Attached files
file | filename |
---|---|
EX-23.1 - China Electronics Holdings, Inc. | v210533_ex23-1.htm |
EX-23.2 - China Electronics Holdings, Inc. | v210533_ex23-2.htm |
As
filed with the Securities and Exchange Commission on February 10,
2011
Registration
No. 333-169968
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT
NO. 1
TO
FORM
S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933
CHINA
ELECTRONICS HOLDINGS, INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
0273
|
98-0550385
|
(State or other jurisdiction of
incorporation or organization)
|
(Primary Standard Industrial
Classification Code Number)
|
(I.R.S. Employer
Identification Number)
|
Building
3, Binhe District, Longhe East Road, Lu’an City
Anhui
Province, PRC 237000
011-86-564-3224888
(Address,
including zip code, and telephone number,
including
area code, of registrant’s principal executive offices)
China
Electronics Holdings, Inc.
c/o
China Financial Services, Inc.
87 Dennis
Street
Garden
City Park, NY 11040
(212)
240-0707
(Name,
address, including zip code, and telephone number, including area code, of agent
for service)
Copies
to:
Evan
L. Greebel, Esq.
Howard
S. Jacobs, Esq.
Yue
Cao, Esq.
Katten
Muchin Rosenman LLP
575
Madison Avenue
New
York, New York 10022
(212)
940-8800
Approximate
date of commencement of proposed sale to public: as soon as practicable after
this Registration Statement is declared effective.
If any of
the securities being registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o __________
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o_________
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier registration statement for the same
offering. o __________
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer
|
¨
|
Accelerated filer
|
¨
|
|
Non-accelerated filer
|
¨
|
Smaller reporting company
|
x
|
|
(Do not check if a smaller reporting company)
|
CALCULATION
OF REGISTRATION FEE
Title of each class of
securities to be
registered
|
Amount to be
registered (1)
|
Proposed maximum
offering price per
unit
|
Proposed
Maximum
aggregate offering
price
|
Amount of
registration fee
(2)(10)
|
||||||||||||
Common
Stock, par value $.0001 per share
|
1,451,578 | $ | 3.18 | (3) | $ | 4,616,018 | $ | 536 | ||||||||
Common
Stock, par value $.0001 per share
|
2,767,246 | $ | 3.80 | (4) | $ | 10,515,535 | $ | 750 | ||||||||
Common
Stock, par value $.0001 per share, underlying Series A
Warrants
|
314,286 | (5) | $ | 2.19 | $ | 688,286 | $ | 49 | ||||||||
Common
Stock, par value $.0001 per share, underlying Series B
Warrants
|
314,286 | (6) | $ | 2.63 | $ | 826,572 | $ | 59 | ||||||||
Common
Stock, par value $.0001 per share, underlying Series C
Warrants
|
497,303 | (7) | $ | 3.70 | $ | 1,840,021 | $ | 131 | ||||||||
Common
Stock, par value $.0001 per share, underlying Series D
Warrants
|
497,303 | (8) | $ | 4.75 | $ | 2,362,189 | $ | 168 | ||||||||
Common
Stock, par value $.0001 per share, underlying Series E
Warrants
|
1,000,000 | (9) | $ | 0.25 | $ | 250,000 | $ | 18 | ||||||||
Total
|
$ | 1,711 | ||||||||||||||
(1)
|
Pursuant
to Rule 416 promulgated under the Securities Act of 1933, as amended,
there are also registered hereunder such indeterminate number of
additional shares as may be issued to the selling stockholders to prevent
dilution resulting from stock splits, stock dividends or similar
transactions.
|
(2)
|
The
registration fee is calculated pursuant to Rule
457(g).
|
(3)
|
The
registration fee is calculated pursuant to Rule 457(c). As of the date of
this prospectus, our Common Stock is quoted under the symbol "CEHD.OB" on
the Over-the-Counter Bulletin Board (“OTCBB”). The average of the high and
low prices for our Common Stock reported on February 4, 2011 was
$3.18.
|
(4)
|
The
registration fee is calculated pursuant to Rule 457(c). As of the date of
this prospectus, our Common Stock is quoted under the symbol "CEHD.OB" on
the Over-the-Counter Bulletin Board (“OTCBB”). The last reported sale
price of our Common Stock as of October 14, 2010 was
$3.80.
|
(5)
|
Consists
of shares of Common Stock underlying three year Series A warrants to
purchase an aggregate of 314,286 shares of Common Stock with an exercise
price of $2.19 per share.
|
(6)
|
Consists
of shares of Common Stock underlying three year Series B warrants to
purchase an aggregate of 314,286 shares of Common Stock with an exercise
price of $2.63 per share.
|
(7)
|
Consists
of shares of Common Stock underlying three year Series C warrants to
purchase an aggregate of 497,303 shares of Common Stock with an exercise
price of $3.70 per share.
|
(8)
|
Consists
of shares of Common Stock underlying three year Series D warrants to
purchase an aggregate of 497,303 shares of Common Stock with an exercise
price of $4.75 per share.
|
(9)
|
Consists
of shares of Common Stock underlying five year Series E warrants to
purchase an aggregate of 1,000,000 shares of Common Stock with an exercise
price of $0.25 per share.
|
(10)
|
$1,175
was previously paid.
|
The
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
6,842,002
Shares of Common Stock
CHINA
ELECTRONICS HOLDINGS, INC.
Common
Stock
PROSPECTUS
__________,
2011
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and it is not soliciting offers to buy these securities in any
state where the offer is not permitted.
SUBJECT
TO COMPLETION, DATED FEBRUARY 10, 2011
PRELIMINARY
PROSPECTUS
6,842,002
Shares
China
Electronics Holdings, Inc.
Common
Stock
This
prospectus relates to the resale by the Selling Stockholders of up to 6,842,002
shares of our Common Stock, $.0001 par value (“Common Stock”), including an
aggregate of 778,035 shares issued to 5 Selling Stockholders
pursuant to or in connection with a Share Exchange Agreement dated as of
July 9, 2010 (the “Share Exchange Agreement”), an aggregate of
1,628,572 shares of common stock issuable to 5 Selling Stockholders upon
exercise of warrants to purchase our Common Stock issued pursuant to the Share
Exchange Agreement, an aggregate of 1,989,211 shares of our Common Stock
issued to 106 Selling Stockholders in a series of private placements
(individually, a “Private Placement” and collectively the “Private Placements”)
pursuant to Subscription Agreements dated between July 9, 2010 and August 17,
2010 (the “Purchase Agreement”), an aggregate of 1,451,578 shares of our Common
Stock issued to 4 Selling Stockholders pursuant to the Share Exchange Agreement
and an aggregate of 994,606 shares of Common Stock issuable to
105 Selling Stockholders upon exercise of warrants to purchase our Common
Stock issued in the Private Placements.
All of
such shares may be sold by the Selling Stockholders. It is anticipated that the
Selling Stockholders will sell these shares of Common Stock from time to time in
one or more transactions, in negotiated transactions or otherwise, at prevailing
market prices or at prices otherwise negotiated (see “Plan of Distribution”). We
will not receive any proceeds from the sales by the Selling
Stockholders. Under the terms of the warrants, cashless exercise is
permitted in certain circumstances. We will not receive any proceeds from any
cashless exercise of the warrants, but will receive the exercise price of
warrants exercised on a cash basis. If all of the warrants covered by this
prospectus are exercised for cash, the Company would receive aggregate gross
proceeds of $5,967,069. We will pay all of the registration expenses
incurred in connection with this offering, but the Selling Stockholders will pay
any selling commissions, brokerage fees and related expenses.
There
is a limited market for our Common Stock. The shares are being offered by the
Selling Stockholders in anticipation of the continued development of a secondary
trading market in our Common Stock. We cannot give you any assurance that an
active trading market for our Common Stock will develop, or if an active market
does develop, that it will continue.
Our
Common Stock is listed on the OTC Bulletin Board and trades under the symbol
CEHD.OB. On February 1, 2011, the closing sale price of our Common
Stock was $2.80 per share.
Investing
in our Common Stock involves risks. See “Risk Factors” beginning on page
7.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal
offense.
The
date of this prospectus is ______, 2011
TABLE OF
CONTENTS
Page
|
||
Prospectus
Summary
|
1
|
|
Risk
Factors
|
7
|
|
Cautionary
Note Regarding Forward-Looking Statements
|
15
|
|
Use
of Proceeds
|
17
|
|
Market
for Common Equity and Related Stockholder Matters
|
17
|
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
19
|
|
Organizational
History of the Company and its Subsidiaries
|
33
|
|
Business
|
35
|
|
Description
of Property
|
42
|
|
Directors,
Executive Officers, Promoters and Control Persons
|
42
|
|
Transactions
With Related Persons, Promoters And Control Persons; Corporate
Governance
|
43
|
|
Legal Proceedings | 44 | |
Security
Ownership of Certain Beneficial Owners and Management
|
44
|
|
Selling
Stockholders
|
45
|
|
Description
of Securities
|
54
|
|
Shares
Eligible for Future Sale
|
57
|
|
Material
United States Federal Income Tax Considerations
|
58
|
|
Material
PRC Income Tax Considerations
|
61
|
|
Plan
of Distribution
|
63
|
|
Legal
Matters
|
65
|
|
Experts
|
65
|
|
Changes
in and Disagreements With Accountants
|
65
|
|
Where
You Can Find More Information
|
65
|
|
Index
to Financial Statements
|
F-1
|
ABOUT
THIS PROSPECTUS
You
should rely only on the information contained in this prospectus and any free
writing prospectus prepared by or on behalf of us or to which we have referred
you. We and the underwriter have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to offer or sell these securities. This prospectus does not constitute an offer
to sell or the solicitation of an offer to buy these securities in any
jurisdiction in which such offer or solicitation may not be legally made.
If any other information or representation is given or made, such information or
representation may not be relied upon as having been authorized by us or the
underwriter, and neither we nor the underwriter accept any liability in relation
thereto.
We
obtained statistical data, market data and other industry data and forecasts
used throughout, or incorporated by reference in, this prospectus from market
research, publicly available information and industry publications. Industry
publications generally state that they obtain their information from sources
that they believe to be reliable, but they do not guarantee the accuracy and
completeness of the information. While we believe that the
statistical data, industry data and forecasts and market research are reliable,
we have not independently verified the data. We have not sought the consent of
the sources to refer to their reports appearing or incorporated by reference in
this prospectus.
PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in this
prospectus. This summary does not contain all of the information you
should consider before investing in our common stock. You should read this
entire prospectus carefully, especially the “Risk Factors” section and our
consolidated financial statements and the related notes appearing at the end of
this prospectus, before making an investment decision. Unless the
context otherwise requires, the "Company", "we," "us," and "our," refer to (i)
China Electronics Holdings, Inc., a Nevada corporation (“China Electronics”),
(ii) China Electronic Holdings, Inc., a Delaware corporation (“CEH Delaware”),
and (iii) Lu’an Guoying Electronic Sales Co., Ltd., a wholly foreign enterprise
(“WOFE”), under the laws of the People’s Republic of China
(“Guoying”).
Our
Business
Through
our subsidiary, Guoying, we are engaged in the retail sale of consumer
electronics and appliances in the People’s Republic of China (the “PRC”), such
as solar heaters, refrigerators, air conditioners, televisions, and similar
items. We sell such products in certain rural markets in Anhui, Henan and Hubei
provinces.
We
started selling home appliances and electronics in 2002. During the fiscal year
ended December 31, 2009 (“fiscal 2009”), approximately 66% of our revenue
was due to the sale of solar water heaters, approximately 10.5% of our revenue
was due to the sale of refrigerators and approximately 6.5% of our revenue
was due to the sale of televisions. Approximately 69% of our net income for
fiscal 2009 was due to the sale of solar water heaters, approximately 12.7% of
our 2009 net income was due to the sale of refrigerators and approximately 8.0%
of our 2009 net income was due to the sale of televisions.
We
operate 3 company-owned stores, all of which are located in Lu’an City, Anhui
Province. We own and operate such stores and control all marketing, promotional,
management and operational aspects of these businesses. Such stores
operate under the Guoying brand name and we are their exclusive wholesaler and
distributor. As of December 31, 2010, we had 552 exclusive franchise
stores that operate under the Guoying brand name pursuant to cooperation
agreements with us. These franchise stores only sell merchandise that
we provide to them as their exclusive wholesaler. Such merchandise
includes Guoying branded products as well as products from Sony, Samsung and
LG. In addition to the exclusive franchise stores, as of December 31,
2010, 715 non-exclusive stores sold Guoying branded merchandise that we provide
as a wholesaler or distributor. Such merchandise includes Guoying
branded merchandise as well as products from Sony, Samsung and LG. Guoying is
one of many wholesalers that provide items to the non-exclusive stores, and such
stores may sell items provided by other companies, including Guoying’s
competitors. Approximately 3.3% of our revenue for fiscal 2009 was from the
company-owned stores, approximately 88.9% of our 2009 revenue was from the
exclusive franchise stores and approximately 7.8% of our 2009 revenue was from
the non-exclusive stores.
Our
wholesale business purchases consumer electronics and appliances from well-known
manufacturers or large distributors and sells them to the company-owned stores,
the exclusive franchise stores and the non-exclusive stores. Currently, 30% of
our products are supplied to us 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 televisions, air
conditioners, washing machines and micro-wave ovens. Guoying has
teamed up with Huangming and Huayang, the two largest manufacturers of solar
thermal products in China, to be their exclusive retail outlet in Lu’an. Some of
their energy efficient, “green” products include solar thermal water
heaters, solar panels (photovoltaic) and energy saving glass.
In
addition to providing wholesale merchandise purchased from manufacturers or
distributors, we provide refrigerators that are manufactured by one OEM
manufacturer, Shanghai Pengbai Electronic Co., Ltd. (“Pengbai”), under the
Company’s trademark “Guoying”. Guoying refrigerators have “3C” quality national
authentication certificates, which are mandatory in PRC for the sale of
refrigerators. During fiscal 2009, approximately 2% of our revenue and 2.5% of
our net income was from the sale of Guoying brand refrigerators. In August 2007,
Guoying entered into a 5-year OEM agreement with Pengbai, under which Pengbai
manufactures refrigerators for us to sell under the “Guoying” trademark. Guoying
sold a total of 30,000 refrigerators in 2007, 46,000 in 2008, 62,000 in 2009,
and 50,948 in 2010. On October 2, 2006, Guoying loaned Pengbai RMB 80 million
(approximately $12.12 million) in four installments of RMB 20 million each from
2006 to 2010. In consideration for the loan, Pengbai sells refrigerators to
Guoying at a discounted price. Pengbai is required to repay the loan by October
2017, with payments in four equal installments of RMB 20 million beginning in
October 2013. The loan is secured by all the assets of Pengbai and is interest
free.
Our
Growth Strategies
·
|
Develop New
Exclusive Franchise Stores. We plan to develop additional exclusive
franchise stores and intend to have at least 600 exclusive franchise
stores in service by the end of 2011. We plan for more than 20%
of such stores to be located in Henan and Hubei provinces. By developing
new exclusive franchise stores, we believe that the delivery and service
quality of such stores will be enhanced due to the proximity of such
stores to our distribution
centers.
|
·
|
Develop New
Company-Owned Stores. We plan to open 6-7 company-owned stores in
Lu’an City with at least one store located in each major county of Lu’an,
including Shucheng, Huoshan, Huoqiu and Jinzhai. A 1000-square-meter
shopping mall is scheduled to be established in Lu’an City in mid
2011.
|
·
|
Develop New
Non-Exclusive Stores. We plan to develop commercial relationships
with additional non-exclusive stores in order to have a total of 1,000
non-exclusive stores in service by the end of
2011.
|
·
|
Partnering
with well-known electric appliance manufactures. We will negotiate
with well-known brands in order to act as a wholesaler of these brands. We
currently sell Samsung washing machines and we are negotiating an
agreement with Samsung to sell refrigerators, air conditioners and
video-related Samsung products.
|
·
|
Developing
LED Wholesale and Manufacturing Business. In the future, we plan to
develop our own facility to manufacture LED products under the Guoying
brand name. We are currently negotiating with other major
electric appliance manufactures for sales of their products. We
also plan to enter into an exclusive sales agency agreement for LED
electronic lighting products with Shandong Huangming Solar Power Sales Co.
(“Shandong Huangming”) in the Lu An area in
2011.
|
·
|
Maintaining
Relationships with OEM Manufacturers. We intend to maintain a
favorable relationship with Pengbai, the manufacturer of our Guoying brand
refrigerators, so that we will be able to increase the number of
refrigerators that we order in order to expand our private label
refrigerator business in the
future.
|
We
anticipate funding our growth strategy from our working capital and below is a
summary of approximately how much we anticipate spending in order to achieve our
growth strategies:
Develop
new exclusive franchise stores
|
$ | 0.6 million | ||
Develop
new company-owned stores
|
$ | 3.4 million | ||
Develop
new non-exclusive stores
|
$ | 1.7 million | ||
Develop
additional OEM contracts
|
$ | 2.8 million | ||
Develop
LED manufacturing business
|
$ | 8 million |
2
Our
Corporate Structure
Our
current structure is set forth in the diagram below:
Company
Information
Our
principal executive offices are located at Building 3, Binhe District, Longhe
East Road, Lu’an City, Anhui Province, PRC 237000, and our telephone number is
011-86-564-3224888.
THE
OFFERING
Between
three months and 2 ½ years prior to the consummation of the Share Exchange
Agreement, dated as of July 9, 2010 (the “Share Exchange Agreement”), CEH
Delaware sold shares of common stock and warrants to investors in transactions
pursuant to Section 4(2) of the Securities Act of 1933 and Rule 506 of
Regulation D promulgated thereunder. On July 15, 2010 we consummated
the Share Exchange Agreement with certain Selling Stockholders. Pursuant to the
Share Exchange Agreement, on July 15, 2010, 10 former stockholders of our
subsidiary, CEH Delaware, transferred to us 100% of the outstanding shares of
common stock and preferred stock of CEH Delaware and 100% of the warrants to
purchase common stock of CEH Delaware 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 1,628,572 shares of our Common Stock. CEH Delaware’s
outstanding Series A warrants were exchanged on a one-for-one basis for Series A
warrants of the Company to purchase an aggregate of 314,286 shares of Common
Stock, with an exercise price of $2.19 per share. CEH Delaware’s
outstanding Series B warrants were exchanged on a one-for-one basis for Series B
warrants of the Company to purchase an aggregate of 314,286 shares of Common
Stock, with an exercise price of $2.63 per share. CEH Delaware’s
outstanding $1.00 warrants were exchanged on a one-for-one basis for Series E
warrants of the Company to purchase an aggregate of 1,000,000 shares of Common
Stock, with an exercise price of $0.25 per share. Pursuant to the
terms of the Series A, B and E warrants, the Company is required to register the
shares of Common Stock that are issuable upon the exercise of the
warrants.
On
July 15, 2010 we also consummated a Private Placement made pursuant to a
Subscription Agreement dated as of July 9, 2010 (the “Purchase Agreement”) with
certain of the Selling Stockholders, pursuant to which we sold units (the
“Units”) to such Selling Stockholders. Each Unit consists of four
shares of our Common Stock, a warrant to purchase one share of Common Stock at
an exercise price of $3.70 per share (a “Series C Warrant”) and a
warrant to purchase one share of Common Stock at an exercise price of
$4.75 per share (a “Series D Warrant”). Additional Private Placements
were consummated on July 26, 2010 and August 17, 2010. The aggregate gross
proceeds for the sale of the Units was $5,251,548 and in such Private
Placements, an aggregate of (a) 1,989,211 shares of our Common Stock, (b) Series
C Warrants to purchase an aggregate of 497,303 shares of our Common Stock and
(c) Series D Warrants to purchase an aggregate of 497,303 shares of our Common
Stock was sold. Pursuant to Section 9(d) of the Purchase Agreement,
the Company is required to register all of the shares of Common Stock and shares
of Common Stock underlying the warrants that were issued in the Private
Placement. Under Section 8 of the warrants issued by the Company,
shares of Common Stock issuable upon exercise of the warrants are required to be
registered pursuant to Section 9(d) of the Purchase
Agreement.
3
The
below table sets forth gross proceeds paid to the Company in the Private
Placements, fees paid by the Company in connection with the Private Placements
and the resulting net proceeds to the Company:
Gross
Proceeds
|
Fees
|
Net
Proceeds
|
||||||||
$ | 5,251,548 | $ | 525,155 | (1) | $ | 4,726,393 |
(1) Represents
an aggregate of success fees paid to Hunter Wise Securities, LLC and American
Capital Partners, LLC in connection with the offering. As additional
consideration, Hunter Wise Securities, LLC received a Series F warrant to
purchase 31,429 shares of Common Stock at an exercise price of $1.75 per share,
a Series F warrant to purchase 94,329 shares of Common Stock at an exercise
price of $2.64 per share and 180,000 shares of Common Stock. American
Capital Partners, LLC received a Series F warrant to purchase 104,592 shares of
Common Stock at an exercise price of $2.64 per share.
This
prospectus relates to the resale of the 6,842,002 shares of our Common Stock
issued to the Selling Stockholders and issuable to the Selling Stockholders upon
exercise of all of the warrants referred to in the preceding
paragraphs.
Issuer
|
China
Electronics Holdings, Inc.
|
|
Common
Stock outstanding prior to the Offering
|
16,775,113
shares
|
|
Common
Stock offered by the Selling Stockholders
|
6,842,002
shares
|
|
Total
shares of Common Stock to be outstanding after the Offering assuming
exercise of the Series A, B, C, D and E warrants registered on this
Registration Statement
|
19,398,291 shares
|
|
Use
of Proceeds
|
We
will not receive any proceeds from the sale of the shares of Common
Stock.
|
|
Our
OTC Bulletin Board Trading Symbol
|
CEHD.OB
|
|
Risk
Factors
|
You
should read the “Risk Factors” section of this prospectus for a discussion
of factors to consider carefully before deciding to invest in shares of
our Common Stock.
|
The
number of shares of our Common Stock that will be outstanding after this
offering is based on 16,775,113 shares of our Common Stock outstanding as
of February 3, 2011, and gives effect to the issuance of an aggregate of
2,623,178 shares of Common Stock to the Selling Stockholders upon exercise of
the Series A, B, C, D and E warrants to purchase our Common
Stock. The number of shares of our Common Stock that will be
outstanding after this offering does not include 230,350 shares of Common Stock
that are currently issuable upon exercise of our Series F warrants and 50,000
shares of Common Stock that are currently issuable upon exercise of our Series G
warrants. We are not required to register the shares of
Common Stock issuable upon exercise of our Series F and Series G warrants at
this time and we cannot estimate when or whether we will be required to register
such shares.
4
SUMMARY
CONSOLIDATED FINANCIAL DATA
The
following tables summarize our consolidated financial data for the periods
presented. You should read these tables together with the consolidated financial
statements and related notes appearing at the end of this prospectus, as well as
“Capitalization,” “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and the other financial information included
elsewhere in this prospectus. We have derived the consolidated statement of
operations data for the nine months ended September 30, 2010 and 2009 from our
unaudited consolidated financial statements included in this
prospectus. Our historical results are not necessarily indicative of
the results to be expected in any future period.
|
Nine months
ended September 30, 2010
|
Nine months
ended September 30, 2009
|
||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Net
Revenue
|
$ | 89,364,902 | $ | 25,721,159 | ||||
Cost
of goods sold
|
73,013,309 | 20,294,430 | ||||||
Gross
profit
|
16,351,593 | 5,426,729 | ||||||
Operating
expenses:
|
||||||||
Selling
expenses
|
1,561,949 | 37,145 | ||||||
General
and administrative expenses
|
1,469,436 | 50,652 | ||||||
Total
operating expenses
|
3,031,385 | 87,797 | ||||||
Net
Operating income
|
13,320,208 | 5,338,932 | ||||||
Other
income (expenses):
|
||||||||
Financial
income (expense)
|
(5,419 | ) | (648 | ) | ||||
Other
income
|
1,824,223 | - | ||||||
Other
expense
|
(41,956 | ) | - | |||||
Total
other income (expense)
|
1,776,848 | (648 | ) | |||||
Net
income before income taxes
|
15,097,056 | 5,338,284 | ||||||
Income
taxes
|
2,436 | 2,083 | ||||||
Net
income
|
$ | 15,094,620 | $ | 5,336,201 | ||||
Foreign
currency translation adjustment
|
675,543 | 35,627 | ||||||
Comprehensive
income
|
$ | 15,770,163 | 5,371,828 | |||||
Earnings
per share - basic
|
$ | 1.74 | $ | 0.39 | ||||
Earnings
per share - diluted
|
$ | 1.50 | $ | 0.39 | ||||
Weighted
average shares outstanding -basic
|
8,672,998 | 13,785,902 | ||||||
Weighted
average shares outstanding - diluted
|
10,086,801 | 13,785,902 |
5
Balance
Sheet Data:
September 30, 2010
|
December 31, 2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Cash
and cash equivalents
|
$ | 5,976,273 | $ | 64,736 | ||||
Trade
accounts receivable, net
|
$ | 7,304,508 | $ | 6,295,375 | ||||
Advance
to Suppliers
|
$ | 5,959,959 | $ | - | ||||
Inventories,
net
|
$ | 8,140,221 | 992,090 | |||||
Property
and equipment, net
|
$ | 8,321 | $ | 11,733 | ||||
Other
receivables - Long term
|
$ | 5,011,145 | $ | 12,831,849 | ||||
Total
assets
|
$ | 38,475,253 | $ | 20,195,783 | ||||
Total
current liabilities
|
$ | 1,477,410 | $ | 14,174,389 | ||||
Total
stockholders' equity
|
$ | 36,997,843 | $ | 6,021,394 | ||||
Total
liabilities and stockholders’ equity
|
$ | 38,475,253 | $ | 20,195,783 |
6
RISK
FACTORS
An
investment in our Common Stock involves a high degree of risk. You should
carefully consider the risks described below, together with all of the other
information included in this prospectus, before making an investment decision.
If any of the following risks actually occurs, our business, financial condition
or results of operations could suffer. In that case, the trading price of our
common stock could decline, and you may lose all or part of your
investment.
RISKS
RELATED TO OUR BUSINESS
Our
sales revenues are derived primarily from our exclusive franchise stores and
non-exclusive stores, and should any of them perform poorly or cease purchasing
wholesale merchandise from us, our sales results, revenues, net income,
reputation and competitive position would suffer.
We
sell most of our products through exclusive franchise stores and non-exclusive
stores. Though our sales persons visit the stores regularly, third party
store managers make decisions about order quantities and are responsible for the
daily operations of the stores. If factors either in or out of a store manager’s
control cause harm to a store’s business, the store’s income could decrease,
which would negatively impact our sales. If an exclusive franchise
store bearing our brand name performs poorly or is run improperly by such third
party store managers, our reputation could be adversely affected.
Additionally, if a large number of exclusive franchise stores and non-exclusive
franchise stores choose to cease purchasing products from us, we could
experience a material decrease in revenues and net income. There is no
termination provision in, or expiration of the term of, the exclusive franchise
agreements.
We
depend heavily on large suppliers and if any of our largest suppliers cease to
provide products to us, our business could be adversely
affected.
All of
the products purchased by the Company during the nine months ended September 30,
2010 were provided by twelve vendors, with three major vendors, Shandong
Huangming, Jiangsu Huayang Solar Power Sales Co. and Ynagzhou Huiyin Co.,Ltd.
accounting for 43.5%, 16.5% and 12.6% of our total purchases, respectively. All
of the products purchased by the Company during the nine months ended September
30, 2009 were provided by seven vendors, with three major vendors, Shandong
Huangming, Hier Hefei Ririshun Sales Co., and Jiangshu Huayang Solar Power Sales
Co. accounting for 52.2%, 26.2% and 14.9% of our total purchases, respectively.
If any of these vendors cease doing business with us, we will experience
significant reductions in our sales and income.
We
may not be able to effectively control and manage our growth, and a failure to
do so could adversely affect our operations and financial
condition.
We
also plan to expand our company-owned stores and develop manufacturing
capabilities for our new LED business. Planned expenditures for the stores and
manufacturing capabilities are $8-10 million. Even if we are able to
secure the funds necessary to implement our growth strategies (of which there
can be no assurance), we will face management, resource and other challenges in
expanding our current facilities, integrating acquired assets or businesses with
our own, and managing expanding product offerings. Failure to effectively deal
with increased demands on our resources could interrupt or adversely affect our
operations and cause production backlogs, longer product development time frames
and administrative inefficiencies. Other challenges involved with expansion,
acquisitions and operation include:
●
|
unanticipated
costs;
|
●
|
the
diversion of management’s attention for unanticipated business
concerns;
|
●
|
potential
adverse effects on existing business relationships with suppliers and
customers;
|
●
|
obtaining
sufficient working capital to support
expansion;
|
●
|
expanding
our product offerings and maintaining the high quality of our
products;
|
●
|
maintaining
adequate control of our expenses and accounting
systems;
|
●
|
successfully
integrating any future
acquisitions;
|
●
|
anticipating
and adapting to changing conditions in the electronics retail industry,
whether from changes in government regulations, mergers and acquisitions
involving our competitors, technological developments or other economic,
competitive or market dynamics;
and
|
7
●
|
outsourcing
the manufacture and production of our refrigerators to OEM manufacturers
may not give us sufficient control over the quality of those
products.
|
Even
if we do experience increased sales due to expansion, there may be a lag between
the time when the expenses associated with an expansion or acquisition are
incurred and the time when we recognize such benefits, which would affect our
earnings.
We
may not be able to hire and retain qualified personnel to support our growth and
if we are unable to do so, our ability to implement our business objectives
could be limited. Difficulties with hiring, employee training and other labor
issues could disrupt our operations.
Our
operations depend on the work of our sales persons and other employees. We may
not be able to retain those employees, successfully hire and train new employees
or integrate new employees into the Company. Any such difficulties would reduce
our operating efficiency and increase our costs of operations, and could harm
our overall financial condition.
Our
operations also depend in significant part upon the continued contributions of
our key technical and senior management personnel, including Mr. Hailong Liu,
and upon our ability to attract and retain additional qualified management,
technical, marketing and sales and support personnel for our operations. If one
or more of our senior executives or other key personnel are unable or unwilling
to continue in their present positions, we may not be able to replace them
within a reasonable time, which could result in disruption of our business and
an adverse effect on our financial condition and results of operations. None of
our senior management personnel have signed employment agreements. Significant
turnover in our senior management could significantly deplete the institutional
knowledge held by our existing senior management team. We depend on the skills
and abilities of these key employees in managing the technical, marketing and
sales aspects of our business, which could be harmed by turnover in the future.
Competition for senior management and personnel is intense, the pool of
qualified candidates is very limited, and we may not be able to retain the
services of our senior executives or senior personnel, or attract and retain
high-quality senior executives or senior personnel in the future. This failure
could limit our future growth and reduce the value of our common
stock.
The
consumer electronics and appliances retail industry in the PRC is competitive
and, unless we are able to compete effectively with competitor retailers, our
profits could suffer.
The
consumer electronics and appliances retail industry in the PRC has become highly
and increasingly competitive. Large national retailers such as Suning Appliance
and Guomei Appliance have expanded, and local and regional competition has
increased. Some of these companies have substantially greater financial,
marketing, personnel and other resources than we do.
Our
competitors could adapt more quickly to evolving consumer preferences or market
trends, have greater success in their marketing efforts, control supply costs
and operating expenses more effectively, or do a better job in formulating and
executing expansion plans. Increased competition may also lead to price wars,
counterfeit products or negative brand advertising, all of which may adversely
affect our market share and profit margins. Existing or new competitors could
receive contracts for which we compete due to events and factors beyond our
control, and expansion of large retailers into new locations may limit the
locations into which we may profitably expand. To the extent that our
competitors are able to take advantage of any of these factors, our competitive
position and operating results may suffer.
