc., (the Company is engaged in the
retail sale of consumer electronics and appliances in China, such as solar
heaters, refrigerators, air conditioners, televisions, and etc. The Company is
targeting the rural market in Anhui Province.
The
Company started sales of home appliances and electronics in 2001.
During
the fiscal year ended December 31, 2009 (“fiscal
2009”), approximately 66% of the Company’s revenues were from the
sale of solar water heaters, , approximately 10.5% of its revenues were from the
sale of refrigerators and approximately 6.5% of its revenues were
generated from the sale of televisions. Approximately 69% of the Company’s net
income for fiscal 2009 was from the sale of solar water heaters, approximately
12.7% of the Company’s 2009 net income was from the sale of refrigerators and
approximately 8.0% of the Company’s 2009 net income was profit from sales of
televisions.
The
Company operates 3 company owned stores, all of which are located in Lu’an City,
Anhui Province. The Company operates 408 exclusive franchise stores and 600
non-exclusive franchise stores, which are located in the rural areas around
Lu’an. Approximately 3.3% of the Company’s revenues for fiscal 2009 were from
the company owned stores, approximately 88.9% of the Company’s 2009 revenues
were from the exclusive franchise stores and approximately 7.8% of the Company’s
2009 revenues were generated from the non-exclusive franchise
stores.
For
additional information concerning the location and area of each of the Company’s
company owned stores and the terms under which the real estate for each store is
leased, see “Description of Property” herein.
The
Company purchases the consumer electronics and appliances it sells directly from
the manufacturers thereof or large distributors. Currently, 30% of the products
are supplied to the Company by large distributors, mainly under the brand names
Samsung and LG. Guoying is the exclusive wholesaler in the Lu’an area
for products under the brand names, Sony, LG, Samsung, Shanghai Shangling,
Chigo, Huayang and Huangming. Guoying is the general sales agency of
Sino-Japan Sanyo electronic products, such as Sanyo TVs, air conditioners,
washing machines and micro-wave ovens. Guoying has teamed up with
Huangming and Huayang, the 2 largest manufacturers of solar thermal products in
China, to be their exclusive retail outlet in Anhui. Some of their energy
efficient, “green” products include: solar thermal water heaters,
solar panels (photovoltaic) and energy saving glass.
In
addition to purchasing from the manufactures or distributors, the Company has
refrigerators manufactured by an OEM manufacturer under the Company’s own
trademark “Guoying”. Guoying refrigerators have “3C” quality national
authentication certificates. During fiscal year 2009, approximately 2 % of the
Company’s 2009 revenues and 2.5% of the Company’s 2009 net income were from the
sale of Guoying brand refrigerators. In August 2007, Guoying entered into a 5
year OEM agreement with Shanghai Pengpai Electronic Co., Ltd (“Pengpai”), under
which Pengpai will manufacture refrigerators for Guoying to sell under its own
trademark. Guoying sold a total of 30,000 refrigerators in 2007, 46,000 in 2008,
and 62,000 in 2009, and expects to sell 77,000 in 2010 and 100,000 in 2011, in
provinces like Anhui, Henan and Hubei. On October 2, 2006, Guoying entered into
a loan agreement with Pengpai where Guoying loaned to Pengpai a total of RMB 80
million (approximately $ 11.76 million) from year 2006 to 2010. In exchange
Pengpai sells refrigerators to Guoying at a discounted price. Pengpai is
required to repay the loan within 4 years, starting from October 2013. The loan
is secured by all the assets of Pengpai
Retail
Operations
The
various stores are described below:
Company
Owned Stores
The
Company operates 3 company owned stores. Two of them are focused on the sale of
solar thermal products, with one store having an area of 100 square meters and
another one having an area of 60 square meters. The third one is a general store
with an area of 180 square meters, which carries solar thermal products,
refrigerators, air conditioners, TV, and other products. The Company’s offices
are located on the second floor of the third store. The Company currently leases
all the company owned stores.
Exclusive
Franchise Stores
The
Company operates 408 exclusive franchise stores. The stores are located in rural
areas around Lu’an City. The customers of these stores are residents of the
local towns and villages. Guoying is the only wholesaler providing products to
these type of stores. Guoying is in charge of the delivery to each store and the
stores pay the purchase price of the products provided in cash at
delivery. Generally, after receiving orders from the stores, Guoying
can make the delivery within 3 days. For products within the national
“Rural consumer electronics and appliances” plan, meaning, the maximum sales
price is fixed, Guoying will give the stores certain discounts based on the
quantity of their purchases.
With each
store, Guoying has signed an exclusive franchise agreement with a term ranging
from 1 year to 3 years. Based on the agreements, Guoying provides a loan to the
store owner when establishing the stores. The loan is in the form of cash and
products, while the loan amount to each store depends on the specific needs of
each store. The store owners provide the operating space. In consideration of
the loan, the stores will exclusively purchase products from
Guoying.
Non-Exclusive
Franchise Stores
The
Company also operates 600 non-exclusive franchise stores, which are located at
the rural areas around Lu’an City. Guoying is in charge of the delivery of
products and gets cash payment for the products it sells to the stores at
delivery. Each non-exclusive franchise store pays Guoying an annual
franchise fee of 5,000 RMB (approximately $ 735). Guoying is not the only
wholesaler of the stores and the stores are free to purchase products from
anyone, including Guoying’s competitors.
Our
Warehouses
We
currently distribute products to our stores from two warehouses located within
Lu’an city, which are leased by Guoying. For additional
information concerning the location and area of each of the Company’s warehouse
and the terms under which the real estate for each warehouse is leased, see
“Description of Property” herein.
Industry
Background
Approximately
56% of China’s population still resides in rural areas of China, making rural
residents the largest consumer group in China. After many years of economic
reforms, the average income of people living in China's rural areas has
gradually increased. The rural market is largely untapped and has enormous
potential for growth. The rural consumer group has tremendous purchasing power
and is increasing as the Chinese government encourages rural communities to
modernize.
There are
several reasons for the potential development of rural consumer electronics and
appliances market.
First,
the central government has decided to expand internal demand by increasing the
income of the rural population. The continuous improvements in the rural power
network, rural transportation, and rural communication make the rural market
extremely favorable for home appliances and electronics.
Second,
after many years of economic reforms, the average income of people living in
China's rural areas has gradually increased. It is reported that the rural
residents hold more than US $120 billion in savings and US$106 billion in cash.
A survey done by the China Electronic Product Association showed that 14% to 33%
of rural families are willing to spend their money on televisions, DVDs, washers
and dryers, and telephones in the next few years. For example, refrigerator
ownership in big and middle cities of China is over 95%, even 99% in some
cities. However, the ownership of refrigerators is only 22.7% in rural areas of
China.
Third,
the Chinese government has initiated a rural home appliance and electronics
rebate program, called “Rural Consumer Electronics” plan. The plan provides that
the maximum sales price of electronics is fixed, at a price which is usually
equal to or less than the market price in urban areas of the same product.
Meanwhile, rural consumers can get a 13% government rebate on their purchases of
electronics.
Fourth,
the current consumer electronics and appliances markets in big cities like
Beijing, Shanghai, and Shenzhen are already saturated by an over abundance of
competitors – leading to very lean margins. Although some competitors have
announced interest in the rural market, none of the current competitors have
established any significant presence in the rural markets. Successful brand
names typically established in cities are not an indicator of automatic success
in the rural. A majority of the population from the rural market has not seen or
heard of the retail chains that exist in the cities. Additionally, the rural
consumers have different tastes and values in making their purchases. For
example, when it comes to appliances, functionality to cost is the most
important factor in deciding which product to purchase. However, product colors
have a significant impact in decision making. Most rural consumers prefer
certain colors, such as red, over colors like black, silver, and white that are
successful in the city. As a result, much research has to be carried out to
fully understand the outlook of the rural consumer.
Guoying
is the first rural home appliance and electronics retailer in Anhui
province.
Raw
Materials and Suppliers
Approximately
95% of the cost of sales is the purchase price of products.
Our
biggest suppliers of merchandise in 2009, in terms of cost to us,
were:
Name
of Supplier
|
Percentage
|
|||
Shangdong
Huangming Solar Power Sales Co.
|
52.15 | % | ||
Jiangshu
Huayang Solar Power Sales Co.
|
14.89 | % | ||
Hier
Hefei Ririshun Sales Co.
|
26.22 | % | ||
Shanghai
Tengpai Electronic Co.
|
1.50 | % | ||
Sanyo
Hefei Office
|
3.21 | % | ||
Jiangshu
Taizhou Chunlan Sales Co.
|
0.78 | % | ||
Anhui
Germei Tech. Co.
|
1.02 | % |
Our
biggest suppliers of merchandise in 2008, in terms of cost to us ,,
were:
Name
of Supplier
|
Percentage
|
|||
Hier
Hefei Ririshun Sales Co.
|
45.51 | % | ||
Shangdong
Huangming Solar Power Sales Co.
|
24.33 | % | ||
Jiangshu
Taizhou Chunlan Sales Co.
|
25.34 | % | ||
Sanyo
Hefei Office
|
4.82 | % |
Our
biggest suppliers of merchandise in 2007, in terms of value, were:
Name
of Suppliers
|
Percentage
|
|||
Sanyo
Hefei Office
|
78.85 | % | ||
Shanghai
Pengpai Electronic Sales Co.
|
21.15 | % |
We
receive all of our merchandise from our suppliers, which are often the
manufacturers, by the suppliers’ delivery trucks sent to our two warehouses
located within Lu’an city.
Marketing,
Sales, and Distribution
The
Company has a staff of 27 employees who take orders and provide customer service
to each franchise store in assigned geographical areas. We advertise in many
ways, including using TV advertisements, on buses and walls and on pagers on the
streets distributed by our promotion personnel and general promotions, including
discounts. We base our advertising on our observations of the market and our
competitors. Under contracts we have with our suppliers, our suppliers are
responsible for the costs of all discounts and promotions.
Customers
and Pricing
Our
customer strategy is to offer products to the rural market where there is less
competition.
Our
customers pay different prices for our products depending on where they
live.
·
|
In general, most of the products
sold in our franchise stores are under the regulation of the national
“Rural Consumer Electronics” plan, meaning that the maximum sales price is
fixed, which price is usually equal to or less than the market price in
urban areas of the same product. Meanwhile, rural consumers can get a 13%
government rebate on
electronics.
|
·
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Some products sold by our company
owned stores to the residents in Lu’an city are at the market price in
urban areas.
|
Payment
methods for customers are mainly cash.
In recent
years, the pricing of our merchandise has changed as the price charged by our
vendors has changed. For example, due to inflation in the recent years, the
market price of consumer electronics and appliances has risen. However, the
selling prices on some old models have decreased since such models are being
discontinued.
Employees
As of
July 9, 2010, 2010, Guoying had 47 full-time employees, including 15 management
and supervisory personnel, 27 sales and marketing personnel and 5 after sale
support.
Seasonality
Approximately
30% of the Company’s sales of products are made in the first quarter as the
Chinese Spring Festival (which is a traditional shopping time) is in the first
quarter. The fourth quarter is the next busiest. For sales of electronic
appliances, the first quarter is the busiest quarter and the third quarter is
the slowest quarter, because in the third quarter the demands for solar heaters,
refrigerators and air conditioners decrease and the demands for Chinese Spring
Festival have not begun.
Competition
We
believe our main competitor is Guosheng Electronic (“Guosheng”), which is a
state-owned enterprise in Anhui Province. Guosheng is the third
biggest retail of consumer electronics and appliances in Anhui Province and runs
several franchise stores in small cities and towns. Guosheng also has
stores in Lu’an city.
Compared
to Guosheng, our competitive disadvantages are:
·
|
Fund. As a state-owned
enterprise, it is easier for Guosheng to get bank
loans.
|
·
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Exclusive Representative Rights.
With its current larger size, it is easier for Guosheng to get the
exclusive representative rights with respect to certain major
brands
|
Compared
to Guosheng, our competitive advantages are:
·
|
Rural market. We have
hundreds of franchise stores in rural markets, which are market with high
potential margin, but which markets are ignored by the big retail chain
stores.
|
·
|
Flexibility. We are running 24/7
in making deliveries. After receiving an order, we can make delivery as
soon as within 2 hours. Huge state-owned retail stores, such as Guosheng,
usually take 2-3 days to deliver after receipt of
orders.
|
·
|
Sales Networking. We have 27
sales persons visiting the franchise stores each week, which serves to
keep a good relationship between Guoying and the
stores.
|
Research
and Development
We are
not presently involved or engaged in any research and development
activities.
Intellectual
Property
The
Company does not own any patents.
Mr.
Hailong Liu, our CEO, owns the following trademarks:
(i)
|
Trademark
Registration No:
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5307764
|
Owned
Trademark:
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GUOYING(国鹰)
|
|
Clarification
No:
|
11
|
|
Term:
|
May
7, 2009 to May 6, 2019
|
|
Issued
by:
|
Trademark
Office, State Administration for Industry and Commerce
|
|
(ii)
|
Trademark
Registration No:
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5307765
|
Owned
Trademark:
|
GUOYING(国鹰)
|
|
Clarification
No:
|
7
|
|
Term:
|
April
28, 2009 to April 27 2019
|
|
Issued
by:
|
Trademark
Office, State Administration for Industry and
Commerce
|
Mr. Liu
has orally authorized the Company to use the trademarks for an unspecified term
at no cost to the Company.
Regulation
We are
subject to a wide range of regulation covering every aspect of our business. The
most significant of these regulations are set forth below.
Chain
Stores Management
In March
1997, the Domestic Trade Ministry issued and enforced the Standard Opinions on the Operation
and Management of Chain Stores, or the Opinions, to regulate and
administrate the forms, management models, composition, business area and other
requirements of Chain Stores. Such Opinions specifically stipulate the three
forms of Chain Stores, including regular chain, franchise chain and voluntary
chain. The Opinions also stipulate that the franchise chain and voluntary chain
store shall execute relevant cooperation contracts with specified clauses
provided in the Opinions including but without limited to license use of
trademarks, product quality management, centralized purchase and sales promotion
policies.
In May
1997, the State Administration of Industry and Commerce issued the Circular of the Relevant Issues for
the Administration of Registration of Chain Stores, mainly providing the
conditions of the establishment for chain stores and branches, the procedures
and documents for application for the registration with the administration of
industry and commerce and name of chain stores to regulate the registration
issues of chain stores.
Regulations
on consumer protection
On
October 31, 1993, the Standing Committee of the National People's Congress
issued and enforced the Law on
the Protection of the Rights and Interests of
Consumers, or the Consumer Protection Law, revised in 2009. The State
Administration of Industry and Commerce also issued the notice regarding
Handling of Acts of Infringement of Rights of Consumers or the Notice in March
2004. Under the Consumer Protection Law and the Notice, a business operator
providing a commodity or service to a consumer shall first undertake the
responsibilities of products for the manufacturers. These liabilities include
restoring the consumer’s reputation, eliminating the adverse effects suffered by
the consumer, and offering an apology and compensation for any losses incurred.
The following penalties may also be imposed upon business operators for the
infraction of these obligations: issuance of a warning, confiscation of any
illegal income, imposition of a fine, an order to cease business operation,
revocation of its business license or imposition of criminal liabilities under
circumstances that are specified in laws and statutory
regulations.
Regulations
on commercial franchising
On May 1,
2007, the State Council issued and enforced the Regulations for Administration of
Commercial Franchising, to supervise and administrate the Franchise
activities. The Regulations for Administration of Commercial Franchising were
later supplemented by the Administrative Measures for Archival Filing of
Commercial Franchise and the Administrative Measures for Information Disclosure
of Commercial Franchise, both of which were issued by the Ministry of Commerce.
Under these regulations, Franchisors are required to file franchise contracts
with the Ministry of Commerce or its local counterparts; and franchise contracts
shall include certain required provisions, such as terms, termination rights and
payments. Franchisors are also required to satisfy certain requirements
including but without limitation to have mature business models, the capacity to
provide operation guidance, technical support and training to franchisees.
Franchisors engaged in franchising activities without satisfying the above
requirements may be subject to administrative penalties.
Regulations
on trademarks
The State Council issued
the PRC Trademark Law
in 1982, revised in 2001, and the Implementation Regulation of the
PRC Trademark Law in 2002, to protect the owners of registered trademarks
and trade names. The Trademark Office handles trademark registrations and grants
a term of ten years to registered trademarks. Trademark license agreement must
be filed with the Trademark Office or its regional counterpart.
Home
appliances sales on the rural market
On April
16, 2009, the Ministry of Commerce, the Ministry Of Finance, the Industry and
Information Technology, National Development and Reform Committee, the
Ministry of Environmental Protection, State Administration of Industry and
Commerce and State Administration of Quality Supervision promulgated the Implementation Rules of Home Appliance Sales on the Rural Market, or the Implementation Rules to stimulating
domestic demands and promote the economic development. Under the Implementation
Rules, the local government authority would fix the home appliance sales
enterprise by bidding. Such enterprise shall satisfy the certain requirements
including having measures on dispatching, price management, after-sale service
and sales channel. Such enterprises are also required to file with local
commerce bureau for sale of home appliances and shall provide good service. The
sales enterprises can be cancelled its qualification to sell home appliances in
the rural areas in case of any serious violation of commitments or duties as set
forth in the Implementation Rules.
DESCRIPTION
OF PROPERTY
Set forth
below is a table containing certain information concerning the location and area
of each of the Company’s company owned stores and warehouses and the terms under
which such properties are leased.
Name
|
Area
(Square Meters)
|
Location
|
Landlord
|
Lease
Commencement
Date
|
Term
(years)
|
Rent per Year ($)
|
|||||||||
Foziling
Road Warehouse
|
800 |
Foziling
Road
|
Zongjun
Gao
|
January
1,2008
|
6
years and 11 months
|
9,882.35 | |||||||||
Development
Zone Warehouse
|
1437.50 |
Development
Zone, East of Jing Er Road, North of Foziling Road
|
Benjun
Zhang
|
April
1,2010
|
1
year
|
20,294.12 | |||||||||
Guangcai
Big Market Lease Agreement
|
100 |
First
Floor of Guangcai Big Market
|
Haibo
Liu
|
October
30,2008
|
3
years
|
20,882.35 | |||||||||
Haomen
Garden Lease Agreeement
|
Haomen
Store operation site
|
Haibo
Liu
|
June
1, 2007
|
3
years
|
10,000 | ||||||||||
Wangpai
Warehouse
|
808 |
Wangpai
Warehouse, Liufo Road
|
Haibo
Liu
|
January,
2008
|
4
years and 11 months
|
950.59 | |||||||||
Office
Lease Building
|
375 |
No.166,
No.266 and No.176 stores, Building 3, Longgang Road, Liu’an
City
|
Taidong
Han
|
September
1, 2007
|
10
years
|
11647.06 |
The
Company believes that the foregoing properties are adequate for its present
needs.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain
statements, other than purely historical information, including estimates,
projections, statements relating to our business plans, objectives, and expected
operating results, and the assumptions upon which those statements are based,
are “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of
1934. These forward-looking statements generally are identified
by the words “believes,” “project,” “expects,” “anticipates,” “estimates,”
“intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will
continue,” “will likely result,” and similar expressions. We intend
such forward-looking statements to be covered by the safe-harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and are including this statement for purposes of complying with
those safe-harbor provisions. Forward-looking statements are based on
current expectations and assumptions that are subject to risks and uncertainties
which may cause actual results to differ materially from the forward-looking
statements. Our ability to predict results or the actual effect of future plans
or strategies is inherently uncertain. Factors which could have a
material adverse affect on our operations and future prospects on a consolidated
basis include, but are not limited to: changes in economic conditions,
legislative/regulatory changes, availability of capital, interest rates,
competition, and generally accepted accounting principles. These risks and
uncertainties should also be considered in evaluating forward-looking statements
and undue reliance should not be placed on such statements. We
undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or
otherwise. Further information concerning our business, including
additional factors that could materially affect our financial results, is
included herein and in our other filings with the SEC.
Overview
Buyonate,
Inc. (the “Company,” “we,” “us” or “pur”) was organized in Nevada on July 9,
2007 with a business purpose of seeking and acquiring interest in an operating
business. We did not restrict our search to any specific business, industry, or
geographical location.
We
entered into a Share Exchange Agreement, dated as of July 9, 2010 (the “Share
Exchange Agreement”) with China Electronic and certain stockholders and
warrantholders of China Electronic (the “CEH Stockholders”). Pursuant to
the Share Exchange Agreement, on July 15, 2010, 10 CEH Stockholders transferred
100% of the outstanding shares of common stock and preferred stock and 100% of
the warrants to purchase common stock of China Electronic held by them, in
exchange for an aggregate of 13,785,902 newly issued shares of
our Common Stock and warrants to purchase an aggregate of 1,628,570 shares of
our Common Stock. The shares of our common stock acquired by the CEH
Stockholders in such transactions constitute approximately 86% of our issued and
outstanding Common Stock giving effect to the share and warrant exchange and the
sale of our Common Stock pursuant to the Subscription Agreement discussed below,
but not including any outstanding purchase warrants to purchase shares of our
common stock, including the warrants issued pursuant to the Subscription
Agreement. In connection with the closing of the Share Exchange Agreement, China
Electronic purchased from the former principal stockholder of Buyonate an
aggregate of 4 million shares of our common stock and then agreed to the
cancellation of such shares.
The Share
Exchange resulted in (i) a change in our control with a shareholder of China
Electronic owning approximately 72.5% of issued and outstanding shares of our
common stock, (ii) China Electronic becoming our wholly-owned subsidiary, and
(iii) appointment of certain nominees of the shareholder of China Electronic as
our directors and officers and resignation of Mr. Ryan Cravey as our sole
director, Chief Executive Officer, Chief Financial Officer, Secretary and
Treasurer.
China
Electronic was incorporated in Delaware on November 15, 2007 for the purpose of
acquiring an existing company with continuing operations. On December 31, 2008
China Electronic entered into a Share Transfer Agreement with four shareholders
of Lu’an Guoying Electronic Sales Co., Ltd., a limited liability company
organized under the laws of the PRC, which resulted in Guoying becoming a
wholly-owned subsidiary of China Electronic. The transfer of ownership of
Guoying took effect on February 10, 2010 upon approval of the transaction by the
PRC authorities. Guoying is a manufacturer and retailer of home appliances and
consumer electronics in the PRC.
Because
until its acquisition of Guoying in 2010, China Electronic was a development
stage company and did not have significant operations, the discussion and
analysis of our financial condition and results of operations presented below
was prepared without taking into account operations of China Electronic during
fiscal years ended December 31, 2009 and 2008.
Results
of Operations
Three
Months Ended March 31, 2010 Compared to Three Months Ended March 31,
2009
|
|
|
$
|
|
|
%
|
||||||||||
2010
|
2009
|
Change
|
Change
|
|||||||||||||
Revenue
|
$
|
26,598,134
|
$
|
7,183,590
|
$
|
19,414,544
|
270.3
|
|||||||||
Cost
of goods
|
21,861,352
|
6,100,206
|
15,761,146
|
258.4
|
||||||||||||
Gross
profit
|
4,736,782
|
1,083,384
|
3,653,398
|
337.2
|
||||||||||||
Operating
expenses
|
454,547
|
23,387
|
431,160
|
1,843.6
|
||||||||||||
Net
Operating Income
|
4,282,235
|
1,055,997
|
3,226,238
|
305.5
|
||||||||||||
Income
taxes
|
498
|
708
|
210
|
(29.7)
|
||||||||||||
Net
income
|
4,279,764
|
1,056,042
|
3,223,722
|
75.3
|
Revenues
Our
revenue for the three months ended March 31, 2010 was $26,598,134, an increase
of 270.3% or $19,144,544 from $7,183,590 for the three months ended March 31,
2009. The increase was mainly due to the improved economic situation in PRC and
globally which had a positive impact on the demand for our products and our
sales.
Cost
of Goods Sold
Our cost
of goods sold for the three months ended March 31, 2010 was $21,861,352 compared
to $6,100,206 for the three months ended March 31, 2009, an increase of 258.4%
or $15,761,146. The increase was mainly due to the increase in
sales.
Gross
Profit
Gross
profit for the three months ended March 31, 2010 was $4,736,782, an increase of
$3,653,398 or approximately 337.2%, compared to $1,083,384 for the three months
ended March 31, 2009. The increase was proportionate to the increased
sales.
Operating
Expenses
Operating
expenses for the three months ended March 31, 2010 was $454,547, an increase of
$431,160 or 1,843.6%, from $23,387 for the three months ended March 31,
2009. The increase was mainly due the increase in capital raising related
general and administrative expenses.
Net
Operating Income
Our net
operating income for the three months ended March 31, 2010 was $4,282,235, an
increase of $3,226,238 or 305.5%, from $1,055,997 for the same period in 2009.
The increase was proportionate to the increased sales
Income
Tax Expense
Pursuant
to authorizations from the Company’s local and provincial taxing authorities,
the Company pays di minimis annual income taxes. There can be no assurance
that such preferential tax treatment will continue or that PRC tax authorities
will not assess taxes in the future which relate to prior periods.
Fiscal
Year Ended December 31, 2009 Compared to the Fiscal Year Ended December 31,
2008
|
|
|
$
|
|
|
%
|
||||||||||
2009
|
2008
|
Change
|
Change
|
|||||||||||||
Revenue
|
$
|
47,671,380
|
$
|
55,107,177
|
$
|
(7,435,797
|
)
|
(13.5
|
)
|
|||||||
Cost
of goods
|
37,766,469
|
47,104,992
|
(9,338,523
|
)
|
(19.8
|
)
|
||||||||||
Gross
profit
|
9,904,912
|
8,002,185
|
1,902,727
|
23.8
|
||||||||||||
Operating
expenses
|
159,668
|
7,957,589
|
(7,797,921
|
)
|
(98.0
|
)
|
||||||||||
Net
Operating Income
|
9,745,244
|
44,956
|
9,700,288
|
21,577.3
|
||||||||||||
Income
taxes
|
-
|
-
|
-
|
-
|
||||||||||||
Net
income
|
9,743,245
|
44,522
|
9,698,723
|
21,784.1
|
Revenues
Our
revenue for the fiscal year ended December 31, 2009 was $47,671,380 a decrease
of $7,435,797 or 13.5% from $55,107,177 for the fiscal year ended December 31,
2008. The decrease in revenue in fiscal 2009 was primarily due to the economic
slowdown in PRC. Our revenues in the first quarter of 2009 were lower than our
expectation. The first quarter is typically our best quarter and can account for
as much as 30% of our annual sales due to greater volume for the Chinese New
Year.
Cost
of Goods Sold
Our cost
of goods sold for the year ended December 31, 2009 decreased by $9,338,523 or
19.8% from $47,104,992 for the fiscal year ended December 31, 2008 to
$37,766,469 for the fiscal year ended December 31, 2009. The decrease
was due primarily to the decrease in revenues in the fiscal year
2009.
Gross
Profit
Gross
profit for the fiscal year ended December 31, 2009 was $9,904,912, an increase
of $1,902,727 or approximately 23.8%, compared to $8,002,185 for the fiscal year
ended December 31, 2008. The increase in gross profit is mainly attributable to
the increases in both gross margin and revenue.
Gross
Margin
Our gross
margin for the fiscal year ended December 31, 2009 was 20.8% compared to 14.5%
for the same period in 2008. The increase in gross margin for the year ended
December 31, 2009 compared to the same period in 2008 was due to our product mix
changes. We added solar water heater in our product mix, which has a better
gross margin.
Operating
Expenses
Operating
expenses for the fiscal year ended December 31, 2009 decreased by $7,797,921 or
98.0%, from $7,957,589 for the fiscal year ended December 31, 2008 to $159,668
for the year ended December 31, 2009. Selling expenses for the fiscal year
ended December 31, 2009 decreased by 82.3% or $222,948 in comparison to the same
period in 2008 primarily due to the change in compensation of our sales
managers. In 2009 we increased our sales network and commissions earned by our
sales managers increased. However, we required that selling expenses of the
sales managers be covered by the sales managers themselves, thereby decreasing
selling expenses. General and administrative expenses for the year ended
December 31, 2009 decreased by 94.3% or $1,881,048 in comparison to the same
period in 2008. Additionally, operating expenses in the fiscal year 2008
included a one time expense of $5,693,925 incurred in connection with a
write-off of accounts receivable from a franchise store.