Because
we face intense competition, we must anticipate and quickly respond to changing
consumer demands more effectively than our competitors. In order to succeed in
implementing our business plan, we must achieve and maintain favorable
recognition of our private label brands (i.e. our Guoying branded products,
company-owned stores and exclusive franchise stores operating under our brand
name), effectively market our products to consumers, competitively price our
products, and maintain and enhance a perception of value for consumers. We must
also source and distribute our merchandise efficiently. Failure to accomplish
these objectives could impair our ability to compete with larger retailers and
could adversely affect our growth and profitability .
8
We
do not maintain product liability insurance or business interruption insurance,
and our property and equipment insurance does not cover the full value of our
property and equipment.
We
currently do not carry any product liability or other similar insurance or
business interruption insurance. If product liability litigation becomes more
commonplace in the PRC, we could be exposed to additional liability. Moreover,
we may have increased product liability exposure as we expand our sales into
international markets, like the United States, where product liability claims
are more prevalent.
We
may be required from time to time to recall products entirely or from specific
markets or batches. We do not maintain recall insurance. Additionally, our
property and equipment insurance does not cover the full value of our property
and equipment. In the event we do experience product liability claims
or a product recall, or suffer from a natural or other unexpected disaster,
business or government litigation, or any uncovered risks of operation, our
financial condition and business operations could be materially adversely
affected.
As
all of our operations and personnel are in the PRC, we may have difficulty
establishing adequate western style management, legal and financial
controls.
The
PRC has not adopted a Western style of management and financial reporting
concepts and practices. We may have difficulty in hiring and retaining a
sufficient number of qualified employees to work in the PRC. As a result, we may
experience difficulty in establishing accounting and financial controls,
collecting financial data, budgeting, managing our funds and preparing financial
statements, books and records and instituting business practices that meet
Western standards.
Our lack
of familiarity with Western practices generally and Section 404 specifically may
unduly divert management’s time and resources, which could have a material
adverse effect on our operating results. Further, if material weaknesses in our
internal controls over financial reporting are identified, this could result in
a loss of investor confidence in our financial reports, have an adverse effect
on our stock price and/or subject us to sanctions or investigation by regulatory
authorities.
RISKS
RELATED TO DOING BUSINESS IN CHINA
The Company faces the risk that
changes in the policies of the PRC government could have a significant impact
upon the business that the Company may be able to conduct in the PRC and the
profitability of such business.
The
PRC economy is in a transition from a planned economy to a market oriented
economy subject to five-year and annual plans adopted by the government that set
national economic development goals. Policies of the PRC government can have
significant effects on the economic conditions of the PRC. The PRC government
has confirmed that economic development will follow the model of a market
economy, but there can be no assurance that this will be the case. A
change in policies by the PRC government could adversely affect the Company’s
interests due to factors such as changes in laws, regulations or the
interpretation thereof, confiscatory taxation, restrictions on currency
conversion, imports or sources of supplies, or the expropriation or
nationalization of private enterprises. There can be no assurance that the
government will continue to pursue economic reform policies or that such
policies may not be significantly altered, especially in the event of a change
in leadership, social or political disruption, or other circumstances affecting
the PRC political, economic and social life.
The
PRC laws and regulations governing the Company’s business operations are
sometimes vague and uncertain. Any changes in such PRC laws and regulations may
have a material and adverse effect on the Company’s business.
There are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including but not limited to the laws and regulations
governing the Company’s business, or the enforcement and performance of the
Company’s arrangements with customers in the event of the imposition of
statutory liens, death, bankruptcy and criminal proceedings. The Company and any
future subsidiaries are considered foreign persons or foreign funded enterprises
under PRC laws, and as a result, the Company is required to comply with PRC laws
and regulations. These laws and regulations are sometimes vague and may be
subject to future changes, and their official interpretation and enforcement may
involve substantial uncertainty.
9
The
effectiveness of newly enacted laws, regulations or amendments may be delayed,
resulting in detrimental reliance by foreign investors. New laws and regulations
that affect existing and proposed future businesses may also be applied
retroactively. The Company cannot predict what effect the interpretation of
existing or new PRC laws or regulations may have on the Company’s
businesses.
New
labor laws in the PRC may adversely affect our results of
operations.
On
January 1, 2008, the PRC government promulgated the Labor Contract Law of
the PRC, or the New Labor Contract Law. The New Labor Contract Law
imposes greater liabilities on employers and significantly impacts the cost of
an employer’s decision to reduce its workforce. Further, it requires
certain terminations to be based upon seniority and not merit. In the event we
decide to significantly change or decrease our workforce, the New Labor Contract
Law could adversely affect our ability to enact such changes in a manner that is
most advantageous to our business or in a timely and cost effective manner, thus
materially and adversely affecting our financial condition and results of
operations.
A
slowdown or other adverse developments in the PRC economy may materially and
adversely affect the Company’s customers, demand for the Company’s products and
the Company’s business.
All of
the Company’s operations are conducted in the PRC and all of its revenue is
generated from sales in the PRC and we cannot
assure you that our historic growth will continue. In
addition, the PRC government exercises significant control over PRC economic
growth through the allocation of resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies. Efforts
by the PRC government to slow the pace of growth of the PRC economy could result
in reduced demand for our products. A slowdown in overall economic
growth, an economic downturn or recession or other adverse economic developments
in the PRC may materially reduce the demand for our products and materially and
adversely affect our business.
Inflation
in the PRC could negatively affect our profitability and growth.
In
recent years, the Chinese economy has experienced periods of rapid expansion and
highly fluctuating rates of inflation. During the past ten years, the rate
of inflation in China has been as high as 20.7% and as low as -2.2%. These
factors have led to the adoption by the Chinese government, from time to time,
of various corrective measures designed to restrict the availability of credit
or regulate growth and contain inflation. High inflation may in the future
cause the Chinese government to impose controls on credit and/or prices, or to
take other action, which could inhibit economic activity in China, reduce
demand, materially increase our costs, and harm the market for our products
and our Company.
Governmental
control of currency conversion may affect the value of an investment in the
Company and may limit our ability to receive and use our revenues
effectively.
At the
present time, the Renminbi, the currency of the PRC, is not a freely convertible
currency. We receive all of our revenue in Renminbi, which may need
to be converted to other currencies, primarily U.S. dollars, in order to be
remitted outside of the PRC. The PRC government imposes controls on
the convertibility of Renminbi into foreign currencies and, in certain cases,
the remittance of currency out of the PRC. Any future restrictions on currency
exchanges may limit our ability to use revenue generated in Renminbi to fund any
future business activities outside China or to make dividend or other payments
in U.S. dollars.
Effective
July 1, 1996, foreign currency “current account” transactions by foreign
investment enterprises are no longer subject to the approval of State
Administration of Foreign Exchange (“SAFE,” formerly, “State Administration of
Exchange Control”), but need only a ministerial review, according to the
Administration of the Settlement, Sale and Payment of Foreign Exchange
Provisions promulgated in 1996 (the “FX regulations”). “Current account” items
include international commercial transactions, which occur on a regular basis,
such as those relating to trade and provision of services. Distributions to
joint venture parties also are considered “current account transactions.”
Non-current account items, including direct investments and loans, known as
“capital account” items, remain subject to SAFE approval and companies are
required to open and maintain separate foreign exchange accounts for capital
account items. There are other significant restrictions on the convertibility of
Renminbi, including that foreign-invested enterprises may only buy, sell or
remit foreign currencies after providing valid commercial documents, at those
banks in China authorized to conduct foreign exchange business. Under current
regulations, we can obtain foreign currency in exchange for Renminbi from swap
centers authorized by the government. While we do not anticipate problems in
obtaining foreign currency to satisfy our requirements, we cannot be certain
that foreign currency shortages or changes in currency exchange laws and
regulations by the PRC government will not restrict us from freely converting
Renminbi in a timely manner.
10
The
fluctuation of the Renminbi may materially and adversely affect investments in
the Company and the value of our securities.
As the
Company relies principally on revenues earned in the PRC, any significant
revaluation of the Renminbi may materially and adversely affect the Company’s
cash flows, revenues and financial condition, and the price of our common stock
may be harmed. The value of the Renminbi depends to a large extent on
PRC government policies and the PRC’s domestic and international economic and
political developments, as well as supply and demand in the local market. Since
1994, the official exchange rate for the conversion of Renminbi to the U.S.
dollar had generally been stable and the Renminbi had appreciated slightly
against the U.S. dollar. However, on July 21, 2005, the PRC
government changed its policy of pegging the value of Renminbi to the U.S.
dollar. Under the new policy, Renminbi may fluctuate within a narrow
and managed band against a basket of certain foreign currencies. It is possible
that the PRC government could adopt a more flexible currency policy, which could
result in more significant fluctuation of Renminbi against the U.S.
dollar. We can offer no assurance that Chinese Renminbi will be
stable against the U.S. dollar or any other foreign currency.
For
example, to the extent that the Company needs to convert U.S. dollars it
receives from an offering of its securities into Renminbi for the Company’s
operations, appreciation of the Renminbi against the U.S. dollar could have a
material adverse effect on the Company’s business, financial condition and
results of operations. Conversely, if the Company decides to convert its
Renminbi into U.S. dollars for the purpose of making payments for dividends on
its common stock or for other business purposes and the U.S. dollar appreciates
against the Renminbi, the U.S. dollar equivalent of the Renminbi that the
Company converts would be reduced. In addition, the depreciation of significant
U.S. dollar denominated assets could result in a charge to the Company’s income
statement and a reduction in the value of these assets.
The
application of Chinese regulations relating to the overseas listing of Chinese
domestic companies is uncertain, and we may be subject to penalties for failing
to request approval of the Chinese authorities prior to listing our shares in
the U.S.
On
August 8, 2006, six Chinese government agencies, namely, the Ministry of
Commerce, or MOFCOM, the State Administration for Industry and Commerce, or
SAIC, the China Securities Regulatory Commission, or CSRC, the State
Administration of Foreign Exchange, or SAFE, the State Assets Supervision and
Administration Commission, or SASAC, and the State Administration for Taxation,
or SAT, jointly issued the Regulations on Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors, which we refer to as the “New M&A Rules”,
which became effective on September 8, 2006. The New M&A Rules purport,
among other things, to require offshore “special purpose vehicles,” that are (1)
formed for the purpose of overseas listing of the equity interests of Chinese
companies via acquisition and (2) are controlled directly or indirectly by
Chinese companies and/or Chinese individuals, to obtain the approval of the CSRC
prior to the listing and trading of their securities on overseas stock
exchanges. The Company has not sought any approvals under the New
M&A Rules.
There
are substantial uncertainties regarding the interpretation, application and
enforcement of the New M&A Rules and CSRC has yet to promulgate any written
provisions or formally declare or state whether the overseas listing of a
China-related company structured similar to ours is subject to the approval of
CSRC. Any violation of these rules could result in fines and other penalties on
our operations in China, restrictions or limitations on remitting dividends
outside of China, and other forms of sanctions that may cause a material and
adverse effect to our business, operations and financial
conditions.
11
The
new mergers and acquisitions regulations also established additional procedures
and requirements that are expected to make merger and acquisition activities by
foreign investors more time-consuming and complex, including requirements in
some instances that the Ministry of Commerce be notified in advance of any
change-of-control transaction in which a foreign investor takes control of a
Chinese domestic enterprise that owns well-known trademarks or China’s
traditional brands. We may grow our business in part by acquiring other
businesses. Complying with the requirements of the new mergers and acquisitions
regulations in completing this type of transactions could be time-consuming, and
any required approval processes, including CSRC approval, may delay or inhibit
our ability to complete such transactions, which could affect our ability to
expand our business or maintain our market share.
PRC
regulations relating to the establishment of offshore special purpose companies
by PRC residents may subject our PRC resident shareholders or our PRC subsidiary
to penalties, limit our ability to distribute capital to our PRC subsidiary,
limit our Chinese subsidiary’s ability to distribute funds to us, or otherwise
adversely affect us.
The
PRC State Administration of Foreign Exchange (“SAFE”) issued a public notice in
October 2005, or the SAFE Circular No. 75, requiring PRC residents to register
with the local SAFE branch before establishing or controlling any company
outside of China for the purpose of capital financing with assets or equities of
PRC companies, referred to in the SAFE Circular No. 75 as special purpose
vehicles, or SPVs. PRC residents who are shareholders of SPVs established before
November 1, 2005 were required to register with the local SAFE branch before
June 30, 2006. Further, PRC residents are required to file amendments to their
registrations with the local SAFE branch if their SPVs undergo a material event
involving changes in capital, such as changes in share capital, mergers and
acquisitions, share transfers or exchanges, spin-off transactions or long-term
equity or debt investments.
Our
current shareholders and/or beneficial owners may fall within the ambit of the
SAFE notice and be required to register with the local SAFE branch as required
under the SAFE notice. If so required, and if such shareholders and/or
beneficial owners fail to timely register their SAFE registrations pursuant to
the SAFE notice, or if future shareholders and/or beneficial owners of our
company who are PRC residents fail to comply with the registration procedures
set forth in the SAFE notice, this may subject such shareholders, beneficial
owners and/or our PRC subsidiary to fines and legal sanctions and may also limit
our ability to contribute additional capital to our PRC subsidiary, limit our
PRC subsidiary’s ability to distribute dividends to our company, or otherwise
adversely affect our business. To date, our current shareholders and
beneficial owners have not made any filings with the applicable SAFE
branch.
We
face uncertainty from the Circular on Strengthening the Administration of
Enterprise Income Tax on Non-resident Enterprises' Share Transfer, or Circular
698, released in December 2009 by China's State Administration of Taxation, or
the SAT, effective as of January 1, 2010.
Pursuant
to the Circular 698, where a foreign investor transfers the equity interests of
a Chinese resident enterprise indirectly via disposing of the equity interests
of an overseas holding company, which we refer to as an Indirect Transfer, and
such overseas holding company is located in a tax jurisdiction that: (i) has an
effective tax rate less than 12.5% or (ii) does not tax foreign income of its
residents, the foreign investor shall report such Indirect Transfer to the
competent tax authority of the Chinese resident enterprise. The Chinese tax
authority will examine the true nature of the Indirect Transfer, and if the tax
authority considers that the foreign investor has adopted an abusive arrangement
in order to avoid Chinese tax, they will disregard the existence of the overseas
holding company and re-characterize the Indirect Transfer and as a result, gains
derived from such Indirect Transfer may be subject to Chinese withholding tax at
the rate of up to 10%. Circular 698 also provides that, where a
non-Chinese resident enterprise transfers its equity interests in a Chinese
resident enterprise to its related parties at a price lower than the fair market
value, the competent tax authority has the power to make a reasonable adjustment
to the taxable income of the transaction.
Since
Circular 698 became effective on January 1, 2010, we cannot assure you that our
reorganization will not be subject to examination by Chinese tax authorities or
that any direct or indirect transfer of our equity interests in our Chinese
subsidiary via our overseas holding companies will not be subject to a
withholding tax of 10%.
12
We
may be exposed to liabilities under the Foreign Corrupt Practices Act, and any
determination that we violated the Foreign Corrupt Practices Act could harm our
business.
Although
we are currently not subject to these regulations, we anticipate that we will be
subject to the United States Foreign Corrupt Practices Act, or FCPA, and other
laws that prohibit U.S. companies from engaging in bribery or other prohibited
payments to foreign officials for the purpose of obtaining or retaining
business. Our activities in China create the risk of unauthorized payments or
offers of payments by one of the employees, consultants, sales agents or
distributors of our Company, even though these parties are not always subject to
our control. It is our policy to implement safeguards to discourage these
practices by our employees. However, our existing safeguards and any future
improvements may prove ineffective, and the employees, consultants, sales agents
or distributors of our Company may engage in conduct for which we might be held
responsible. Violations of the FCPA may result in severe criminal or civil
sanctions, and we may be subject to other liabilities, which could adversely
impact our business, operating results and financial condition.
Because
the Company’s principal assets are located outside of the United States and the
Company’s officers and directors reside outside of the United States, it may be
difficult for investors to enforce their rights in the U.S. based on U.S.
federal securities laws against the Company and the Company’s officers and
directors or to enforce U.S. court judgments against the Company or them in the
PRC.
The
Company is located in the PRC and substantially all of its assets are located
outside of the United States. The PRC does not have a treaty with
United States providing for the reciprocal recognition and enforcement of
judgments of courts. It may therefore be difficult for investors in
the United States to enforce their legal rights based on the civil liability
provisions of the United States federal securities laws against us in the courts
of either the United States or the PRC and, even if civil judgments are obtained
in courts of the United States, to enforce such judgments in PRC
courts. Further, it is unclear if extradition treaties now in effect
between the United States and the PRC would permit effective enforcement against
us or our officers and directors of criminal penalties, under the United States
federal securities laws or otherwise.
There
are substantial uncertainties regarding the interpretation and application of
PRC laws and regulations governing the validity and legality of call
options which are held by our Chairman and others and there can be no assurance
that the call options are not in breach of such laws and
regulations.
Under
a call option agreement with our Chairman Hailong Liu, Sherry Li, the holder of
11,556,288 shares of our Common Stock, has granted to Mr. Liu an option to
purchase all of her shares over the course of two years in installments upon
achievement of certain performance milestones by the Company. While we believe
that this arrangement is not governed by PRC laws and regulations, there are
substantial uncertainties regarding the interpretation and application of
current or future PRC laws and regulations, including regulations governing the
validity and legality of call options. Accordingly, we cannot assure you that
PRC government authorities will not determine that the call option agreement is
subject to PRC laws and regulations. If the call option agreement is deemed to
be governed by PRC laws and regulations, our Chairman may be required to
register with the local SAFE branch for his overseas direct investment in the
Company. Failure to make such SAFE registration may subject our Chairman to
fines and legal sanctions, and may also limit his ability to receive dividends
from our PRC subsidiary and remit his proceeds from their overseas investment
into the PRC as a result of foreign exchange control under PRC laws and
regulations.
The
cessation of tax exemptions and deductions by the Chinese government may affect
our profitability.
On
March 16, 2007, the National People’s Congress of China enacted a new tax law,
or the New Tax Law, whereby both foreign investment enterprises, or FIEs, and
domestic companies will be subject to a uniform income tax rate of 25%. On
November 28 2007, the
State Council of China promulgated the Implementation Rules of the New Tax Law,
the “Implementation Rules”. Both the New Tax Law and the Implementation Rules
have become effective on January 1, 2008. Both the New Tax Law and the
Implementation Rules provide that companies not entitled to tax exemption or
relevant preferential tax treatment shall be subject to 17% value added tax. 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 VATs. This is
approved by the PRC tax department. In the future, if the relevant tax
authorities determine that the Company is not eligible for preferential
treatment of VAT, loss of such preferential treatment may materially and
adversely affect our profits, business and financial
performance.
13
RISKS
RELATED TO OUR COMMON STOCK
Our
common stock is quoted on the OTC Bulletin Board which may have an unfavorable
impact on our stock price and liquidity.
Our
common stock is quoted on the Over-the-Counter Bulletin Board (the “OTCBB”).
The OTCBB is a significantly more limited market than the New York Stock
Exchange or NASDAQ. The quotation of our shares on the OTCBB may result in
a less liquid market for our common stock, could depress the trading price of
our common stock, could cause high volatility and price fluctuations, and could
have a long-term adverse impact on our ability to raise capital in the
future.
There is a limited trading market for
our common stock.
There
is currently a limited trading market on the OTCBB for our common stock, and
there can be no assurance that a less limited trading market will develop or be
sustained.
Certain
of our existing stockholders will control the outcome of matters requiring
stockholder approval, and their interests may not be aligned with the interests
of our other stockholders.
Sherry
Li is our majority stockholder, holding 11,556,288 shares of our Common Stock
(approximately 68.9 % of the outstanding shares of Common Stock as of February
3, 2011. As more particularly described in footnote (3) and (4) to the table
contained in “Security Ownership of Certain Beneficial Owners and Management,”
Ms. Li has entered into a voting trust agreement with, and granted options to,
our Chairman, Hailong Liu, to vote or purchase all 11,556,288 of her shares. As
a result, Mr. Liu will have the ability to control the election of
our directors and the outcome of corporate actions requiring stockholder
approval, such as changes to our articles of incorporation and by-laws and a
merger or a sale of our company or a sale of all or substantially all of our
assets. This concentration of voting power and control could have a significant
effect in delaying, deferring or preventing an action that might otherwise be
beneficial to our other stockholders and be disadvantageous to our stockholders
with interests different from those of our officers, directors and affiliates. .
Additionally, this significant concentration of share ownership may adversely
affect the trading price for our Common Stock because investors often perceive
disadvantages in owning stock in companies with controlling
stockholders.
The
elimination of monetary liability of the Company’s directors and officers under
the Nevada law and the existence of indemnification rights of the
Company’s directors, officers and employees may result in substantial
expenditures by the Company and may discourage lawsuits against the Company’s
directors and officers.
Under
Nevada law, a corporation may indemnify its directors, officers, employees and
agents under certain circumstances, including indemnification of such persons
against liability under the Securities Act of 1933, as amended (the “Securities
Act”). In addition, a corporation may purchase or maintain insurance on behalf
of its directors, officers, employees or agents for any liability incurred by
him in such capacity, whether or not the corporation has the authority to
indemnify such person. We do not currently maintain such
insurance.
These
provisions may eliminate the rights of the Company and its stockholders
(through stockholder’s derivative suits on behalf of the Company) to
recover monetary damages against a director, officer, employee or agent for
breach of fiduciary duty. Insofar as indemnification for liabilities arising
under the Securities Act may be provided for directors, officers, employees,
agents or persons controlling an issuer pursuant to the foregoing provisions,
the opinion of the Commission is that such indemnification is against public
policy as expressed in the Securities Act, and is therefore
unenforceable.
Shares
eligible for future sale may adversely affect the market price of our common
stock, as the future sale of a substantial amount of outstanding stock in the
public marketplace could reduce the price of our common stock.
As of
February 3, 2011, there were issued and outstanding (i) 16,775,113 shares of our
Common Stock,and (ii) immediately exercisable warrants to purchase an
aggregate of 2,903,528 shares of our Common Stock. We currently have obligation
to register the resale of an aggregate of 2,623,178 shares of our Common Stock,
including shares issuable upon exercise of warrants. Future sales of substantial
amounts of our Common Stock in the trading market could adversely affect market
price of our Common Stock.
14
Our
holding company structure may limit the payment of dividends.
We
have no direct business operations, other than ownership of our subsidiaries.
While we have no current intention of paying dividends, should we decide
to do so in the future, as a holding company, our ability to pay dividends and
meet other obligations depends upon the receipt of dividends or other payments
from our operating subsidiaries and other holdings and investments. In
addition, our operating subsidiaries may be subject to restrictions on their
ability to make distributions to us, including restrictions resulting from
restrictive covenants in loan agreements, restrictions on the conversion of
local currency into U.S. dollars or other hard currency and other regulatory
restrictions discussed below. If future dividends are paid in RMB,
fluctuations in the exchange rate for the conversion of RMB into U.S. dollars
may reduce the amount received by U.S. stockholders upon conversion of the
dividend payment into U.S. dollars.
The
Wholly-Foreign Owned Enterprise Law (1986), as amended, the Wholly-Foreign Owned
Enterprise Law Implementing Rules (1990), as amended and the Company Law of
China (2006) contain the principal regulations governing dividend distributions
by wholly foreign-owned enterprises. Under these regulations, wholly
foreign-owned enterprises may pay dividends only out of their accumulated
profits, if any, determined in accordance with Chinese accounting standards and
regulations. Our subsidiary in China is also required to set aside a certain
amount of its accumulated profits each year, if any, to fund certain reserve
funds. These reserves are not distributable as cash dividends except in the
event of liquidation and cannot be used for working capital purposes. The
Chinese government also imposes controls on the conversion of RMB into foreign
currencies and the remittance of currencies out of China. We may experience
difficulties in completing the administrative procedures necessary to obtain and
remit foreign currency for the payment of dividends from the profits of our
subsidiary in China.
Furthermore,
if our subsidiaries in China incur debt in the future, the instruments governing
the debt may restrict its ability to pay dividends or make other
payments. If we are unable to receive all of the revenues from our
operations through these contractual or dividend arrangements, we may be unable
to pay dividends on our common stock. In addition, under current PRC
law, we must retain a reserve equal to 10 percent of net income after taxes each
year, with the total amount of the reserve not to exceed 50 percent of
registered capital. Accordingly, this reserve will not be available
to be distributed as dividends to our shareholders.
Provisions
in our Articles of Incorporation could prevent or delay stockholders’ attempts
to replace or remove current management or otherwise adversely affect the rights
of the holders of our Common Stock.
Under
our Articles of Incorporation, our Board of Directors is authorized to issue
“blank check” preferred stock, with any designations, rights and preferences
they may determine. Any shares of preferred stock that are issued are likely to
have priority over our common stock with respect to dividend or liquidation
rights. If issued, preferred stock could be used under certain
circumstances as a method of discouraging, delaying or preventing a change in
control, which could have discourage bids to acquire us and thereby prevent
shareholders from receiving the maximum value for their
shares. Though we have no present intention to issue any additional
shares of preferred stock, there can be no assurance that preferred stock will
not be issued at some time in the future.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus contains certain forward-looking statements (as such term is defined
in Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934). The statements herein which are not historical
reflect our current expectations and projections about the Company’s future
results, performance, liquidity, financial condition, prospects and
opportunities and are based upon information currently available to us and our
management and our interpretation of what we believe to be significant factors
affecting our business, including many assumptions about future
events. Such forward-looking statements include statements regarding,
among other things:
|
·
|
our
ability to produce, market and generate sales of our private label
products;
|
15
|
·
|
our
ability to market and generate sales of the products that we sell as a
wholesaler;
|
|
·
|
our
ability to develop, acquire and/or introduce new
products;
|
|
·
|
our
projected future sales, profitability and other financial
metrics;
|
|
·
|
our
future financing plans;
|
|
·
|
our
plans for expansion of our stores and manufacturing
facilities;
|
|
·
|
our
anticipated needs for working
capital;
|
|
·
|
the
anticipated trends in our
industry;
|
|
·
|
our
ability to expand our sales and marketing
capability;
|
|
·
|
acquisitions
of other companies or assets that we might undertake in the
future;
|
|
·
|
our
operations in China and the regulatory, economic and political conditions
in China;
|
|
·
|
our
ability as a U.S. company to operate our business in China through our
subsidiary, Guoying; and
|
|
·
|
competition
existing today or that will likely arise in the
future.
|
Forward-looking
statements, which involve assumptions and describe our future plans, strategies,
and expectations, are generally identifiable by use of the words “may,”
“should,” “will,” “plan,” “could,” “target,” “contemplate,” “predict,”
“potential,” “continue,” “expect,” “anticipate,” “estimate,” “believe,”
“intend,” “seek,” or “project” or the negative of these words or other
variations on these or similar words. Actual results, performance,
liquidity, financial condition and results of operations, prospects and
opportunities could differ materially from those expressed in, or implied by,
these forward-looking statements as a result of various risks, uncertainties and
other factors, including the ability to raise sufficient capital to continue the
Company’s operations. These statements may be found under the sections of
this prospectus entitled “Risk Factors,” “Management’s Discussion and Analysis
of Financial Condition and Results of Operations ” and “Business,” as well as
elsewhere in this prospectus generally. Actual events or results may
differ materially from those discussed in forward-looking statements as a result
of various factors, including, without limitation, the risks outlined under
“Risk Factors” and matters described in this prospectus generally. In
light of these risks and uncertainties, there can be no assurance that the
forward-looking statements contained in this prospectus will in fact
occur.
Potential
investors should not place undue reliance on any forward-looking statements.
Except as expressly required by the federal securities laws, there is no
undertaking to publicly update or revise any forward-looking statements, whether
as a result of new information, future events, changed circumstances or any
other reason.
The
forward-looking statements in this prospectus represent our views as of the date
of this prospectus. Such statements are presented only as a guide about
future possibilities and do not represent assured events, and we anticipate that
subsequent events and developments will cause our views to change. You
should, therefore, not rely on these forward-looking statements as representing
our views as of any date after the date of this prospectus.
This
prospectus also contains estimates and other statistical data prepared by
independent parties and by us relating to market size and growth and other data
about our industry. These estimates and data involve a number of assumptions and
limitations, and potential investors are cautioned not to give undue weight to
these estimates and data. We have not independently verified the statistical and
other industry data generated by independent parties and contained in this
prospectus. In addition, projections, assumptions and estimates of our future
performance and the future performance of the industries in which we operate are
necessarily subject to a high degree of uncertainty and
risk.
16
Potential
investors should not make an investment decision based solely on the our
projections, estimates or expectations.
USE
OF PROCEEDS
We
will not receive any proceeds from the sale of the shares of Common Stock. To
the extent the warrants are exercised for cash, if they are exercised at all,
the Company will receive the exercise price for those warrants. Under the terms
of the warrants, cashless exercise is permitted in certain circumstances. The
Company intends to use any proceeds received from the exercise of warrants for
working capital and other general corporate purposes. The Company cannot make
assurances that any of the warrants will ever be exercised for cash or at all.
If all of the warrants covered by this prospectus are exercised for cash, the
Company would receive aggregate gross proceeds of $5,967,069.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Our
Common Stock is listed on the OTC Bulletin Board under the symbol “CEHD.OB.”
There were no reported quotations for our Common Stock during calendar years
2008 and 2009.
The
following table sets forth the high and low sales prices, without retail
mark-up, mark-down or commission, of our Common Stock during each calendar
quarter in the fiscal year ending December 31, 2010, and may not represent
actual transactions.
Fiscal Year 2010
|
High
|
Low
|
||||||
First
quarter
|
$ | 2.00 | $ | 2.00 | ||||
Second
quarter
|
$ | — | $ | — | ||||
Third
quarter
|
$ | 3.60 | $ | 2.00 | ||||
Fourth
quarter
|
$ | 6.40 | $ | 2.85 |
As of
February 3, 2011, there were 16,775,113 shares of our Common Stock outstanding.
Our shares of Common Stock are held by approximately 123 stockholders of record.
The number of record holders was determined based on the records of our transfer
agent and does not include beneficial owners of Common Stock whose shares are
held in the names of various security brokers, dealers, and registered clearing
agencies.
Securities
Authorized for Issuance under Equity Compensation Plans
We do not
have any equity compensation plans.
Dividend
Policy
There
are no restrictions in our Articles of Incorporation or By-laws that prevent us
from declaring dividends. The Nevada Revised Statutes, however, prohibit
us from declaring dividends where after giving effect to the distribution of the
dividend:
1.
|
we
would not be able to pay our debts as they become due in the usual course
of business, or
|
2.
|
our
total assets would be less than the sum of our total liabilities plus the
amount that would be needed to satisfy the rights of shareholders who have
preferential rights superior to those receiving the
distribution.
|
Because
we are a holding company, we rely entirely on dividend payments from our direct
wholly owned subsidiary, CEH Delaware, and in turn, the various direct and
indirect subsidiaries of CEH Delaware, who may, from time to time, be
subject to certain additional restrictions on its ability to make distributions
to us. PRC accounting standards and regulations currently permit payment of
dividends only out of accumulated profits, a portion of which must be set aside
to fund certain reserve funds. Our inability to receive all of the revenues from
our subsidiaries’ operations may create an additional obstacle to our ability to
pay dividends on our Common Stock in the future. Additionally, because the PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of the PRC, shortages in
the availability of foreign currency may occur, which could restrict our ability
to remit sufficient foreign currency to pay dividends.
17
We
currently intend to retain any future earnings to finance the development and
growth of our business and do not anticipate paying cash dividends on our Common
Stock in the foreseeable future, but will review this policy as circumstances
dictate. If in the future we are able to pay dividends and determine it is in
our best interest to do so, such dividends will be paid at the discretion of the
Board of Directors after taking into account various factors, including our
financial condition, operating results, capital requirements, restrictions
contained in any future financing instruments and other factors the Board of
Directors deems relevant.
18
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
China
Electronics was originally incorporated in Nevada on July 9, 2007 under the name
Buyonate, Inc. The Company was formed to develop and offer software products for
the creation of interactive digital software for children. However, upon a
change of control of the Company on March 29, 2010, the Company immediately
discontinued such business and began to search for target companies as
candidates for business combinations.
We
entered into the Share Exchange Agreement, dated as of July 9, 2010 with CEH
Delaware and certain stockholders and warrant holders of CEH Delaware (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 of CEH Delaware and 100% of the warrants to purchase
common stock of CEH Delaware 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 1,628,572 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, CEH Delaware purchased from our former principal
stockholder an aggregate of 4 million shares of our Common Stock and agreed to
the cancellation of such shares.
The
Share Exchange resulted in (i) a change in control due to ownership of
approximately 72.5% of the issued and outstanding shares of our Common Stock by
a former shareholder of CEH Delaware, (ii) CEH Delaware becoming our
wholly-owned subsidiary, and (iii) the appointment of certain nominees of the
former principal shareholder of CEH Delaware as our directors and officers and
the resignation of Mr. Ryan Cravey as our sole director, Chief Executive
Officer, Chief Financial Officer, Secretary and Treasurer. CEH Delaware is
considered the acquirer for accounting purposes, therefore, CEH Delaware’s
financial results are being presented below.
CEH
Delaware was incorporated in Delaware on November 15, 2007 for the purpose of
acquiring an existing company with continuing operations. On December 31, 2008
CEH Delaware entered into a Share Transfer Agreement with four shareholders of
Guoying, which resulted in Guoying becoming a wholly-owned subsidiary of
CEH Delaware. 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.
19
Results
of Operations
Three
Months Ended September 30, 2010 Compared with Three Months Ended September 30,
2009
Revenues
Our
net revenue for the three months ended September 30, 2010 was $33,579,597, an
increase of 137.2%, or $19,424,126, from $14,155,471 for the three months ended
September 30, 2009.
THREE MONTHS ENDED SEPTEMBER 30,
|
||||||||
2010
|
2009
|
|||||||
Net
revenue from exclusive franchise stores
|
$ | 15,941,130 | $ | 2,678,233 | ||||
Net
revenue from non-exclusive stores
|
15,215,724 | 1,645,322 | ||||||
Net
revenue from company-owned stores
|
2,422,743 | 9,831,916 | ||||||
Net
Revenue
|
$ | 33,579,597 | $ | 14,155,471 |
For
the three months ended September 30, 2010, net revenue from exclusive franchise
stores was $15,941,130, an increase of 495.2%, or $13,262,897, from $2,678,233
for the three months ended September 30, 2009. There were 99, or 30%, more
exclusive franchise stores as of September 30, 2010, compared to the number of
exclusive franchise stores as of September 30, 2009.
For
the three months ended September 30, 2010, net revenue from non-exclusive stores
was $15,215,724, an increase of 824.8%, or $13,570,403, from $1,645,322 for the
three months ended September 30, 2009. There were 158, or 152%, more
non-exclusive stores as of September 30, 2010 compared to the number of
non-exclusive stores as of September 30, 2009.
The
increased revenue from exclusive franchise stores and from non-exclusive stores
was due to our increased sales network, expanded products lines, and the
improved economic environment in China. Starting in 2010, we began to carry more
product lines, including Sony, LG and Hong Kong THTF Co., Ltd. By acting as a
wholesaler for these international brands, we are able to serve the needs of
high end customers in rural areas, attract more non-exclusive stores and occupy
additional space in non-exclusive stores. All of these factors contributed to
our increase in revenue.
For
three months ended September 30, 2010, net revenue from company-owned stores was
$2,422,743, a decrease of 75.4%, or $7,409,173, from $9,831,916 for the three
months ended September 30, 2009. The decreased revenue for company-owned stores
was mainly because the Company transferred its resources to develop exclusive
franchise stores and non-exclusive stores during the first three quarters of
2010. The Company believes that company-owned stores will continue to be an
important part of the Company’s network and business and that the revenue from
company-owned stores will increase in the coming year.
The
increased revenue from new product lines carried in 2010 was approximately
$19,037,961 for the three months ended September 30, 2010.
The
increased revenue from new stores opened in 2010 was approximately $867,565 for
the three months ended September 30, 2010.
Cost
of Goods Sold
Our
cost of goods sold for the three months ended September 30, 2010 was
$27,414,701, an increase of $16,904,857, or 160.8%, compared to $10,509,844 for
the three months ended September 30, 2009. The increase was mainly due to
the increase in sales.
20
THREE MONTHS ENDED SEPTEMBER 30,
|
||||||||
2010
|
2009
|
|||||||
Cost
of goods sold from exclusive franchise stores
|
$ | 13,681,842 | $ | 1,991,739 | ||||
Cost
of goods sold from non-exclusive stores
|
12,334,024 | 1,169,114 | ||||||
Cost
of goods sold from company-owned stores
|
1,398,835 | 7,348,991 | ||||||
Cost
of goods sold
|
$ | 27,414,701 | $ | 10,509,844 |
For
the three months ended September 30, 2010, cost of goods sold from exclusive
franchise stores was $13,681,842, an increase of 586.9%, or $11,690,103, from
$1,991,739 for the three months ended September 30, 2009. The increase was due
to the increase in revenue from exclusive franchise stores. The increase was
also because in 2010 we started to carry more expensive brands, such as Sony and
LG.
For
the three months ended September 30, 2010, cost of goods sold from non-exclusive
stores was $12,334,024, an increase of 955.0%, or $11,164,910, from $1,169,114
for the three months ended September 30, 2009. The increase was due to the
increase in revenue from non-exclusive stores. The increase was also because in
2010 we started to carry more expensive brands, such as Sony and
LG.
For
the three months ended September 30, 2010, cost of goods sold from company-owned
stores was $1,398,835, a decrease of 81.0 %, or $5,950,156, from $ 7,348,991 for
the three months ended September 30, 2009. The decrease was due to the decrease
in revenue from company-owned stores.
The
increased cost of goods sold from new product lines carried in 2010 was
approximately $15,232,291 for the three months ended September 30,
2010.
The
increased cost of goods sold from new stores opened in 2010 was approximately
$802,500 for the three months ended September 30, 2010.
Gross
Profit
Gross
profit for the three months ended September 30, 2010 was $6,164,896, an increase
of $2,519,270, or approximately 69.1%, compared to $3,645,627 for the three
months ended September 30, 2009.
For
the three months ended September 30, 2010, gross profit for exclusive franchise
stores was $2,259,288, an increase of 229.11%, or $1,572,794, from $686,494 for
the three months ended September 30, 2009. The increase was due to the increased
revenue from exclusive franchised stores.
For
the three months ended September 30, 2010, gross profit for non-exclusive stores
was $2,881,701, an increase of 505.14%, or $2,405,493, from $476,208 for the
three months ended September 30, 2009. The increase was due to the increased
revenue from non-exclusive stores.
For
the three months ended September 30, 2010, gross profit for company-owned stores
was $1,023,908, a decrease of 58.76%, or $1,459,017, from $2,482,925 for the
three months ended September 30, 2009. The decrease was due to the decreased
revenue from company-owned stores.
The
increased gross profit from new product lines carried in 2010 was approximately
$3,805,671 for the three months ended September 30, 2010.
The
increased gross profit from products sold by new stores opened in 2010 was
approximately $1,200,000 for the three months ended September 30,
2010.
Gross
Profit Rate
Gross
profit rate for the three months ended September 30, 2010 was 18.36%, a decrease
of approximately 28.71%, compared to 25.75% for the three months ended September
30, 2009. The decrease was mainly due to the change of the products that we sell
and our selling strategy.
21
For
the three months ended September 30, 2010, gross profit rate for exclusive
franchise stores was 14.17%, a decrease of approximately 44.71%, compared to
25.63% for the three months ended September 30, 2009. The decrease was due to a
change of the products that we sell and our selling strategy. In order to
develop exclusive stores, we offered lower wholesale prices than we offered to
non-exclusive stores. Also in 2010, we started to carry well-known brands such
as Sony and LG that had a lower gross profit rate.
For
the three months ended September 30, 2010, gross profit rate for non-exclusive
stores was 18.94%, a decrease of approximately 34.56%, compared to 28.94% for
the three months ended September 30, 2009. The decrease was due to a change of
the products that we sell and our selling strategy. In order to develop
exclusive stores, we offered lower wholesale prices than we offered to
non-exclusive stores. Also in 2010, we started to carry well-known brands such
as Sony and LG that had a lower gross profit rate.
For
the three months ended September 30, 2010, gross profit rate for company-owned
stores was 42.26%, an increase of approximately 67.35%, compared to 25.25% for
the three months ended September 30, 2009. The increase was due to the focus of
company-owned stores on high profit rate products for the three months ended
September 30, 2010.
Gross
profit rate from new product lines carried in 2010 was approximately 19.99% for
the three months ended September 30, 2010.
Gross
profit rate from new stores opened in 2010 was approximately 20% for the three
months ended September 30, 2010.
Operating
Expenses
Operating
expenses for the three months ended September 30, 2010 were $2,193,108, an
increase of $2,161,800, or 6,904.8%, from $31,308 for the three months ended
September 30, 2009.
Selling
expenses for the three months ended September 30, 2010 were $768,344, an
increase of $756,274, or 6,266.0%, from $12,069 for the three months ended
September 30, 2009. The increase was due to the increase in sales and business
expansion. The increased sales expenses mainly include increased shipping and
handling expenses.
General
and administrative expenses for the three months ended September 30, 2010 were
$1,424,764, an increase of $1,405,525, or 7,305.6%, from $19,239 for the three
months ended September 30, 2009. The increase was mainly due to the
increased cost of being a public company starting July 2010. We incurred
approximately $800,000 in professional expenses, including legal, accounting and
audit expenses, for the three months ended September 30, 2010. The increase also
related to the expansion of our PRC business.
Net
Operating Income
Our
net operating income for the three months ended September 30, 2010 was
$3,971,788, an increase of $357,469, or 9.9%, from $3,614,319 for the same
period in 2009. The increase was due to increased sales, offset by increased
costs of good sold and operating expenses.
Net
Income
Our
net income for the three months ended September 30, 2010 was $5,748,326, an
increase of $2,135,991, or 59.13%, from $3,612,335 for the same period in 2009.
The increase resulted from other income due to dividends payable to employees
that were forgiven by the employees. On December 31, 2008, Guoying’s board
approved a resolution that RMB 74,407,470 (approximately $10,915,576) would be
allocated as dividend payable to shareholders, and RMB12, 401,245 (approximately
$1,819,263) would be allocated as welfare payable to employees. In May 2010,
Guoying’s board passed a resolution withdrawing the dividend declared in 2008.
In June 2010, the original shareholders of Guoying signed agreements waiving
their rights to receive the dividends declared in 2008. Dividends payable to
shareholders forgiven by the shareholders were re-classed as equity. Dividends
payable to employees forgiven by the shareholders were recorded as other income.
There is no dividend declared for the year ended December 31, 2009 or for the
nine months period ended September 30, 2010.
22
Nine
Months Ended September 30, 2010 Compared with Nine Months Ended September 30,
2009
Revenues
Our
net revenue for the nine months ended September 30, 2010 was $89,364,902, an
increase of 247.4%, or $63,643,743, from $25,721,159 for the nine months ended
September 30, 2009.
2010
|
2009
|
|||||||
Net
revenue from exclusive franchise stores
|
$ | 47,293,651 | $ | 8,579,729 | ||||
Net
revenue from non-exclusive stores
|
35,370,277 | 5,453,226 | ||||||
Net
revenue from company-owned stores
|
6,700,974 | 11,688,204 | ||||||
Net
Revenue
|
$ | 89,364,902 | $ | 25,721,159 |
For
the nine months ended September 30, 2010, net revenue from exclusive franchise
stores was $47,293,651, an increase of 451.2%, or $38,713,922, from $8,579,729
for the nine months ended September 30, 2009. There were 99, or 30%, more
exclusive franchise stores as of September 30, 2010 compared to the number of
exclusive franchise stores as of September 30, 2009.
For
the nine months ended September 30, 2010, net revenue from non-exclusive stores
was $35,370,277, an increase of 548.6%, or $29,917,052, from $5,453,226 for the
nine months ended September 30, 2009. There were 158, or 152%, more
non-exclusive stores as of September 30, 2010 compared to the number of
non-exclusive stores as of September 30, 2009.
The
increased revenue from exclusive franchise stores and from non-exclusive stores
was due to our increased sales network, expanded products lines, and the
improved economic environment in China. Starting in 2010, we began to carry more
product lines, including Sony, LG and Hong Kong THTF Co., Ltd.. By acting as a
wholesaler for these international brands, we are able to serve the needs of
high end customers in rural areas, attract more non-exclusive stores and occupy
additional space in non-exclusive stores. All of these factors contributed to
our increase in revenue.
For
nine months ended September 30, 2010, net revenue from company-owned stores was
$6,700,974, a decrease of 42.7%, or $4,987,231, from $11,688,204 for the nine
months ended September 30, 2009. The decreased revenue from company-owned stores
was mainly because the Company had transferred its resources to develop
exclusive franchise stores and non-exclusive stores for the first three quarters
in 2010. Looking forward, the Company believes that company-owned stores will
continue to be an important part of the Company’s network and that the revenue
from company-owned stores will increase in the coming year.
The
increased revenue from new product lines carried in 2010 was approximately
$33,896,470 for the nine months ended September 30, 2010.
The
increased revenue from new stores opened in 2010 was approximately $26,264,483
for the nine months ended September 30, 2010.
The
new stores opened in 2010 sold new product lines of approximately
$17,642,875 during the nine months ended September 30, 2010.
23
Cost
of Goods Sold
Our
cost of goods sold for the nine months ended September 30, 2010 was $73,013,309,
an increase of $52,718,879, or 259.8%, compared to $20,294,430 for the nine
months ended September 30, 2009.
NINE MONTHS ENDED SEPTEMBER 30,
|
||||||||
2010
|
2009
|
|||||||
Cost
of goods sold from exclusive franchise stores
|
$ | 38,763,858 | $ | 6,777,986 | ||||
Cost
of goods sold from non-exclusive stores
|
28,740,472 | 4,253,516 | ||||||
Cost
of goods sold from company-owned stores
|
5,508,979 | 9,262,928 | ||||||
Cost
of goods sold
|
$ | 73,013,309 | $ | 20,294,430 |
For
the nine months ended September 30, 2010, cost of goods sold from exclusive
franchise stores was $38,763,858, an increase of 471.9%, or $31,985,872, from
$6,777,986 for the nine months ended September 30, 2009. The increase was due to
the increase in revenue from exclusive franchise stores. The increase was also
because in 2010 we started to carry more expensive brands, such as Sony and
LG.
For
the nine months ended September 30, 2010, cost of goods sold from non-exclusive
stores was $28,740,472, an increase of 575.7%, or $24,486,955, from $4,253,516
for the nine months ended September 30, 2009. The increase was due to the
increase in revenue from non-exclusive stores The increase was also because in
2010 we started to carry more expensive brands, such as Sony and
LG.
For
the nine months ended September 30, 2010, cost of goods sold from our owned
stores was $5,508,979, a decrease of 40.53%, or $3,753,949, from $9,262,928 for
the nine months ended September 30, 2009. The decrease was due to decreased
sales in our owned stores.
The
increased cost of goods sold from new product lines carried in 2010 was
approximately $27,610,821 for the nine months ended September 30,
2010.
The
increased cost of goods sold from new stores opened in 2010 was approximately
$2,407,500 for the nine months ended September 30, 2010.
Gross
Profit
Gross
profit for the nine months ended September 30, 2010 was $16,351,593, an increase
of $10,924,864, or approximately 201.3%, compared to $5,426,729 for the nine
months ended September 30, 2009.
For
the nine months ended September 30, 2010, gross profit for exclusive franchise
stores was $8,529,793, an increase of 373.42%, or $6,728,050, from $1,801,743
for the nine months ended September 30, 2009. The increase was due to the
increased revenue from exclusive franchise stores.
For
the nine months ended September 30, 2010, gross profit for non-exclusive stores
was $6,629,806, an increase of 452.62%, or $5,430,096, from $1,199,710 for the
nine months ended September 30, 2009. The increase was due to the increased
revenue from non-exclusive stores.
For
the nine months ended September 30, 2010, gross profit for company-owned stores
was $1,191,993, a decrease of 50.85%, or $1,233,283, from $2,425,276 for the
nine months ended September 30, 2009. The decrease was due to the decreased
revenue from company-owned stores.
The
increased gross profit from new product lines carried in 2010 was approximately
$6,280,776 for the nine months ended September 30, 2010.
The
increased gross profit from products sold by new stores opened in 2010 was
approximately $3,200,000 for the nine months ended September 30,
2010.
24
Gross
Profit Rate
Gross
profit rate for the nine months ended September 30, 2010 was 18.30%, a decrease
of approximately 13.27%, compared to 21.10% for the nine months ended September
30, 2009. The decrease was mainly due to a change of the products that we sell
and our selling strategy.
For
the nine months ended September 30, 2010, gross profit rate for exclusive
franchise stores was 18.04%, a decrease of approximately 14.12%, compared to
21.00% for the nine months ended September 30, 2009. The decrease of gross
profit rate in exclusive franchise stores was due to a change of the products
that we sell and our selling strategy. In order to develop exclusive stores, we
provided very attractive prices. Also in 2010, we started to carry well-known
brands, such as Sony and LG, with a lower gross profit rate.
For
the nine months ended September 30, 2010, gross profit rate for non-exclusive
stores was 18.74%, a decrease of approximately 14.80%, compared to 22.00% for
the nine months ended September 30, 2009. The decrease of gross profit rate in
non-exclusive stores was due to a change of the products that we sell and our
selling strategy. In order to develop exclusive stores, we provided very
attractive prices. Also in 2010, we started to carry well-known brands, such as
Sony and LG, with a lower gross profit rate.
For
the nine months ended September 30, 2010, gross profit rate for company-owned
stores was 17.79%, a decrease of approximately 14.27%, compared to 20.75% for
the nine months ended September 30, 2009. The decrease of gross profit rate in
company-owned stores was because during the first six months of 2010
company-owned stores attempted to sell products in stock for a lower
profit.
Gross
profit rate from new product lines carried in 2010 was approximately 18.53% for
the nine months ended September 30, 2010.
Gross
profit rate from new stores opened in 2010 was approximately 20% for the nine
months ended September 30, 2010.
Operating
Expenses
Operating
expenses for the nine months ended September 30, 2010 were $3,031,385, an
increase of $2,943,588, or 3,352.7%, from $87,797 for the nine months ended
September 30, 2009.
Selling
expenses for the nine months ended September 30, 2010 were $1,561,949, an
increase of $1,524,805, or 4,105.0%, from $37,145 for the nine months ended
September 30, 2009. The increase was due to the increase in sales and business
expansion. The increased sales expenses mainly consist of increased shipping and
handling expenses.
General
and administrative expenses for the nine months ended September 30, 2010 were
$1,469,436, an increase of $1,418,784, or 2,801.0%, from $50,652 for the nine
months ended September 30, 2009. The increase was mainly due to the increased
cost of being a public company starting July 2010. We have incurred about
$800,000 in professional expenses, including legal, accounting and audit
expenses, for the nine months ended September 30, 2010. The increase also
related to the expansion of our PRC business.
Net
Operating Income
Our
net operating income for the nine months ended September 30, 2010 was
$13,320,208, an increase of $7,981,276, or 149.5%, from $5,338,932 for the same
period in 2009. The increases were due to increased sales, offset by increased
costs of good sold and operating expenses.
Net
Income
Our
net income for the nine months ended September 30, 2010 was $15,094,620, an
increase of $9,758,419, or 182.87%, from $5,336,201 for the same period in 2009.
The increase resulted from other income due to dividends payable to employees
that were forgiven by the employees.
25
On
December 31, 2008, Guoying’s board approved a resolution that RMB 74,407,470
(approximately $10,915,576) would be allocated as a dividend payable to
shareholders, and RMB 12,401,245 (approximately $1,819,263) would be allocated
as welfare payable to employees. In May 2010, the Guoying board passed a
resolution withdrawing the dividend declared in 2008. In June 2010, the original
shareholders of Guoying signed agreements waiving their rights to receive
dividends declared in 2008. Dividends payable to shareholders forgiven by the
shareholders were re-classed into equity. Dividend payable to employees forgiven
by the shareholders was recorded as other income. There was no dividend declared
for the year ended December 31, 2009 or for the nine month period ended
September 30, 2010.
Income
Taxes Expense
Income
Taxes
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the nine months ended September 30, 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
|
25.00 | 25.00 | ||||||
China
income tax exemption
|
(24.98 | ) | (24.96 | ) | ||||
Total
provision for income taxes
|
0.02 | % | 0.04 | % |
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 September 30, 2010 and 2009 are $1,485 and $760,
respectively. The income tax expenses for the nine months ended September 30,
2010 and 2009 are $2,436 and $2,083, respectively. There can be no
assurance that such de minimis 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 or during the nine months ended September 30, 2010 that have, or are
reasonably likely to have, a current or future material affect on our financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
Liquidity
and Capital Resources
As of
September 30, 2010, we had cash and cash equivalents of $5,976,273. We have
historically funded our working capital needs with amounts 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.
We had no material
commitments for capital expenditures as of September 30, 2010.
26
The
following table sets forth a summary of our cash flows for the periods
indicated:
September 30, 2010
|
September 30, 2009
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Net
cash provided by (used in) operating activities
|
$ | 7,505,520 | $ | (90,085 | ) | |||
Net
cash used in investing activities
|
(5,752,773 | ) | - | |||||
Net
cash provided by financing activities
|
4,068,751 | - | ||||||
Effect
of rate changes on cash
|
90,039 | 74,527 | ||||||
Increase
(decrease) in cash and cash equivalents
|
5,911,537 | (15,558 | ) | |||||
Cash
and cash equivalents, beginning of period
|
64,736 | 33,600 | ||||||
Cash
and cash equivalents, end of period
|
$ | 5,976,273 | $ | 18,042 |
Operating
Activities
Net
cash provided by operating activities was $7,505,520 for the nine months ended
September 30, 2010, compared to net cash used in operating activities of $90,085
for the nine months ended September 30, 2009, an increase of $7,595,605, or
8,431.6%. The increase of net cash provided by operating activities was
primarily due to an increase of cash provided by increased net income resulting
from greater sales, and decrease of accounts receivable due to collection of
accounts receivable. During the nine months ended September 30, 2010, the
Company developed its sales network by increasing more stores and developed its
product lines by carrying more product lines, such as Sony, LG and Hong Kong
THTF Co., Ltd. This allows the Company to cover a larger geographic area and
meet a larger variety of customer needs. Not only did sales increase but our
accounts receivable were collected faster compared to the same period last
year.
Investing
Activities
Net
cash used in investing activities was $5,752,773 for the nine months ended
September 30, 2010, compared to $0 for the nine months ended September 30, 2009.
The increase was mainly because $5,884,000 was deposited to acquire a land use
right during the nine months ended September 30, 2010.
Financing
Activities
Net
cash provided by financing activities was $4,068,751 for the nine months
ended September 30, 2010, compared to $0 for the nine months ended September 30,
2009. The increase was mainly due to the $4,154,069 in cash that was received
through share issuance during the nine months ended September 30,
2010.
Year
Ended December 31, 2009 Compared with Year Ended December 31,
2008
Revenues
Our
net revenue for the year ended December 31, 2009 was $47,671,380, a decrease of
13.5%, or $7,435,797, from $55,107,177 for the year ended December 31,
2008.
2009
|
2008
|
|||||||
Net
revenue from exclusive franchise stores
|
$ | 29,358,234 | $ | 29,539,441 | ||||
Net
revenue from non-exclusive stores
|
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 |
27
For
the year ended December 31, 2009, net revenue from exclusive franchise stores
was $29,358,234, an increase of 0.6%, or $181,207, from $29,539,441 for the year
ended December 31, 2008. The net revenue from exclusive franchise stores is
stable.
For
the year ended December 31, 2009, net revenue from non-exclusive stores was
$17,589,402, a decrease of 21.1%, or $4,695,933, from $22,285,335 for the year
ended December 31, 2008. The decrease in net revenue from non-exclusive stores
was mainly due to the Company’s discontinuance of the Sanyo and Chunlan
brands.
For
the year ended December 31, 2009, net revenue from company-owned stores was
$723,745, a decrease of 78.0%, or $2,558,656, from $3,282,401 for the year ended
December 31, 2008. The decreased revenue for company-owned stores was mainly
because the Company transferred its resources to develop exclusive franchise
stores and non-exclusive stores and because the Company discontinued one product
line in the year ended December 31, 2009. Looking forward, the Company believes
that the company-owned stores will still be an important part of the Company’s
network, and believes that the revenue from company-owned stores will increase
in the long term.
The
total net revenue from two discontinued brands decreased approximately
$7,206,000 in the year ended December 31, 2009 compared to the same period
2008.
The
Company expects to continue to expand in the coming twelve months by developing
relationships with more exclusive franchise stores and non-exclusive stores. The
number of stores will depend on the economy, qualification of stores, and other
factors.
Cost
of Goods Sold
Our
cost of goods sold for the year ended December 31, 2009 was $37,766,469, a
decrease of $9,338,523, or 19.8%, compared to $47,104,992 for the year ended
December 31, 2008. The increase was mainly due to the increase in
sales.
2009
|
2008
|
|||||||
Cost
of goods sold from exclusive franchise stores
|
$ | 23,427,871 | $ | 25,522,077 | ||||
Cost
of goods sold from non-exclusive stores
|
13,800,013 | 18,725,161 | ||||||
Cost
of goods sold from company-owned stores
|
538,585 | $ | 2,857,754 | |||||
Cost
of goods sold
|
$ | 37,766,469 | 47,104,992 |
For
the year ended December 31, 2009, cost of goods sold from exclusive franchise
stores was $23,427,871, a decrease of 8.2%, or $2,094,206, from $25,522,077 for
the year ended December 31, 2008. The decrease was due to the change of the
products that we sell. In the year ended December 31, 20009, additional lower
cost products were sold due to market demand.
For
the year ended December 31, 2009, cost of goods sold from non-exclusive stores
was $13,800,013, a decrease of 26.3%, or $4,925,148, from $18,725,161 for the
year ended December 31, 2008. The decrease was due to the decreased sales and
revenue from non-exclusive stores.
For
the year ended December 31, 2009, cost of goods sold from our owned stores was
$538,585, a decrease of 81.2%, or $2,319,169, from $2,857,754 for the year ended
December 31, 2008. The decrease was due to the decreased sales and revenue from
company-owned stores.
28
The
total cost of goods sold from two discontinued brands decreased approximately
$5,452,000 in the year ended December 31, 2009 compared to the same period
2008.
Gross
Profit
Gross
profit for the 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 year ended
December 31, 2008.
For
the year ended December 31, 2009, gross profit for exclusive franchise stores
was $5,930,363, an increase of 47.62%, or $1,912,999, from $4,017,364 for the
year ended December 31, 2008. The increase was mainly due to the decreased cost
of goods sold.
For
the year ended December 31, 2009, gross profit for non-exclusive stores was
$3,789,389, an increase of 6.44%, or $229,215, from $3,560,174 for the year
ended December 31, 2008. The increase was due to a change of the products that
we sell.
For
the year ended December 31, 2009, gross profit for company-owned stores was
$185,160, a decrease of 56.40%, or $239,487, from $424,647 for the year ended
December 31, 2008. The decrease was due to decreased revenue.
The
gross profit from discontinued product lines decreased approximately $3,805,671
for the year ended December 31, 2009 compared to the year ended December 31,
2008.
Gross
Profit Rate
Gross
profit rate for the year ended December 31, 2009 was 20.78%, an increase of
approximately 43.08%, compared to 14.52% for the year ended December 31, 2008.
The decrease was mainly due to a change of the products that we sell and our
selling strategy.
For
the year ended December 31, 2009, gross profit rate for exclusive franchise
stores was 20.20%, an increase of approximately 48.53%, compared to 13.60% for
the year ended December 31, 2008. The increase of gross profit rate in exclusive
franchise stores was due to a change of the products that we sell and our
selling strategy.
For
the year ended December 31, 2009, gross profit rate for non-exclusive stores was
21.54%, an increase of approximately 34.85%, compared to 15.98% for the year
ended December 31, 2008. The increase of gross profit rate in non-exclusive
stores was due to a change of the products that we sell and our selling
strategy.
For
the year ended December 31, 2009, gross profit rate for company-owned stores was
25.58%, an increase of approximately 97.75%, compared to 12.94% for the year
ended December 31, 2008. The increase of gross profit rate was due to the
Company’s focus on high profit rate products during the year ended December 31,
2009.
Operating
Expenses
Operating
expenses for the year ended December 31, 2009 were $159,668, a decrease of
$7,797,921, or 98.0%, from $7,957,589 for the year ended December 31,
2008.
Selling
expenses for the year ended December 31, 2009 were $47,838, a decrease of
$222,948, or 82.3%, from $270,786 for the year ended December 31, 2008. The
decrease was due to decreased shipping and handling expenses as the Company has
requested that the stores pick up or pay for such expenses.
General
and administrative expenses for the year ended December 31, 2009 were $111,830,
a decrease of $1,881,048, or 94.4%, from $1,992,878 for the year ended December
31, 2008. The decrease was mainly due to cost control. Bad debt expenses
for the year ended December 31, 2009 were $0, a decrease of $5,693,925, from
$5,693,925 for the year ended December 31, 2008.
29
Net
Operating Income
Our
net operating income for the year ended December 31, 2009 was $9,745,244, an
increase of $9,700,648, or 21,752.3%, from $44,596 for the year ended December
31, 2008. The increase was mainly due to increased gross profit and decreased
operating expenses.
Net
Income
Our
net income for the year ended December 31, 2009 was $9,743,245, an increase of
$9,698,723, or 21,784.1%, from $44,522 for the year ended December 31, 2008. The
increase was mainly due to increased profit and decreased operating
expenses.
Income
Taxes Expense
Income
Taxes
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the years ended December 31, 2009 and 2008:
2009
|
2008
|
|||||||
U.S.
Statutory rates
|
34.0 | % | 34.0 | % | ||||
Foreign
income not recognized in USA
|
(34.0 | ) | (34.0 | ) | ||||
China
income taxes
|
25.00 | 25.00 | ||||||
China
income tax exemption
|
(25.00 | ) | (25.00 | ) | ||||
Total
provision for income taxes
|
0.00 | % | 0.00 | % |
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 September 30, 2010 and 2009 are $1,485 and $760,
respectively. The income tax expenses for the nine months ended September 30,
2010 and 2009 are $2,436 and $2,083, respectively. There can be no
assurance that such de minimis 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,
2008 or during the years ended December 31, 2009 that have, or are
reasonably likely to have, a current or future material affect on our financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
Liquidity
and Capital Resources
As of
December 31, 2009, we had cash and cash equivalents of $64,736. 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.
We had
no material commitments for capital expenditures as of December 31,
2009.
30
The
following table sets forth a summary of our cash flows for the periods
indicated:
December 31, 2009
|
December 31, 2008
|
|||||||
Net
cash used in operating activities
|
$ | (3,249 | ) | $ | (1,081,511 | ) | ||
Net
cash used in investing activities
|
(4,692 | ) | - | |||||
Net
cash provided by financing activities
|
- | - | ||||||
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 |
Operating
Activities
Net
cash used in operating activities was $3,249 for the year ended December 31,
2009, compared to net cash used in operating activities of $1,081,511 for the
year ended December 31, 2008, a decrease of $1,078,262, or 99.7%. The decrease
of net cash provided by operating activities was primarily due to an increase of
cash resulting from increased net income, mainly due to the result of greater
sales, and decrease of accounts receivable due to collection of accounts
receivable.
Investing
Activities
Net
cash used in investing activities was $4,692 for the year ended December
31, 2009, compared to $0 for the year ended December 31, 2008. The increase was
mainly because $4,692 was invested to acquire fixed assets during the year ended
December 31, 2009.
Financing
Activities
Net
cash provided by financing activities was $0 for the years ended December
31, 2009 and 2008.