Net
Operating Income
Our net
operating income for the fiscal year ended December 31, 2009 was $9,745,244, an
increase of $7,826,725 or 408.0%, from $1,918,519 for the fiscal year ended
December 31, 2008. The increase in net operating income is due to a decrease of
the cost of goods sold in the fiscal year 2009.
Income
Tax Expense
Pursuant
to authorizations from the Company’s local and provincial taxing authorities,
the Company pays di minimis annual income taxes. There can be no assurance
that such preferential tax treatment will continue or that PRC tax authorities
will not assess taxes in the future which relate to prior periods.
Off-Balance
Sheet Arrangements
There
were no off-balance sheet arrangements during the year ended December 31, 2009
that have, or are reasonably likely to have, a current or future affect on our
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to our
interests.
Liquidity
and Capital Resources
As of
March 31, 2010, we had cash and cash equivalents of $51,956. We have
historically funded our working capital needs from operations, advance payments
from customers, bank borrowings, and capital from shareholders. Our working
capital requirements are influenced by the level of our operations, and the
timing of accounts receivable collections.
The
following table sets forth a summary of our cash flows for the periods
indicated:
|
|
Three Months Ended
March
31,
|
|
|||||
|
|
2010
|
|
|
2009
|
|
||
Net
cash provided by (used in) operating activities
|
$
|
(8,552
|
)
|
$
|
(11,163
|
)
|
||
Net
cash provided by (used in) in investing activities
|
247,420
|
-
|
||||||
Net
cash provided by (used in) financing activities
|
-
|
-
|
||||||
Effect
of exchange rate change on cash and cash equivalents
|
(4)
|
(45
|
)
|
|||||
Increase
(decrease) in cash and cash equivalents
|
238,863
|
(11,208
|
)
|
|||||
Cash
and cash equivalents, beginning balance
|
64,736
|
33,600
|
||||||
Cash
and cash equivalents, ending balance
|
$
|
303,599
|
$
|
22,392
|
Operating
Activities
Net cash
used in operating activities was $8,552 for the three months ended March 31,
2010, compared to net cash used in operating activities of $11,163 for the three
months ended March 31, 2009, a decrease of $2,611, or 23.4%. The decrease of net
cash provided by operating activities was primarily due to a increase of
accounts receivable during the first quarter of 2010.
Investing
Activities
Net cash
provided by investing activities was $247,420 for the three months ended
March 31, 2010, compared to $0 for the three months ended March 31, 2009 because
the Company raised capital in the first quarter of 2010.
Critical
Accounting Policies
Revenue
Recognition - Direct sales and Wholesale Activities
The
Company receives revenue from sales of electronic products. The Company's
revenue recognition policies are in compliance with ASC 605 (previously Staff
Accounting Bulletin 104). Sales revenue is recognized at the date of shipment to
customers, when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company exist
and collectability is reasonably assured. Our sales are usually covered by the
manufacturers’ return and warranty policies. Therefore, we do not estimate
deductions or allowance for sales returns. Sales are presented net of any
discounts, reward, or incentive given to customers. Payments received
before all of the relevant criteria for revenue recognition are satisfied are
recorded as customer deposit. Customer deposit amounted to $1,333,092 and
$74,641 as of December 31, 2009 and 2008, respectively.
Our
products delivered to customers would be checked on site by customers and, once
the products are accepted by customers, they will sign the acceptance
notice.
Reward or
incentive given to our customers is an adjustment of the selling prices of our
products; therefore, the consideration is characterized as a reduction of
revenue when recognized in our income statement.
The
Company recognizes its revenues net of value-added taxes (“VAT”). The
Company is subject to VAT which is levied at a fixed annual amount.
Currently, the Company is charged at a fixed annual amount of approximately
$1,200 to cover all types of taxes including income taxes and value added taxes.
This is approved by the PRC tax department.
Revenue
Recognition – Franchise Activities
Revenues
from franchised activities include area development and initial franchise fees
(collectively referred to as “Franchise fees”) received from franchisees to
establish new stores and royalties charged to franchisees based on a percentage
of a franchised store’s sales. Franchise fees are accrued as an unearned
franchise revenue liability when received and are recognized as revenue when the
franchised stores covered by the fees open, which is generally when we have
fulfilled all significant obligations to the franchisee. Continuing fees and
royalties are recognized in the period earned.
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosures of
contingent assets and liabilities, at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
Inventories
Inventories
are stated at the lower of cost, determined on a weighted average basis, and net
realizable value. Net realizable value is the estimated selling price, in the
ordinary course of business, less estimated costs to complete and
dispose.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth information regarding beneficial ownership of
Buyonate, Inc. common stock as of July 15, 2010 (i) by each person who is
known by us to beneficially own more than 5% of our Common Stock; (ii) by each
of the officers and directors of Buyonate, Inc.; and (iii) by all of officers
and directors of Buyonate, Inc. as a group.
Address of
Beneficial Owner (1)
|
Positions with the
Company
|
Title of Class
|
Amount and
Nature
of Beneficial
Ownership (2)
|
Percent of
Class (2)
|
||||||||
Officers and Directors
|
||||||||||||
Hailong
Liu
|
Chairman,
President, CEO and CFO
|
Common
stock, $0.0001 par value
|
11,556,288
|
72
|
%
|
|||||||
Haibo
Liu
|
Director
and Vice President
|
Common
stock, $0.0001 par value
|
0
|
0
|
||||||||
All
officers and directors as a group (2 persons named above)
|
Common
stock, $0.0001 par value
|
11,556,288
|
72
|
%
|
(1) Unless otherwise provided, the address of each
person is Building 3, Binhe District, Longhe East Road, Lu’an City, Anhui
Province, PRC 237000.
(2) Beneficial
Ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to securities. The percent of
class has also been determined in accordance with rules of the SEC. For purposes
of computing such percentage, as of July 15, 2010, there were
16,027,719 shares of Buyonate, Inc. Common Stock outstanding.
(3)
Pursuant to certain Call Option Agreements between Ms. Sherry Li and Hailong
Liu, Hailong Liu has been granted an option, subject to the satisfaction of
certain conditions, to purchase from Ms. Li over the course of approximately 2
years for $0.0001 per share, up to 11,556,288 shares of our Common Stock held by
Ms. Li. The conditions and the percentage of the total number of shares subject
to the option that would vest upon satisfaction of the condition are as
follows:
·
|
Filing
of Form 10-Q with SEC, following the execution of the Share Exchange
Agreement –
50%
|
·
|
2
years after the filing of Form 10-Q –
50%;
|
Changes
in Control
Except as
described herein, there are currently no arrangements which may result in a
change in control of the Company.
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Directors
and Executive Officers
The
following table sets forth the name and position of each of our current
executive officers and directors.
Name
|
Age
|
Position
|
||||
Hailong
Liu
|
39
|
Chairman,
President, CEO and CFO
|
||||
Haibo
Liu
|
36
|
Director
and Vice
President
|
Hailong
Liu became our Chairman, President and CEO on July 15, 2010. Mr. Liu is the CEO
of Lu’an Guoying Electronic Sales Co., Ltd. since May 2007. From 2004 to 2007,
Mr. Liu was the general manager of Guoying (Formerly named as Lu’an Dongshen
Electronic Sales Co., Ltd.). From 2001 to 2003, Mr. Liu was the general manager
of Lu’an Xianglong Electronic Sales Co., Ltd. From 1997 to 2001, Mr. Liu was the
associate manager of Operation Department of Lu’an Xianglong Electronic
Sales. From 1994 to 1996, Mr.Liu was the manager of Nanjing Branch of Shanghai
Kaili Company. From 1990 to 1994, Mr. Liu was the manager of Shenzhen Branch of
Shanghai Kaili Company. Mr. Liu got his Executive MBA Degree on Marketing and
Sales of Beijing University on 2005.
Haibo Liu
became our Director and Vice President on July 15, 2010. Mr.Liu is the general
manager of sales of Lu’an Guoying Electronic Sales Co., Ltd. since
September 2007. From January 2004 to September 2007, Mr.Liu was the shareholder
and general manager of Guoying. From 2000 to 2003, Mr. Liu was the general
manager of Lu’an Shengtang Sales Co., Ltd. From 1992 to 1999, Mr. Liu
established Lu’an Haifeng Sales Operation Department. Mr Liu has been enrolled
as a part-time student in Shenzhen Jucheng Business School since October 2007,
majoring in marketing and sales.
Employment
Agreements
The
Company has not entered into employment agreements with any of its officers or
other key employees.
Compensation
of Officers and Directors
In 2010
Hailong Liu received an annual salary of 400,000 RMB (approximately $58,823)
from Guoying. In 2009 Hailong Liu has received an annual salary of
300,000 RMB (approximately $44,118). In 2008 Hailong Liu received an
annual salary of 280,000 RMB (approximately $41,176).
The
Company does not currently pay any compensation to its non-officer
directors.
TRANSACTIONS
WITH RELATED PERSONS, PROMOTERS AND CONTROL PERSONS; CORPORATE
GOVERNANCE
Transactions
with related persons
None.
Director
Independence
We
currently do not have any independent directors, as the term “independent” is
defined by the rules of the Nasdaq Stock Market.
Board
Composition and Committees
The
Company’s board of directors is currently composed of two members, Hailong
Liu and Haibo Liu.
We
currently do not have standing audit, nominating or compensation committees.
Currently, our entire board of directors is responsible for the functions
that would otherwise be handled by these committees. We intend, however,
to establish an audit committee, a nominating committee and a compensation
committee of the board of directors as soon as practicable. We envision
that the audit committee will be primarily responsible for reviewing the
services performed by our independent auditors, evaluating our accounting
policies and our system of internal controls. The nominating committee
would be primarily responsible for nominating directors and setting policies and
procedures for the nomination of directors. The nominating committee would
also be responsible for overseeing the creation and implementation of our
corporate governance policies and procedures. The compensation committee
will be primarily responsible for reviewing and approving our salary and benefit
policies (including stock options), including compensation of executive
officers.
Our board
of directors has not made a determination as to whether any member of our board
of directors is an audit committee financial expert. Upon the
establishment of an audit committee, the board will determine whether any of the
directors qualify as an audit committee financial expert.
Code
of Ethics
Our board
of directors will adopt a new code of ethics that applies to all of our
directors, officers and employees, including our principal executive officer,
principal financial officer and principal accounting officer. The new code will
address, among other things, honesty and ethical conduct, conflicts of interest,
compliance with laws, regulations and policies, including disclosure
requirements under the federal securities laws, confidentiality, trading on
inside information, and reporting of violations of the code.
LEGAL
PROCEEDINGS
From time
to time, we may become involved in various lawsuits and legal proceedings
which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. We are
currently not aware of any such legal proceedings or claims that we believe will
have a material adverse affect on our business, financial condition or operating
results.
MARKET
PRICE OF AND DIVIDENDS ON OUR COMMON
EQUITY
AND RELATED STOCKHOLDER MATTERS
Prior to
the share exchange transaction described above, China Electronic was a privately
held company and there was no trading in its common stock. China Electronic has
become a wholly owned subsidiary of the Company as a result of the share
exchange transaction.
RECENT
SALES OF UNREGISTERED SECURITIES;
USE
OF PROCEEDS FROM REGISTERED SECURITIES
Reference
is made to the disclosure set forth under Item 3.02 of this report, which
disclosure is incorporated herein by reference.
DESCRIPTION
OF SECURITIES
China
Electronic is authorized to issue up to 50,000,000 shares of common stock, par
value $.00001 per share and up to 500,000 shares of preferred stock, par value
$.00001 per share. Each outstanding share of common stock entitles the holder
thereof to one vote per share on all matters. China Electronic’s bylaws
provide that elections for directors shall be by a majority of votes.
Stockholders do not have preemptive rights to purchase shares in any
future issuance of our common stock. Upon its liquidation, dissolution or
winding up, and after payment of creditors the assets of China Electronic will
be divided pro-rata on a share-for-share basis among the holders of the shares
of its common stock.
The
holders of shares of China Electronic common stock are entitled to dividends out
of funds legally available when and as declared by our board of directors.
The board of directors of China Electronic has never declared a dividend
and does not anticipate declaring a dividend in the foreseeable future. However,
certain subsidiaries of China Electronic declared and paid dividends to their
shareholders prior to such subsidiaries’ acquisitions by China
Electronic. Should China Electronic decide in the future to pay
dividends, as a holding company, its ability to do so and meet other obligations
depends upon the receipt of dividends or other payments from its operating
subsidiaries and other holdings and investments, and such payments may be
restricted under the laws of the PRC. In addition, China Electronic’s
operating subsidiaries, from time to time, may be subject to restrictions on
their ability to make distributions to China Electronic, including as a result
of restrictive covenants in loan agreements, restrictions on the conversion of
local currency into U.S. dollars or other hard currency and other regulatory
restrictions. In the event of China Electronic’s liquidation, dissolution
or winding up, holders of its common stock are entitled to receive, ratably, the
net assets available to stockholders after payment of all
creditors.
All of
the issued and outstanding shares of China Electronic’s common stock are duly
authorized, validly issued, fully paid and non-assessable. To the extent
that additional shares of China Electronic’s common stock are issued, the
relative interests of existing stockholders will be diluted.
China
Electronic is a privately held company and has no transfer agent.
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
China
Electronic’s Articles of Incorporation do not provide for the indemnification of
its directors, officer or agents. Article V, Section 1 of China Electronic’s
By-laws provide that China Electronic may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of China Electronic) by
reason of the fact that he or she is or was a director, officer, employee or
agent of China Electronic, or is or was serving at the request of China
Electronic as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of China Electronic, and,
with respect to any criminal action or proceedings, had no reasonable cause to
believe his or her conduct was unlawful.
Reference
is made to Section 145 of the Delaware General Corporation Law, which
provides that a corporation may indemnify directors and officers as well as
other employees and individuals against expenses (including attorneys’ fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation (a
“derivative action”)), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interest of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys’ fees) incurred in connection with the
defense or settlement of such action, and the statute requires court approval
before there can be any indemnification where the person seeking indemnification
has been found liable to the corporation. The statute provides that it is not
exclusive of other indemnification that may be granted by a corporation’s
charter, bylaws, disinterested director vote, stockholder vote, agreement or
otherwise.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the SEC, such indemnification is against public policy as expressed in the
Securities Act and is, therefore unenforceable.
At the
present time, there is no pending litigation or proceeding involving a director,
officer, employee or other agent of ours in which indemnification would be
required or permitted. We are not aware of any threatened litigation or
proceeding which may result in a claim for such indemnification.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
Please
see Item 9.01 - “Financial Statements and Exhibits” of this Current
Report.
WHERE
YOU CAN FIND MORE INFORMATION
We have
filed with the Commission, located on 100 F Street NE, Washington, D.C. 20549,
Current Reports on Form 8-K, Quarterly Reports on Form 10-Q, Annual Reports on
Form 10-K, and other reports, statements and information as required under the
Securities Exchange Act of 1934, as amended.
The
reports, statements and other information that we have filed with the Commission
may be read and copied at the Commission's Public Reference Room at 100 F Street
NE, Washington, D.C. 20549. The public may obtain information on the operation
of the Public Reference Room by calling the Commission at
1-800-SEC-0330.
The
Commission maintains a web site (http://www.sec.gov.) that contains the
registration statements, reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
such as us. You may access our Commission filings electronically at this
Commission website. These Commission filings are also available to the public
from commercial document retrieval services.
ITEM
3.02 UNREGISTERED SALES OF EQUITY SECURITIES
We
entered into a Share Exchange Agreement, dated as of July 9,
2010 (the “Share Exchange Agreement”) with China Electronic and
certain stockholders and warrantholders of China Electronic (the “CEH
Stockholders”). Pursuant to the Share Exchange Agreement, on July 15,
2010, 10 CEH Stockholders transferred 100% of the outstanding shares of common
stock and preferred stock and 100% of the warrants to purchase common stock of
China Electronic held by them, in exchange for an aggregate of 13,785,902 newly
issued shares of our Common Stock and warrants to purchase an aggregate of
1,628,570 shares of our Common Stock. The shares of our common stock acquired by
the CEH Stockholders in such transactions constitute approximately 86% of our
issued and outstanding Common Stock giving effect to the share and warrant
exchange and the sale of our Common Stock pursuant to the Subscription Agreement
discussed below, but not including any outstanding purchase warrants to purchase
shares of our common stock, including the warrants issued pursuant to the
Subscription Agreement. In connection with the closing of the Share Exchange
Agreement, China Electronic purchased from the former principal stockholder of
Buyonate an aggregate of 4 million shares of our common stock and then agreed to
the cancellation of such shares.
The
shares of our Common Stock and warrants to purchase our Common Stock were issued
in accordance with a safe harbor from the registration requirements of the
Securities Act under Regulation S thereunder or an exemption from the
registration requirements of the Securities Act under Section 4(2) by virtue of
compliance with the provisions of Regulation D under the Securities
Act.
On July
9, 2010 we entered into and on July 15, 2010 consummated a Subscription
Agreement (the “Subscription Agreement”) with 27 investors pursuant to which the
investors agreed to and did purchase for an aggregate of (a) 1,241,817 shares of
our common stock, (b) three year warrants (“Series C Warrants”) to purchase an
aggregate of 310,454 shares of our common stock for $3.70 per share and (c)
three year warrants (“Series D Warrants”) to purchase an aggregate of 310,454
shares of our Common Stock for $4.75 per share.
The
issuances of our Common Stock and warrants to purchase our Common Stock were
exempt from registration under the Securities Act by virtue of compliance with
Section 4(2) of the Securities Act and Regulation D thereunder and Regulation
S.
ITEM
5.01 CHANGES IN CONTROL OF REGISTRANT
Reference
is made to the disclosure set forth under Item 2.01 of this report, which
disclosure is incorporated herein by reference.
As a
result of the closing of the share exchange with the China Electronic
Stockholders, the CEH Stockholders now own approximately 86% of the total
outstanding shares of our Common Stock giving effect to the share exchange, but
not including any outstanding purchase warrants to purchase shares of our common
stock, including the warrants issued pursuant to the Purchase Agreement or the
warrants issued pursuant to the Share Exchange Agreement
ITEM
5.02 DEPARTURE OF DIRECTORS OR CERTAIN OFFICERS; ELECTION OF
DIRECTORS; APPOINTMENT OF CERTAIN OFFICERS; COMPENSATORY ARRANGEMENTS OF CERTAIN
OFFICERS
In
connection with the closing of the Share Exchange Agreement on July 15 2010,
Mr. Ryan Cravey
resigned as sole Director of Buyonate, Inc. Such person resigned voluntarily
with no disagreement regarding Buyonate, Inc.
Also on
July 15, 2010, in connection with the closing of the Share Exchange Agreement
and the reverse acquisition, Hailong Liu and Haibo Liu were appointed as
directors of Buyonate, Inc. Hailong Liu was elected by the board of directors to
be Chairman of the Board, President, CEO and CFO of Buyonate, Inc. and Haibo Liu
was elected as Vice President of Buyonate, Inc.
For
certain biographical and other information regarding the newly appointed
officers and directors, see the disclosure under Item 2.01 of this Current
Report, which disclosure is incorporated herein by reference.
ITEM
9.01 FINANCIAL STATEMENTS AND EXHIBITS
(a)
Financial Statements
The
financial statements of China Electronic are appended to this Current Report
beginning on page F-1.
(d)
Exhibits
EXHIBIT
INDEX
|
|
|
Exhibit
Number
|
|
Description
|
2.1
|
Share
Exchange Agreement by and among Buyonate, Inc., China Electronic Holdings,
Inc and the China Electronic Stockholders, dated July 9,
2010
|
|
4.1
|
Subscription
Agreement between Buyonate, Inc. and certain investors, dated July 9,
2010.
|
|
4.2
|
Form
of Warrant of Buyonate, Inc. issued on July 15, 2010
|
|
4.3
|
Chairman
Lock-up Agreement between Buyonate, Inc and Hailong Liu, dated July 9,
2010.
|
|
10.1
|
Call
Option Agreement between Sherry Li and Hailong Liu, dated as July 9,
2010.
|
|
10.2
|
Voting
Trust Agreement between Sherry Li and Hailong Liu, dated as July 9,
2010
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
Date:
July 21, 2010
|
||
BUYONATE, INC.
|
||
By:
|
/s/ Hailong
Liu
|
|
Hailong
Liu
|
||
Chief
Executive Officer
|
Report of Independent
Registered Public Accounting Firm
Board of
Directors and Stockholders of
Lu’an
Guoying Electronics Sales Co., Ltd.
We have
audited the accompanying balance sheets of Lu’an Guoying Electronics Sales Co.,
Ltd. as of December 31, 2009 and 2008, and the related statements of income,
stockholders' equity, and cash flows for the two years period ended December 31,
2009. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Lu’an Guoying Electronics Sales
Co., Ltd. as of December 31, 2009 and 2008, and the results of their operations
and their cash flows for the two years period ended December 31, 2009, in
conformity with U.S. generally accepted accounting principles.
As of
December 31, 2009 and 2008, other receivables amounted to $12,831,849 and
$5,794,650, respectively. Other receivable mainly includes a loan to a Shanghai
Pengbai Electric Inc (“Pengbai”). The receivables are secured by collateral of
Pengbai, interest free, and due in the years from 2012 to 2017. (Note
4)
/s/
Kabani & Company, Inc.
Certified Public
Accountants
Los
Angeles, California
June 25,
2010
LU' AN
CHINA ELECTRONIC SALES CO., LTD
BALANCE
SHEETS
AS OF
DECEMBER 31, 2009 AND 2008
DECEMBER
31,
|
||||||||
2009
|
2008
|
|||||||
Assets
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 64,736 | $ | 33,600 | ||||
Trade
accounts receivable
|
6,295,375 | 746,410 | ||||||
Inventories
|
992,090 | 2,554,922 | ||||||
Total
current assets
|
7,352,201 | 3,334,932 | ||||||
Property,
plant and equipment, net
|
11,733 | 17,508 | ||||||
Other
receivables - Long term
|
12,831,848 | 5,794,650 | ||||||
Total
assets
|
$ | 20,195,782 | $ | 9,147,090 | ||||
Liabilities
and Stockholders' equity (deficit)
|
||||||||
Current
liabilities
|
||||||||
Trade
accounts payable
|
$ | - | $ | 8,156 | ||||
Customer
deposit
|
1,333,092 | 74,641 | ||||||
Accrued
payroll and welfare payable
|
1,925,721 | 1,876,550 | ||||||
Dividends
payable
|
10,915,576 | 10,915,576 | ||||||
Total
current liabilities
|
14,174,389 | 12,874,922 | ||||||
Stockholders'
equity (deficit)
|
||||||||
Share
Capital
|
137,100 | 137,100 | ||||||
Retained
earnings (Accumulated deficits)
|
4,216,433 | (4,552,488 | ) | |||||
Statutary
reserve
|
978,777 | 4,452 | ||||||
Accumulated
other comprehensive income
|
689,084 | 683,103 | ||||||
Total
stockholders' equity (deficit)
|
6,021,392 | (3,727,833 | ) | |||||
Total
liabilities and stockholders' equity
|
$ | 20,195,782 | $ | 9,147,090 |
The
accompanying notes are an integral part of this statement.
LU' AN
CHINA ELECTRONIC SALES CO., LTD
STETEMENTS
OF INCOME AND COMPREHENSIVE ITEMS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
2009
|
2008
|
|||||||
Net
revenue from co-operative stores
|
$ | 29,358,234 | $ | 29,539,441 | ||||
Net
revenue from franchise
|
17,589,402 | 22,285,335 | ||||||
Net
revenue from company owned stores
|
723,745 | 3,282,401 | ||||||
Net
Revenue
|
47,671,380 | 55,107,177 | ||||||
Cost
of goods sold - co-operative stores
|
23,427,871 | 25,522,077 | ||||||
Cost
of goods sold - franchise
|
13,800,013 | 18,725,161 | ||||||
Cost
of goods sold - company owned stores
|
538,585 | 2,857,754 | ||||||
Cost
of goods sold
|
37,766,469 | 47,104,992 | ||||||
Gross
profit
|
9,904,912 | 8,002,185 | ||||||
Operating
expenses:
|
||||||||
Selling
expense
|
47,838 | 270,786 | ||||||
General
and administrative expenses
|
111,830 | 1,992,878 | ||||||
Bad
debt expenses
|
- | 5,693,925 | ||||||
Total
operating expenses
|
159,668 | 7,957,589 | ||||||
Net
operating income
|
9,745,244 | 44,596 | ||||||
Other
income (expense):
|
||||||||
Financial
income (expense)
|
(1,953 | ) | (74 | ) | ||||
Other
expense
|
(47 | ) | - | |||||
Total
other income (expense)
|
(1,999 | ) | (74 | ) | ||||
Net
income
|
9,743,245 | 44,522 | ||||||
Foreign
currency translation adjustment
|
5,981 | 410,737 | ||||||
Comprehensive
income
|
$ | 9,749,226 | $ | 455,259 |
The
accompanying notes are an integral part of this statement.
LU' AN
CHINA ELECTRONIC SALES CO., LTD
STATEMENTS
OF CASH FLOWS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
DECEMBER
31,
|
||||||||
2009
|
2008
|
|||||||
Net
income
|
$ | 9,743,245 | $ | 44,522 | ||||
Adjustments
to reconcile net income to net cash used in operations:
|
||||||||
Depreciation
|
10,463 | 10,215 | ||||||
Bad
debt expenses
|
- | 5,693,925 | ||||||
Changes
in operating liabilities and assets:
|
||||||||
Trade
accounts receivable
|
(5,152,389 | ) | - | |||||
Prepayments
|
- | 2,110,355 | ||||||
Inventories
|
1,561,874 | 7,203,300 | ||||||
Other
receivables
|
(7,032,882 | ) | (11,387,850 | ) | ||||
Trade
accounts payable
|
(401,323 | ) | (3,882,536 | ) | ||||
Other
payables
|
- | (720,664 | ) | |||||
Customer
deposit
|
1,257,679 | (2,037,011 | ) | |||||
Accrued
expenses
|
10,084 | 1,884,234 | ||||||
Net
cash used in operating activities
|
(3,249 | ) | (1,081,511 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Property,
plant, and equipment additions
|
(4,692 | ) | - | |||||
Net
cash used in investing activities
|
(4,692 | ) | - | |||||
Effect
of rate changes on cash
|
39,076 | 55,093 | ||||||
Increase
(decrease) in cash and cash equivalents
|
31,136 | (1,026,418 | ) | |||||
Cash
and cash equivalents, beginning of period
|
33,600 | 1,060,018 | ||||||
Cash
and cash equivalents, end of period
|
$ | 64,736 | $ | 33,600 | ||||
Supplemental
disclosures of cash flow information:
|
||||||||
Interest
paid in cash
|
$ | - | $ | - | ||||
Income
taxes paid in cash
|
$ | - | $ | - | ||||
Non-cash
investing activities:
|
||||||||
Declaration
of Dividends - unpaid
|
$ | $ | (10,915,576 | ) |
The
accompanying notes are an integral part of this statement.
LU' AN
CHINA ELECTRONIC SALES CO., LTD
STATEMENT
OF CHANGES IN EQUITY
FOR THE
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
Retained Earnings
(Accumulated Deficit)
|
Accumulated Other
|
|||||||||||||||||||
Statutory
|
Comprehensive
|
Total
|
||||||||||||||||||
Share Capital
|
Unrestricted
|
Reserve
|
Income
|
Stockholders' equity (deficit)
|
||||||||||||||||
Balance:
December 31, 2007
|
$ | 137,100 | $ | 6,323,018 | $ | - | $ | 272,366 | $ | 6,732,484 | ||||||||||
Net
income
|
- | 44,522 | - | - | 44,522 | |||||||||||||||
Allocation
to statutory reserve
|
- | (4,452 | ) | 4,452 | - | - | ||||||||||||||
Dividends
declared
|
- | (10,915,576 | ) | - | - | (10,915,576 | ) | |||||||||||||
Foreign
currency translation adjustment
|
- | - | - | 410,737 | 410,737 | |||||||||||||||
Balance:
December 31, 2008
|
137,100 | (4,552,488 | ) | 4,452 | 683,103 | (3,727,832 | ) | |||||||||||||
Net
income
|
- | 9,743,245 | - | 9,743,245 | ||||||||||||||||
Allocation
to statutory reserve
|
(974,324 | ) | 974,324 | |||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | 5,981 | 5,981 | |||||||||||||||
Balance:
December 31, 2009
|
$ | 137,100 | $ | 4,216,433 | $ | 978,777 | $ | 689,084 | $ | 6,021,393 |
The
accompanying notes are an integral part of this statement.