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. The Company’s revenue from sales is
presented as gross revenue. Payments received before all of the relevant
criteria for revenue recognition are satisfied are recorded as customer
deposits. Customer deposits amounted to $0 and $1,333,091 as of September 30,
2010 and December 31, 2009, respectively.
Our products delivered to
customers are checked on site by customers and, once the products are accepted
by customers, the customers sign acceptance notices as evidence of delivery and
completion of sales.
Rewards
or incentives given to our customers are 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 amount has been approved by the PRC national and tax departments for
March 2007 through 2010.
31
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. Initial franchise fees were not received from
exclusive franchise stores. Franchise fees from non-exclusive stores are
accrued as unearned franchise revenue when received and are recognized as
revenue when the non-exclusive stores covered by the fees open, which is
generally when we have fulfilled all significant obligations, which include only
having one store per village, free delivery and free post-sale service 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 orders and dispose
of products.
Recent
Accounting Pronouncements
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
February 2010, the FASB issued Accounting Standards Update 2010-09 (ASU
2010-09), "Subsequent Events (Topic 855)." The amendments remove the
requirements for an SEC filer to disclose a date, in both issued and revised
financial statements, through which subsequent events have been reviewed.
Revised financial statements include financial statements revised as a result of
either correction of an error or retrospective application of U.S. GAAP. ASU
2010-09 is effective for interim or annual financial periods ending after June
15, 2010. The provisions of ASU 2010-09 did not have a material effect on the
Company's consolidated financial statements.
In
February 2010, the FASB issued Accounting Standards Update 2010-10 (ASU
2010-10), "Consolidation (Topic 810)." The amendments to the consolidation
requirements of Topic 810 resulting from the issuance of Statement 167 are
deferred for a reporting entity's interest in an entity (1) that has all the
attributes of an investment company or (2) for which it is industry practice to
apply measurement principles for financial reporting purposes that are
consistent with those followed by investment companies. An entity that qualifies
for the deferral will continue to be assessed under the overall guidance on the
consolidation of variable interest entities in Subtopic 810-10 (before the
Statement 167 amendments) or other applicable consolidation guidance, such as
the guidance for the consolidation of partnerships in Subtopic 810-20. The
deferral is primarily the result of differing consolidation conclusions reached
by the International Accounting Standards Board ("IASB") for certain investment
funds when compared with the conclusions reached under Statement 167. The
deferral is effective as of the beginning of a reporting entity's first annual
period that begins after November 15, 2009, and for interim periods within that
first annual reporting period, which coincides with the effective date of
Statement 167. Early application it not permitted. The provisions of ASU 2010-10
are effective for the Company beginning in 2010. The adoption of ASU 2010-10 did
not have a material impact on the Company's consolidated financial
statements.
32
In
March 2010, the FASB issued Accounting Standards Update 2010-11 (ASU 2010-11),
"Derivative and Hedging (Topic 815)." All entities that enter into contracts
containing an embedded credit derivative feature related to the transfer of
credit risk that is not only in the form of subordination of one financial
instrument to another will be affected by the amendments in this Update because
the amendments clarify that the embedded credit derivative scope exception in
paragraph 815-15-15-8 through 15-9 does not apply to such contracts. ASU 2010-11
is effective at the beginning of the reporting entity's first fiscal quarter
beginning after June 15, 2010. The adoption of such standard does not have a
material impact on the Company's consolidated financial
statements.
In
April 2010, the FASB issued Accounting Standards Update 2010-13 (ASU 2010-13),
"Compensation - Stock Compensation (Topic 718)." This Update provides amendments
to Topic 718 to clarity that an employee share-based payment award with an
exercise price denominated in the currency of a market in which a substantial
portion of the entity's equity securities trades should not be considered to
contain a condition that is not a market, performance, or service condition.
Therefore, an entity would not classify such an award as a liability if it
otherwise qualifies as equity. The amendments in ASU 2010-13 are effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2010. The provisions of ASU 2010-13 are not expected to have
a material effect on the Company's consolidated financial
statements.
In
July 2010, the FASB issued an accounting update to provide guidance to enhance
disclosures related to the credit quality of a company's financing receivables
portfolio and the associated allowance for credit losses. Pursuant to this
accounting update, a company is required to provide a greater level of
disaggregated information about its allowance for credit loss with the objective
of facilitating users' evaluation of the nature of credit risk inherent in the
company's portfolio of financing receivables, how that risk is analyzed and
assessed in arriving at the allowance for credit losses, and the changes and
reasons for those changes in the allowance for credit losses. The revised
disclosures as of the end of the reporting period are effective for the Company
beginning in the second quarter of fiscal 2011, and the revised discourses
related to activities during the reporting period are effective for the Company
beginning in the third quarter of fiscal 2011. The Company is currently
evaluating the impact of this accounting update on its financial
disclosures.
ORGANIZATIONAL
HISTORY OF THE COMPANY AND ITS SUBSIDIARIES
China
Electronics was incorporated in Nevada on July 9, 2007 under the name Buyonate,
Inc. The Company was formed to develop and offer software products for the
creation of interactive digital software for children. However, upon a
change of control of the Company on March 29, 2010, the Company immediately
discontinued such business and began to search for target companies as
candidates for business combinations.
On
July 15, 2010 we consummated the Share Exchange Agreement with certain Selling
Stockholders. Pursuant to the Share Exchange Agreement, on July 15, 2010, 10
former stockholders of our subsidiary, CEH Delaware, transferred to us 100% of
the outstanding shares of common stock and preferred stock of CEH Delaware and
100% of the warrants to purchase common stock of CEH Delaware 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 1,628,572 shares of our Common
Stock. CEH Delaware’s outstanding Series A warrants were exchanged on a
one-for-one basis for Series A warrants of the Company to purchase an aggregate
of 314,286 shares of Common Stock, with an exercise price of $2.19 per
share. CEH Delaware’s outstanding Series B warrants were exchanged on a
one-for-one basis for Series B warrants of the Company to purchase an aggregate
of 314,286 shares of Common Stock, with an exercise price of $2.63 per
share. CEH Delaware’s outstanding $1.00 warrants were exchanged on a
one-for-one basis for Series E warrants of the Company to purchase an aggregate
of 1,000,000 shares of Common Stock, with an exercise price of $0.25 per
share. In connection with the closing of the Share Exchange Agreement, CEH
Delaware purchased from our former principal stockholder an aggregate of 4
million shares of our Common Stock and agreed to the cancellation of such
shares.
Effective
August 3, 2010, CEH Merger Corp., a Nevada corporation newly formed by the
Company for the purposes of merging into the Company, merged into the Company.
In connection with the merger and pursuant to the Articles of Merger filed with
the Nevada Secretary of State, Buyonate, Inc. changed its name to China
Electronics Holdings, Inc. No securities of the Company were issued in
connection with the merger. The merger and name change were approved by the
Financial Industry Regulatory Authority ("FINRA") and the Common Stock began
trading under the symbol “CEHD.OB” on August 23, 2010.
33
CEH
Delaware owns 100% of the capital stock of Guoying. Guoying is a wholly
foreign-owned enterprise, or “WFOE,” under the laws of the PRC by virtue of its
status as a wholly-owned subsidiary of a non-PRC company, CEH
Delaware.
During
the period from July 15, 2010 to August 17, 2010 we consummated a series of
Private Placements of our Common Stock and warrants to purchase our Common Stock
pursuant to a Subscription Agreement dated as of July 9, 2010 (the “Purchase
Agreement”). Pursuant to the Purchase Agreement we sold to 105 investors for an
aggregate gross purchase price of $5,251,548 an aggregate of (a) 1,989,211
shares of our Common Stock, (b) three year Series C Warrants to purchase an
aggregate of 497,303 shares of our Common Stock for $3.70 per share and (c)
three year Series D Warrants to purchase an aggregate of 497,303 shares of our
Common Stock for $4.75 per share.
Our
Corporate Structure
As set
forth in the following diagram, following our acquisition of CEH Delaware, CEH
Delaware became and currently is our direct, wholly-owned
subsidiary.
34
BUSINESS
Overview
Through
our subsidiary, Guoying, we are engaged in the retail sale of consumer
electronics and appliances in the People’s Republic of China (the “PRC”), such
as solar heaters, refrigerators, air conditioners, televisions, and similar
items. We sell such products in certain rural markets in Anhui, Henan and Hubei
provinces.
We
started selling home appliances and electronics in 2002. During the fiscal year
ended December 31, 2009 (“fiscal 2009”), approximately 66% of our revenue
was due to the sale of solar water heaters, approximately 10.5% of our revenue
was due to the sale of refrigerators and approximately 6.5% of our revenue
was due to the sale of televisions. Approximately 69% of our net income for
fiscal 2009 was due to the sale of solar water heaters, approximately 12.7% of
our 2009 net income was due to the sale of refrigerators and approximately 8.0%
of our 2009 net income was due to the sale of televisions.
We
operate 3 company-owned stores, all of which are located in Lu’an City, Anhui
Province. As of December 31, 2010, we had 552 exclusive franchise stores that
operate under the Guoying brand name pursuant to cooperation agreements with
us. These franchise stores only sell merchandise that we provide to them
as their exclusive wholesaler. Such merchandise includes Guoying branded
products as well as products from Sony, Samsung and LG. In addition to the
exclusive franchise stores, as of December 31, 2010, 715 non-exclusive stores
sold Guoying branded merchandise that we provide as a wholesaler or
distributor. Such merchandise includes Guoying branded merchandise as well
as products from Sony, Samsung and LG. Guoying is one of many wholesalers that
provide items to the non-exclusive stores, and such stores may sell items
provided by other companies, including Guoying’s competitors. Approximately 3.3%
of our revenue for fiscal 2009 was from the company-owned stores, approximately
88.9% of our 2009 revenue was from the exclusive franchise stores and
approximately 7.8% of our 2009 revenue was from the non-exclusive
stores.
Our
wholesale business purchases consumer electronics and appliances from well-known
manufacturers or large distributors and sells them to the company-owned stores,
the exclusive franchise stores and the non-exclusive stores. Currently, 30% of
our products are supplied to us 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 televisions, air
conditioners, washing machines and micro-wave ovens. Guoying has teamed up
with Huangming and Huayang, the two largest manufacturers of solar thermal
products in China, to be their exclusive retail outlet in Lu’an. Some of their
energy efficient, “green” products include solar thermal water heaters,
solar panels (photovoltaic) and energy saving glass.
In
addition to providing wholesale merchandise purchased from manufacturers or
distributors, we provide refrigerators that are manufactured by one OEM
manufacturer, Shanghai Pengbai Electronic Co., Ltd. (“Pengbai”), under the
Company’s trademark “Guoying”. Guoying refrigerators have “3C” quality national
authentication certificates, which are mandatory in PRC for the sale of
refrigerators. During fiscal 2009, approximately 2% of our revenue and 2.5% of
our net income was from the sale of Guoying brand refrigerators. In August 2007,
Guoying entered into a 5-year OEM agreement with Pengbai, under which Pengbai
manufactures refrigerators for us to sell under the “Guoying” trademark. Guoying
sold a total of 30,000 refrigerators in 2007, 46,000 in 2008, 62,000 in 2009,
and 50,948 in 2010. On October 2, 2006, Guoying loaned Pengbai RMB 80 million
(approximately $12.12 million) in four installments of RMB 20 million each from
2006 to 2010. In consideration for the loan, Pengbai sells refrigerators to
Guoying at a discounted price. Pengbai is required to repay the loan by October
2017, with payments in four equal installments of RMB 20 million beginning in
October 2013. The loan is secured by all the assets of Pengbai and is interest
free.
35
Retail
Operations
The
various types of stores are described below:
Company-owned
stores
We own
and operate 3 company-owned stores, which sell Guoying branded products as well
as other merchandise that we provide as the exclusive wholesaler. Two of the
company-owned stores focus on the sale of solar thermal products, one with an
area of 100 square meters and the other with an area of 60 square meters. The
third company-owned store is a general store with an area of 180 square meters,
which carries solar thermal products, refrigerators, air conditioners,
televisions and other products. Our offices are located on the second floor of
the general company-owned store. We currently lease all of the company-owned
stores.
Exclusive
Franchise Stores
As of
December 31, 2010, 552 exclusive franchise stores operated under the Guoying
brand name. The exclusive franchise stores are owned and operated by third
parties under our brand name pursuant to cooperation agreements with the
Company. Such stores sell both Guoying branded products and other products
that we provide as the exclusive wholesaler. Guoying is the only
wholesaler providing products to our exclusive franchise stores. The exclusive
franchise stores are located in rural areas around Lu’an City and in Henan and
Hubei provinces, and the primary customers of these stores are residents of the
local towns and villages. The store owners arrange for or lease the operating
space for the exclusive franchise stores. Guoying makes deliveries to each store
and upon delivery, the stores pay in cash the wholesale price of the products
provided. After receiving orders from such stores we are generally able to
deliver the merchandise within two to three hours to stores located in or near
Lu’an City or within three days to stores that are further away. Due
to the PRC “Rural consumer electronics and appliances” plan, which is available
to some of our stores, Guoying is able to offer the exclusive franchise stores
certain discounts based on the quantity of their purchases.
We
have signed cooperation agreements with each exclusive franchise store with a
term ranging from 1 year to 3 years, subject to renewals. The average
remaining term under most of the cooperation agreements is 3 years, and most of
the agreements were renewed in November 2010. Pursuant to the cooperation
agreements, we provide loans to store owners to facilitate the establishment of
the exclusive franchise stores. The loans are interest free, unsecured loans,
which are payable in a single installment no later than three years from the
date of the loan. Each loan is made in the form of cash and products, in an
amount of up to 40% of the cost of establishing the store. The specific amount
of each loan varies depending on factors including location of the store and the
economy of the area, the consumption capacity of the store and the size of the
store. The average value of products provided to the store owners in
connection with the loans ranges from RMB 201,744 to RMB 341,5480 and varies
based on the factors discussed above and the total amount of the loan. In
consideration of the loan, the exclusive franchise stores exclusively purchase
products from Guoying.
Non-exclusive
stores
As of
December 31, 2010, we provided merchandise to 715 non-exclusive stores as a
wholesaler. Such stores are owned and operated by third parties and are
located in the rural areas around Lu’an City and in Henan and Hubei provinces.
These stores sell both Guoying branded merchandise and other merchandise
manufactured by other companies and sold to the stores by the Company pursuant
to franchise agreements and sales agreements with the Company. These
stores also buy merchandise from other wholesalers, including Guoying’s
competitors. The non-exclusive stores pay the Company cash upon the
Company’s delivery of products. Under the franchise agreements, each
non-exclusive store pays Guoying an annual fee of 5,000 RMB (approximately
$735).
The
below table lists company-owned stores, exclusive franchise stores and
non-exclusive stores grouped by the province in the PRC in which they are
located:
Province
|
Company-owned
stores
|
Exclusive franchise
stores
|
Non-exclusive
stores
|
|||
Anhui
|
3
|
527
|
684
|
|||
Henan
|
13
|
12
|
||||
Hubei
|
10
|
19
|
36
Our
Warehouses
We
currently distribute products to company-owned stores, exclusive franchise
stores and non-exclusive stores from two warehouses located within Lu’an city,
which are leased by Guoying. We engage third parties to transport the
products from our warehouses to the stores. 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.
Our
Private Label Brands
We
have agreements with one OEM manufacturer, Pengbai, pursuant to which they
manufacture our private label brand refrigerators. These
refrigerators are labeled with the Company’s trademark “Guoying”, and we
distribute such refrigerators to our company-owned stores, exclusive franchise
stores and non-exclusive stores. Guoying branded refrigerators have “3C”
quality national authentication certificates, which are mandatory in PRC for the
sale of refrigerators. The term of the agreement is valid from July 2,
2010 to July 2, 2013.
Land
Use Right
We
entered into a Land Use Right Purchase Agreement on October 28, 2010 and a
supplemental Deposit Agreement on December 28, 2010 with the management
committee of Pingqiao Industrial Park (the “Pingqiao Committee”), under which
the Pingqiao Committee granted us a land use right for 300 Chinese acres where
our LED manufacturing facility will be built. 120 Chinese acre of this
land is for commercial use and 180 Chinese acre of this land is for industrial
use. Pursuant to the agreement, we have paid the deposit for this parcel of land
in amount of RMB 100 million by December 31, 2010.
Industry
Background
According
to information published by Xinhua News Agency on October 23, 2007,
approximately 56% of China’s population currently resides in rural areas of
China, thereby causing rural residents to be 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. Despite the increase in average
income, many retailers do not prioritize the rural area and we believe that such
area has significant growth potential.
We
believe that there are several reasons for the potential development of rural
consumer electronics and appliances markets.
According
to information published by China Economic News dated December 9, 2010, the
central government has increased the income of the rural population by reducing
the amount of tax paid by farmers. Increased income of consumers living in rural
areas combined with continuing improvements in the rural power network, rural
transportation, and rural communication make the rural market extremely
favorable for home appliances and electronics.
Second,
the Chinese government has initiated a rural home appliance and electronics
rebate program, called the “Rural Consumer Electronics” plan. The plan provides
that the maximum sales price of electronics is fixed at a price which is usually
equal to the market price of the same products in urban areas, but allows rural
consumers to receive a 13% rebate from the government on their purchases of
electronics.
Third,
the current consumer electronics and appliances markets in big PRC cities like
Beijing, Shanghai, and Shenzhen are already saturated by electronics stores,
which leads to very lean margins. Although some competitors have announced
interest in the rural market, none of our current competitors have established
any significant presence in the rural markets. Success of established brand
names in cities is not necessarily an indicator of success in rural areas. We
believe that a majority of the rural population has not seen or heard of the
retail chains that exist in the cities.
37
Additionally,
rural consumers have different tastes and values than city consumers according
to a market research published by Shandong Agriculture University dated January
3, 2000. For example, the ratio of functionality to cost is the most important
factor for rural consumers in deciding which appliances to purchase. However,
product colors also 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 popular in cities. As a result, much research is necessary to
fully understand the outlook of rural consumers.
Our
Growth Strategies
·
|
Develop New
Exclusive Franchise Stores. We plan to develop additional exclusive
franchise stores and intend to have at least 600 exclusive franchise
stores in service by the end of 2011. We plan for more than 20% of
such stores to be located in Henan and Hubei provinces. By developing new
exclusive franchise stores, we believe that the delivery and service
quality of such stores will be enhanced due to the proximity of such
stores to our distribution
centers.
|
·
|
Develop New
Company-Owned Stores. We plan to open 6-7 company-owned stores in
Lu’an City with at least one store located in each major county of Lu’an,
including Shucheng, Huoshan, Huoqiu and Jinzhai. A 1000-square-meter
shopping mall is scheduled to be established in Lu’an City in mid
2011.
|
·
|
Develop New
Non-Exclusive Stores. We plan to develop commercial relationships
with additional non-exclusive stores in order to have a total of 1,000
non-exclusive stores in service by the end of
2011.
|
·
|
Partnering
with well-known electric appliance manufactures. We will negotiate
with well-known brands in order to act as a wholesaler of these brands. We
currently sell Samsung washing machines and are negotiating an agreement
with Samsung to sell refrigerators, air conditioners and video-related
Samsung
|
·
|
Developing
LED Wholesale and Manufacturing Business. In the future, we plan to
develop our own facility to manufacture LED products under the Guoying
brand name. We are currently negotiating with other major electric
appliance manufactures for sales of their products. We also plan to
enter into an exclusive sales agency agreement for LED electronic lighting
products with Shandong Huangming Solar Power Sales Co. (“Shandong
Huangming”) in the Lu An area in
2011.
|
·
|
Maintaining
Relationships with OEM Manufacturers. We intend to maintain a
favorable relationship with Pengbai, the manufacturer of our Guoying brand
refrigerators, so that we will be able to increase the number of
refrigerators that we order in order to expand our private label
refrigerator business in the
future.
|
We
anticipate funding our growth strategy from our working capital and below is a
summary of approximately how much we anticipate spending in order to achieve our
growth strategies:
Develop
new exclusive franchise stores
|
$ | 0.6 million | ||
Develop
new company-owned stores
|
$ | 3.4 million | ||
Develop
new non-exclusive stores
|
$ | 1.7 million | ||
Develop
additional OEM contracts
|
$ | 2.8 million | ||
Develop
LED manufacturing business
|
$ | 8 million |
Raw
Materials and Suppliers
Approximately
95% of the cost of sales is the purchase price of products.
38
Our
principal suppliers of merchandise in 2010, in terms of cost to us,
were:
Name
of Supplier
|
Type
of Products
|
Shandong
Huangming Solar Power Sales Co.
|
Huangming
Solar Power
|
Jiangsu
Huayang Solar Power Sales Co.
|
Huayang
Solar Power
|
Ynagzhou
Huiyin Co.,Ltd.
|
SONY
LCD
|
Our
principal suppliers of merchandise in 2009, in terms of cost to us,
were:
Name
of Supplier
|
Type
of Products
|
Shangdong
Huangming Solar Power Sales Co.
|
Solar
Heaters
|
Jiangshu
Huayang Solar Power Sales Co.
|
Solar
Heaters
|
Hier
Hefei Ririshun Sales Co.
|
Small
Appliances
|
We
receive all of our merchandise from our suppliers, which are often the
manufacturers, through deliveries to our two warehouses located within Lu’an
city.
Marketing,
Sales, and Distribution
We
have a staff of 27 employees who take orders and provide customer service to
each exclusive franchise store and non-exclusive store in assigned geographical
areas. We advertise in many ways, including using television advertisements,
advertisements on buses and walls, fliers distributed on the streets by our
promotion personnel and general promotions, including discounts. We base our
advertising on our analysis 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 the franchise stores are under the
regulation of the national “Rural Consumer Electronics” plan.
The plan provides that the maximum sales price of electronics is
fixed at a price which is usually equal to the market price of the same
products in urban areas. The plan allows rural consumers to receive
a 13% rebate from the government on their purchases of
electronics.
|
·
|
Some
of the products sold by our company-owned stores to the residents in Lu’an
city are sold at the market price for urban
areas.
|
Most
customers pay for their purchases in 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 recent years, the
market price of consumer electronics and appliances has risen. However, the
selling prices of some older models of products have decreased since such models
are being discontinued.
Employees
As of
February 3, 2011, Guoying had 47 full-time employees, including 15 management
and supervisory personnel, 27 sales and marketing personnel and 5 after sale
support personnel.
Seasonality
Approximately
30% of our sales of products are made in the first quarter, because the Chinese
Spring Festival, the traditional shopping time, is during the first quarter. The
fourth quarter is our second busiest season.
39
Competition
We
believe our main competitor is Guosheng Electronic (“Guosheng”), which is a
state-owned enterprise in Anhui Province. Guosheng is the third biggest
retailer 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:
·
|
Funding.
We need more capital than larger wholesalers in order to expand. As
a state-owned enterprise, it is easier for Guosheng to obtain bank
loans.
|
·
|
Exclusive
Representative Rights. Currently we are smaller than Guosheng and it is
easier for Guosheng to be the exclusive representative of
certain major brands because it is
larger.
|
·
|
Brand
Recognition. As a smaller wholesaler, we need to invest more in
advertising in order to make our brand as competitive as larger
wholesalers such as Guosheng.
|
Compared
to Guosheng, our competitive advantages are:
·
|
Rural
Market. We have relationships with hundreds of exclusive franchise
stores and non-exclusive stores in rural markets, which are markets that
have a high potential volume of sales, but which markets are ignored by
the big retail chain stores.
|
·
|
Flexibility.
We make deliveries quickly and consistently. After receiving an order, we
are able to deliver products within 2 hours to stores within or close to
Lu’an city. Large state-owned retail stores, such as Guosheng, typically
take 2-3 days to deliver products after the receipt of
orders.
|
·
|
Sales
Networking. We have 27 sales persons visiting the exclusive franchise
stores and non-exclusive stores each week, which allows us to maintain
good relationships with the
stores.
|
Intellectual
Property
Mr.
Hailong Liu, our CEO, owns the following trademarks:
(i)
|
Trademark
Registration No:
|
5307764
|
Owned
Trademark:
|
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:
|
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
|
By
written agreement, Mr. Liu has granted Guoying the right to use the
trademarks from January 1, 2008 to December 31, 2012 at no cost to
us.
Regulation
We are
subject to a wide range of regulations covering every aspect of our business.
The most significant of these regulations are set forth below. Management
believes it is in material compliance with applicable
regulations.
40
Chain
Stores Management
In
March 1997, the Domestic Trade Ministry issued and enforced the Standard Opinions on the Operation
and Management of Chain Stores (the “Opinions”), to regulate and
administrate the forms, management models, composition, business area and other
requirements of chain stores. The Opinions discuss three forms of chain stores:
regular chain, franchise chain and voluntary chain. The Opinions stipulate that
franchise chain and voluntary chain stores must execute relevant cooperation
contracts including certain clauses including but not limited to licensed 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, which provides the
conditions for the establishment of chain stores and branches, the procedures
and documents for application for registration with the administration of
industry and commerce, and the names of chain stores, to regulate registration
issues relating to chain stores.
Regulations
relating to 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 certain responsibilities of the manufacturers
relating to products. 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, without limitation, having mature business models and 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 agreements must
be filed with the Trademark Office or its regional counterpart.
Home
appliance 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
stimulate domestic demand and promote economic development. According to the
Implementation Rules, the local government authority would make its decision
concerning the qualification of home appliance selling enterprises based on the
process of public bidding and tendering. Such enterprises shall satisfy certain
requirements, including having measures on dispatching, price management,
after-sale service and sales channels. Such enterprises are also required to
file with the local commerce bureau for sale of home appliances and shall
provide good service. The qualification of sales enterprises to sell home
appliances in rural areas may be cancelled in the event of any serious violation
of commitments or duties as set forth in the Implementation
Rules.
41
DESCRIPTION
OF PROPERTY
Set forth
below is a table containing certain information concerning the location and area
of each of our 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
|
We
believe that the foregoing properties are adequate for our present
needs.
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, CEO and CFO on July 15, 2010. Mr. Liu has
been 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. Hailong Liu and Haibo Liu are
brothers. Mr. Liu got his Executive MBA Degree on Marketing and Sales from
Beijing University in 2005. He is currently studying for his Ph.D. degree
in economics at Tsinghua University in China.
42
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. Haibo Liu and
Hailong Liu are brothers. 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
We have
not entered into employment agreements with any of our officers or other key
employees.
Compensation
of Officers and Directors
Our
former executive officers did not receive any compensation. Our current
executive officers do not receive any compensation for serving as executive
officers for China Electronics; however, they are compensated by and through
Guoying. The following table sets forth information concerning cash and
non-cash compensation paid by Guoying to our named executive officers for 2009
and 2008, respectively. None of our executive officers received
compensation in excess of $100,000 for either of those two years.
Name and
Principal
Position
|
Year
Ended
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-
Equity
Incentive
Plan
Compensation
($)
|
Non-
Qualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total ($)
|
|||||||||||||||||||||||||
Hailong
Liu,
|
12/31/2009
|
$
|
44,118
|
—
|
—
|
—
|
—
|
—
|
—
|
$
|
44,118
|
|||||||||||||||||||||||
Chairman,
President, CEO and CFO
|
12/31/2008
|
$
|
41,176
|
—
|
—
|
—
|
—
|
—
|
—
|
$
|
41,176
|
|||||||||||||||||||||||
Haibo
Liu,
|
12/31/2009
|
$
|
29,850
|
—
|
—
|
—
|
—
|
—
|
—
|
$
|
29,850
|
|||||||||||||||||||||||
Vice
President
|
12/31/2008
|
$
|
29,850
|
—
|
—
|
—
|
—
|
—
|
—
|
$
|
29,850
|
|||||||||||||||||||||||
Husni
Hassadiyeh
|
12/31/2009
|
$
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
$
|
—
|
|||||||||||||||||||||||
Former
President, CEO, Principal Executive Officer, and
Director
|
12/31/2008
|
$
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
$
|
—
|
|||||||||||||||||||||||
Inbar
Kuta
|
12/31/2009
|
$
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
$
|
—
|
|||||||||||||||||||||||
Former
Secretary, Treasurer, CFO, Principal Financial Officer and Principal
Accounting Officer
|
12/31/2008
|
$
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
$
|
—
|
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
On
July 9, 2010, Hailong Liu (the “Grantee”), our Chairman, President, Chief
Executive Officer and Chief Financial Officer, entered into a Call Option
Agreement with Sherry Li (the “Grantor”), the holder of 11,556,288 shares of our
Common Stock. Under the Call Option Agreement, the Grantee shall have
right and option to acquire up to all of such 11,556,288 shares held by the
Grantor over the course of two years in installments upon achievement of certain
performance milestones by the Company.
Director
Independence
We
currently do not have any independent directors, as the term “independent” is
defined by the Rule 5605(a)(2) of the Marketplace Rules of the NASDAQ Stock
Market.
43
Board
Composition and Committees
Our 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.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth information regarding beneficial ownership of our
Common Stock as of February 3, 2011 (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 the Company and (iii) by all of officers and directors
of the Company 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 (3)(4)(5)
|
Chairman,
CEO, President and CFO
|
Common
Stock, $0.0001 par value
|
11,556,288
|
68.9
|
%
|
|||||||
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
|
68.9
|
%
|
||||||||
5%
Securities Holders
|
||||||||||||
Sherry
Li (3)(4)
87
Dennis Street,
Garden
City Park
NY
11040
|
Common
Stock, $0.0001 par value
|
11,556,288
|
68.9
|
%
|
||||||||
Professional
Capital Partners, Ltd. (6)
1400
Old Country Road
Suite
206,
Westbury
NY 11590
|
Common
Stock, $0.0001 par value
|
1,463,750
|
8.7
|
%
|
44
(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 Securities and
Exchange Commission (the “SEC” or the “Commission”) 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 Commission. For purposes of
computing such percentage, as of February 3, 2011, there were
16,775,113 shares of our Common Stock outstanding.
(3) Hailong
Liu is the Voting Trustee under a Voting Trust Agreement dated as of July 9,
2010 between Sherry Li and Hailong Liu pursuant to which Hailong has the right
to vote an aggregate of 11,556,288 shares of Common Stock which were issued to
Sherry Li.
(4)
Pursuant to that certain Call Option Agreement 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 a Quarterly Report on Form 10-Q with SEC following the execution of the
Share Exchange Agreement – 50%
|
·
|
2
years after the filing of Form 10-Q –
50%;
|
The
first condition was satisfied on August 23, 2010 and 5,778,144 shares have been
assigned to Mr. Liu. The second condition will be satisfied on August 23,
2012.
(5) Under
a Stock Option Agreement dated as of July 9, 2010, Hailong Liu has granted to
American Capital Partners, LLC an option to purchase an aggregate
of 757,576 shares of Common Stock at an exercise price of $2.64 per
share. The option becomes exercisable in two installments of 378,788 shares
each, the first installment of which is exercisable from October 9, 2010 to
April 8, 2011 and the second installment of which is exercisable from April 9,
2011 to October 8, 2011. To date, no options have been exercised under the
Stock Option Agreement.
(6) Includes
1,000,000 shares issuable upon exercise of currently exercisable
warrants.
Changes
in Control
Except
for the Call Option Agreement described in footnote (4) to the table contained
in the section of this prospectus entitled “Security Ownership of Certain
Beneficial Owners and Management,” there are currently no arrangements that may
result in a change in control of the Company.
SELLING
STOCKHOLDERS
This
prospectus relates to the offering by the Selling Stockholders of shares of our
Common Stock held by and/or issuable to the Selling Stockholders identified in
the table below.
During
the period from July 15, 2010 to August 17, 2010 we entered into and consummated
the Purchase Agreement with certain of the Selling Stockholders, pursuant to
which we issued to certain of the Selling Stockholders for aggregate gross
proceeds of $5,251,548 (a) an aggregate of 1,989,211 shares of our
Common Stock, (b) Series C Warrants to purchase an aggregate of 497,303 shares
of Common Stock for $3.70 per share and (c) Series D Warrants to
purchase an aggregate of 497,303 shares of Common Stock for $4.75 per
share.
All of
the Selling Stockholders are “accredited investors” within the meaning of Rule
501 of Regulation D promulgated under the Securities Act.
The
table set forth below lists the names of the Selling Stockholders as well as the
number of shares of Common Stock which are being offered by the Selling
Stockholders hereby. None of the Selling Stockholders is a broker-dealer
or an affiliate of a broker-dealer. None of the Selling Stockholders has
or has had within the past three years any position, office, or other material
relationship with the Company or any of its predecessors or
affiliates.
45
Each
Selling Stockholder may offer for sale all or part of the shares from time to
time. The table below assumes that the Selling Stockholders will sell all of the
shares offered for sale. A selling stockholder is under no obligation, however,
to sell any shares immediately pursuant to this prospectus, nor is a selling
stockholder obligated to sell all or any portion of its shares at any
time.
Name of Selling
Stockholder
|
Total Number and Percentage of
Shares of Common Stock Beneficially
Owned Prior to the Offering (1) (2)
|
Maximum
Number of
Shares to
be Sold
|
Total Number
and
Percentage of
Shares
Beneficially
Owned After the
Offering (2)(3)
|
||||||||||||||
Chestnut
Ridge Partners, LP (4)
|
170,454 | (5) | 1.0 | % | 170,454 | 0 | 0 | ||||||||||
Silver
Rock II Limited (6)
|
428,571 | (7) | 2.7 | % | 428,571 | 0 | 0 | ||||||||||
The
Bosphorous Group, Inc. (8)
|
85,731 | (9) | * | 85,731 | 0 | 0 | |||||||||||
Jayhawk
Private Equity Fund II, L.P. (10)
|
342,858 | (11) | 2.0 | % | 342,858 | 0 | 0 | ||||||||||
Professional
Capital Partners, Ltd. (12)
|
1,463,750 | (13) | 8.7 | % | 1,643,750 | 0 | 0 | ||||||||||
John
Baldwin
|
28,410 | (14) | * | 28,410 | 0 | 0 | |||||||||||
DNST
Properties, LLC (15)
|
56,820 | (16) | * | 56,820 | 0 | 0 | |||||||||||
The
Burke Family Trust (17)
|
143,533 | (18) | * | 143,533 | 0 | 0 | |||||||||||
SEL
Private Trust Co. FAO JM Smucker Co. Master Trust (19)
|
284,094 | (20) | 1.7 | % | 284,094 | 0 | 0 | ||||||||||
Coronado
Capital Partners LP (21)
|
85,230 | (22) | * | 85,230 | 0 | 0 | |||||||||||
Lazy
Bear, LLC (23)
|
22,728 | (24) | * | 22,728 | 0 | 0 | |||||||||||
Lazy
Bear I, LLC (25)
|
71,022 | (26) | * | 71,022 | 0 | 0 | |||||||||||
Joseph
R. Lee
|
198,864 | (27) | 1.2 | 198,864 | 0 | 0 | |||||||||||
Chris
Clayton
|
34,092 | (28) | * | 34,092 | 0 | 0 | |||||||||||
Bear
Marsh, LLC (29)
|
14,202 | (30) | * | 14,202 | 0 | 0 | |||||||||||
Harry
Unger Jr.
|
12,000 | (31) | * | 12,000 | 0 | 0 | |||||||||||
Denise
Scarpelli
|
12,000 | (32) | * | 12,000 | 0 | 0 | |||||||||||
Thomas
H. Burke
|
60,000 | (33) | * | 60,000 | 0 | 0 | |||||||||||
RBC
Capital Markets, Custodian for Bruce R. Schafer IRA
(34)
|
16,800 | (35) | * | 16,800 | 0 | 0 | |||||||||||
Randall
M. Toig Family Posterity Trust (36)
|
90,000 | (37) | * | 90,000 | 0 | 0 | |||||||||||
Arthur
A. Mitchell, Jr.
|
12,000 | (38) | * | 12,000 | 0 | 0 | |||||||||||
Scott
Sammis
|
30,000 | (39) | * | 30,000 | 0 | 0 | |||||||||||
Craig
Sherlock
|
60,000 | (40) | * | 60,000 | 0 | 0 | |||||||||||
Frank
P. Cutrone
|
30,000 | (41) | * | 30,000 | 0 | 0 | |||||||||||
John
W. Trone
|
60,000 | (42) | * | 60,000 | 0 | 0 | |||||||||||
Gregory
T. Jones
|
24,000 | (43) | * | 24,000 | 0 | 0 | |||||||||||
Randy
Hyland
|
15,000 | (44) | * | 15,000 | 0 | 0 | |||||||||||
John
J. DiLorenzo
|
12,000 | (45) | * | 12,000 | 0 | 0 | |||||||||||
Norman
J. Ferenz
|
6,000 | (46) | * | 6,000 | 0 | 0 | |||||||||||
Barry
A. Morguelan
|
30,000 | (47) | * | 30,000 | 0 | 0 | |||||||||||
William
M. Rogers
|
6,000 | (48) | * | 6,000 | 0 | 0 | |||||||||||
Mark
L. Bumler
|
30,000 | (49) | * | 30,000 | 0 | 0 | |||||||||||
Stanley
& Suzanne Dorf
|
12,000 | (50) | * | 12,000 | 0 | 0 | |||||||||||
Susan
Hardesty
|
6,000 | (51) | * | 6,000 | 0 | 0 | |||||||||||
Lawrence
R. Clarke, M.D.
|
15,000 | (52) | * | 15,000 | 0 | 0 | |||||||||||
Thomas
Scott Deal
|
24,000 | (53) | * | 24,000 | 0 | 0 | |||||||||||
George
Eilers Living Trust (54)
|
30,000 | (55) | * | 30,000 | 0 | 0 | |||||||||||
Joseph
Tolliver
|
18,000 | (56) | * | 18,000 | 0 | 0 | |||||||||||
Jan
Dauer
|
6,000 | (57) | * | 6,000 | 0 | 0 | |||||||||||
Dean
N. Browning
|
18,000 | (58) | * | 18,000 | 0 | 0 | |||||||||||
Larry
& Diane Zimmerman
|
12,000 | (59) | * | 12,000 | 0 | 0 | |||||||||||
Steven
Hribar
|
60,000 | (60) | * | 60,000 | 0 | 0 | |||||||||||
Frank
Krawiecki Profit Sharing Plan (61)
|
60,000 | (62) | * | 60,000 | 0 | 0 | |||||||||||
A.
Sam Coury
|
15,000 | (63) | * | 15,000 | 0 | 0 | |||||||||||
Miles
Blacksberg
|
30,000 | (64) | * | 30,000 | 0 | 0 | |||||||||||
Henry
& Trisha Ihnfeldt
|
12,000 | (65) | * | 12,000 | 0 | 0 | |||||||||||
John
M. Grenfell
|
15,000 | (66) | * | 15,000 | 0 | 0 | |||||||||||
David
Sutherlan
|
6,000 | (67) | * | 6,000 | 0 | 0 | |||||||||||
Matt
Kinchen
|
12,000 | (68) | * | 12,000 | 0 | 0 | |||||||||||
Arthur
Goldstein
|
15,000 | (69) | * | 15,000 | 0 | 0 | |||||||||||
Barney
Evangelista
|
6,000 | (70) | * | 6,000 | 0 | 0 | |||||||||||
Ron
Dilks
|
30,000 | (71) | * | 30,000 | 0 | 0 | |||||||||||
Anthony
R. Bartolo
|
12,000 | (72) | * | 12,000 | 0 | 0 | |||||||||||
Phil
& Denise Fortuna
|
15,000 | (73) | * | 15,000 | 0 | 0 | |||||||||||
Atlas
Tubular LP (74)
|
30,000 | (75) | * | 30,000 | 0 | 0 | |||||||||||
Jeffrey
Webster
|
6,000 | (76) | * | 6,000 | 0 | 0 | |||||||||||
Wade
M. Harris and Tracy L. Harris JTWROS
|
60,000 | (77) | * | 60,000 | 0 | 0 | |||||||||||
Daniel
W. Gottlieb
|
60,000 | (78) | * | 60,000 | 0 | 0 | |||||||||||
David
L. Erickson
|
6,000 | (79) | * | 6,000 | 0 | 0 | |||||||||||
Bill
Campbell and Edda Campbell JTWROS
|
18,000 | (80) | * | 18,000 | 0 | 0 | |||||||||||
Daniel
& Deborah Gibson
|
30,000 | (81) | * | 30,000 | 0 | 0 | |||||||||||
James
J. Roberts
|
12,000 | (82) | * | 12,000 | 0 | 0 | |||||||||||
Walter
French
|
6,000 | (83) | * | 6,000 | 0 | 0 | |||||||||||
LJW
Partnership (84)
|
18,000 | (85) | * | 18,000 | 0 | 0 | |||||||||||
John
S. Harris
|
18,000 | (86) | * | 18,000 | 0 | 0 | |||||||||||
William
Lurie
|
25,200 | (87) | * | 25,200 | 0 | 0 | |||||||||||
David
J. Beyer
|
18,000 | (88) | * | 18,000 | 0 | 0 | |||||||||||
James
E. Mattutat
|
6,000 | (89) | * | 6,000 | 0 | 0 | |||||||||||
Neil
T. Gutekunst
|
21,600 | (90) | * | 21,600 | 0 | 0 | |||||||||||
Dale
Cripps
|
30,000 | (91) | * | 30,000 | 0 | 0 | |||||||||||
Troy
Stubbs
|
144,000 | (92) | * | 144,000 | 0 | 0 | |||||||||||
Steven
Stubbs
|
31,800 | (93) | * | 31,800 | 0 | 0 | |||||||||||
Vincent
Cafici
|
6,000 | (94) | * | 6,000 | 0 | 0 | |||||||||||
Paul
Sipple
|
6,000 | (95) | * | 6,000 | 0 | 0 | |||||||||||
Andrew
Pace
|
6,000 | (96) | * | 6,000 | 0 | 0 | |||||||||||
Bhajan
Singh
|
6,000 | (97) | * | 6,000 | 0 | 0 | |||||||||||
Byron
D. Winans
|
6,000 | (98) | * | 6,000 | 0 | 0 | |||||||||||
Charles
Landrum
|
6,000 | (99) | * | 6,000 | 0 | 0 | |||||||||||
Dean
Krutty
|
6,000 | (100) | * | 6,000 | 0 | 0 | |||||||||||
Derek
Polk
|
18,000 | (101) | * | 18,000 | 0 | 0 | |||||||||||
Garry
Blandford
|
18,000 | (102) | * | 18,000 | 0 | 0 | |||||||||||
Gary
L. Olshansky and Jeanie H. Olshansky JTWROS
|
6,000 | (103) | * | 6,000 | 0 | 0 | |||||||||||
Giuseppe
Surace
|
6,000 | (104) | * | 6,000 | 0 | 0 | |||||||||||
Greg
Kromminga
|
30,000 | (105) | * | 30,000 | 0 | 0 | |||||||||||
Howard
R. Adrian and Debora J. Adrian JTWROS
|
6,000 | (106) | * | 6,000 | 0 | 0 | |||||||||||
Howard
Reinsch
|
12,000 | (107) | * | 12,000 | 0 | 0 | |||||||||||
ISSC
Management (108)
|
9,000 | (109) | * | 9,000 | 0 | 0 | |||||||||||
James
A. Quesenberry
|
12,000 | (110) | * | 12,000 | 0 | 0 | |||||||||||
Jeffrey
& Tessa Fitzgerald
|
18,000 | (111) | * | 18,000 | 0 | 0 | |||||||||||
Jeffrey
Jutras
|
5,682 | (112) | * | 5,682 | 0 | 0 | |||||||||||
Jerry
D. Daugherty
|
6,000 | (113) | * | 6,000 | 0 | 0 | |||||||||||
Jonathan
Belding
|
12,000 | (114) | * | 12,000 | 0 | 0 | |||||||||||
Kevin
Bell
|
6,000 | (115) | * | 6,000 | 0 | 0 | |||||||||||
Larry
V. Coleman
|
6,000 | (116) | * | 6,000 | 0 | 0 | |||||||||||
Mark
G. Mann
|
60,000 | (117) | * | 60,000 | 0 | 0 | |||||||||||
Mark
Timmerman
|
18,000 | (118) | * | 18,000 | 0 | 0 | |||||||||||
Michael
E. Miner
|
15,000 | (119) | * | 15,000 | 0 | 0 | |||||||||||
Michael
Kearns
|
12,000 | (120) | * | 12,000 | 0 | 0 | |||||||||||
Patrick
O’Keefe
|
6,000 | (121) | * | 6,000 | 0 | 0 | |||||||||||
Phillip
Gendelman
|
6,000 | (122) | * | 6,000 | 0 | 0 | |||||||||||
Phillip
Larue
|
6,000 | (123) | * | 6,000 | 0 | 0 | |||||||||||
Raymond
Oakley
|
6,000 | (124) | * | 6,000 | 0 | 0 | |||||||||||
Richmond
Capital LP (125)
|
60,000 | (126) | * | 60,000 | 0 | 0 | |||||||||||
Robert
Oetter
|
18,000 | (127) | * | 18,000 | 0 | 0 | |||||||||||
Robert
S. & Diana Moskowitz
|
30,000 | (128) | * | 30,000 | 0 | 0 | |||||||||||
Stephen
Bircher
|
12,000 | (129) | * | 12,000 | 0 | 0 | |||||||||||
Thomas
Leslie
|
6,000 | (130) | * | 6,000 | 0 | 0 | |||||||||||
Todd
Guest
|
6,000 | (131) | * | 6,000 | 0 | 0 | |||||||||||
Troy
Palmer
|
12,000 | (132) | * | 12,000 | 0 | 0 | |||||||||||
Wan
Xuesheng, Inc.
|
533,539 | 3.2 | % | 533,539 | 0 | 0 | |||||||||||
Jin
Hai Fu, Inc.
|
500,000 | 3.0 | % | 500,000 | 0 | 0 | |||||||||||
China
Financial Services
|
393,039 | 2.3 | % | 393,039 | 0 | 0 | |||||||||||
Maxsun
Investment
|
25,000 | * | 25,000 | 0 | 0 |
* Less
than 1%
46
(1) As
of February 3, 2011, there were 16,775,113 shares of our Common Stock
outstanding. Under applicable Commission rules, a person is deemed to
beneficially own securities which he has the right to acquire within 60 days
through the exercise of any option or warrant or through the conversion of
another security, and also is deemed to be the “beneficial owner” of a security
with regard to which he directly or indirectly has or shares (a) voting power
(which includes the power to vote or direct the voting of the security), or (b)
investment power (which includes the power to dispose, or direct the
disposition, of the security), in each case irrespective of the person’s
economic interest in the security. Each Selling Stockholder has the sole
investment and voting power with respect to all shares of Common Stock shown as
beneficially owned by such Selling Stockholder, except as otherwise indicated in
the table.
(2) In
determining the percent of Common Stock beneficially owned by a Selling
Stockholder on February 3, 2011, (a) the numerator is the number of shares of
Common Stock beneficially owned by such Selling Stockholder, including shares
the beneficial ownership of which may be acquired within 60 days through the
conversion of convertible securities and the exercise of warrants, if any, held
by that Selling Stockholder, and (b) the denominator is the sum of (i) the
16,775,113 shares of Common Stock outstanding on February 3, 2011, and (ii) the
aggregate number of shares of Common Stock that may be acquired by such Selling
Stockholder within 60 days upon the conversion of convertible securities and the
exercise of warrants held by the Selling Stockholder.
(3)
Assumes the sale of all shares offered by the Selling Stockholders.
(4)
Kenneth Pasternak has the voting and investment power as the managing member of
Chestnut Ridge Capital, LLC, the General Partner of Chestnut Ridge Partners,
LP.
(5)
Includes 28,409 shares of Common Stock which may be issued upon exercise of
Class C Warrants and 28,409 shares of Common Stock which may be issued upon
exercise of Class D Warrants.
(6)
Ezzat Jallad has the voting and investment power over Silver Rock II
Limited.
(7) Includes
142,857 shares of Common Stock which may be issued upon exercise of Class A
Warrants and 142,857 shares of Common Stock which may be issued upon exercise of
Class B Warrants.
(8) Daniel
J. McClory has the voting and investment power over all of the shares held by
The Bosphorous Group, Inc.
(9) Includes
28,571 shares of Common Stock which may be issued upon exercise of Class A
Warrants and 28,571 shares of Common Stock which may be issued upon exercise of
Class B Warrants.
(10) Kent
McCarthy controls Jayhawk Private Equity, LLC, the general partner of Jayhawk
Private Equity GP II, LP, which has the voting and investment power as the
general partner of Jayhawk Private Equity Fund II, L.P.
(11) Includes
114,286 shares of Common Stock which may be issued upon exercise of Class A
Warrants and 114,286 shares of Common Stock which may be issued upon exercise of
Class B Warrants.
(12) Greg
Goldberg has the voting and investment power over Professional Capital Partners,
Ltd.
(13) Includes
1,000,000 shares of Common Stock which may be issued upon exercise of Class E
Warrants.
47
(14) Includes
4,735 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 4,735 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(15) David
Aufrecht has the voting and investment power as President of Directional
Managing Co., which is the manger of DNST Properties, LLC.
(16) Includes
9,470 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 9,470 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(17) Peter
Burke, as the settlor and trustee, has the voting and investment power over
Burke Family Trust.
(18) Includes
28,571 shares of Common Stock which may be issued upon exercise of Class A
Warrants, 28,571 shares of Common Stock which may be issued upon exercise of
Class B Warrants, 9,470 shares of Common Stock which may be issued upon exercise
of Class C Warrants and 9,470 shares of Common Stock which may be issued upon
exercise of Class D Warrants.
(19) Zach
Easton has the voting and investment power over SEL Private Trust Co. FAO JM
Smucker Co. Master Trust.
(20) Includes
47,349 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 47,349 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(21) Zach
Easton has the voting and investment power over Coronado Capital Partners
LP.
(22) Includes
14,205 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 14,205 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(23)
Scott B. Gann controls Oso Capital, whichhas the voting and investment power
over Lazy Bear, LLC.
(24) Includes
3,788 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 3,788 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(25) Scott
B. Gann controls Oso Capital, a member of Lazy Bear, LLC, which has the voting
and investment power over Lazy Bear I, LLC.
(26) Includes
11,837 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 11,837 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(27) Includes
33,144 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 33,144 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(28) Includes
5,682 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 5,682 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(29)
Kevin Marsh has the voting and investment power over Bear Marsh,
LLC.
(30) Includes
2,367 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 2,367 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(31) Includes
2,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 2,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(32) Includes
2,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 2,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
48
(33) Includes
10,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 10,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(34) Bruce
R. Schafer has the voting and investment power over all of the shares held by
RBC Capital Markets as Custodian for Bruce R. Schafer IRA.
(35) Includes
2,800 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 2,800 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(36) Randall
M Toig has the voting and investment power over Randall M Toig Family Posterity
Trust.
(37) Includes
15,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 15,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(38) Includes
2,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 2,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(39) Includes
5,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 5,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(40) Includes
10,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 10,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(41) Includes
5,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 5,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(42) Includes
10,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 10,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(43) Includes
4,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 4,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(44) Includes
2,500 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 2,500 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(45) Includes
2,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 2,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(46) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(47) Includes
5,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 5,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(48) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(49) Includes
5,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 5,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(50) Includes
2,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 2,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(51) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
49
(52) Includes
2,500 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 2,500 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(53) Includes
4,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 4,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(54) George
C. Eilers Sr. has the voting and investment power over George Eilers Living
Trust.
(55) Includes
5,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 5,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(56) Includes
3,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 3,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(57) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(58) Includes
3,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 3,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(59) Includes
2,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 2,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(60) Includes
10,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 10,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(61) Frank
Krawiecki has the voting and investment power over the Frank Krawiecki
Profit Sharing Plan.
(62) Includes
10,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 10,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(63) Includes
2,500 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 2,500 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(64) Includes
5,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 5,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(65) Includes
2,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 2,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(66) Includes
2,500 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 2,500 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(67) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(68) Includes
2,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 2,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(69) Includes
2,500 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 2,500 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(70) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
50
(71) Includes
5,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 5,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(72) Includes
2,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 2,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(73) Includes
2,500 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 2,500 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(74) John
J Hubbard has the voting and investment power over all of the shares held by
Atlas Tubular LP.
(75) Includes
5,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 5,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(76) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(77) Includes
10,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 10,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(78) Includes
10,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 10,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(79) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(80) Includes
3,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 3,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(81) Includes
5,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 5,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(82) Includes
2,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 2,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(83) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(84) Bob
Lucas has the voting and investment power over LJW
Partnership.
(85) Includes
3,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 3,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(86) Includes
3,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 3,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(87) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(88) Includes
3,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 3,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(89) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
51
(90) Includes
3,600 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 3,600 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(91) Includes
5,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 5,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(92) Includes
24,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 24,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(93) Includes
10,600 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 10,600 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(94) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(95) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(96) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(97) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(98) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(99) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(100) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(101) Includes
3,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 3,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(102) Includes
3,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 3,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(103) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(104) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(105) Includes
5,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 5,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(106) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(107) Includes
2,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 2,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(108)
Carl Nelson has the voting and investment power as the President, Chairman and
CEO of ISSC Management.
52
(109) Includes
1,500 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,500 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(110) Includes
2,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 2,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(111) Includes
3,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 3,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(112) Includes
947 shares of Common Stock which may be issued upon exercise of Class C Warrants
and 947 shares of Common Stock which may be issued upon exercise of Class D
Warrants.
(113) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(114) Includes
2,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 2,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(115) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(116) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(117) Includes
10,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 10,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(118) Includes
3,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 3,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(119) Includes
2,500 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 2,500 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(120) Includes
2,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 2,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(121) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(122) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(123) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(124) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(125) David
Kass has the voting and investment power as the Managing Member of DBK LLC and
the General Partner of Richmond Capital LP.
(126) Includes
10,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 10,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(127) Includes
3,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 3,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
53
(128) Includes
5,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 5,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(129) Includes
2,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 2,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(130) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(131) Includes
1,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 1,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
(132) Includes
2,000 shares of Common Stock which may be issued upon exercise of Class C
Warrants and 2,000 shares of Common Stock which may be issued upon exercise of
Class D Warrants.
DESCRIPTION
OF SECURITIES
Our
authorized capital stock consists of 100,000,000 shares of Common Stock, with a
par value of $0.0001 per share, and 50,000,000 shares of preferred stock, with a
par value of $0.0001 per share. As of February 3, 2011, there were 16,775,113
shares of our Common Stock issued and outstanding and no shares of our Preferred
Stock outstanding. Our shares of Common Stock are held by 123 stockholders
of record.
Common
Stock
Our
Common Stock is entitled to one vote per share on all matters submitted to a
vote of the stockholders, including the election of directors. Except as
otherwise required by law or provided in any resolution adopted by our board of
directors with respect to any series of preferred stock, the holders of our
Common Stock will possess all voting power. Generally, all matters to be voted
on by stockholders must be approved by a majority (or, in the case of election
of directors, by a plurality) of the votes entitled to be cast by all shares of
our Common Stock that are present in person or represented by proxy, subject to
any voting rights granted to holders of any preferred stock. Holders of our
Common Stock representing fifty percent (50%) of our capital stock issued,
outstanding and entitled to vote, represented in person or by proxy, are
necessary to constitute a quorum at any meeting of our stockholders. A
vote by the holders of a majority of our outstanding shares is required to
effectuate certain fundamental corporate changes such as liquidation, merger or
an amendment to our Articles of Incorporation. Our Articles of Incorporation do
not provide for cumulative voting in the election of directors.
Subject
to any preferential rights of any outstanding series of preferred stock created
by our board of directors from time to time, the holders of shares of
our Common Stock will be entitled to such cash dividends as may be declared from
time to time by our board of directors from funds available
therefore.
Subject
to any preferential rights of any outstanding series of preferred stock created
from time to time by our board of directors, upon liquidation, dissolution or
winding up, the holders of shares of our Common Stock will be entitled to
receive pro rata all assets available for distribution to such
holders.
In the
event of any merger or consolidation with or into another company in connection
with which shares of our Common Stock are converted into or exchangeable for
shares of stock, other securities or property (including cash), all holders of
our Common Stock will be entitled to receive the same kind and amount of shares
of stock and other securities and property (including cash). Holders of our
Common Stock have no pre-emptive rights, no conversion rights and there are no
redemption provisions applicable to our Common Stock.
Preferred
Stock
Our
board of directors is authorized by our Articles of Incorporation to issue the
authorized shares of our preferred stock in one or more series. Our board of
directors is authorized, within any limitations prescribed by law and our
Articles of Incorporation, to fix and determine the designations, rights,
qualifications, preferences, limitations and terms of the shares of any series
of preferred stock including, but not limited to, the
following:
54
1.
|
The
number of shares constituting that series and the distinctive designation
of that series;
|
2.
|
The
dividend rate on the shares of that series, the conditions and time upon
which such dividends shall be payable, and whether dividends will be
cumulative or non-cumulative;
|
3.
|
Whether
that series will have voting rights, in addition to the voting rights
provided by law, and, if so, the terms of such voting
rights;
|
4.
|
Whether
that series will have conversion privileges, and, if so, the terms and
conditions of such conversion, including provision for adjustment of the
conversion rate in such events as the Board of Directors
determines;
|
5.
|
Whether
or not the shares of that series will be redeemable, and, if so, the terms
and conditions of such redemption;
|
6.
|
Whether
that series will have a sinking fund for the redemption or purchase of
shares of that series, and, if so, the terms and amount of such sinking
fund;
|
7.
|
The
rights of the shares of that series in the event of voluntary or
involuntary liquidation, dissolution or winding up of the corporation, and
the relative rights of priority, if any, of payment of shares of that
series;
|
|
8.
|
Any
other relative rights, preferences and limitations of that
series.
|
Provisions
in Our Articles of Incorporation and By-Laws That Would Delay, Defer or Prevent
a Change in Control
Our
Articles of Incorporation authorize our board of directors to issue a class of
preferred stock commonly known as a "blank check" preferred stock. Specifically,
the preferred stock may be issued from time to time by the board of directors as
shares of one (1) or more classes or series. Our board of directors, subject to
the provisions of our Articles of Incorporation and limitations imposed by law,
is authorized to adopt resolutions; to issue the shares; to fix the number of
shares; to change the number of shares constituting any series; and to provide
for or change the following: the voting powers; designations; preferences; and
relative, participating, optional or other special rights, qualifications,
limitations or restrictions, including the following: dividend rights, including
whether dividends are cumulative; dividend rates; terms of redemption, including
sinking fund provisions; redemption prices; conversion rights and liquidation
preferences of the shares constituting any class or series of the preferred
stock.
In each
such case, we will not need any further action or vote by our shareholders. One
of the effects of undesignated preferred stock may be to enable the board of
directors to render more difficult or to discourage an attempt to obtain control
of us by means of a tender offer, proxy contest, merger or otherwise, and
thereby to protect the continuity of our management. The issuance of shares of
preferred stock pursuant to the board of director's authority described above
may adversely affect the rights of holders of Common Stock. For example,
preferred stock issued by us may rank prior to the Common Stock as to dividend
rights, liquidation preference or both, may have full or limited voting rights
and may be convertible into shares of Common Stock. Accordingly, the issuance of
shares of preferred stock may discourage bids for the Common Stock at a premium
or may otherwise adversely affect the market price of the Common
Stock.
Dividend
Policy
We
currently intend to retain future earnings, if any, to finance the expansion of
our business. As a result, we do not anticipate paying any cash dividends in the
foreseeable future.
55
Common
Stock Purchase Warrants
During
the period from July 15, 2010 to August 17, 2010 we issued three -year warrants
to purchase our Common Stock at various exercise prices as set forth
below:
Title of Warrant
|
Exercise Price
|
Total Number of Shares of
Common Stock Subject to
Issuance Upon Exercise
|
||||||
Series
A
|
$
|
2.19
|
314,286
|
|||||
Series
B
|
$
|
2.63
|
314,286
|
|||||
Series
C
|
$
|
3.70
|
497,303
|
|||||
Series
D
|
$
|
4.75
|
497,303
|
|||||
Series
F
|
$
|
1.75
|
31,429
|
|||||
Series
F
|
$
|
2.64
|
198,921
|
|||||
Series
G
|
$
|
2.64
|
50,000
|
On July
13, 2010 we also issued a five-year Series E Warrant to purchase an aggregate of
1,000,000 shares of Common Stock at $.25 per share.
All of
the above warrants contain the following provisions:
Cashless
Exercise. Subject to certain exceptions, the holders may make
a cashless exercise if a registration statement covering the resale of the
shares of Common Stock issuable upon exercise of the Warrants is not in effect
on February 13, 2011.
Maximum Exercise;
9.9% Limitation.
The holder is not permitted to exercise the warrant to the extent that on the
date of exercise the exercise would result in beneficial ownership by the holder
and its affiliates of more than 9.9% of the outstanding shares of Common Stock
on such date.
Adjustment for
Stock Splits, Stock Dividends, Recapitalizations, Etc. The exercise price of the
warrants and the number of shares of common stock issuable on exercise of the
warrants will be appropriately adjusted to reflect any stock dividend, stock
split, stock distribution, combination of shares, reverse split,
reclassification, recapitalization or other similar event affecting the number
of outstanding shares.
Adjustment for
Reorganization, Consolidation, Merger, Etc. If we merge or consolidate
with or into any other person, or are a party to certain other corporate
reorganizations, then, in each case, the holder of the warrant (on exercise at
any time after the consummation of such transaction) will be entitled to
receive, the stock and other securities and property (including cash) which the
holder would have been entitled to receive if the holder had exercised the
warrant immediately prior to the effectiveness of the transaction.
Options
We have
not issued and do not have outstanding any options to purchase shares of our
Common Stock.
Convertible
Securities
We have
not issued and do not have outstanding any securities convertible into shares of
our Common Stock or any rights convertible or exchangeable into shares of our
Common Stock.
Nevada
Anti-Takeover Laws
Nevada
Revised Statutes sections 78.378 to 78.379 provide state regulation over the
acquisition of a controlling interest in certain Nevada corporations unless the
articles of incorporation or bylaws of the corporation provide that the
provisions of these sections do not apply. Our Articles of Incorporation
and By-laws do not state that these provisions do not apply. The statute
creates a number of restrictions on the ability of a person or entity to acquire
control of a Nevada company by setting down certain rules of conduct and voting
restrictions in any acquisition attempt, among other things. The statute is
limited to corporations that are organized in the state of Nevada and that have
200 or more stockholders, at least 100 of whom are stockholders of record and
residents of the State of Nevada; and does business in the State of Nevada
directly or through an affiliated corporation. Because of these conditions, the
statute currently does not apply to our company.
56
Transfer
Agent and Registrar
The
registrar and transfer agent for the Company’s capital stock is Empire Stock
Transfer, Inc., 1859 Whitney Mesa Drive, Henderson, Nevada 89014 and its main
telephone number is 702-818-5898.
SHARES
ELIGIBLE FOR FUTURE SALE
As of
February 3, 2011, there were issued and outstanding (i)
16,775,113 shares of our Common Stock and (ii) warrants to purchase
an aggregate of 2,903,528 shares of our Common Stock. We currently have
obligation to register for resale by the holders thereof an aggregate of the
2,623,178 shares of our Common Stock issuable upon exercise of warrants.
We are not required to register 280,350 shares of Common Stock issuable upon
exercise of the Series F and Series G warrants at this time.
Shares
Covered by this Prospectus
All of
the 6,842,002 shares being registered in this offering may be sold without
restriction under the Securities Act, so long as the registration statement of
which this prospectus is a part is, and remains, effective.
Rule
144
Under
Rule 144, a person who has beneficially owned restricted shares of our Common
Stock or warrants for at least six months is entitled to sell its securities
provided that (1) such person is not deemed to have been one of our affiliates
at the time of, or at any time during the three months preceding, a sale, (2) we
are subject to the reporting requirements under the Exchange Act for at least 90
days before the sale and (3) if the sale occurs prior to satisfaction of a
one-year holding period, we provide current information at the time of
sale.