Lu’an Guoying
Electronic Sales Co., Ltd
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009
1. Nature
of Operations
Lu’an Guoying Electronic
Sales Co., Ltd., a PRC corporation, (the “Company”, “Guoying”, “Guoying
Electronic”, “We”, “Our”, “Us”) was established on January 4th, 2002
with share capital of RMB1,000,000 (approximately $137,100). Guoying sells
electronic products in PRC through its own stores and through wholesale stores.
It also sells through Franchises.
2.
Summary of Significant Accounting Policies
Economic and Political
Risks
The
Company faces a number of risks and challenges as a result of having primary
operations and marketing in the PRC. Changing political climates in the PRC
could have a significant effect on the Company’s business.
Control by Principal
Stockholders
The
directors, executive officers and their affiliates or related parties own,
beneficially and in the aggregate, the majority of the outstanding shares of the
Company. Accordingly, the directors, executive officers and their affiliates, if
they voted their shares uniformly, would have the ability to control the
approval of most corporate actions, including increasing the authorized capital
stock of the Company and the dissolution, merger or sale of the Company’s
assets.
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosures of
contingent assets and liabilities, at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash
Equivalents
For
purposes of the statements of cash flows, cash and cash equivalents includes
cash on hand and demand deposits held by banks. Deposits held in financial
institutions in the PRC are not insured by any government entity or
agency.
Trade Accounts
Receivable
The
Company extends unsecured credit to its customers in the ordinary course of
business but mitigates the associated risks by performing credit checks and
actively pursuing past due accounts. Trade accounts receivable are recognized
and carried at original invoice amount less an allowance for any uncollectible
amounts. An allowance for doubtful accounts is established and determined based
on management’s regular assessment of known requirements, aging of receivables,
payment history, the customer’s current credit worthiness and the economic
environment. These factors continuously change, and can have an impact on
collections and the Company’s estimation process. These impacts may be material.
Management reviews and maintains an allowance for doubtful accounts that
reflects the management’s best estimate of potentially uncollectible trade
receivables. Certain accounts receivable amounts are charged off against
allowances after a designated period of collection efforts. Subsequent cash
recoveries are recognized as income in the period when they
occur.
Inventories
Inventories
are stated at the lower of cost, determined on a weighted average basis, and net
realizable value. Net realizable value is the estimated selling price, in the
ordinary course of business, less estimated costs to complete and dispose.
Inventories consist of the following:
|
December 31, 2009
|
December 31, 2008
|
||||||
Electronic
products
|
$
|
992,090
|
$
|
2,554,922
|
Property, Plant and
Equipment
Property,
plant and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the useful lives of
the assets. Major renewals are capitalized and depreciated; maintenance and
repairs that do not extend the life of the respective assets are charged to
expense as incurred. Upon disposal of assets, the cost and related accumulated
depreciation are removed from the accounts and any gain or loss is included in
income. Depreciation related to manufacturing is reported in cost of revenues.
Depreciation not related to manufacturing is reported in selling, general and
administrative expenses. Property, plant and equipment are depreciated over
their estimated useful lives as follows:
Furniture
and office equipment
|
5
years
|
Motor
vehicles
|
10
years
|
Impairment of Long-Lived and
Intangible Assets
Long-lived
assets of the Company are reviewed annually to assess whether the carrying value
has become impaired according to the guidelines established in FASB Codification
(ASC) 360. The Company
considers assets to be impaired if the carrying value exceeds the future
projected cash flows from related operations. The Company also re-evaluates the
periods of depreciation to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. As of December 31, 2009, the Company
expects these assets to be fully recoverable. No impairment of assets was
recorded in the periods reported.
Accumulated Other
Comprehensive Income
Accumulated
other comprehensive income represents foreign currency translation
adjustments.
Revenue Recognition –
Company owned and co-operative store activities
The
Company receives revenue from sales of electronic products. The Company's
revenue recognition policies are in compliance with ASC 605 (previously Staff
Accounting Bulletin 104). Sales revenue is recognized at the date of shipment to
customers, when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company exist
and collectability is reasonably assured. Our sales are usually covered by the
manufacturers’ return and warranty policies. Therefore, we do not estimate
deductions or allowance for sales returns. Sales are presented net of any
discounts, reward, or incentive given to customers. Payments received
before all of the relevant criteria for revenue recognition are satisfied are
recorded as customer deposit. Customer deposit amounted to $1,333,092 and
$74,641 as of December 31, 2009 and 2008, respectively.
Our
products delivered to customers would be checked on site by customers and, once
the products are accepted by customers, they will sign the acceptance
notice.
Reward or
incentive given to our customers is an adjustment of the selling prices of our
products; therefore, the consideration is characterized as a reduction of
revenue when recognized in our income statement.
The
Company recognizes its revenues net of value-added taxes (“VAT”). The
Company is subject to VAT which is levied at a fixed annual amount.
Currently, the Company is charged at a fixed annual amount of approximately
$1,200 to cover all types of taxes including income taxes and value added taxes.
This is approved by the PRC tax department.
Revenue Recognition –
Franchise Activities:
Revenues
from franchised activities include area development and initial franchise fees
(collectively referred to as “Franchise fees”) received from franchisees to
establish new stores and royalties charged to franchisees based on a percentage
of a franchised store’s sales. Franchise fees are accrued as an unearned
franchise revenue liability when received and are recognized as revenue when the
franchised stores covered by the fees open, which is generally when we have
fulfilled all significant obligations to the franchisee. Continuing fees and
royalties are recognized in the period earned. Franchise fees included in
revenues were approximately $17,589,402, and $22,285,335 in 2009 and 2008,
respectively.
Cost of Goods
Sold
Cost of
goods sold consists primarily of the costs of the products sold and freight in
charges.
Selling, General and
Administration Expenses
Selling,
general and administrative expenses include costs incurred in connection with
performing selling, general and administrative activities such as executives and
administrative and sale employee salaries, related employee benefits, office
supplies, and professional services.
Shipping and Handling
Costs
ASC
605-45-20 “Shipping and
Handling costs” establishes standards for the classification of shipping
and handling costs. All amounts billed to a customer related to shipping and
handling are classified as selling expenses.
Advertising
Costs
The
Company expenses advertising costs as incurred. Advertising expenses
charged to operations were $0and $156,70 for the years ended December
31, 2009 and 2008, respectively. Advertising costs, if any, are included in
selling, general and administrative expense on the income
statement.
Foreign Currency and
Comprehensive Income
The
accompanying financial statements are presented in US dollars. The functional
currency is the Renminbi (“RMB”) of the PRC. The financial statements are
translated into US dollars from RMB at period-end exchange rates for assets and
liabilities, and weighted average exchange rates for revenues and expenses.
Capital accounts are translated at their historical exchange rates when the
capital transactions occurred.
On July
21, 2005, the PRC changed its foreign currency exchange policy from a fixed
RMB/USD exchange rate into a flexible rate under the control of the PRC’s
government. We use the Closing Rate Method in currency translation of the
financial statements of the Company.
RMB is
not freely convertible into the currency of other nations. All such exchange
transactions must take place through authorized institutions. There is no
guarantee the RMB amounts could have been, or could be, converted into US
dollars at rates used in translation.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740 (formerly SFAS 109,
“Accounting for Income Taxes.”) Under the asset and liability method as required
by ASC 740 (formerly SFAS 109), deferred income taxes are recognized for the tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. Under ASC
740, the effect on deferred income taxes of a change in tax rates is recognized
in income in the period that includes the enactment date. A valuation allowance
is recognized if it is more likely than not that some portion, or all of, a
deferred tax asset will not be realized. As of February 28, 2010 and May 31,
2009, the Company did not have any deferred tax assets or liabilities, and as
such, no valuation allowances were recorded at February 28, 2010 and May 31,
2009.
ASC 740
(Formerly FIN 48) clarifies the accounting and disclosure for uncertain tax
positions and prescribes a recognition threshold and measurement attribute for
recognition and measurement of a tax position taken or expected to be taken in a
tax return. ASC 740 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition.
Under ASC
740, evaluation of a tax position is a two-step process. The first step is to
determine whether it is more-likely-than-not that a tax position will be
sustained upon examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The second step is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition threshold should
be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
criteria should be de-recognized in the first subsequent financial reporting
period in which the threshold is no longer met.
The
Company’s operations are subject to income and transaction taxes in the PRC
jurisdictions. Significant estimates and judgments are required in determining
the Company’s provision for income taxes. Some of these estimates are based on
interpretations of existing tax laws or regulations, and as a result the
ultimate amount of tax liability may be uncertain. However, the Company
does not anticipate any events that would lead to changes to these
uncertainties.
Restrictions on Transfer of
Assets Out of the PRC
Dividend
payments by the Company are limited by certain statutory regulations in the PRC.
No dividends may be paid by the Company without first receiving prior approval
from the Foreign Currency Exchange Management Bureau. However, no such
restrictions exist with respect to loans and advances.
Statement of Cash
Flows
In
accordance with FASB ASC 230 cash flows from the Company's operations is
calculated based upon the local currencies. As a result, amounts related to
assets and liabilities reported on the statement of cash flows may not
necessarily agree with changes in the corresponding balances on the balance
sheet.
Segment
Reporting
Statement
of Financial Accounting Standards No. 131 (SFAS 131), (ASC 250) “Disclosure
about Segments of an Enterprise and Related Information” requires use of the
management approach model for segment reporting. The management approach model
is based on the way a company's management organizes segments within the company
for making operating decisions and assessing performance. Reportable segments
are based on products and services, geography, legal structure, management
structure, or any other manner in which management disaggregates a
company.
Recent Accounting
Pronouncements
In
June 2009, the FASB issued ASC 860 (previously SFAS No. 166,
“Accounting for Transfers of Financial Assets”), which requires additional
information regarding transfers of financial assets, including securitization
transactions, and where companies have continuing exposure to the risks related
to transferred financial assets. SFAS 166 eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures. SFAS 166 is effective for
fiscal years beginning after November 15, 2009. The Company does not
believe this pronouncement will impact its financial
statements.
In
June 2009, the FASB issued ASC 810 (previously SFAS No. 167) for
determining whether to consolidate a variable interest entity. These amended
standards eliminate a mandatory quantitative approach to determine whether a
variable interest gives the entity a controlling financial interest in a
variable interest entity in favor of a qualitatively focused analysis, and
require an ongoing reassessment of whether an entity is the primary beneficiary.
We are currently evaluating the impact that adoption will have on our
consolidated financial statements.
In August
2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, which amends
ASC Topic 820, Measuring
Liabilities at Fair Value, which provides additional guidance on the
measurement of liabilities at fair value. These amended standards clarify that
in circumstances in which a quoted price in an active market for the identical
liability is not available, we are required to use the quoted price of the
identical liability when traded as an asset, quoted prices for similar
liabilities, or quoted prices for similar liabilities when traded as assets. If
these quoted prices are not available, we are required to use another valuation
technique, such as an income approach or a market approach. We do not expect it
to have a significant impact on our consolidated financial
statements.
In
October 2009, the FASB issued Accounting Standards Update, 2009-13, Revenue
Recognition (Topic 605): Multiple Deliverable Revenue
Arrangements - A Consensus of the FASB Emerging Issues Task Force.” This
update provides application guidance on whether multiple deliverables exist, how
the deliverables should be separated and how the consideration should be
allocated to one or more units of accounting. This update establishes a selling
price hierarchy for determining the selling price of a deliverable. The selling
price used for each deliverable will be based on vendor-specific objective
evidence, if available, third-party evidence if vendor-specific objective
evidence is not available, or estimated selling price if neither vendor-specific
or third-party evidence is available. The Company will be required to apply this
guidance prospectively for revenue arrangements entered into or materially
modified after January 1, 2011; however, earlier application is permitted.
Management is in the process of evaluating the impact of adopting this ASC
update on the Company’s financial statements.
3. Property, Plant and
Equipment
Plant and
equipment consist of the following:
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
||
Vehicle
|
$
|
4,694
|
$
|
-
|
||||
Furniture
and office equipment
|
54,713
|
54,712
|
||||||
Total
property, plant and equipment
|
59,407
|
54,712
|
||||||
Accumulated
depreciation
|
(47,674
|
)
|
(37,204
|
)
|
||||
Net
property, plant and equipment
|
$
|
11,733
|
$
|
17,508
|
Depreciation
expense included in selling, general and administrative expenses for the years
ended December 31, 2009 and 2008 was $10,463 and $10,215,
respectively.
4. Other Receivables
As of
December 31, 2009 and 2008, net other receivables amounted to $12,831,849 and
$5,794,650, respectively. Other receivable mainly includes a loan to a Shanghai
Pengbai Electric Inc (“Pengbai”). The receivables are secured by collateral of
Pengbai, interest free, and due in the years from 2012 to 2017. The
other receivable also includes advances to stores.
The
allowances on the other accounts receivable are recorded when circumstances
indicate collection is doubtful for particular accounts
receivable. Certain other accounts receivable amounts are charged off
against allowances after a designated period of collection efforts. Subsequent
cash recoveries are recognized as income in the period when they occur. The
Company provides for allowances on a specific account
basis. Allowance for other receivables as of December 31, 2009 and
2008 amounted to $0 and $5,693,925, respectively.
The
detail of the other receivables are as follows:
For the year ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Loan
to direct stores
|
$ | 1,241,142 | $ | - | ||||
Loan
to franchise
|
250,797 | - | ||||||
Loan
to Shanghai Pengpai
|
11,339,910 | 5,794,650 | ||||||
Total
|
$ | 12,831,849 | $ | 5,794,650 |
5.