Persons
who have beneficially owned restricted shares of our Common Stock or warrants
for at least six months, but who are our affiliates at the time of, or at any
time during the three months preceding, a sale, would be subject to additional
restrictions, by which such person would be entitled to sell within any
three-month period only a number of securities that does not exceed the greater
of:
|
·
|
1%
of the total number of securities of the same class then outstanding,
which will equal approximately 167,751 shares immediately after this
offering; or
|
|
·
|
the
average weekly trading volume of such securities during the four calendar
weeks preceding the filing of a notice on Form 144 with respect to such
sale.
|
provided, in each case, that
we are subject to the Exchange Act periodic reporting requirements for at least
three months before the sale.
Such
sales by affiliates must also comply with the manner of sale, current public
information and notice provisions of Rule 144. The selling stockholders will not
be governed by the foregoing restrictions when selling their shares pursuant to
this prospectus.
57
MATERIAL
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
General
The
following is a general summary of certain material U.S. federal income tax
consequences to an investor of the acquisition, ownership and disposition of the
Common Stock purchased by the investor pursuant to this offering. As used in
this discussion, “we”, “our” and “us” refers to China Electronics Holdings, Inc.
This discussion assumes that an investor will hold each share of our Common
Stock issued and purchased pursuant to this offering as a “capital asset” within
the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended
(the “Code”). This discussion does not address all aspects of U.S. federal
income taxation that may be relevant to an investor in light of that investor’s
particular circumstances. In addition, this discussion does not address (a) U.S.
federal non-income tax laws, such as estate or gift tax laws, (b) state, local
or non-U.S. tax consequences, or (c) the special tax rules that may apply to
certain investors, including, without limitation, banks, insurance companies,
financial institutions, broker-dealers, taxpayers that have elected
mark-to-market accounting, taxpayers subject to the alternative minimum tax
provisions of the Code, tax-exempt entities, governments or agencies or
instrumentalities thereof, regulated investment companies, real estate
investment trusts, persons whose functional currency is not the U.S. dollar,
U.S. expatriates or former long-term residents of the United States, or
investors that acquire, hold, or dispose of our common stock as part of a
straddle, hedge, wash sale, constructive sale or conversion transaction or other
integrated transaction. Additionally, this discussion does not consider the tax
treatment of entities treated as partnerships or other pass-through entities for
U.S. federal income tax purposes or of persons who hold our common stock through
such entities. The tax treatment of a partnership and each partner thereof will
generally depend upon the status and activities of the partnership and such
partner. Thus, partnerships, other pass-through entities and persons holding our
common stock through such entities should consult their own tax
advisors.
This
discussion is based on current provisions of the Code, its legislative history,
U.S. Treasury regulations promulgated under the Code, judicial opinions, and
published rulings and procedures of the U.S. Internal Revenue Service (“IRS”),
all as in effect on the date of this prospectus. These authorities are subject
to differing interpretations or to change, possibly with retroactive effect. We
have not sought, and will not seek, any ruling from the IRS or any opinion of
counsel with respect to the tax consequences discussed below, and there can be
no assurance that the IRS will not take a position contrary to the tax
consequences discussed below or that any position taken by the IRS would not be
sustained.
As used
in this discussion, the term “U.S. person” means a person that is, for U.S.
federal income tax purposes, (i) an individual citizen or resident of the United
States, (ii) a corporation (or other entity treated as a corporation for U.S.
federal income tax purposes) created or organized (or treated as created or
organized) in or under the laws of the United States or of any state thereof or
the District of Columbia, (iii) an estate the income of which is subject to U.S.
federal income taxation regardless of its source, or (iv) a trust if (A) a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the authority to
control all substantial decisions of the trust, or (B) it has in effect a valid
election to be treated as a U.S. person under applicable U.S. Treasury
regulations. As used in this discussion, the term “U.S. holder” means a
beneficial owner of our common stock that is a U.S. person, and the term
“non-U.S. holder” means a beneficial owner of our common stock (other than an
entity that is treated as a partnership or other pass-through entity for U.S.
federal income tax purposes) that is not a U.S. person.
THIS
DISCUSSION IS ONLY A SUMMARY OF CERTAIN MATERIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK.
IT IS NOT TAX ADVICE. EACH PROSPECTIVE INVESTOR IN OUR COMMON STOCK IS URGED TO
CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO
SUCH INVESTOR OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, AND NON-U.S. TAX
LAWS, AS WELL AS U.S. FEDERAL TAX LAWS, AND ANY APPLICABLE TAX
TREATY.
U.S.
Holders
Taxation
of Distributions
A U.S.
holder will be required to include in gross income as ordinary income the amount
of any dividend paid on the shares of our Common Stock. A distribution on such
shares will be treated as a dividend for U.S. federal income tax purposes to the
extent paid from our current or accumulated earnings and profits, as determined
under U.S. federal income tax principles. Distributions in excess of current and
accumulated earnings and profits generally will constitute a return of capital
that will be applied against and reduce (but not below zero) the U.S. holder’s
adjusted tax basis in our common stock. Any remaining excess generally will be
treated as gain from the sale or other disposition of the common stock and will
be treated as described under “Gain or Loss on Sale, Taxable Exchange or Other
Taxable Disposition of Common Stock” below.
58
Any
dividends we pay to a U.S. holder that is treated as a taxable corporation for
U.S. federal income tax purposes generally will qualify for the
dividends-received deduction if the applicable holding period and other
requirements are satisfied. With certain exceptions, if the applicable holding
period and other requirements are satisfied, dividends we pay to a non-corporate
U.S. holder generally will constitute “qualified dividends” that will be subject
to tax at the maximum tax rate accorded to long-term capital gains for tax years
beginning on or before December 31, 2010, after which the tax rate applicable to
dividends is scheduled to return to the tax rate generally applicable to
ordinary income.
If PRC
taxes apply to any dividends paid to a U.S. holder on our common stock, such
taxes may be treated as foreign taxes eligible for credit against such holder’s
U.S. federal income tax liability (subject to certain limitations), and such
U.S. holder may be entitled to certain benefits under the income tax treaty
between the United States and the PRC. U.S. holders should consult their own tax
advisors regarding the creditability of any such PRC tax and their eligibility
for the benefits of the income tax treaty between the United States and the
PRC.
Gain
or Loss on Sale, Taxable Exchange or Other Taxable Disposition of Common
Stock
In
general, a U.S. holder must treat any gain or loss recognized upon a sale,
taxable exchange, or other taxable disposition of our common stock as capital
gain or loss. Any such capital gain or loss will be long-term capital gain or
loss if the U.S. holder’s holding period for the common stock so disposed of
exceeds one year. In general, a U.S. holder will recognize gain or loss in an
amount equal to the difference between (i) the sum of the amount of cash and the
fair market value of any property received in such disposition and (ii) the U.S.
holder’s adjusted tax basis in the common stock so disposed of. Long-term
capital gain recognized by a non-corporate U.S. holder generally will be subject
to a maximum tax rate of 15 percent for tax years beginning on or before
December 31, 2010, after which the maximum long-term capital gains tax rate is
scheduled to increase to 20 percent. The deduction of capital losses is subject
to various limitations.
If PRC
taxes apply to any gain from the disposition of our common stock by a U.S.
holder, such taxes may be treated as foreign taxes eligible for credit against
such holder’s U.S. federal income tax liability (subject to certain
limitations), and such U.S. holder may be entitled to certain benefits under the
income tax treaty between the United States and the PRC. U.S. holders should
consult their own tax advisors regarding the creditability of any such PRC tax
and their eligibility for the benefits of the income tax treaty between the
United States and the PRC.
Non-U.S.
Holders
Taxation
of Distributions
In
general, any distribution we make to a non-U.S. holder of shares of our common
stock, to the extent paid out of our current or accumulated earnings and profits
(as determined under U.S. federal income tax principles), will constitute a
dividend for U.S. federal income tax purposes. Unless we are treated as an
“80/20 company” for U.S. federal income tax purposes, as described below, any
dividend paid to a non-U.S. holder with respect to shares of our common stock
that is not effectively connected with the non-U.S. holder’s conduct of a trade
or business within the United States, as described below, generally will be
subject to U.S. federal withholding tax at a rate of 30 percent of the gross
amount of the dividend, unless such non-U.S. holder is eligible for a reduced
rate of withholding tax under an applicable income tax treaty and provides
proper certification of its eligibility for such reduced rate (usually on an IRS
Form W-8BEN). Any distribution not constituting a dividend will be treated first
as reducing the non-U.S. holder’s adjusted tax basis in its shares of our common
stock (but not below zero) and, to the extent such distribution exceeds the
non-U.S. holder’s adjusted tax basis, as gain from the sale or other disposition
of the common stock, which will be treated as described under “Gain on Sale,
Taxable Exchange or Other Taxable Disposition of Common Stock”
below.
There is
a possibility that we may qualify as an “80/20 company” for U.S. federal income
tax purposes. In general, a U.S. corporation is an 80/20 company if at least 80
percent of its gross income earned directly or from subsidiaries during an
applicable testing period is “active foreign business income.” The 80 percent
test is applied on a periodic basis. If we qualify as an 80/20 company, a
percentage of any dividend paid by us generally will not be subject to U.S.
federal withholding tax. You should consult with your own tax advisors regarding
the amount of any such dividend subject to withholding tax in this
circumstance.
59
Dividends
we pay to a non-U.S. holder that are effectively connected with such non-U.S.
holder’s conduct of a trade or business within the United States (and, if
certain income tax treaties apply, are attributable to a U.S. permanent
establishment or fixed base maintained by the non-U.S. holder) generally will
not be subject to U.S. withholding tax, provided such non-U.S. holder complies
with certain certification and disclosure requirements (usually by providing an
IRS Form W-8ECI). Instead, such dividends generally will be subject to U.S.
federal income tax, net of certain deductions, at the same graduated individual
or corporate tax rates applicable to U.S. persons. If the non-U.S. holder is a
corporation, dividends that are effectively connected income may also be subject
to a “branch profits tax” at a rate of 30 percent (or such lower rate as may be
specified by an applicable income tax treaty).
Gain
on Sale, Taxable Exchange or Other Taxable Disposition of Common
Stock
A
non-U.S. holder generally will not be subject to U.S. federal income tax in
respect of gain recognized on a sale, exchange or other disposition of common
stock, unless:
·
|
the
gain is effectively connected with the conduct of a trade or business by
the non-U.S. holder within the United States (and, under certain income
tax treaties, is attributable to a U.S. permanent establishment or fixed
base maintained by the non-U.S.
holder);
|
·
|
the
non-U.S. holder is an individual who is present in the United States for
183 days or more in the taxable year of disposition and certain other
conditions are met; or
|
·
|
we
are or have been a “United States real property holding corporation”
(“USRPHC”) for U.S. federal income tax purposes at any time during the
shorter of the five year period ending on the date of disposition or the
non-U.S. holder’s holding period for the common stock disposed of, and,
generally, in the case where our common stock is regularly traded on an
established securities market, the non-U.S. holder has owned, directly or
indirectly, more than 5 percent of the common stock disposed of, at any
time during the shorter of the five year period ending on the date of
disposition or the non-U.S. holder’s holding period for the common stock
disposed of. There can be no assurance that our common stock will be
treated as regularly traded on an established securities market for this
purpose.
|
Unless an
applicable tax treaty provides otherwise, gain described in the first and third
bullet points above generally will be subject to U.S. federal income tax, net of
certain deductions, at the same tax rates applicable to U.S. persons. Any gains
described in the first bullet point above of a non-U.S. holder that is a foreign
corporation may also be subject to an additional “branch profits tax” at a 30
percent rate (or a lower applicable tax treaty rate). Any U.S. source capital
gain of a non-U.S. holder described in the second bullet point above (which may
be offset by U.S. source capital losses during the taxable year of the
disposition) generally will be subject to a flat 30 percent U.S. federal income
tax (or a lower applicable tax treaty rate).
In
connection with the third bullet point above, we generally will be classified as
a USRPHC if the fair market value of our “United States real property interests”
equals or exceeds 50 percent of the sum of the fair market value of our
worldwide real property interests plus our other assets used or held for use in
a trade or business, as determined for U.S. federal income tax purposes. We
believe that we currently are not a USRPHC, and we do not anticipate becoming a
USRPHC (although no assurance can be given that we will not become a USRPHC in
the future).
Information
Reporting and Backup Withholding
We
generally must report annually to the IRS and to each holder the amount of
dividends and certain other distributions we pay to such holder on our common
stock and the amount of tax, if any, withheld with respect to those
distributions. In the case of a non-U.S. holder, copies of the information
returns reporting those distributions and withholding may also be made available
to the tax authorities in the country in which the non-U.S. holder is a resident
under the provisions of an applicable income tax treaty or agreement.
Information reporting is also generally required with respect to proceeds from
the sales and other dispositions of our common stock to or through the U.S.
office (and in certain cases, the foreign office) of a broker.
60
In
addition, backup withholding of U.S. federal income tax, currently at a rate of
28 percent, generally will apply to distributions made on our common stock to,
and the proceeds from sales and other dispositions of our common stock by, a
non-corporate U.S. holder who:
·
|
fails
to provide an accurate taxpayer identification
number;
|
·
|
is
notified by the IRS that backup withholding is required;
or
|
·
|
in
certain circumstances, fails to comply with applicable certification
requirements.
|
A
non-U.S. holder generally may eliminate the requirement for information
reporting (other than with respect to distributions, as described above) and
backup withholding by providing certification of its foreign status, under
penalties of perjury, on a duly executed applicable IRS Form W-8 or by otherwise
establishing an exemption.
Backup
withholding is not an additional tax. Rather, the amount of any backup
withholding will be allowed as a credit against a U.S. holder’s or a non-U.S.
holder’s U.S. federal income tax liability and may entitle such holder to a
refund, provided that certain required information is timely furnished to the
IRS. Holders are urged to consult their own tax advisors regarding the
application of backup withholding and the availability of and procedure for
obtaining an exemption from backup withholding in their particular
circumstances.
MATERIAL
PRC INCOME TAX CONSIDERATIONS
The
following discussion summarizes the material PRC income tax considerations
relating to the ownership of our Common Stock following the consummation of this
offering.
Resident
Enterprise Treatment
On March
16, 2007, the Fifth Session of the Tenth National People’s Congress passed the
Enterprise Income Tax Law of the PRC (“EIT Law”), which became effective on
January 1, 2008. Under the EIT Law, enterprises are classified as “resident
enterprises” and “non-resident enterprises.” Pursuant to the EIT Law and its
implementing rules, enterprises established outside China whose “de facto
management bodies” are located in China are considered “resident enterprises”
and subject to the uniform 25% enterprise income tax rate on global income.
According to the implementing rules of the EIT Law, “de facto management body”
refers to a managing body that in practice exercises overall management control
over the production and business, personnel, accounting and assets of an
enterprise.
The EIT
Law and the interpretation of many of its provisions, including the definition
of “resident enterprise,” are unclear. It is also uncertain how the PRC tax
authorities would interpret and implement the EIT Law and its implementing
rules. Our management is substantially based in the PRC and expected to be based
in the PRC in the future, although two of our executive officers and one of our
directors are not PRC nationals. It remains uncertain whether the PRC tax
authorities would determine that we are a “resident enterprise” or a
“non-resident enterprise.”
Given the
short history of the EIT Law and lack of applicable legal precedent, it remains
unclear how the PRC tax authorities will determine the PRC tax resident
treatment of a non-PRC company such as us. If the PRC tax authorities determine
that we are a “resident enterprise” for PRC enterprise income tax purposes, a
number of tax consequences could follow. First, we could be subject to the
enterprise income tax at a rate of 25% on our global taxable income. Second, the
EIT Law provides that dividend income between “qualified resident enterprises”
is exempt from income tax. It is unclear whether the dividends we receive would
constitute dividend income between “qualified resident enterprises” and would
therefore qualify for tax exemption.
As of the
date of this prospectus, there has not been a definitive determination as to the
“resident enterprise” or “non-resident enterprise” status of us. However, since
it is not anticipated that we would receive dividends or generate other income
in the near future, we are not expected to have any income that would be subject
to the 25% enterprise income tax on global income in the near future. We will
consult with the PRC tax authorities and make any necessary tax payment if we
(based on future clarifying guidance issued by the PRC), or the PRC tax
authorities, determine that we are a resident enterprise under the EIT Law, and
if we were to have income in the future.
61
Dividends
From PRC Operating Companies
If we are
not treated as resident enterprises under the EIT Law, then dividends that we
receive may be subject to PRC withholding tax. The EIT Law and the implementing
rules of the EIT Law provide that (A) an income tax rate of 25% will normally be
applicable to investors that are “non-resident enterprises,” or non-resident
investors, which (i) have establishments or premises of business inside the PRC,
and (ii) the income in connection with their establishment or premises of
business is sourced from the PRC or the income is earned outside the PRC but has
actual connection with their establishments or places of business inside the
PRC, and (B) an income tax rate of 10% will normally be applicable to dividends
payable to investors that are “non-resident enterprises,” or non-resident
investors, which (i) do not have an establishment or place of business in the
PRC or (ii) have an establishment or place of business in the PRC, but the
relevant income is not effectively connected with the establishment or place of
business, to the extent such dividends are derived from sources within the
PRC.
As
described above, the PRC tax authorities may determine the resident enterprise
status of entities organized under the laws of foreign jurisdictions, on a
case-by-case basis. We are a holding company and substantially all of our income
may be derived from dividends. Thus, if we are considered as a “non-resident
enterprise” under the EIT Law and the dividends paid to us are considered income
sourced within the PRC, such dividends received may be subject to the income tax
described in the foregoing paragraph.
As of the
date of this prospectus, there has not been a definitive determination as to the
“resident enterprise” or “non-resident enterprise” status of us. As indicated
above, however, we are not expected to be paid any dividends in the near future.
We will consult with the PRC tax authorities and make any necessary tax
withholding if, in the future, we were to be paid any dividends and we (based on
future clarifying guidance issued by the PRC), or the PRC tax authorities,
determine that we are a non-resident enterprise under the EIT Law.
Dividends
that Non-PRC Resident Investors Receive From Us; Gain on the Sale or Transfer of
Our Common Stock
If
dividends payable to (or gains recognized by) our non-resident investors are
treated as income derived from sources within the PRC, then the dividends that
non-resident investors receive from us and any such gain on the sale or transfer
of our common stock, may be subject to taxes under PRC tax laws.
Under the
EIT Law and the implementing rules of the EIT Law, PRC income tax at the rate of
10% is applicable to dividends payable to investors that are “non-resident
enterprises,” or non-resident investors, which (i) do not have an establishment
or place of business in the PRC or (ii) have an establishment or place of
business in the PRC but the relevant income is not effectively connected with
the establishment or place of business, to the extent that such dividends have
their sources within the PRC. Similarly, any gain realized on the transfer of
common stock by such investors is also subject to 10% PRC income tax if such
gain is regarded as income derived from sources within the PRC.
The
dividends paid by us to non-resident investors with respect to our Common Stock,
or gain non-resident investors may realize from sale or the transfer of our
common stock, may be treated as PRC-sourced income and, as a result, may be
subject to PRC tax at a rate of 10%. In such event, we also may be required to
withhold a 10% PRC tax on any dividends paid to non-resident investors. In
addition, non-resident investors in our common stock may be responsible for
paying PRC tax at a rate of 10% on any gain realized from the sale or transfer
of our common stock after the consummation of the offering if such non-resident
investors and the gain satisfy the requirements under the EIT Law and its
implementing rules. However, under the EIT Law and its implementing rules, we
would not have an obligation to withhold income tax in respect of the gains that
non-resident investors (including U.S. investors) may realize from the sale or
transfer of our common stock from and after the consummation of this
offering.
62
If we
were to pay any dividends in the future, we would again consult with the PRC tax
authorities and if we (based on future clarifying guidance issued by the PRC),
or the PRC tax authorities, determine that we must withhold PRC tax on any
dividends payable by us under the EIT Law, we will make any necessary tax
withholding on dividends payable to our non-resident investors. If non-resident
investors as described under the EIT Law (including U.S. investors) realized any
gain from the sale or transfer of our common stock and if such gain were
considered as PRC-sourced income, such non-resident investors would be
responsible for paying 10% PRC income tax on the gain from the sale or transfer
of our common stock. As indicated above, under the EIT Law and its implementing
rules, we would not have an obligation to withhold PRC income tax in respect of
the gains that non-resident investors (including U.S. investors) may realize
from the sale or transfer of our common stock from and after the consummation of
this offering.
Penalties
for Failure to Pay Applicable PRC Income Tax
Non-resident
investors in us may be responsible for paying PRC tax at a rate of 10% on any
gain realized from the sale or transfer of our common stock after the
consummation of this offering if such non-resident investors and the gain
satisfy the requirements under the EIT Law and its implementing rules, as
described above.
According
to the EIT Law and its implementing rules, the PRC Tax Administration Law (the
“Tax Administration Law”) and its implementing rules, the Provisional Measures
for the Administration of Withholding of Enterprise Income Tax for Non-resident
Enterprises (the “Administration Measures”) and other applicable PRC laws or
regulations (collectively the “Tax Related Laws”), where any gain derived by
non-resident investors from the sale or transfer of our common stock is subject
to any income tax in the PRC, and such non-resident investors fail to file any
tax return or pay tax in this regard pursuant to the Tax Related Laws, they may
be subject to certain fines, penalties or punishments, including without
limitation: (1) if a non-resident investor fails to file a tax return and
present the relevant information in connection with tax payments, the competent
tax authorities shall order it to do so within the prescribed time limit and may
impose a fine up to RMB 2,000, and in egregious cases, may impose a fine ranging
from RMB 2,000 to RMB 10,000; (2) if a non-resident investor fails to file a tax
return or fails to pay all or part of the amount of tax payable, the
non-resident investor shall be required to pay the unpaid tax amount payable, a
surcharge on overdue tax payments (the daily surcharge is 0.05% of the overdue
amount, beginning from the day the deferral begins), and a fine ranging from 50%
to 500% of the unpaid amount of the tax payable; (3) if a non-resident investor
fails to file a tax return or pay the tax within the prescribed time limit
according to the order by the PRC tax authorities, the PRC tax authorities may
collect and check information about the income items of the non-resident
investor in the PRC and other payers (the “Other Payers”) who will pay amounts
to such non-resident investor, and send a “Notice of Tax Issues” to the Other
Payers to collect and recover the tax payable and impose overdue fines on such
non-resident investor from the amounts otherwise payable to such non-resident
investor by the Other Payers; (4) if a non-resident investor fails to pay the
tax payable within the prescribed time limit as ordered by the PRC tax
authorities, a fine may be imposed on the non-resident investor ranging from 50%
to 500% of the unpaid tax payable; and the PRC tax authorities may, upon
approval by the director of the tax bureau (or sub-bureau) of, or higher than,
the county level, take the following compulsory measures: (i) notify in writing
the non-resident investor’s bank or other financial institution to withhold from
the account thereof for payment of the amount of tax payable, and (ii) detain,
seal off, or sell by auction or on the market the non-resident investor’s
commodities, goods or other property in a value equivalent to the amount of tax
payable; or (5) if the non-resident investor fails to pay all or part of the
amount of tax payable or surcharge for overdue tax payment, and can not provide
a guarantee to the tax authorities, the tax authorities may notify the frontier
authorities to prevent the non-resident investor or their legal representative
from leaving the PRC.
PLAN
OF DISTRIBUTION
The
Selling Stockholders identified in this prospectus may offer and sell up to an
aggregate of 6,842,002 shares of our Common Stock. The Selling Stockholders may
sell all or a portion of their shares through public or private transactions at
prevailing market prices or at privately negotiated prices.
The
Selling Stockholders may sell all or a portion of the shares of Common Stock
beneficially owned by them and offered hereby from time to time directly or
through one or more underwriters, broker-dealers or agents. If the shares of
Common Stock are sold through underwriters or broker-dealers, the Selling
Stockholders will be responsible for underwriting discounts or commissions or
agent’s commissions. The shares of Common Stock may be sold in one or more
transactions at fixed prices, at prevailing market prices at the time of the
sale, at varying prices determined at the time of sale, or at negotiated prices.
These sales may be effected in transactions, which may involve crosses or block
transactions:
63
·
on any national securities exchange or quotation service on which the
securities may be listed or quoted at the time of sale;
|
|
·
in the over-the-counter market;
|
|
·
in transactions otherwise than on these exchanges or systems or in the
over-the-counter market;
|
|
·
through the writing of options, whether such options are listed on an
options exchange or otherwise;
|
|
·
ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
|
|
·
block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal
to facilitate the transaction;
|
|
·
purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
|
|
·
an exchange distribution in accordance with the rules of the applicable
exchange;
|
|
·
privately negotiated transactions;
|
|
·
short sales;
|
|
·
sales pursuant to Rule 144;
|
|
·
broker-dealers may agree with the selling securityholders to sell a
specified number of such shares at a stipulated price per share;
and
|
|
·
a combination of any such methods of
sale.
|
If the
Selling Stockholders effect such transactions by selling shares of Common Stock
to or through underwriters, broker-dealers or agents, such underwriters,
broker-dealers or agents may receive commissions in the form of discounts,
concessions or commissions from the Selling Stockholders or commissions from
purchasers of the shares of common stock for whom they may act as agent or to
whom they may sell as principal (which discounts, concessions or commissions as
to particular underwriters, broker-dealers or agents may be in excess of those
customary in the types of transactions involved). In connection with sales of
the shares of common stock or otherwise, the Selling Stockholders may enter into
hedging transactions with broker-dealers, which may in turn engage in short
sales of the shares of common stock in the course of hedging in positions they
assume. The Selling Stockholders may also sell shares of Common Stock short and
deliver shares of Common Stock covered by this prospectus to close out short
positions and to return borrowed shares in connection with such short sales. The
Selling Stockholders may also loan or pledge shares of Common Stock to
broker-dealers that in turn may sell such shares.
The
Selling Stockholders and any broker-dealer participating in the distribution of
the shares of Common Stock may be deemed to be “underwriters” within the meaning
of the Securities Act, and any commission paid, or any discounts or concessions
allowed to, any such broker-dealer may be deemed to be underwriting commissions
or discounts under the Securities Act. At the time a particular offering of the
shares of Common Stock is made, a prospectus supplement, if required, will be
distributed which will set forth the aggregate amount of shares of common stock
being offered and the terms of the offering, including the name or names of any
broker-dealers or agents, any discounts, commissions and other terms
constituting compensation from the Selling Stockholders and any discounts,
commissions or concessions allowed or re-allowed or paid to
broker-dealers.
Under the
securities laws of some states, the shares of Common Stock may be sold in such
states only through registered or licensed brokers or dealers. In addition, in
some states the shares of Common Stock may not be sold unless such shares have
been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
There can
be no assurance that any Selling Stockholder will sell any or all of the shares
of Common Stock registered pursuant to the shelf registration statement of which
this prospectus is a part.
The
Selling Stockholders and any other person participating in such distribution
will be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including, without limitation, Regulation M of the
Exchange Act, which may limit the timing of purchases and sales of any of the
shares of common stock by the Selling Stockholders and any other participating
person. Regulation M may also restrict the ability of any person engaged in the
distribution of the shares of common stock to engage in market-making activities
with respect to the shares of common stock. All of the foregoing may affect the
marketability of the shares of Common Stock and the ability of any person or
entity to engage in market-making activities with respect to the shares of
Common Stock.
64
We have
agreed to pay all expenses of the registration of the shares of common stock
including, without limitation, Commission filing fees and expenses of compliance
with state securities or “blue sky” laws; provided, however, that a Selling
Stockholder will pay all underwriting discounts and selling commissions, if any.
We will indemnify the Selling Stockholders against liabilities, including some
liabilities under the Securities Act, in accordance with our agreement to
register the shares, or the Selling Stockholders will be entitled to
contribution. We may be indemnified by the Selling Stockholders against civil
liabilities, including liabilities under the Securities Act that may arise from
any written information furnished to us by the Selling Stockholder specifically
for use in this prospectus, in accordance with the related registration rights
agreements, or we may be entitled to contribution.
Once sold
under the registration statement of which this prospectus is a part, the shares
of common stock will be freely tradable in the hands of persons other than our
affiliates.
LEGAL
MATTERS
The
validity of the shares of Common Stock offered by this prospectus will be passed
upon for us by Katten Muchin Rosenman LLP, New York, New York.
EXPERTS
The
financial statements appearing in this prospectus and registration statement
have been audited by Kabani & Company, Inc. and GBH CPAs, PC, independent
registered public accounting firms, as set forth in their reports thereon
appearing elsewhere herein, and are included in reliance upon such reports given
on the authority of such firms as experts in accounting and
auditing.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS
We
changed our independent registered public accounting firm effective September
29, 2010 from GBH CPAs, PC (“GBH”) to Kabani & Company, Inc. (“Kabani”).
Information regarding the change in the independent registered public accounting
firm was disclosed in our Current Report on Form 8-K filed with the
Commission on October 4, 2010. There were no disagreements with GBH, or
any reportable events requiring disclosure under Item 304(b) of
Regulation S-K.
WHERE
YOU CAN FIND MORE INFORMATION
We
have filed with the Commission a registration statement on Form S-1 (File
No. 333-169968) under the Securities Act, as amended, with respect to the
shares of Common Stock being offered by this prospectus. This prospectus does
not contain all of the information included in the registration statement. For
further information pertaining to us and our Common Stock, you should refer to
the registration statement and the exhibits and schedules filed with the
registration statement. Whenever we make reference in this prospectus to any of
our contracts, agreements or other documents, the references are not necessarily
complete, and you should refer to the exhibits attached to the registration
statement for copies of the actual contract, agreement or other
document.
The
registration statement and any other material we may file with the Commission
may be read and copied at the Commission’s Public Reference Room at 100 F
Street, NE, Washington, D.C. 20549, on official business days during the
hours of 10:00 am to 3:00 pm. 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.
We file
periodic reports (Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q
and Current Reports on Form 8-K) with the Commission. We are not required to
file proxy statements or information statements with the Commission or to
deliver an annual report to security holders and we do not undertake to
voluntarily send annual reports to our security holders.
65
You
may read and copy any reports, statements or other information that we have
filed with the Commission at the addresses indicated above and you may also
access them electronically at the web site set forth above. These Commission
filings are also available to the public from commercial document retrieval
services.
66
INDEX
TO FINANCIAL STATEMENTS
Page
|
||||
1.
|
Unaudited
Financial Statements of Buyonate, Inc for the six months ended June 30,
2010 and 2009
|
|||
i
|
Unaudited
Balance Sheets as of June 30, 2010 and December 31,
2009
|
F-2
|
||
ii
|
Unaudited
Statements of Operations for the three and six months ended June 30, 2010
and 2009
|
F-3
|
||
iii.
|
Unaudited
Statements of Stockholders’ Equity for the six months ended June 30, 2010
and the year ended December 31, 2009
|
F-4
|
||
iv.
|
Unaudited
Statements of Cash Flows for the six months ended June 30, 2010 and
2009
|
F-5
|
||
v
|
Notes
to unaudited Financial Statements
|
F-6
|
||
2.
|
Audited
Financial Statements of Buyonate, Inc for the Years ended December 31,
2009 and 2008
|
|||
i.
|
Report
of Independent Registered Public Accounting Firm
|
F-9
|
||
ii.
|
Balance
Sheets as of December 31, 2009 and 2008
|
F-10
|
||
iii.
|
Statements
of Operations for the Years Ended December 31, 2009 and
2008
|
F-11
|
||
iv.
|
Statements
of Stockholders’ Equity for the Years Ended December 31, 2009 and
2008
|
F-12
|
||
v.
|
Statements
of Cash Flows for the Years Ended December 31, 2009 and
2008
|
F-13
|
||
vi.
|
Notes
to Financial Statements
|
F-14
|
||
3.
|
Unaudited
Consolidated Financial Statements of CHINA ELECTRONICS HOLDINGS, INC AND
SUBSIDIARIES for the nine months ended September 30, 2010 and
2009
|
|||
i
|
Unaudited
Consolidated Balance Sheets as of September 30, 2010 and December 31,
2009
|
F-21
|
||
ii
|
Unaudited
Consolidated Statements of Income for the three and nine months ended
September 30, 2010 and 2009
|
F-22
|
||
iii.
|
Unaudited
Consolidated Statements of Cash Flows for the nine months ended September
30, 2010 and 2009
|
F-23
|
||
iv.
|
Notes
to unaudited consolidated Financial Statements
|
F-24
|
||
4.
|
Audited
Financial Statements of Lu’an Guoying Electronics Sales Co., Ltd for the
Years ended December 31, 2009 and 2008
|
|||
i.
|
Report
of Independent Registered Public Accounting Firm
|
F-38
|
||
ii.
|
Balance
Sheets as of December 31, 2009 and 2008
|
F-39
|
||
iii.
|
Statements
of Income for the Years Ended December 31, 2009 and
2008
|
F-40
|
||
iv.
|
Statements
of Cash Flows for the Years Ended December 31, 2009 and
2008
|
F-41
|
||
v.
|
Statements
of Changes in Equity for the Years Ended December 31, 2009, 2008 and
2007
|
F-42
|
||
vi.
|
Notes
to Financial Statements
|
F-43
|
F-1
PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements
BUYONATE,
INC.
Balance
Sheets
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
|
$
|
-
|
$
|
-
|
||||
Current
assets of discontinued operations
|
183
|
5,591
|
||||||
Total
Current Assets
|
183
|
5,591
|
||||||
TOTAL
ASSETS
|
$
|
183
|
$
|
5,591
|
||||
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable
|
$
|
-
|
$
|
-
|
||||
Accounts
payable - related party
|
-
|
-
|
||||||
Currnet
liabilities of discontiued operations
|
7,900
|
12,185
|
||||||
Total
Current Liabilities
|
7,900
|
12,185
|
||||||
STOCKHOLDERS'
EQUITY (DEFICIT)
|
||||||||
Preferred
stock, 50,00,000 shares authorized at par value of $0.0001, no
shares issued and outstanding
|
-
|
-
|
||||||
Common
stock, 100,000,000 shares authorized at par value of $0.0001,
4,810,000 shares issued and outstanding
|
481
|
481
|
||||||
Additional
paid-in capital
|
51,914
|
40,419
|
||||||
Accumulated
deficit
|
(60,112
|
)
|
(47,494
|
)
|
||||
Total
Stockholders' Equity (Deficit)
|
(7,717
|
)
|
(6,594
|
)
|
||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
$
|
183
|
$
|
5,591
|
The
accompanying notes are an integral part of these financial
statements.
F-2
BUYONATE,
INC.
Statements
of Operations
(Unaudited)
For the Three Months Ended
|
For the Six Months Ended
|
|||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
REVENUES
|
$
|
-
|
$
|
-
|
$
|
$
|
-
|
|||||||||
OPERATING
EXPENSES
|
||||||||||||||||
General
and administrative
|
-
|
-
|
-
|
-
|
||||||||||||
Professional
fees
|
-
|
-
|
-
|
-
|
||||||||||||
Total
Operating Expenses
|
-
|
-
|
-
|
-
|
||||||||||||
LOSS
FROM OPERATIONS
|
-
|
-
|
-
|
-
|
||||||||||||
OTHER
INCOME (EXPENSES)
|
||||||||||||||||
Gain
on extinguishment of debt
|
-
|
-
|
-
|
|
||||||||||||
Total
Other Income (Expenses)
|
-
|
-
|
-
|
-
|
||||||||||||
LOSS
BEFORE INCOME TAXES
|
-
|
-
|
-
|
-
|
||||||||||||
INCOME
TAX EXPENSE
|
-
|
-
|
|
|
||||||||||||
NET
LOSS FROM CONTINUING OPERATIONS
|
-
|
-
|
-
|
-
|
||||||||||||
LOSS
FROM DISCONTINUED OPERATIONS
|
(9,495
|
)
|
(685
|
)
|
(12,618
|
)
|
(3,455
|
)
|
||||||||
NET
LOSS
|
(9,495
|
)
|
(685
|
)
|
(12,618
|
)
|
(3,455
|
)
|
||||||||
BASIC
AND DILUTED LOSS PER SHARE
|
$
|
0.00
|
$
|
0.00
|
0.00
|
$
|
0.00
|
|||||||||
WWEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING
|
4,810,000
|
4,810,000
|
4,810,000
|
4,810,000
|
The
accompanying notes are an integral part of these financial
statements
F-3
BUYONATE,
INC.
Statements
of Stockholders' Equity (Deficit)
(Unaudited)
Total
|
||||||||||||||||||||
Additional
|
Stockholders'
|
|||||||||||||||||||
Common Stock
|
Paid-In
|
Accumulated
|
Equity
|
|||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
(Deficit)
|
||||||||||||||||
Balance,
December 31, 2008
|
4,810,000
|
$
|
481
|
$
|
40,419
|
$
|
(40,887
|
)
|
$
|
13
|
||||||||||
Net
loss for the year ended December 31, 2009
|
-
|
-
|
-
|
(6,607
|
)
|
(6,607
|
)
|
|||||||||||||
Balance,
December 21, 2009
|
4,810,000
|
481
|
40,419
|
(47,494
|
)
|
(6,594
|
)
|
|||||||||||||
Contributed
capital
|
-
|
-
|
11,495
|
-
|
11,495
|
|||||||||||||||
Net
loss for the six months ended June 30, 2010
|
-
|
-
|
-
|
(12,618
|
)
|
(12,618
|
)
|
|||||||||||||
Balance,
June 30, 2010
|
4,810,000
|
$
|
481
|
$
|
51,914
|
$
|
(60,112
|
)
|
$
|
(7,717
|
)
|
The
accompanying notes are an integral part of these financial
statements.
F-4
BUYONATE,
INC.
Statements
of Cash Flows
(Unaudited)
For the Six Months Ended
|
||||||||
June 30,
|
||||||||
2010
|
2009
|
|||||||
OPERATING
ACTIVITIES
|
||||||||
Net
loss
|
$
|
(12,618
|
)
|
$
|
(3,455
|
)
|
||
Adjustments
to Reconcile Net Loss to Net
|
||||||||
Cash
Used in Operating Activities:
|
||||||||
Gain
on extinguishment of debt
|
-
|
-
|
||||||
Changes
in Operating Assets and Liabilities:
|
||||||||
Accounts
payable
|
-
|
-
|
||||||
Net
Cash Used in Continuing Operating Activities
|
(12,618
|
)
|
(3,455
|
)
|
||||
Net
Cash Used in Discontinued Operating Activities
|
3,210
|
1,250
|
||||||
Net
Cash Used in Operating Activities
|
(9,408
|
)
|
(2,205
|
)
|
||||
INVESTING
ACTIVITIES
|
-
|
-
|
||||||
FINANCING
ACTIVITIES
|
||||||||
Increase
in related party payable
|
-
|
-
|
||||||
Net
Cash Provided by Continuing Financing Activities
|
-
|
-
|
||||||
Net
Cash Provided by Discontinued Financing Activities
|
4,000
|
3,250
|
||||||
Net
Cash Provided by Financing Activities
|
4,000
|
3,250
|
||||||
NET
INCREASE (DECREASE) IN CASH
|
(5,408
|
)
|
1,045
|
|||||
CASH
AT BEGINNING OF PERIOD
|
5,591
|
13
|
||||||
CASH
AT END OF PERIOD
|
$
|
183
|
$
|
1,058
|
||||
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
||||||||
CASH
PAID FOR:
|
||||||||
Interest
|
$
|
-
|
$
|
-
|
||||
Income
Taxes
|
$
|
-
|
$
|
-
|
||||
NON
CASH INVESTING AND FINANCING ACTIVITIES
|
||||||||
Contributed
capital
|
$
|
11,495
|
$
|
-
|
The
accompanying notes are an integral part of these financial
statements.
F-5
BUYONATE,
INC.
Notes to
Financial Statements
For the
six months ended June 30, 2010
(Unaudited)
NOTE
1 - CONDENSED FINANCIAL STATEMENTS
The
accompanying financial statements have been prepared by the Company without
audit. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations, and cash flows at June 30, 2010, and for all
periods presented herein, have been made.
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted. It is suggested
that these condensed financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's December 31,
2009 audited financial statements. The results of operations for the
periods ended June 30, 2010 and 2009 are not necessarily indicative of the
operating results for the full years.
NOTE 2
– SIGNIFICANT ACCOUNTING POLICIES
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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Recent Accounting
Pronouncements
Management
has considered all recent accounting pronouncements issued since the last audit
of the Company’s financial statements. The Company’s management believes that
these recent pronouncements will not have a material effect on the Company’s
financial statements.
F-6
BUYONATE,
INC.
Notes to
Financial Statements
For the
six months ended June 30, 2010
(Unaudited)
NOTE 3
- RELATED PARTY TRANSACTIONS
The
Company has received an aggregate of $7,250 ($4,000 and $3,250 during the six
months ended June 30, 2010 and 2009, respectively) from related parties to fund
ongoing operations. The related party advances are non interest bearing,
unsecured and due upon demand.
NOTE 4
– GAIN ON EXTINGUISHMENT OF DEBT
During
the six months ended June 30, 2010, management wrote-off $2,250 of trade
payables from a vendor, resulting in a gain of $2,250. No consideration was
provided to extinguish the liabilities and the gain recognized was for the
difference between the recorded amount of the liability and the fair value of
the consideration provided to the vendor. As a result, the gain was
recognized as a gain on extinguishment of debt included with the Company’s loss
from discontinued operations in the accompanying Statement of Operations for the
six months ended June 30, 2010.
NOTE 5
– DISCONTINUED OPERATIONS
Effective
July 15, 2010, the Company’s board of directors determined to discontinue its
interactive digital software for children. The Company has entered into a share
exchange agreement that will be accounted for as a reverse merger, as further
described in Note 7. As such, the Company will continue only as the legal
entity and the acquired subsidiary will continue as the accounting entity.
A summary of the discontinued operations is as follows for the three and six
months ended June 30, 2010 and 2009, respectively:
Three
months ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Discontinued
operations:
|
||||||||
Revenues
|
$
|
-
|
$
|
-
|
||||
Operating
expenses
|
(11,748
|
)
|
(685
|
)
|
||||
Gain
on extinguishment of debt
|
2,250
|
-
|
||||||
Total
|
$
|
(9,495
|
)
|
$
|
(685
|
)
|
Six
months ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Discontinued
operations:
|
||||||||
Revenues
|
$
|
-
|
$
|
1,459
|
||||
Operating
expenses
|
(14,868
|
)
|
(4,914
|
)
|
||||
Gain
on extinguishment of debt
|
2,250
|
-
|
||||||
Total
|
$
|
(12,618
|
)
|
$
|
(3,455
|
)
|
F-7
BUYONATE,
INC.
Notes to
Financial Statements
For the
six months ended June 30, 2010
(Unaudited)
NOTE 6
– SUBSEQUENT EVENTS
On
July 15, 2010, the Company entered into a share exchange agreement with China
Electronic Holdings, Inc., a Delaware corporation (“CEH Delaware”) and certain
stockholders and warrant holders of CEH Delaware. Pursuant to the share
exchange agreement, ten CEH Delaware Stockholders transferred 100% of the
outstanding shares of common stock and preferred stock and 100% of the warrants
to purchase common stock of CEH Delaware held by them, in exchange for an
aggregate of 13,785,902 newly issued shares of the Company’s common stock and
warrants to purchase an aggregate of 1,628,570 shares of the Company’s common
stock. The shares of the Company common stock acquired by the CEH Delaware
Stockholders in such transactions constitute approximately 86% of the Company’s
issued and outstanding common stock giving effect to the share and warrant
exchange and the sale of the Company’s common stock pursuant to a subscription
agreement, but not including any outstanding purchase warrants to purchase
shares of the Company’s common stock, including the warrants issued pursuant to
the Subscription Agreement. In connection with the closing of the Share Exchange
Agreement, CEH Delaware purchased from the former principal stockholder of the
Company an aggregate of 4 million shares of the Company’s common stock and then
agreed to the cancellation of such shares.
Subsequent
to the share exchange agreement, the Company has discontinued all operations
previously associated with Buyonate, Inc. As such, the financial
statements presented herein have been retroactively restated to reflect the
discontinuance of operations.
On July
15, 2010, the Company consummated transactions under a subscription agreement,
dated as of July 9, 2010 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 the Company’s common stock, (b) Series C Warrants to
purchase an aggregate of 310,454 shares of the Company’s common stock for
$3.70 per share and (c) Series D Warrants to purchase an aggregate of 310,454
shares of the Company’s common stock for $4.75 per share.
On July
26, 2010, the Company entered into and consummated a subscription agreement with
68 accredited investors pursuant to which the investors agreed to and did
purchase for an aggregate gross purchase price of $1,401,855 an aggregate of (a)
531,005 shares of the Company’s common stock, (b) three year warrants Series C
Warrants to purchase an aggregate of 132,751 shares of the Company’s common
stock for $3.70 per share and (c) Series D Warrants to purchase an aggregate of
132,751 shares of the Company’s common stock for $4.75 per share. The
Subscription Agreement was on the same terms as the subscription agreement the
Company entered into on July 9, 2010.
On August
17, 2010, the Company entered into and consummated a subscription
agreement with 11 accredited investors pursuant to which the investors
agreed to and did purchase for an aggregate gross purchase price of $571,296 an
aggregate of (a) 216,400 shares of the Company’s common stock, (b) Series C
Warrants to purchase an aggregate of 54,100 shares of the Company’s common stock
for $3.70 per share and (c) Series D Warrants to purchase an aggregate of 54,100
shares of the Company’s common stock for $4.75 per share. The Subscription
Agreement was on the same terms as the subscription agreement the Company
entered into on July 9, 2010.
In
accordance with ASC 855, Company management reviewed all material events through
the date of this report and there are no additional material subsequent events
to report.
F-8
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
Buyonate,
Inc.
Las
Vegas, Nevada
We have
audited the accompanying balance sheets of Buyonate, Inc. (the "Company") as of
December 31, 2009 and 2008, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the years then ended. 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 audits to obtain reasonable assurance whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit 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 Buyonate, Inc. as of December 31,
2009 and 2008, and the results of its operations and its cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America.
/s/
GBH CPAs, PC
|
||
GBH
CPAs, PC
|
||
www.gbhcpas.com
|
||
Houston,
Texas
|
||
March
22, 2010
|
F-9
BUYONATE,
INC.
Balance
Sheets
December 31,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
|
$
|
5,591
|
$
|
13
|
||||
Total
Current Assets
|
5,591
|
13
|
||||||
TOTAL
ASSETS
|
$
|
5,591
|
$
|
13
|
||||
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable
|
$
|
8,935
|
$
|
—
|
||||
Advances
from related party
|
3,250
|
—
|
||||||
Total
Current Liabilities
|
12,185
|
—
|
||||||
STOCKHOLDERS'
EQUITY (DEFICIT)
|
||||||||
Preferred
stock, 50,00,000 shares authorized at par value of $0.0001, no
shares issued and outstanding
|
—
|
—
|
||||||
Common
stock, 100,000,000 shares authorized at par value of $0.0001,
4,810,000 shares issued and outstanding
|
481
|
481
|
||||||
Additional
paid-in capital
|
40,419
|
40,419
|
||||||
Accumulated
deficit
|
(47,494
|
)
|
(40,887
|
)
|
||||
Total
Stockholders' Equity (Deficit)
|
(6,594
|
)
|
13
|
|||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
$
|
5,591
|
$
|
13
|
The
accompanying notes are an integral part of these financial
statements.
F-10
BUYONATE,
INC.
Statements
of Operations
For the Year
|
For the Year
|
|||||||
Ended
|
Ended
|
|||||||
December 31,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
REVENUES
|
$
|
8,955
|
$
|
—
|
||||
OPERATING
EXPENSES
|
||||||||
General
and administrative
|
7,212
|
24,608
|
||||||
Professional
fees
|
8,350
|
16,279
|
||||||
Total
Operating Expenses
|
15,562
|
40,887
|
||||||
LOSS
FROM OPERATIONS
|
(6,607
|
)
|
(40,887
|
)
|
||||
INCOME
TAX EXPENSE
|
—
|
—
|
||||||
NET
LOSS
|
$
|
(6,607
|
)
|
$
|
(40,887
|
)
|
||
BASIC
AND DILUTED LOSS PER SHARE
|
$
|
(0.00
|
)
|
$
|
(0.01
|
)
|
||
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND
DILUTED
|
4,810,000
|
4,810,000
|
The
accompanying notes are an integral part of these financial
statements
F-11
BUYONATE,
INC.
Statements
of Stockholders' Equity (Deficit)
For
the Years Ended December 31, 2009 and 2008
Deficit
|
||||||||||||||||||||||||
Accumulated
|
Total
|
|||||||||||||||||||||||
Additional
|
Stock
|
During the
|
Stockholders'
|
|||||||||||||||||||||
Common Stock
|
Paid-In
|
Subscription
|
Development
|
Equity
|
||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Receivable
|
Stage
|
(Deficit)
|
|||||||||||||||||||
Balance,
December 31, 2007
|
4,810,000
|
$
|
481
|
$
|
40,419
|
$
|
(23,900
|
)
|
$
|
—
|
$
|
17,000
|
||||||||||||
Stock
subscriptions received
|
—
|
—
|
—
|
23,900
|
—
|
23,900
|
||||||||||||||||||
Net
loss for the year ended December 31, 2008
|
—
|
—
|
—
|
—
|
(40,887
|
)
|
(40,887
|
)
|
||||||||||||||||
Balance,
December 31, 2008
|
4,810,000
|
481
|
40,419
|
—
|
(40,887
|
)
|
13
|
|||||||||||||||||
Net
loss for the year ended December 31, 2009
|
—
|
—
|
—
|
—
|
(6,607
|
)
|
(6,607
|
)
|
||||||||||||||||
Balance,
December 21, 2009
|
4,810,000
|
$
|
481
|
$
|
40,419
|
$
|
—
|
$
|
(47,494
|
)
|
$
|
(6,594
|
)
|
The
accompanying notes are an integral part of these financial
statements.
F-12
BUYONATE,
INC.
Statements
of Cash Flows
For
the Year Ended
|
||||||||
December
31,
|
||||||||
2009
|
2008
|
|||||||
OPERATING
ACTIVITIES
|
||||||||
Net
loss
|
$
|
(6,607
|
)
|
$
|
(40,887
|
)
|
||
Adjustments
to Reconcile Net Loss
|
||||||||
Cash
Used by Operating Activities:
|
||||||||
Increase
in accounts payable
|
8,935
|
—
|
||||||
Net
Cash (Used in) Provided by Operating Activities
|
2,328
|
(40,887
|
)
|
|||||
INVESTING
ACTIVITIES
|
—
|
—
|
||||||
FINANCING
ACTIVITIES
|
||||||||
Increase
in related party advances
|
3,250
|
—
|
||||||
Common
stock issued for cash
|
—
|
23,900
|
||||||
Net
Cash Provided by Financing Activities
|
3,250
|
23,900
|
||||||
NET
INCREASE (DECREASE) IN CASH
|
5,578
|
(16,987
|
)
|
|||||
CASH
AT BEGINNING OF PERIOD
|
13
|
17,000
|
||||||
CASH
AT END OF PERIOD
|
$
|
5,591
|
$
|
13
|
||||
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
||||||||
CASH
PAID FOR:
|
||||||||
Interest
|
$
|
—
|
$
|
—
|
||||
Income
Taxes
|
$
|
—
|
$
|
—
|
The
accompanying notes are an integral part of these financial
statements.
F-13
BUYONATE,
INC.
Notes to
Financial Statements
December
31, 2009 and 2008
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
and Nature of Business
Buyonate,
Inc., (the "Company"), was incorporated in the State of Nevada on July 9, 2007
to engage in developing user-friendly/child friendly interactive digital
software for children between the ages of 5 to 12 years old. Our target market
is primarily elementary aged children who wish to capture their school, family
and friends memories in a fun and interesting way and to be able to save those
memories to watch and play for years to come. The Company was in the development
stage through December 31, 2008. The year 2009 is the first year during which
the Company is considered an operating company and is no longer in the
development stage.
Accounting
Basis
The basis
is accounting principles generally accepted in the United States of America. The
Company has adopted a December 31 fiscal year end.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Basic
and Diluted Earnings per Common Share
Basic
earnings per share is calculated by dividing the Company's net loss applicable
to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is calculated by
dividing the Company's net loss by the diluted weighted average number of shares
outstanding during the year. The diluted weighted average number of shares
outstanding is the basic weighted average number of shares adjusted for any
potentially dilutive debt or equity instruments. There were no such common stock
equivalents outstanding as of December 31, 2009 and 2008.
For the
|
For the
|
|||||||
Year Ended
|
Year Ended
|
|||||||
December 31,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Loss
(numerator)
|
$
|
(6,607
|
)
|
$
|
(40,887
|
)
|
||
Shares
(denominator)
|
4,810,000
|
4,810,000
|
||||||
Per
share amount
|
$
|
(0.00
|
)
|
$
|
(0.01
|
)
|
Advertising
Costs
The
Company's policy regarding advertising is to expense advertising costs when
incurred. The Company did not incur any advertising expense during the years
ended December 31, 2009 and 2008.
F-14
BUYONATE,
INC.
Notes to
Financial Statements
December
31, 2009 and 2008
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments purchased with a maturity of
three months or less to be cash equivalents to the extent the funds are not
being held for investment purposes.
Income
Taxes
The
Company uses an asset and liability approach in accounting for income taxes.
Deferred tax assets and liabilities are recorded based on the differences
between the financial statement and tax bases of assets and liabilities and the
tax rates in effect when these differences are expected to reverse. The Company
reduces deferred tax assets by a valuation allowance if, based on the weight of
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized. The provision for income taxes differs from the
amounts which would be provided by applying the statutory federal income tax
rate of 39% to the net loss before provision for income taxes for the following
reasons:
For the
|
For the
|
|||||||
Year Ended
|
Year Ended
|
|||||||
December 31,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Income
tax benefit at statutory rate
|
$ | 2,577 | $ | 15,946 | ||||
Change
in valuation allowance
|
(2,577 | ) | (15,946 | ) | ||||
Income
tax benefit per books
|
$ | — | $ | — |
Net
deferred tax assets consist of the following components as of:
December 31,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
NOL
Carryover
|
$ | 18,523 | $ | 15,946 | ||||
Valuation
allowance
|
(18,523 | ) | (15,946 | ) | ||||
Net
deferred tax asset
|
$ | — | $ | — |
Due to
the change in ownership provisions of the Tax Reform Act of 1986, net operating
loss carry forwards of approximately $47,000 for federal income tax reporting
purposes may be subject to annual limitations. The net operating loss carry
forwards began expiring in the year ending December 31, 2028. Should a change in
ownership occur net operating loss carry forwards may be limited as to use in
future years.
F-15
BUYONATE,
INC.
Notes to
Financial Statements
December
31, 2009 and 2008
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent
Accounting Pronouncements
In May
2009, the FASB issued FAS 165 (ASC 855-10), "Subsequent Events". This
pronouncement establishes standards for accounting for and disclosing subsequent
events (events which occur after the balance sheet date but before financial
statements are issued or are available to be issued). FAS
165 (ASC
855-10) requires an entity to disclose the date subsequent events were evaluated
and whether that evaluation took place on the date financial statements were
issued or were available to be issued. The Company adopted FAS 165 (ASC 855-10)
during the second quarter of 2009. The Company has evaluated subsequent events
and any related required disclosures through the date of the issuance of these
financial statements.
In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles ("SFAS 168" or ASC
105-10). SFAS 168 (ASC 105-10) establishes the Codification as the sole source
of authoritative accounting principles recognized by the FASB to be applied by
all nongovernmental entities in the preparation of financial statements in
conformity with GAAP. SFAS 168 (ASC 105-10) was prospectively effective for
financial statements issued for fiscal years ending on or after September 15,
2009, and interim periods within those fiscal years. The adoption of SFAS 168
(ASC 105-10) on July 1, 2009 did not impact the Company's results of operations
or financial condition. The Codification did not change GAAP; however, it did
change the way GAAP is organized and presented. As a result, these changes
impact how companies reference GAAP in their financial statements and in their
significant accounting policies. The Company implemented the Codification in
this Report by providing references to the Codification topics alongside
references to the corresponding standards.
In
October 2009, the FASB issued Accounting Standards Update 2009-14, Software
(Topic 985): Certain Revenue Arrangements That Include Software Elements. This
update changed the accounting model for revenue arrangements that include both
tangible products and software elements. This update is effective prospectively
for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. Early adoption is permitted. The Company
does not expect the provisions of ASU 2009-14 to have a material effect on the
financial position, results of operations or cash flows of the
Company.
In
October 2009, the FASB issued Accounting Standards Update 2009-13, Revenue
Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. This update
addressed the accounting for multiple-deliverable arrangements to enable vendors
to account for products or services (deliverables) separately rather than as a
combined unit and deliverables will be separated in more circumstances than
under existing US GAAP. This amendment has eliminated that residual method of
allocation. This update is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June
15, 2010. Early adoption is permitted. The Company does not expect the
provisions of ASU 2009-13 to have a material effect on the financial position,
results of operations or cash flows of the Company.
With the
exception of the pronouncements noted above, no other accounting standards or
interpretations issued or recently adopted are expected to a have, or did have,
a material impact on the Company's financial position, operations or cash
flows.
F-16
BUYONATE,
INC.
Notes to
Financial Statements
December
31, 2009 and 2008
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue
Recognition
We
evaluate the recognition of revenue based on the criteria set forth in ASC Topic
985, SOFTWARE REVENUE RECOGNITION, and recognize revenue when all four of the
following criteria are met:
*
EVIDENCE OF AN ARRANGEMENT. Evidence of an agreement with the customer that
reflects the terms and conditions to deliver products that must be present in
order to recognize revenue.
*
DELIVERY. Delivery is considered to occur when a product is shipped and the risk
of loss and rewards of ownership have been transferred to the customer. For
web-based services, delivery is considered to occur as the service is provided.
For digital downloads that do not have an online service component, delivery is
considered to occur generally when the download is made available.
* FIXED
OR DETERMINABLE FEE. If a portion of the arrangement fee is not fixed or
determinable, we recognize revenue as the amount becomes fixed or
determinable.
*
COLLECTION IS DEEMED PROBABLE. Collection is deemed probable if we expect the
customer to be able to pay amounts under the arrangement as those amounts become
due. If we determine that collection is not probable, we recognize revenue when
collection becomes probable (generally upon cash collection).
Determining
whether and when some of these criteria have been satisfied often involves
assumptions and management judgments that can have a significant impact on the
timing and amount of revenue we report in each period. For example, for multiple
element arrangements, we must make assumptions and judgments in order to (1)
determine whether and when each element has been delivered, (2) determine
whether undelivered products or services are essential to the functionality of
the delivered products and services, (3) determine whether vendor- specific
objective evidence of fair value ("VSOE") exists for each undelivered element,
and (4) allocate the total price among the various elements we must deliver.
Changes to any of these assumptions or management judgments, or changes to the
elements in a software arrangement, could cause a material increase or decrease
in the amount of revenue that we report in a particular period. Sales
transactions may consist of multiple element arrangements which typically would
include technical support and other service fees. These multiple element
arrangements must be analyzed to determine the relative fair value of each
element, the amount of revenue to be recognized upon delivery, if any, and the
period and conditions under which deferred revenue should be
recognized.
The
Company entered into a reseller agreement with Yearbook Alive Software Company,
its primary vendor, effective July 31, 2008. Under the agreement, the Company is
reselling the vendor's products and programs through offline and online markets
to individuals, schools, school districts, county school districts, and state
school agencies. Under the terms of the agreement, the Company has the right to
market, promote, and resell the software products developed by YearBook Alive,
and may set the price of the products for resale. The Company has the right to
sell the software without paying a royalty until July 31, 2010. After July 31,
2010, the Company may choose to continue selling the software by paying an
annual royalty advance of $100,000.
F-17
BUYONATE,
INC.
Notes to
Financial Statements
December
31, 2009 and 2008
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue
Recognition
GROSS
VERSUS NET REVENUE CLASSIFICATION
In the
normal course of business, the Company acts as a principal with respect to sales
to third parties. The Company distributes software on behalf of a third-party
software developer. As required by FASB ASC Subtopic 605-45, PRINCIPAL AGENT
CONSIDERATIONS, such transactions are recorded on a "gross" or "net" basis
depending on whether the Company is acting as the "principal" in the transaction
or acting as an "agent" in the transaction. The Company serves as the principal
in transactions in which it has substantial risks and rewards of ownership and,
accordingly, revenues are recorded on a gross basis. For those transactions in
which the Company does not have substantial risks and rewards of ownership, the
Company is considered an agent and, accordingly, revenues are recorded on a net
basis. To the extent revenues are recorded on a gross basis, any participations
and royalties paid to third parties are recorded as expenses so that the net
amount (gross revenues less expenses) flows through operating income. To the
extent revenues are recorded on a net basis, revenues are reported based on the
amounts received, less participations and royalties paid to third parties. In
both cases, the impact on operating income is the same whether the Company
records the revenues on a gross or net basis. Based on an evaluation of the
individual terms of its contract and whether the Company is acting as principal
or agent, the Company will record any revenues from the distribution of software
on behalf of the third-party software developer on a gross basis.
2. EQUITY
TRANSACTIONS
During
December 2007, the Company closed a private placement for 810,000 common shares
at a price of $0.05 per share, or an aggregate of $40,500. The Company received
$16,600 of the proceeds in 2007 and $23,900 in 2008.
F-18
BUYONATE,
INC.
Notes to
Financial Statements
December
31, 2009 and 2008
3.
RELATED PARTY TRANSACTIONS
The
Company received $3,250 during 2009 from related parties to fund ongoing
operations. The related party advance is non interest bearing, unsecured and due
upon demand.
4.
SUBSEQUENT EVENT
In
accordance with SFAS 165 (ASC 855-10), the Company's management reviewed all
material events through the date of issuance of the financial statements and
there were no material subsequent events to report, except as
follows:
On
February 6, 2010 the Company entered into a stock purchase agreement wherein the
majority shareholders of the Company, Mr. Husni Hassadiyeh and Ms. Inbar Kuta
have agreed to sell 4,000,000 shares of the Company's stock for a total of
$355,000.