Dividend Payable
During
the year ended December 31, 2008, the Board of directors declared a dividend of
$10,915,576.Dividend Payable amounted to $10,915,576 and $ 10,915,576 as of
December 31, 2009 and 2008, respectively. On December 31, 2008, Guoying’s board
approved a resolution that RMB 74,407,470 (approximately $10,915,576) will be
allocated as dividend payable to shareholders, RMB12,401,245 (approximately
$1,819,263) will be allocated as welfare payable to employees which is included
in the general and administrative expenses. There is no dividend declared for
the year ended December 31, 2009.
6.
Shareholder’s Equity
On
December 31, 2008, Guoying Electronic declared a dividend payable of
RMB74,407,469.96 (appromixately $10,915,576). As of December 31, 2009, the
amount was not paid out.
7.
Surplus reserve fund
The laws
and regulations of the PRC require that before a Sino-foreign cooperative joint
venture enterprise distributes profits to its partners, it must first satisfy
all tax liabilities, provide for losses in previous years, and make allocations
in proportions determined at the discretion of the board of directors, after the
statutory reserves. The statutory reserves include the surplus reserve fund, the
common welfare fund, and the enterprise fund. These statutory reserves
represent restricted retained earnings.
The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC’s accounting rules and regulations, to a statutory
surplus reserve fund until such reserve balance reaches 50% of the Company’s
registered capital.
The
transfer to this reserve must be made before distribution of any dividends to
shareholders. For the years ended December 31, 2009 and 2008 , the Company
transferred $974,325, and $4,452, respectively, to this reserve. The
surplus reserve fund is non-distributable other than during liquidation and can
be used to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholding or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 25% of the registered
capital.
8.
Employee Welfare Plan
The
Company has established its own employee welfare plan in accordance with Chinese
law and regulations. The Company makes contributions to an employee welfare
plan. The total expense for the above plan was $0 and $0 for the
twelve months ended December 31, 2009 and 2008,
respectively.
9.
Income Tax
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the twelve months ended December 31, 2009 and 2008:
2010
|
2009
|
|||||||
U.S.
Statutory rates
|
34.0
|
%
|
34.0
|
%
|
||||
Foreign
income not recognized in USA
|
(34.0
|
)
|
(34.0
|
)
|
||||
China
income taxes
|
25
|
25
|
||||||
China
income tax exemption
|
(25
|
) |
(25
|
) | ||||
Total
provision for income taxes
|
0
|
%
|
0
|
%
|
People’s Republic of China
(PRC)
Under the
Income Tax Laws of the PRC, the Company’s subsidiaries are generally subject to
an Enterprise Income Tax (EIT) at a standard rate of 25% on income reported in
the statutory financial statements after appropriate tax adjustments. Currently,
the Company is charged at a fixed annual amount of approximately $1,200 to cover
all types of taxes including income taxes and value added taxes. This is
approved by the PRC tax department. The income tax expenses for the twelve
months ended December 31, 2009 and 2008 are $0. There were no significant
book and tax basis differences.
10.
Concentration of Credit Risks and Uncertainties
The
Company’s practical operations are all carried out in the PRC. Accordingly, the
Company’s business, financial condition, and results of operations may be
influenced by the political, economic and legal environments in the PRC, and by
the general state of the PRC's economy.
The
Company’s operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company’s results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other
things.
Concentration
of credit risk exists when changes in economic, industry or geographic factors
similarly affect groups of counter parties whose aggregate credit exposure is
material in relation to the Company’s total credit exposure.
For the
twelve months ended December 31, 2009, there is no major customer that
individually comprised more than 10% of the Company’s total
sales. For the twelve months ended December 31, 2008, there is no
major customers that each individually comprised more than 10% of the Company’s
total sales.
The top
five major vendors accounted for 97.97% of the Company’s total purchases for the
twelve months ended December 31, 2009, with three major vendors, Shangdong
Huangming Solar Power Sales Co. , Hier Hefei Ririshun Sales Co. and Jiangsu
Huayang Solar Power Sales Co. accounting for 52.15%, 26.22% and 14.89% of the
total purchases. The top five major vendors accounted for 100% of the Company’s
total purchases for the twelve months ended December 31, 2008, with three major
vendors, Hier Hefei Ririshun Sales Co., Jiangshu Taizhou Chunlan Air-Conditioner
Sales Co. and., Shangdong Huangming Solar Power Sales Co. accounting for 45.51%,
25.34% and 24.33% and of the total purchases.
The
Company’s exposure to foreign currency exchange rate risk primarily relates to
cash and cash equivalents and short-term investments, denominated in the U.S.
dollar. Any significant revaluation of RMB may materially and adversely affect
the cash flows, revenues, earnings and financial position of the
Company.
11.
Subsequent Events
In June,
2010, the company’s shareholders all approved that the dividend payable
resolution be canceled and the dividend payable is reclassed into retained
earning.
CHINA
ELECTRONIC HOLDINGS, INC AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
AS OF
MARCH 31, 2010 AND DECEMBER 31, 2009
(Unaudited)
MARCH 31,
|
DECEMBER 31,
|
|||||||
2010
|
2009
|
|||||||
Assets
|
||||||||
Current
assets :-
|
||||||||
Cash
and cash equivalents
|
$ | 303,599 | $ | 64,736 | ||||
Trade
accounts receivable, net
|
10,926,144 | 6,295,375 | ||||||
Inventories,
net
|
1,080,902 | 992,090 | ||||||
Total
current assets
|
12,310,645 | 7,352,201 | ||||||
Property
and equipment, net
|
13,751 | 11,733 | ||||||
Other
receivables - Long term
|
12,831,849 | 12,831,849 | ||||||
Total
assets
|
$ | 25,156,244 | $ | 20,195,783 | ||||
Liabilities
and Stockholders' Equity
|
||||||||
Current
liabilities :
|
||||||||
Customer
deposit
|
$ | 1,333,092 | $ | 1,333,091 | ||||
Accrued
expenses
|
2,353,316 | 1,925,722 | ||||||
Dividend
payable
|
10,915,576 | 10,915,576 | ||||||
Total
current liabilities
|
14,601,984 | 14,174,389 | ||||||
Stockholders'
equity
|
||||||||
Preferred
stock, $0.0001 par value; 500,000 shares authorized; 343,750 shares issued
and outstanding as of March 31, 2010
|
34 | - | ||||||
Common
stock, $0.0001 par value; 100,000,000 shares authorized; 14,052,636 and
13,213,268 shares issued and outstanding as of March 31, 2010 and December
31, 2009, respectively
|
1,406 | 1,322 | ||||||
Additional
paid in capital
|
387,303 | 135,778 | ||||||
Retained
earnings
|
8,068,220 | 4,216,433 | ||||||
Statutary
reserve
|
1,406,753 | 978,777 | ||||||
Accumulated
other comprehensive income
|
690,544 | 689,084 | ||||||
Total
stockholders' equity
|
10,554,261 | 6,021,394 | ||||||
Total
liabilities and stockholders' equity
|
$ | 25,156,244 | $ | 20,195,783 |
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
CHINA
ELECTRONIC HOLDINGS, INC AND SUBSIDIARY
CONSOLIDATED
INCOME STATEMENTS AND COMPREHENSIVE INCOME STATEMENTS
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(Unaudited)
MARCH
31,
|
||||||||
2010
|
2009
|
|||||||
Net
revenue from direct stores
|
$ | 25,789,384 | $ | 6,605,824 | ||||
Net
revenue from franchise
|
699,974 | 539,963 | ||||||
Net
revenue from sales
|
108,776 | 37,803 | ||||||
Net
Revenue
|
26,598,134 | 7,183,590 | ||||||
Cost
of goods sold from direct stores
|
21,214,353 | 5,637,994 | ||||||
Cost
of goods sold from franchise
|
559,979 | 431,970 | ||||||
Cost
of goods sold from sales
|
87,020 | 30,242 | ||||||
Cost
of goods sold
|
21,861,352 | 6,100,206 | ||||||
Gross
profit
|
4,736,782 | 1,083,384 | ||||||
Operating
expenses:
|
||||||||
Selling
expense
|
14,709 | 12,313 | ||||||
General
and administrative expenses
|
439,838 | 15,073 | ||||||
Total
Operating Expenses
|
454,547 | 27,387 | ||||||
Net
operating income
|
4,282,235 | 1,055,997 | ||||||
Other
income (expense):
|
||||||||
Financial
income (expense)
|
(1,973 | ) | 754 | |||||
Total
other income (expense)
|
(1,973 | ) | 754 | |||||
Net
income before income taxes
|
4,280,263 | 1,056,751 | ||||||
Income
taxes
|
498 | 708 | ||||||
Net
income
|
4,279,764 | 1,056,043 | ||||||
Foreign
currency translation adjustment
|
1,460 | (683,103 | ) | |||||
Comprehensive
income
|
$ | 4,281,224 | $ | 372,940 | ||||
Earnings
per share - basic
|
$ | 0.30 | $ | 0.08 | ||||
Earnings
per share - diluted
|
$ | 0.30 | $ | 0.08 | ||||
Basic
weighted average shares outstanding
|
14,052,636 | 13,213,268 | ||||||
Diluted
weighted average shares outstanding
|
14,396,386 | 13,213,268 |
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
CHINA
ELECTRONIC HOLDINGS, INC AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(Unaudited)
MARCH 31,
|
||||||||
2010
|
2009
|
|||||||
Net
income
|
$ | 4,279,764 | $ | 1,056,042 | ||||
Adjustments
to reconcile net income to net cash used in operations:
|
||||||||
Depreciation
|
2,206 | 2,595 | ||||||
Changes
in operating liabilities and assets:
|
||||||||
Trade
accounts receivable
|
(4,964,136 | ) | (1,919,281 | ) | ||||
Inventories
|
(88,782 | ) | 429,853 | |||||
Trade
accounts payable
|
334,946 | 417,262 | ||||||
Other
payables
|
451 | - | ||||||
Accrued
expenses
|
426,999 | 2,365 | ||||||
Net
cash used in operating activities
|
(8,552 | ) | (11,163 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Property,
plant, and equipment additions
|
(4,224 | ) | - | |||||
Cash
received in reverse acquisition
|
251,643 | - | ||||||
Net
cash provided by investing activities
|
247,420 | - | ||||||
Cash
flows from financing activities
|
- | - | ||||||
Effect
of rate changes on cash
|
(4 | ) | (45 | ) | ||||
Increase
(decrease) in cash and cash equivalents
|
238,863 | (11,208 | ) | |||||
Cash
and cash equivalents, beginning of period
|
64,736 | 33,600 | ||||||
Cash
and cash equivalents, end of period
|
$ | 303,599 | $ | 22,392 | ||||
Supplemental
disclosures of cash flow information:
|
||||||||
Interest
paid in cash
|
$ | - | $ | - | ||||
Income
taxes paid in cash
|
$ | 498 | $ | 708 |
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
CHINA
ELECTRONIC HOLDINGS, INC
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
|
FOR
THE TWELVE MONTHS ENDED DECEMBER 31, 2009, 2008 AND THREE MONTHS ENDED
MARCH 31, 2010
|
(Unaudited)
|
Preferred
|
Common
|
Retained Earnings
(Accumulated
Deficit)
|
Accumulated Other
|
Total
|
|||||||||||||||||||||||||||||||
|
Stock
|
Stock
|
Additional Paid
|
Statutory
|
Comprehensive
|
Stockholders'
|
||||||||||||||||||||||||||||||
|
Number
|
Amount
|
Number
|
Amount
|
In Capital
|
Unrestricted
|
Reserve
|
Income
|
Equity (deficit)
|
|||||||||||||||||||||||||||
Balance:
December 31, 2008
|
- | $ | - | 13,213,268 | $ | 1,322 | $ | 135,778 | $ | (4,552,488 | ) | $ | 4,452 | $ | 683,103 | $ | (3,727,832 | ) | ||||||||||||||||||
Net
income
|
- | - | - | - | - | 9,743,245 | - | 9,743,245 | ||||||||||||||||||||||||||||
Allocation
to statutory reserve
|
- | - | - | - | - | (974,324 | ) | 974,324 | - | - | ||||||||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | - | - | - | 5,981 | 5,981 | |||||||||||||||||||||||||||
Balance:
December 31, 2009
|
- | - | 13,213,268 | 1,322 | 135,778 | 4,216,433 | 978,777 | 689,084 | 6,021,393 | |||||||||||||||||||||||||||
Recapitalization
on Reverse Acquisition
|
343,750 | 34 | 839,368 | 84 | 251,525 | 0 | 0 | 0 | 251,643 | |||||||||||||||||||||||||||
Net
income
|
- | - | - | - | - | 4,279,764 | - | - | 4,279,764 | |||||||||||||||||||||||||||
Allocation
to statutory reserve
|
- | - | - | - | - | (427,976 | ) | 427,976 | - | - | ||||||||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | 0 | 0 | 0 | 1,460 | 1,460 | |||||||||||||||||||||||||||
Balance:
March 31, 2010
|
343,750 | $ | 34 | 14,052,636 | $ | 1,406 | $ | 387,303 | $ | 8,068,220 | $ | 1,406,753 | $ | 690,544 | $ | 10,554,261 |
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
CHINA
ELECTRONIC HOLDINGS, INC AND SUBSIDIARY
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
1.
|
Nature
of Operations
|
China
Electronic Holdings, Inc (the “Company”, “China Electronic”, “CEH”, “We”, “Our”,
“Us”) was organized on February 8, 2008, as Delaware Corporation. Prior to
February 10, 2010, the Company was a development stage company attempting to
manufacture and sell carbon and graphite electrodes and planning to manufacture
and sell electronic products in the Peoples’ Republic of China (PRC) through its
own stores and through wholesale stores.
Lu’an
Guoying Electronic Sales Co., Ltd., a PRC corporation, ( “Guoying”) was
established on January 4th, 2002 with share capital of RMB1, 000,000
(approximately $137,100). Guoying sells electronic products in PRC through its
own stores and through wholesale stores. It also sells through
Franchises.
On
December 26, 2008, the shareholders of Guoying (accounting acquirer) entered
into a share transfer agreement with China Electronic Holdings Inc. (legal
acquirer) to transfer 40% of their shares of Guoying Electronic Group Co, Ltd.
to China Electronic Holdings Inc. for a consideration of RMB400, 000
(approximately $60,000). The shareholders of Guoying also entered into another
share transfer agreement with CEH in December 2009 to transfer the rest of their
shares (60%) to CEH for a consideration of RMB600, 000. The amount of RMB400,
000 was paid in February 2010 by CEH. Simultaneously, CEH and Guoying also
entered into an agreement to issue 13,213,268 shares to the CEO of China
Electronic. As of February 10, 2010, a call option agreement was entered between
the CEO of the Company and Guoying original shareholders. The CEO agreed to give
Guoying original shareholders the option to purchase the 13,213,268
shares.Effective February 10, Guoying merged into China Electronic with Guoying
being the surviving entity. On February 10, 2010 the Company issued 13,213,268
shares of Common Stock pursuant to the acquisition agreement effective February
10, 2010. As a part of the acquisition, CEH cancelled 2,272,399 shares of its
issued and outstanding stock owned by its shareholder.
The
exchange of shares with CEH has been accounted for as a reverse acquisition
under the purchase method of accounting since the stockholders of Guoying
obtained control of CEH. the CEO and the original shareholders entered into
voting trust agreements on February 10, 2010, whereby the CEO has given all her
voting rights to the original owners of Guoying. Accordingly, the acquisition of
the two companies has been recorded as a recapitalization of the Company, with
the Guoying being treated as the continuing entity. The historical financial
statements presented are those of Guoying.
As a
result of the reverse acquisition transaction described above the historical
financial statements presented are those of Guoying, the operating
entity.
When we
refer in this report to business and financial information for periods prior to
the consummation of the reverse acquisition, we are referring to the business
and financial information of Guoying on a consolidated basis unless the context
suggests otherwise.
2.
|
Summary of Significant
Accounting Policies
|
Basis of
Presentation
The
accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. All
significant inter-company transactions and accounts have been eliminated in the
consolidation. The functional currency is the Chinese Renminbi (CNY);
however the accompanying financial statements have been translated and presented
in United States Dollars (USD).
The
consolidated condensed interim financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that these consolidated condensed financial statements be read in
conjunction with information included in the 2009 annual report filed on
Form 8K. The results of the three month period ended March 31, 2010 are not
necessarily indicative of the results to be expected for the full fiscal year
ending December 31, 2010.
Economic and Political
Risks
The
Company faces a number of risks and challenges as a result of having primary
operations and marketing in the PRC. Changing political climates in the PRC
could have a significant effect on the Company’s business.
Control by Principal
Stockholders
The
directors, executive officers and their affiliates or related parties own,
beneficially and in the aggregate, the majority of the outstanding shares of the
Company. Accordingly, the directors, executive officers and their affiliates, if
they voted their shares uniformly, would have the ability to control the
approval of most corporate actions, including increasing the authorized capital
stock of the Company and the dissolution, merger or sale of the Company’s
assets.
Principles of
Consolidation
The
consolidated financial statements include the financial statements of China
Electronic, and its wholly owned subsidiary Guoying. All significant
inter-company balances and transactions have been eliminated in
consolidation.
Use of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosures of
contingent assets and liabilities, at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash
Equivalents
For
purposes of the statements of cash flows, cash and cash equivalents includes
cash on hand and cash in time deposits, certificates of deposit and all highly
liquid debt instruments with original maturities of three months or less.
Deposits held in financial institutions in the PRC are not insured by any
government entity or agency.
Trade Accounts
Receivable
The
Company extends unsecured credit to its customers in the ordinary course of
business but mitigates the associated risks by performing credit checks and
actively pursuing past due accounts. Trade accounts receivable are recognized
and carried at original invoice amount less an allowance for any uncollectible
amounts. An allowance for doubtful accounts is established and determined based
on management’s regular assessment of known requirements, aging of receivables,
payment history, the customer’s current credit worthiness and the economic
environment. These factors continuously change, and can have an impact on
collections and the Company’s estimation process. These impacts may be material.
Management reviews and maintains an allowance for doubtful accounts that
reflects the management’s best estimate of potentially uncollectible trade
receivables. Certain accounts receivable amounts are charged off against
allowances after a designated period of collection efforts. Subsequent cash
recoveries are recognized as income in the period when they occur. Allowance for
doubtful debts amounted for accounts receivable to $0 and $0 as of March 31,
2010 and December 31, 2009, respectively.
Inventories
Inventories
are stated at the lower of cost, determined on a weighted average basis, and net
realizable value. Net realizable value is the estimated selling price, in the
ordinary course of business, less estimated costs to complete and dispose.
Inventories consist of the following:
|
March
31, 2010
|
December
31, 2009
|
||||||
Electronic
products
|
$
|
1,080,902
|
$
|
992,090
|
Property, Plant and
Equipment
Property,
plant and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the useful lives of
the assets. Major renewals are capitalized and depreciated; maintenance and
repairs that do not extend the life of the respective assets are charged to
expense as incurred. Upon disposal of assets, the cost and related accumulated
depreciation are removed from the accounts and any gain or loss is included in
income. Depreciation related to manufacturing is reported in cost of revenues.
Depreciation not related to manufacturing is reported in selling, general and
administrative expenses. Property, plant and equipment are depreciated over
their estimated useful lives as follows:
Furniture
and office equipment
|
5
years
|
Motor
vehicles
|
10
years
|
Impairment of Long-Lived and
Intangible Assets
Long-lived
assets of the Company are reviewed annually to assess whether the carrying value
has become impaired according to the guidelines established in FASB Codification
(ASC) 360. The Company
considers assets to be impaired if the carrying value exceeds the future
projected cash flows from related operations. The Company also re-evaluates the
periods of depreciation to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. As of March 31, 2010, the Company
expects these assets to be fully recoverable. No impairment of assets was
recorded in the periods reported.
Revenue Recognition - Direct
sales and Wholesale Activities
The
Company receives revenue from sales of electronic products. The Company's
revenue recognition policies are in compliance with ASC 605 (previously Staff
Accounting Bulletin 104). Sales revenue is recognized at the date of shipment to
customers, when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company exist
and collectability is reasonably assured. Our sales are usually covered by the
manufacturers’ return and warranty policies. Therefore, we do not estimate
deductions or allowance for sales returns. Sales are presented net of any
discounts, reward, or incentive given to customers. Payments received before all
of the relevant criteria for revenue recognition are satisfied are recorded as
customer deposit. Customer deposit amounted to $1,333,092 and $1,333,091 as of
March 31, 2010 and December 31, 2009, respectively.
Our
products delivered to customers would be checked on site by customers and, once
the products are accepted by customers, they will sign the acceptance notice.
Reward or incentive given to our customers is an adjustment of the selling
prices of our products; therefore, the consideration is characterized as a
reduction of revenue when recognized in our income statement.
The
Company recognizes its revenues net of value-added taxes (“VAT”). The Company is
subject to VAT which is levied at a fixed annual amount. Currently, the Company
is charged at a fixed annual amount of approximately $1,200 to cover all types
of taxes including income taxes and value added taxes. This is approved by the
PRC tax department.
Revenue Recognition –
Franchise Activities:
Revenues
from franchised activities include area development and initial franchise fees
(collectively referred to as “Franchise fees”) received from franchisees to
establish new stores and royalties charged to franchisees based on a percentage
of a franchised store’s sales. Franchise fees are accrued as an unearned
franchise revenue liability when received and are recognized as revenue when the
franchised stores covered by the fees open, which is generally when we have
fulfilled all significant obligations to the franchisee. Continuing fees and
royalties are recognized in the period earned. Franchise fees included in
revenues were approximately $7.0 million, and $5.4 million in the three months
ended March 31, 2010 and 2009, respectively.
Cost of Goods
Sold
Cost of
goods sold consists primarily of the costs of the products sold and freight in
charges.
Selling, General and
Administration Expenses
Selling,
general and administrative expenses include costs incurred in connection with
performing selling, general and administrative activities such as executives and
administrative and sale employee salaries, related employee benefits, office
supplies, and professional services.
Shipping and Handling
Costs
ASC
605-45-20 “Shipping and
Handling costs” establishes standards for the classification of shipping
and handling costs. All amounts billed to a customer related to shipping and
handling are classified as selling expenses.
Advertising
Costs
The
Company expenses advertising costs as incurred. However no
advertising expenses was charged to operations for the three months ended March
31, 2010 and 2009, respectively. Advertising costs, if any, are included in
selling, general and administrative expense on the income
statement.
Foreign Currency and
Comprehensive Income
The
accompanying financial statements are presented in US dollars. The functional
currency is the Renminbi (“RMB”) of the PRC. The financial statements are
translated into US dollars from RMB at period-end exchange rates for assets and
liabilities, and weighted average exchange rates for revenues and expenses.
Capital accounts are translated at their historical exchange rates when the
capital transactions occurred.
On July
21, 2005, the PRC changed its foreign currency exchange policy from a fixed
RMB/USD exchange rate into a flexible rate under the control of the PRC’s
government. We use the Closing Rate Method in currency translation of the
financial statements of the Company.
RMB is
not freely convertible into the currency of other nations. All such exchange
transactions must take place through authorized institutions. There is no
guarantee the RMB amounts could have been, or could be, converted into US
dollars at rates used in translation. At March 31, 2010 and December 31, 2009,
the cumulative translation adjustment of $690,544 and $689,084, respectively,
was classified as an item of other comprehensive income in the stockholders’
equity section of the consolidated balance sheet. For the three months ended
March 31, 2010 and 2009, accumulated other comprehensive gain (loss) was $1,460
and $(683,103), respectively.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740 (formerly SFAS 109,
“Accounting for Income Taxes.”) Under the asset and liability method as required
by ASC 740 (formerly SFAS 109), deferred income taxes are recognized for the tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. Under ASC
740, the effect on deferred income taxes of a change in tax rates is recognized
in income in the period that includes the enactment date. A valuation allowance
is recognized if it is more likely than not that some portion, or all of, a
deferred tax asset will not be realized. As of February 28, 2010 and May 31,
2009, the Company did not have any deferred tax assets or liabilities, and as
such, no valuation allowances were recorded at February 28, 2010 and May 31,
2009.
ASC 740
(Formerly FIN 48) clarifies the accounting and disclosure for uncertain tax
positions and prescribes a recognition threshold and measurement attribute for
recognition and measurement of a tax position taken or expected to be taken in a
tax return. ASC 740 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition.
Under ASC
740, evaluation of a tax position is a two-step process. The first step is to
determine whether it is more-likely-than-not that a tax position will be
sustained upon examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The second step is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition threshold should
be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
criteria should be de-recognized in the first subsequent financial reporting
period in which the threshold is no longer met.
The
Company’s operations are subject to income and transaction taxes in the United
States, Hong Kong, and the PRC jurisdictions. Significant estimates and
judgments are required in determining the Company’s worldwide provision for
income taxes. Some of these estimates are based on interpretations of existing
tax laws or regulations, and as a result the ultimate amount of tax liability
may be uncertain. However, the Company does not anticipate any events that
would lead to changes to these uncertainties.
Restrictions on Transfer of
Assets Out of the PRC
Dividend
payments by the Company are limited by certain statutory regulations in the PRC.
No dividends may be paid by the Company without first receiving prior approval
from the Foreign Currency Exchange Management Bureau. However, no such
restrictions exist with respect to loans and advances.
Financial
Instruments
ASC 825
(formerly SFAS 107, “Disclosures about Fair Value of Financial Instruments”)
defines financial instruments and requires disclosure of the fair value of those
instruments. ASC 820 (formerly SFAS 157, “Fair Value Measurements”), adopted
July 1, 2008, defines fair value, establishes a three-level valuation hierarchy
for disclosures of fair value measurement and enhances disclosure requirements
for fair value measures. The carrying amounts reported in the balance sheets for
current receivables and payables, including short-term loans, qualify as
financial instruments and are a reasonable estimate of fair value because of the
short period of time between the origination of such instruments, their expected
realization and, if applicable, the stated rate of interest is equivalent to
rates currently available. The three levels are defined as follows:
|
¨
|
Level
1: inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active
markets.
|
|
¨
|
Level
2: inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the assets or liability, either directly or indirectly, for
substantially the full term of the financial
instruments.
|
|
¨
|
Level
3: inputs to the valuation methodology are unobservable and significant to
the fair value.
|
The
Company did not identify any assets or liabilities that are required to be
presented on the balance sheet at fair value in accordance with ASC 820
(formerly SFAS 157).
Stock-Based
Compensation
The
Company records stock-based compensation expense pursuant to ASC 718 (formerly
SFAS 123R, “Share Based Payment.”) The Company uses the Black-Scholes option
pricing model which requires the input of highly complex and subjective
variables including the expected life of options granted and the Company’s
expected stock price volatility over a period equal to or greater than the
expected life of the options. Because changes in the subjective assumptions can
materially affect the estimated value of the Company’s employee stock options,
it is management’s opinion that the Black-Scholes option pricing model may not
provide an accurate measure of the fair value of the Company’s employee stock
options. Although the fair value of employee stock options is determined in
accordance with ASC 718 using an option pricing model, that value may not
be indicative of the fair value observed in a willing buyer/willing seller
market transaction.
Stock-based
compensation expense is recognized based on awards expected to vest, and there
were no estimated forfeitures as the Company has a short history of issuing
options. ASC 718 (formerly SFAS 123R) requires forfeitures to be estimated at
the time of grant and revised in subsequent periods, if necessary, if actual
forfeitures differ from those estimates.
Basic and Diluted Earnings
Per Share
The
Company reports earnings per share in accordance with the provisions of ASC 260
(formerly SFAS No. 128, "Earnings Per Share.") ASC 260 requires
presentation of basic and diluted earnings per share in conjunction with the
disclosure of the methodology used in computing such earnings per share. Basic
earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average common shares
outstanding during the period. Diluted earnings per share takes into account the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the
period.
The
following is a reconciliation of the basic and diluted earnings per
share:
THREE
MONTHS ENDED
MARCH
31,
|
||||||||
2010
|
2009
|
|||||||
Net
income for earnings per share
|
$
|
4,279,764
|
1,056,042
|
|||||
Weighted
average shares used in basic computation
|
14,052,636
|
13,213,268
|
||||||
Diluted
effect of Preferred stock
|
343,750
|
-
|
||||||
Weighted
average shares used in diluted computation
|
14,396,386
|
13,213,268
|
||||||
Earnings
per share, basic
|
$
|
0.30
|
0.08
|
|||||
Earnings
per share, diluted
|
$
|
0.30
|
0.08
|
Statement of Cash
Flows
In
accordance with FASB ASC 230 cash flows from the Company's operations is
calculated based upon the local currencies. As a result, amounts related to
assets and liabilities reported on the statement of cash flows may not
necessarily agree with changes in the corresponding balances on the balance
sheet.
Segment
Reporting
Statement
of Financial Accounting Standards No. 131 (SFAS 131), (ASC 250) “Disclosure
about Segments of an Enterprise and Related Information” requires use of the
management approach model for segment reporting. The management approach model
is based on the way a company's management organizes segments within the company
for making operating decisions and assessing performance. Reportable segments
are based on products and services, geography, legal structure, management
structure, or any other manner in which management disaggregates a
company. SFAS 131(ASC 280) has no effect on the Company’s
consolidated financial statements as the Company consists of one reportable
business segment. All revenue is from customers in People’s Republic of China.
All of the Company’s assets are located in People’s Republic of
China.
Recent Accounting
Pronouncements
In
June 2009, the FASB issued ASC 860 (previously SFAS No. 166,
“Accounting for Transfers of Financial Assets”), which requires additional
information regarding transfers of financial assets, including securitization
transactions, and where companies have continuing exposure to the risks related
to transferred financial assets. SFAS 166 eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures. SFAS 166 is effective for
fiscal years beginning after November 15, 2009. The Company does not
believe this pronouncement will impact its financial statements.
In
June 2009, the FASB issued ASC 810 (previously SFAS No. 167) for
determining whether to consolidate a variable interest entity. These amended
standards eliminate a mandatory quantitative approach to determine whether a
variable interest gives the entity a controlling financial interest in a
variable interest entity in favor of a qualitatively focused analysis, and
require an ongoing reassessment of whether an entity is the primary beneficiary.
We are currently evaluating the impact that adoption will have on our
consolidated financial statements.
In August
2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, which amends
ASC Topic 820, Measuring
Liabilities at Fair Value, which provides additional guidance on the
measurement of liabilities at fair value. These amended standards clarify that
in circumstances in which a quoted price in an active market for the identical
liability is not available, we are required to use the quoted price of the
identical liability when traded as an asset, quoted prices for similar
liabilities, or quoted prices for similar liabilities when traded as assets. If
these quoted prices are not available, we are required to use another valuation
technique, such as an income approach or a market approach. We do not expect it
to have a significant impact on our consolidated financial
statements.
In
October 2009, the FASB issued Accounting Standards Update, 2009-13, Revenue
Recognition (Topic 605): Multiple Deliverable Revenue
Arrangements - A Consensus of the FASB Emerging Issues Task Force.” This
update provides application guidance on whether multiple deliverables exist, how
the deliverables should be separated and how the consideration should be
allocated to one or more units of accounting. This update establishes a selling
price hierarchy for determining the selling price of a deliverable. The selling
price used for each deliverable will be based on vendor-specific objective
evidence, if available, third-party evidence if vendor-specific objective
evidence is not available, or estimated selling price if neither vendor-specific
or third-party evidence is available. The Company will be required to apply this
guidance prospectively for revenue arrangements entered into or materially
modified after January 1, 2011; however, earlier application is permitted.
Management is in the process of evaluating the impact of adopting this ASC
update on the Company’s financial statements.
In
January 2010, the FASB issued ASU No. 2010-06 Fair Value Measurements and
Disclosures Topic 820 “Improving Disclosures about Fair Value Measurements”.
This ASU requires some new disclosures and clarifies some existing disclosure
requirements about fair value measurement as set forth in Codification Subtopic
820-10. The FASB’s objective is to improve these disclosures and, thus, increase
the transparency in financial reporting. This pronouncement is effective for
interim and annual reporting periods beginning after December 15, 2009, except
for the disclosures about purchases, sales, issuances, and settlements in the
roll forward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The adoption of this ASU will not
have a material impact on the Company’s consolidated financial
statements.
3.
|
Property, Plant and
Equipment
|
Plant and
equipment consist of the following:
|
March
31, 2010
|
December
31, 2009
|
||||||
Vehicle
|
$
|
4,012
|
$
|
4,694
|
||||
Furniture
and office equipment
|
14,635
|
54,713
|
||||||
Total
property, plant and equipment
|
18,647
|
59,407
|
||||||
Accumulated
depreciation
|
(4,896
|
)
|
(47,674
|
)
|
||||
Net
property, plant and equipment
|
$
|
13,751
|
$
|
11,733
|
Depreciation
expense included in selling, general and administrative expenses for the three
months ended March 31, 2010 and 2009 was $2,206 and $2,595,
respectively.
4.
|
Other
Receivables
|
As of
March 31, 2010 and December 31, 2009, net other receivables amounted to
$12,831,849. Other receivable mainly includes a loan to Shanghai Pengbai
Electric Inc (“Pengbai”). The receivables are secured by collateral of Pengbai,
interest fee, and due in the years from 2012 to 2017. The other
receivable also includes advances to stores.
The
allowances on the other accounts receivable are recorded when circumstances
indicate collection is doubtful for particular accounts
receivable. The Company provides for allowances on a specific account
basis. Certain other accounts receivable amounts are charged off against
allowances after a designated period of collection efforts. Subsequent cash
recoveries are recognized as income in the period when they occur. As of March
31, 2010 and December 31, 2009, bad debt allowance for other receivable amounted
to $0 and $0.
The
detail of the other receivables are as follows:
March 31, 2010
|
December 31, 2009
|
|||||||
Advances
to direct stores
|
$ | 1,241,142 | $ | 1,241,142 | ||||
Advances
to franchises
|
250,797 | 250,797 | ||||||
Loan
to Shanghai Pengbai
|
11,339,910 | 11,339,910 | ||||||
Total
|
$ | 12,831,849 | $ | 12,831,849 |
5.
|
Dividend
Payable
|
Dividend
Payable amounted to $10,915,576 and $10,915,576 as of March 31, 2010 and
December 31, 2009, respectively. On December 31, 2008, Guoying’s board approved
a resolution that RMB 74,407,470 (approximately $10,915,576) will be allocated
as dividend payable to shareholders, RMB12, 401,245 (approximately $1,819,263)
will be allocated as welfare payable to employees which is included in the
general and administrative expenses. There is no dividend declared for the year
ended December 31, 2009 and for the three months period ended March 31,
2010.
6.
|
Shareholder’s
Equity
|
On
December 26, 2008, the shareholders of Guoying entered into a share transfer
agreement with China Electronic Holdings Inc. to transfer 40% of their shares of
Guoying Electronic Group Co, Ltd. to China Electronic Holdings Inc. for a
consideration of RMB400, 000 (approximately $60,000). The shareholders of
Guoying also entered into another share transfer agreement with CEH in December
2009 to transfer the rest of their shares (60%) to CEH for a consideration of
RMB600, 000. CEH paid RMB400, 000 in February 2010. Simultaneously, CEH and
Guoying also entered into an agreement to issue 13,213,268 shares to Guoying
original shareholders. Effective February 10, Guoying became a wholly owned
subsidiary of China Electronic. On February 10, 2010 the Company issued
13,213,268 shares of Common Stock pursuant to the acquisition made agreement
effective February 10, 2010.
7.
|
Surplus
reserve fund
|
The laws
and regulations of the PRC require that before a Sino-foreign cooperative joint
venture enterprise distributes profits to its partners, it must first satisfy
all tax liabilities, provide for losses in previous years, and make allocations
in proportions determined at the discretion of the board of directors, after the
statutory reserves. The statutory reserves include the surplus reserve fund, the
common welfare fund, and the enterprise fund. These statutory reserves
represent restricted retained earnings.
The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC’s accounting rules and regulations, to a statutory
surplus reserve fund until such reserve balance reaches 50% of the Company’s
registered capital.
The
transfer to this reserve must be made before distribution of any dividends to
shareholders. For the three months ended March 31, 2010 and 2009, the Company
transferred $470,449 and $0, respectively, to this reserve. The surplus reserve
fund is non-distributable other than during liquidation and can be used to fund
previous years’ losses, if any, and may be utilized for business expansion or
converted into share capital by issuing new shares to existing shareholders in
proportion to their shareholding or by increasing the par value of the shares
currently held by them, provided that the remaining reserve balance after such
issue is not less than 25% of the registered capital.
Enterprise
fund
The
enterprise fund may be used to acquire fixed assets or to increase the working
capital to expand production and operations of the Company. No minimum
contribution is required and the Company has not made any contribution to this
fund. For the three months ended March 31, 2010 and 2009, the Company
transferred $0 and $0, respectively, to this reserve.
8.
|
Employee Welfare
Plan
|
The
Company has established its own employee welfare plan in accordance with Chinese
law and regulations. The Company makes contributions to an employee welfare
plan. The total expense for the above plan was $16,471and $15,985 for
the three months ended March 31, 2010 and 2009, respectively.
9.
|
Income
Tax
|
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the three months ended March 31, 2010 and 2009:
2010
|
2009
|
|||||||
U.S.
Statutory rates
|
34.0
|
%
|
34.0
|
%
|
||||
Foreign
income not recognized in USA
|
(34.0
|
)
|
(34.0
|
)
|
||||
China
income taxes
|
0
|
0
|
||||||
China
income tax exemption
|
0
|
0
|
||||||
Total
provision for income taxes
|
0
|
%
|
0
|
%
|
People’s Republic of China
(PRC)
Under the
Income Tax Laws of the PRC, the Company’s subsidiaries are generally subject to
an Enterprise Income Tax (EIT) at a standard rate of 25% on income reported in
the statutory financial statements after appropriate tax adjustments. Currently,
the Company is charged at a fixed annual amount of approximately $1,200 to cover
all types of taxes including income taxes and value added taxes. This is
approved by the PRC tax department. The income tax expenses for the three
months ended March 31, 2010 and 2009 are $0. There were no significant book
and tax basis differences.
10.
|
Concentration of Credit Risks
and Uncertainties
|
The
Company’s practical operations are all carried out in the PRC. Accordingly, the
Company’s business, financial condition, and results of operations may be
influenced by the political, economic and legal environments in the PRC, and by
the general state of the PRC's economy.
The
Company’s operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company’s results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other
things.
Concentration
of credit risk exists when changes in economic, industry or geographic factors
similarly affect groups of counter parties whose aggregate credit exposure is
material in relation to the Company’s total credit exposure.
For the
three months ended March 31, 2010, there is no major customer that individually
comprised more than 10% of the Company’s total sales. For the three months ended
March 31, 2009, there is no major customer that each individually comprised more
than 10% of the Company’s total sales.
The top
five major vendors accounted for 100% of the Company’s total purchases for the
three months ended March 31, 2010, with three major vendors, Shangdong Huangming
Solar Power Sales Co., Jiangsu Huayang Solar Power Sales Co. and Anhui Digital
Tech Co. accounting for 73%, 15% and 7% of the total purchases. The top five
major vendors accounted for 100% of the Company’s total purchases for the three
months ended March 31, 2009, with three major vendors, Hier Hefei Ririshun Sales
Co., Shangdong Huangming Solar Power Sales Co. and Sanyo Electronics Co.
accounting for 60%, 27% and 10% and of the total purchases.
The
Company’s exposure to foreign currency exchange rate risk primarily relates to
cash and cash equivalents and short-term investments, denominated in the U.S.
dollar. Any significant revaluation of RMB may materially and adversely affect
the cash flows, revenues, earnings and financial position of the
Company.
Operating
Leases
The
Company leases various facilities under operating leases that terminate on
various dates.
The
Company incurred rent expenses of $7,936 and $7,930 for the three months ended
March 31, 2010 and 2009.
The lease
expenses for the next five years after March 31, 2010 are as
follows:
2011
|
$ | 23,435 | ||
2012
|
13,095 | |||
2013
|
711 | |||
2014
|
– | |||
2015
|
– | |||
Total
|
37,241 |
11.
|
Subsequent Events
|
On July
15, 2010, we entered into a Share Exchange Agreement, dated as of July 9, 2010
(the “Share Exchange Agreement”) with Buyonate, Inc. and certain stockholders
and warrant holders of China Electronic (the “CEH Stockholders”). Pursuant
to the Share Exchange Agreement, on July 15, 2010, 10 CEH Stockholders
transferred 100% of the outstanding shares of common stock and preferred stock
and 100% of the warrants to purchase common stock of China Electronic held by
them, in exchange for an aggregate of 13,785,902 newly issued shares of
Buyonate, Inc’s Common Stock and warrants to purchase an aggregate of 1,628,570
shares of Buyonate, Inc’s Common Stock. The shares of Buyonate, Inc’s common
stock acquired by the CEH Stockholders in such transactions constitute
approximately 85.96% of our issued and outstanding Common Stock giving effect to
the share and warrant exchange and the sale of Buyonate, Inc’s Common Stock
pursuant to the Subscription Agreement discussed below, but not including any
outstanding purchase warrants to purchase shares of Buyonate, Inc’s common
stock, including the warrants issued pursuant to the Subscription Agreement. In
connection with the closing of the Share Exchange Agreement, China Electronic
purchased from the former principal stockholder of Buyonate an aggregate of 4
million shares of common stock and then agreed to the cancellation of such
shares.
In
addition, on July 15, 2010 Buyonate, Inc and its subsidiaries, China Electronic
and Guoying, consummated a private placement to 27 investors for an
aggregate gross purchase price of $3,278,397 ($10.56 per unit) of
310,454 units, each unit consisting of four shares of our Common
Stock, par value $0.0001 per share (“Stock”), a three-year warrant to purchase
one shares of our Common Stock for $3.70 per share and a three-year
warrant to purchase one share of our Common Stock for $4.75 per share pursuant
to a Subscription Agreement (the “Subscription Agreement”) with such investors
(the “Private Placement”).
In May
2010, Guoying board had a board resolution withdrawing the dividend declared in
2008. In June 2010, the original shareholders signed agreements waiving their
rights to receive the dividends declared in 2008. All dividend payable were
reclassed into equity.