F-19
INDEX
TO FINANCIAL STATEMENTS
Unaudited Consolidated
Balance Sheets as of September 30, 2010 and December 31,
2009
|
F-21
|
Unaudited Consolidated
Statements of Income for the three and nine months ended September 30,
2010 and 2009
|
F-22
|
Unaudited Consolidated
Statements of Cash Flows for the nine months ended September 30, 2010 and
2009
|
F-23
|
Notes
to unaudited consolidated Financial Statements
|
F-24
|
F-20
CHINA
ELECTRONICS HOLDINGS, INC AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS OF
SEPTEMBER 30, 2010 AND DECEMBER 31, 2009
(UNAUDITED)
SEPTEMBER 30,
|
DECEMBER 31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
||||||||
Assets
|
||||||||
Current
assets :
|
||||||||
Cash
and cash equivalents
|
$ | 5,976,273 | $ | 64,736 | ||||
Restricted
Cash
|
50,898 | - | ||||||
Trade
accounts receivable, net
|
7,304,508 | 6,295,375 | ||||||
Related
party receivables
|
35,928 | - | ||||||
Advances
|
5,959,959 | - | ||||||
Inventories,
net
|
8,140,221 | 992,090 | ||||||
Total
current assets
|
27,467,787 | 7,352,201 | ||||||
Property
and equipment, net
|
8,321 | 11,733 | ||||||
Deposit
- Long term
|
5,988,000 | - | ||||||
Other
receivables - Long term
|
5,011,145 | 12,831,849 | ||||||
Total
assets
|
$ | 38,475,253 | $ | 20,195,783 | ||||
Liabilities
and Stockholders' Equity
|
||||||||
Current
liabilities :
|
||||||||
Trade
accounts payable
|
$ | 1,360,818 | $ | - | ||||
Other
payables
|
55,778 | - | ||||||
Customer
deposit
|
- | 1,333,091 | ||||||
Accrued
expenses
|
60,814 | 1,925,722 | ||||||
Dividend
payable
|
- | 10,915,576 | ||||||
Total
current liabilities
|
1,477,410 | 14,174,389 | ||||||
Stockholders'
equity
|
||||||||
Preferred
stock, $0.0001 par value; 50,000,000 shares authorized; 0 shares issued
and outstanding as of September 30, 2010 and December 31,
2009
|
- | - | ||||||
Common
stock, $0.0001 par value; 150,000,000 shares authorized; 16,783,113 shares
and 13,785,902 issued and outstanding as of September 30, 2010 and
December 31, 2009, respectively
|
1,678 | 1,379 | ||||||
Additional
paid in capital
|
15,341,710 | 135,721 | ||||||
Retained
earnings
|
17,721,907 | 4,216,433 | ||||||
Statutary
reserve
|
2,567,921 | 978,777 | ||||||
Accumulated
other comprehensive income
|
1,364,627 | 689,084 | ||||||
Total
stockholders' equity
|
36,997,843 | 6,021,394 | ||||||
Total
liabilities and stockholders' equity
|
$ | 38,475,253 | $ | 20,195,783 |
The
accompanying notes are an integral part of these unaudited consolidated
statement.
F-21
CHINA
ELECTRONICS HOLDINGS, INC AND SUBSIDIARIES
CONSOLIDATED
INCOME STATEMENTS AND COMPREHENSIVE INCOME STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(Unaudited)
THREE
MONTHS ENDED SEPTEMBER 30,
|
NINE
MONTHS ENDED SEPTEMBER 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
revenue from exclusive franchise stores
|
$ | 15,941,130 | $ | 2,678,233 | $ | 47,293,651 | $ | 8,579,729 | ||||||||
Net
revenue from non-exclusive franchise stores
|
15,215,724 | 1,645,322 | 35,370,277 | 5,453,226 | ||||||||||||
Net
revenue from company owned stores
|
2,422,743 | 9,831,916 | 6,700,974 | 11,688,204 | ||||||||||||
Net
Revenue
|
33,579,597 | 14,155,471 | 89,364,902 | 25,721,159 | ||||||||||||
Cost
of goods sold from direct stores
|
13,681,842 | 1,991,739 | 38,763,858 | 6,777,986 | ||||||||||||
Cost
of goods sold from franchise
|
12,334,024 | 1,169,114 | 28,740,472 | 4,253,516 | ||||||||||||
Cost
of goods sold from sales
|
1,398,835 | 7,348,991 | 5,508,979 | 9,262,928 | ||||||||||||
Cost
of goods sold
|
27,414,701 | 10,509,844 | 73,013,309 | 20,294,430 | ||||||||||||
Gross
profit
|
6,164,896 | 3,645,626 | 16,351,593 | 5,426,729 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Selling
expense
|
768,344 | 12,069 | 1,561,949 | 37,145 | ||||||||||||
General
and administrative expenses
|
1,424,764 | 19,239 | 1,469,436 | 50,652 | ||||||||||||
Total
Operating Expenses
|
2,193,108 | 31,308 | 3,031,385 | 87,797 | ||||||||||||
Net
operating income
|
3,971,788 | 3,614,319 | 13,320,208 | 5,338,932 | ||||||||||||
Other
income (expense):
|
||||||||||||||||
Financial
expense
|
(4,244 | ) | (1,224 | ) | (5,419 | ) | (648 | ) | ||||||||
Other
income
|
1,824,223 | - | 1,824,223 | - | ||||||||||||
Other
expense
|
(41,956 | ) | - | (41,956 | ) | - | ||||||||||
Total
other income (expense)
|
1,778,023 | (1,224 | ) | 1,776,848 | (648 | ) | ||||||||||
Net
income before income taxes
|
5,749,811 | 3,613,095 | 15,097,056 | 5,338,284 | ||||||||||||
Income
taxes
|
1,485 | 760 | 2,436 | 2,083 | ||||||||||||
Net
income
|
5,748,326 | 3,612,335 | 15,094,620 | 5,336,201 | ||||||||||||
Foreign
currency translation adjustment
|
573,511 | 2,225 | 675,543 | 35,627 | ||||||||||||
Comprehensive
income
|
$ | 6,321,837 | $ | 3,614,560 | $ | 15,770,163 | $ | 5,371,828 | ||||||||
Earnings
per share - basic
|
$ | 0.35 | $ | 0.26 | $ | 1.74 | $ | 0.39 | ||||||||
Earnings
per share - diluted
|
$ | 0.33 | $ | 0.26 | $ | 1.50 | $ | 0.39 | ||||||||
Basic
weighted average shares outstanding
|
16,273,027 | 13,785,902 | 8,672,998 | 13,785,902 | ||||||||||||
Diluted
weighted average shares outstanding
|
17,686,830 | 13,785,902 | 10,086,801 | 13,785,902 |
The
accompanying notes are an integral part of these unaudited consolidated
statement.
F-22
CHINA
ELECTRONICS HOLDINGS, INC AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(Unaudited)
SEPTEMBER 30,
|
||||||||
2010
|
2009
|
|||||||
Net
income
|
$ | 15,094,620 | $ | 5,336,201 | ||||
Adjustments
to reconcile net income to net cash provided by (used in)
operations:
|
||||||||
Bad
debt expenses
|
419,899 | - | ||||||
Depreciation
|
9,005 | 7,791 | ||||||
Changes
in operating liabilities and assets:
|
||||||||
Trade
accounts receivable
|
(1,259,589 | ) | (12,646,319 | ) | ||||
Advances
|
(5,856,446 | ) | - | |||||
Inventories
|
(7,004,046 | ) | 114,610 | |||||
Other
receivables
|
7,942,726 | 7,153,592 | ||||||
Trade
accounts payable
|
1,311,771 | 11,375 | ||||||
Other
payables
|
(4,515,834 | ) | - | |||||
Customer
deposit
|
(1,336,727 | ) | (74,585 | ) | ||||
Accrued
expenses
|
2,700,141 | 7,251 | ||||||
Net
cash provided by (used in) operating activities
|
7,505,520 | (90,085 | ) | |||||
Cash
flows from investing activities:
|
||||||||
Property,
plant, and equipment additions
|
(5,416 | ) | - | |||||
Deposit
|
(5,884,000 | ) | - | |||||
cash
received in reverse acquisition
|
136,643 | - | ||||||
Net
cash used in investing activities
|
(5,752,773 | ) | - | |||||
Cash
flows from financing activities
|
||||||||
Restricted
cash
|
(50,014 | ) | - | |||||
Share
issued for cash
|
4,154,069 | - | ||||||
Related
party receivable
|
(35,304 | ) | - | |||||
Net
cash provided by financing activities
|
4,068,751 | - | ||||||
Effect
of rate changes on cash
|
90,039 | 74,527 | ||||||
Increase
(decrease) in cash and cash equivalents
|
5,911,537 | (15,558 | ) | |||||
Cash
and cash equivalents, beginning of period
|
64,736 | 33,600 | ||||||
Cash
and cash equivalents, end of period
|
$ | 5,976,273 | $ | 18,042 | ||||
Supplemental
disclosures of cash flow information:
|
||||||||
Interest
paid in cash
|
$ | 4,431 | $ | 2,778 | ||||
Income
taxes paid in cash
|
$ | 2,436 | $ | 2,083 | ||||
Reclassification
of dividend payable from liability to additional paid in
capital
|
$ | 10,915,576 | $ | - |
The
accompanying notes are an integral part of these unaudited consolidated
statement.
F-23
CHINA
ELECTRONICS HOLDINGS, INC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2010
(Unaudited)
1.
|
Nature of
Operations
|
China
Electronics Holdings, Inc (the “Company”, “We”, “Our”, “Us”), Formerly named
Buyonate, Inc., was incorporated in the State of Nevada on July 9, 2007 to
engage in developing user-friendly/child friendly interactive digital software
for children between the ages of 5 to 12 years old. Our target market is
primarily elementary aged children who wish to capture their school, family and
friends memories in a fun and interesting way and to be able to save those
memories to watch and play for years to come. The Company was in the development
stage through December 31, 2008. The year 2009 is the first year during which
the Company is considered an operating company and is no longer in the
development stage.
China
Electronic Holdings, Inc (“CEH Delaware” ) was organized on November 15, 2007,
as a Delaware corporation. Prior to February 10, 2010, CEH Delaware 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 franchise
stores.
Lu’an
Guoying Electronic Sales Co., Ltd., a PRC corporation, (“Guoying”) was
established on January 4, 2002 with share capital of RMB 1,000,000
(approximately $137,100). Guoying sells electronic products in the PRC through
its company-owned stores, exclusive franchise stores and non-exclusive
stores.
We
entered into a Share Exchange Agreement, dated as of July 9, 2010 (the “Share
Exchange Agreement”) with CEH Delaware and certain stockholders and warrant
holders of CEH Delaware (the “CEH Delaware Stockholders”). Pursuant to the
Share Exchange Agreement, on July 15, 2010, 10 CEH Delaware Stockholders
transferred 100% of the outstanding shares of common stock and preferred stock
and 100% of the warrants to purchase common stock of CEH Delaware 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 Delaware
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, CEH
Delaware 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 CEH
Delaware owning approximately 72.5% of issued and outstanding shares of our
common stock, (ii) CEH Delaware becoming our wholly-owned subsidiary, and (iii)
appointment of certain nominees of the shareholder of CEH Delaware as our
directors and officers and resignation of Mr. Ryan Cravey as our sole director,
Chief Executive Officer, Chief Financial Officer, Secretary and
Treasurer.
The
exchange of shares between the Company and CEH Delaware has been accounted for
as a reverse acquisition under the purchase method of accounting since the
stockholders of CEH Delaware obtained control of the Company.
On
December 26, 2008, the shareholders of Guoying (accounting acquirer) entered
into a share transfer agreement with CEH Delaware (legal acquirer) to transfer
40% of their shares of Guoying Electronic Group Co, Ltd. to CEH Delaware for a
consideration of RMB 400,000 (approximately $60,000). The shareholders of
Guoying also entered into another share transfer agreement with CEH Delaware in
February 2010 to transfer the rest of their shares (60%) to CEH Delaware for a
consideration of RMB 600,000. The amount of RMB 400,000 was paid in February
2010 by CEH Delaware. Simultaneously, CEH Delaware and Guoying also entered into
an agreement to issue 13,213,268 shares to CEO of CEH Delaware. 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, 2010, Guoying merged into CEH Delaware 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 Delaware cancelled 2,272,399 shares of its issued
and outstanding stock owned by its shareholder.
F-24
The
exchange of shares between Guoying and CEH Delaware has been accounted for as a
reverse acquisition under the purchase method of accounting since the
stockholders of Guoying obtained control of CEH Delaware. 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 Guoying being treated as the continuing
entity. The historical financial statements presented are those of
Guoying.
As a
result of the 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
(“RMB”); 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 nine month period ended September 30, 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 CEH
Delaware, and its wholly owned subsidiary Guoying. All significant inter-company
balances and transactions have been eliminated in
consolidation.
F-25
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 $427,321 and $0 as of
September 30, 2010 and December 31, 2009, respectively.
Our
allowance for doubtful accounts from January 1, 2008 through September 30, 2010
is set forth below:
January
1, 2008
|
0 | |||
December
31, 2008
|
0 | |||
December
31, 2009
|
0 | |||
March
31, 2010
|
0 | |||
June
30, 2010
|
0 | |||
September
30, 2010
|
427,321 |
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:
September 30, 2010
|
December 31, 2009
|
|||||||
Electronic
products
|
$ | 8,140,221 | $ | 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
|
F-26
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 September 30, 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. The Company’s revenue from sales is
presented as gross revenue. Payments received before all of the relevant
criteria for revenue recognition are satisfied are recorded as customer deposit.
Customer deposits amounted to $0 and $1,333,091 as of September 30, 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.
Rewards or incentives given to our customers are 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 – Non
Exclusive Franchise Activities:
Revenues
from franchised activities include area development and initial franchise fees
(collectively referred to as “Non Exclusive Franchise fees”) received from
non-exclusive franchise stores to establish new stores and royalties charged to
franchisees based on a percentage of a franchised store’s sales. Initial
franchise fees were not received from exclusive franchise stores. Franchise fees
are accrued as an unearned franchise revenue liability when received and
are recognized as revenue when the non exclusive 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. Non Exclusive Franchise fees included in revenues were
approximately $15.22 million and $1.65 million in the three months ended
September 30, 2010 and 2009, respectively.
For
the nine months ended September 30, 2010 and 2009, no initial franchise fee
revenue has been recognized prior to fulfilling all significant obligations to
the franchisees.
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, advertising costs, and professional services.
F-27
Shipping and Handling
Costs
ASC
605-45-20 “Shipping and
Handling costs” establishes standards for the classification of shipping
and handling costs. All amounts not billed to a customer related to shipping and
handling are classified as selling expenses. Shipping and handling costs for the
nine months ended September 30, 2010 and 2009 are $1,464,424 and $8,477,
respectively. Shipping and handling costs for the three months ended September
30, 2010 and 2009 are $658,307 and $2,404, respectively.
Advertising
Costs
The
Company expenses advertising costs as incurred. However no
advertising expenses were charged to operations for the nine months ended
September 30, 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.
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 September 30, 2010 and December 31,
2009, the cumulative translation adjustment of $1,364,627 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 September 30, 2010 and 2009, accumulated other comprehensive gain
was $573,511 and $2,225, respectively. For the nine months ended September 30,
2010 and 2009, accumulated other comprehensive gain was $675,543 and $35,627,
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 September 30, 2010 and December
31, 2009, the Company did not have any deferred tax assets or liabilities, and
as such, no valuation allowances were recorded at September 30, 2010 and
December 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.
F-28
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.
There
was no stock based compensation for the nine months ended September 30, 2010 and
2009.
F-29
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:
NINE MONTHS ENDED
SEPTEMBER 30,
|
||||||||
2010
|
2009
|
|||||||
Net
income for earnings per share
|
$ | 15,094,620 | $ | 5,336,201 | ||||
Weighted
average shares used in basic computation
|
8,672,998 | 13,785,902 | ||||||
Diluted
effect of warrants
|
1,413,803 | - | ||||||
Weighted
average shares used in diluted computation
|
10,086,801 | 13,785,902 | ||||||
Earnings
per share, basic
|
$ | 1.74 | $ | 0.39 | ||||
Earnings
per share, diluted
|
$ | 1.50 | $ | 0.39 |
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
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.
F-30
In
February 2010, the FASB issued Accounting Standards Update 2010-09 (ASU
2010-09), "Subsequent Events (Topic 855)." The amendments remove the
requirements for an SEC filer to disclose a date, in both issued and revised
financial statements, through which subsequent events have been reviewed.
Revised financial statements include financial statements revised as a result of
either correction of an error or retrospective application of U.S. GAAP. ASU
2010-09 is effective for interim or annual financial periods ending after June
15, 2010. The provisions of ASU 2010-09 did not have a material effect on the
Company's consolidated financial statements.
In
February 2010, the FASB issued Accounting Standards Update 2010-10 (ASU
2010-10), "Consolidation (Topic 810)." The amendments to the consolidation
requirements of Topic 810 resulting from the issuance of Statement 167 are
deferred for a reporting entity's interest in an entity (1) that has all the
attributes of an investment company or (2) for which it is industry practice to
apply measurement principles for financial reporting purposes that are
consistent with those followed by investment companies. An entity that qualifies
for the deferral will continue to be assessed under the overall guidance on the
consolidation of variable interest entities in Subtopic 810-10 (before the
Statement 167 amendments) or other applicable consolidation guidance, such as
the guidance for the consolidation of partnerships in Subtopic 810-20. The
deferral is primarily the result of differing consolidation conclusions reached
by the International Accounting Standards Board ("IASB") for certain investment
funds when compared with the conclusions reached under Statement 167. The
deferral is effective as of the beginning of a reporting entity's first annul
period that begins after November 15, 2009, and for interim periods within that
first annual reporting period, which coincides with the effective date of
Statement 167. Early application it not permitted. The provisions of ASU 2010-10
are effective for the Company beginning in 2010. The adoption of ASU 2010-10 did
not have a material impact on the Company's consolidated financial
statements.
In
March 2010, the FASB issued Accounting Standards Update 2010-11 (ASU 2010-11),
"Derivative and Hedging (Topic 815)." All entities that enter into contracts
containing an embedded credit derivative feature related to the transfer of
credit risk that is not only in the form of subordination of one financial
instrument to another will be affected by the amendments in this Update because
the amendments clarify that the embedded credit derivative scope exception in
paragraph 815-15-15-8 through 15-9 does not apply to such contracts. ASU 2010-11
is effective at the beginning of the reporting entity's first fiscal quarter
beginning after June 15, 2010. The adoption of such standard does not have a
material impact on the Company's consolidated financial
statements.
In
April 2010, the FASB issued Accounting Standards Update 2010-13 (ASU 2010-13),
"Compensation - Stock Compensation (Topic 718)." This Update provides amendments
to Topic 718 to clarity that an employee share-based payment award with an
exercise price denominated in the currency of a market in which a substantial
portion of the entity's equity securities trades should not be considered to
contain a condition that is not a market, performance, or service condition.
Therefore, an entity would not classify such an award as a liability if it
otherwise qualifies as equity. The amendments in ASU 2010-13 are effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2010. The provisions of ASU 2010-13 are not expected to have
a material effect on the Company's consolidated financial
statements.
In
July 2010, the FASB issued an accounting update to provide guidance to enhance
disclosures related to the credit quality of a company's financing receivables
portfolio and the associated allowance for credit losses. Pursuant to this
accounting update, a company is required to provide a greater level of
disaggregated information about its allowance for credit loss with the objective
of facilitating users' evaluation of the nature of credit risk inherent in the
company's portfolio of financing receivables, how that risk is analyzed and
assessed in arriving at the allowance for credit losses, and the changes and
reasons for those changes in the allowance for credit losses. The revised
disclosures as of the end of the reporting period are effective for the Company
beginning in the second quarter of fiscal 2011, and the revised discourses
related to activities during the reporting period are effective for the Company
beginning in the third quarter of fiscal 2011. The Company is currently
evaluating the impact of this accounting update on its financial
disclosures.
F-31
3.
|
Property,
Plant and Equipment
|
Plant and
equipment consist of the following:
September 30, 2010
|
December 31, 2009
|
|||||||
Vehicle
|
$ | 9,102 | $ | 4,694 | ||||
Furniture
and office equipment
|
57,302 | 54,713 | ||||||
Total
property, plant and equipment
|
66,134 | 59,407 | ||||||
Accumulated
depreciation
|
(57,813 | ) | (47,674 | ) | ||||
Net
property, plant and equipment
|
$ | 8,321 | $ | 11,733 |
Depreciation
expense included in selling, general and administrative expenses for the three
months ended September 30, 2010 and 2009 was $1,879 and $2,598, respectively.
Depreciation expense included in selling, general and administrative expenses
for the nine months ended September 30, 2010 and 2009 was $9,005 and $7,791,
respectively.
4.
|
Other
Receivables
|
As of
September 30, 2010 and December 31, 2009, net other receivables amounted to
$5,011,145 and $12,831,849, respectively. Other receivable mainly
includes a loan to Shanghai Pengbai Electronic Co., Ltd. (“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. 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
September 30, 2010 and December 31, 2009, bad debt allowance for other
receivable amounted to $0 and $0.
The
details of the other receivables are as follows:
September 30, 2010
|
December 31, 2009
|
|||||||
Advances
to exclusive franchise stores
|
$ | 2,885,405 | $ | 1,241,142 | ||||
Advances
to non-exclusive franchise stores
|
- | 250,797 | ||||||
Loan
to Shanghai Pengbai
|
2,125,740 | 11,339,910 | ||||||
Total
|
$ | 5,011,145 | $ | 12,831,849 |
5.
|
Related
party receivable
|
Related
party receivables amounted to $35,928 as of September 30, 2010 and $0 as of
December 31, 2009. Related party receivables are mainly travel expenses to CEO,
interest free, due in demand.
6.
|
Advances
|
Advances
amounted to $5,959,959 and $0 as of September 30, 2010 and December 31, 2009,
respectively. Advances as of September 30, 2010 are advances to
suppliers.
7.
|
Deposit
|
Deposit
amounted to $5,988,000 and $0 as of September 30, 2010 and December 31, 2009,
respectively. Deposit is advance for purchasing land use
right.
F-32
8.
|
Dividend
Payable
|
Dividend
payable amounted to $0 and $10,915,576 as of September 30, 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, and RMB12, 401,245 (approximately $1,819,263) will be
allocated as welfare payable to employees. In May 2010, the Guoying board passed
a board resolution withdrawing the dividend declared in 2008. In June 2010, the
original shareholders of Guoying signed agreements waiving their rights to
receive the dividends declared in 2008. Dividend payable to shareholders
forgiven by the shareholders were reclassed into equity. Dividend payable to
employees forgiven by the shareholders were recorded as other income. There is
no dividend declared for the year ended December 31, 2009 and for the nine
months period ended September 30, 2010.
9.
|
Shareholder’s
Equity
|
On
December 26, 2008, the shareholders of Guoying entered into a share transfer
agreement with CEH Delaware to transfer 40% of their shares of Guoying
Electronic Group Co, Ltd. to CEH Delaware for a consideration of RMB 400,000
(approximately $60,000). The shareholders of Guoying also entered into another
share transfer agreement with CEH Delaware in February 2010 to transfer the rest
of their shares (60%) to CEH Delaware for a consideration of RMB 600,000. CEH
Delaware paid RMB 400,000 in February 2010. Simultaneously, CEH Delaware and
Guoying also entered into an agreement to issue 13,213,268 shares to Guoying
original shareholders. Effective February 10, 2010, Guoying became a wholly
owned subsidiary of CEH Delaware. On February 10, 2010 the Company issued
13,213,268 shares of Common Stock pursuant to the acquisition made agreement
effective February 10, 2010.
We
entered into a Share Exchange Agreement, dated as of July 9, 2010 (the “Share
Exchange Agreement”) with CEH Delaware and certain stockholders and warrant
holders of CEH Delaware (the “CEH Delaware Stockholders”). Pursuant to the Share
Exchange Agreement, on July 15, 2010, 10 CEH Delaware Stockholders transferred
100% of the outstanding shares of common stock and preferred stock and 100% of
the warrants to purchase common stock of CEH Delaware 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 Delaware 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, CEH Delaware
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 CEH
Delaware owning approximately 72.5% of issued and outstanding shares of our
common stock, (ii) CEH Delaware becoming our wholly-owned subsidiary, and (iii)
appointment of certain nominees of the shareholder of CEH Delaware as our
directors and officers and resignation of Mr. Ryan Cravey as our sole director,
Chief Executive Officer, Chief Financial Officer, Secretary and
Treasurer.
The
exchange of shares between the Company and CEH Delaware has been accounted for
as a reverse acquisition under the purchase method of accounting since the
stockholders of CEH Delaware obtained control of the Company.
Shares issued for
cash
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 (“Common 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”).
On
July 26, 2010 we consummated a private placement to 68 accredited investors for
an aggregate gross purchase price of $1,401,855 ($10.56 per unit) of 132,751
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”).
F-33
On
August 17, 2010 we consummated a private placement to 11 accredited investors
for an aggregate gross purchase price of $571,296 ($10.56 per unit) of 54,100
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”).
Professional
expenses related to private placement are recorded in equity. Net proceeds of
$4,154,069 were received and recorded as equity. In connection with the
subscription, the Company issued to one placement agent series F warrants to
purchase 31,429 shares of Common Stock exercisable for a period of five years at
an exercise price of $1.75 per share and series F warrants to purchase 94,329
shares of Common Stock exercisable for a period of five years at an exercise
price of $2.64 per share. The Company issued to the same placement agent 180,000
shares of Common Stock for the service provided purely relating to the equity
financing. In connection with the subscription, the Company issued to one
placement agent series E warrants to purchase 104,592 shares of Common Stock
exercisable for a period of five years at an exercise price $2.64 per
share.
Warrants
On
July 9, 2010, in connection with the Share Exchange Agreement between the
Company and CEH Delaware, the Company issued 314,285 series A warrants to CEH
Delaware shareholders. The series A warrants carry an exercise price of $2.19
and a 3-year term. The Company also issued 314,285 series B warrants to CEH
Delaware shareholders. The series B warrants carry an exercise price of $2.63
and a 3-year term. The Warrants contain standard adjustment provisions upon
stock dividend, stock split, stock combination, recapitalization, and a change
of control transaction.
On
July 9, 2010, in connection with the Share Exchange Agreement between the
Company and CEH Delaware, the Company issued 1,000,000 series E warrants with an
exercise price of $0.25 and a 5-year term to a professional who held
warrants with CEH Delaware. The Warrants contain standard adjustment provisions
upon stock dividend, stock split, stock combination, recapitalization, and a
change of control transaction.
On
July 9, 2010, in connection with the Share Purchase Agreement, the Company
issued 497,303 series C warrants with an exercise price of $3.70 and a 3-year
term to investors. The Warrants contain standard adjustment provisions upon
stock dividend, stock split, stock combination, recapitalization, and a change
of control transaction.
On
July 9, 2010, in connection with the Share Purchase Agreement, the Company
issued 497,303 series D warrants with an exercise price of $4.75 and a 3-year
term to a professional who held warrants with CEH Delaware. The Warrants contain
standard adjustment provisions upon stock dividend, stock split, stock
combination, recapitalization, and a change of control
transaction.
On
July 13, 2010, in connection with the Share Purchase Agreement, the Company
issued to one placement agent series F warrants to purchase 31,429 shares of
Common Stock exercisable for a period of five years at an exercise price of
$1.75 per share and series F warrants to purchase 94,329 shares of Common Stock
exercisable for a period of five years at an exercise price of $2.64 per share.
In connection with the subscription, the Company issued to one placement agent
series E warrants to purchase 104,592 shares of Common Stock exercisable for a
period of five years at an exercise price $2.64 per share.
On
July 9, 2010, in connection with share issuance, the Company issued 50,000
series G warrants with an exercise price of $2.64 and a 3-year term to a
professional firm. The Warrants contain standard adjustment provisions upon
stock dividend, stock split, stock combination, recapitalization, and a change
of control transaction.
All
the warrants meet the conditions for equity classification pursuant to FASB ASC
815 “Derivatives and Hedging” and EITF 00-19, “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's
Own Stock.” Therefore, these warrants were classified as equity and accounted
for as common stock issuance cost.
F-34
Warrants
Outstanding
|
Warrants
Exercisable
|
Weighted
Average
Exercise
Price
|
Average
Remaining
Contractual
Life
|
Intrinsic
value
|
||||||||||||||||
Outstanding,
December 31, 2009
|
- | - | $ | - | - | $ | - | |||||||||||||
Granted
|
2,903,526 | 2,903,526 | 2.30 | 3.85 | - | |||||||||||||||
Forfeited
|
- | - | - | - | - | |||||||||||||||
Exercised
|
- | - | - | - | - | |||||||||||||||
Outstanding,
September 30, 2010
|
2,903,526 | 2,903,526 | $ | 2.30 | 3.66 | $ | - |
10.
|
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 September 30, 2010 and 2009, the
Company transferred $654,537 and $361,233, respectively, to this reserve. For
the nine months ended September 30, 2010 and 2009, the Company transferred
$1,589,145 and $533,620, 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 September 30, 2010 and 2009, the Company
transferred $0 and $0, respectively, to this reserve. For the nine months ended
September 30, 2010 and 2009, the Company transferred $0 and $0, respectively, to
this reserve.
11.
|
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 $554 and $0 for the three
months ended September 30, 2010 and 2009, respectively. The total expense for
the above plan was $8,372 and $0 for the nine months ended September 30, 2010
and 2009, respectively.
F-35
12.
|
Income
Tax
|
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the nine months ended September 30, 2010 and 2009:
2010
|
2009
|
|||||||
U.S.
Statutory rates
|
34.00 | % | 34.00 | % | ||||
Foreign
income not recognized in USA
|
(34.00 | ) | (34.00 | ) | ||||
China
income taxes
|
25.00 | 25.00 | ||||||
China
income tax exemption
|
(24.98 | ) | (24.96 | ) | ||||
Total
provision for income taxes
|
0.02 | % | 0.04 | % |
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 September 30, 2010 and 2009 are $1,485 and $760,
respectively. The income tax expenses for the nine months ended September
30, 2010 and 2009 are $2,436 and $2,083, respectively. There were no
significant book and tax basis differences.
13.
|
Concentration
of Credit Risks and Uncertainties and
Commitments
|
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 nine months ended September 30, 2010, there is no major customer that
individually comprised more than 10% of the Company’s total sales. For the nine
months ended September 30, 2009, there is no major customer that each
individually comprised more than 10% of the Company’s total
sales.
There
are four major vendors each accounting for over 10% of the Company’s total
purchases for the nine months ended September 30, 2010, with Shangdong Huangming
Solar Power Sales Co. accounting for 43%, Jiangsu Huayang Solar Power Sales Co.
accounting for 17%, Yangzhou Huiyin Ltd. accounting for12%, and Shangling
Refrigerator accounting for 10% of the total purchases. There are
three major vendors each accounting for over 10% of the Company’s total
purchases for the nine months ended September 30, 2009, with Hier Hefei Ririshun
Sales Co. accounting for 40%, Shangdong Huangming Solar Power Sales Co.,
accounting for 39%, and Jiangsu Huayang Solar Power Sales Co. accounting for 13%
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 $15,948 and $8,343 for the three months ended
September 30, 2010 and 2009. The Company incurred rent expenses of $38,601 and
$25,030 for the nine months ended September 30, 2010 and
2009.
F-36
The
lease expenses for the next five years after September 30, 2010 are as
follows:
2011
|
$ | 55,757 | ||
2012
|
24,345 | |||
2013
|
18,556 | |||
2014
|
11,650 | |||
2015
|
11,650 | |||
Thereafter
|
22,330 | |||
Total
|
$ | 144,288 |
F-37
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
|
F-38
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.
F-39
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 exclusive franchise stores
|
$ | 29,358,234 | $ | 29,539,441 | ||||
Net
revenue from non-exclusive franchise stores
|
17,293,250 | 21,672,640 | ||||||
Franchise
fees from non-exclusive franchise stores
|
296,152 | 612,695 | ||||||
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.
F-40
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.
F-41
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.
F-42
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 company-owned stores, exclusive franchise
stores and non-exclusive stores.
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.
F-43
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. The Company’s revenue from sales is
presented as gross revenue. 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.
F-44
Revenue Recognition –
Franchise Activities:
Revenues
from franchised activities include area development and initial franchise fees
(collectively referred to as “Franchise fees”) received from non-exclusive
franchise stores to establish new stores and royalties charged to franchisees
based on a percentage of a franchised store’s sales. Initial franchise fees were
not received from exclusive franchise stores. 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.
We
have recognized franchise fees of $296,152 and $612,695 for the years ended
December 31, 2009 and 2008.
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 not billed to a customer related to shipping and
handling are classified as selling expenses. Shipping and handling costs for the
twelve months ended December 31, 2009 and 2008 are $1,464,424 and $8,477,
respectively.
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.
F-45
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 December 31, 2010 and 2009, the
Company did not have any deferred tax assets or liabilities, and as such, no
valuation allowances were recorded at December 31, 2009 and
2008.
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.
F-46
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 Electronic Co., Ltd. (“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.
F-47
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 Pengbai
|
11,339,910 | 5,794,650 | ||||||
Total
|
$ | 12,831,849 | $ | 5,794,650 |
Loans
to direct stores represent loans to non-exclusive stores, which were provided
for cash flow and liquidity purposes. Most of the non-exclusive
stores operate in rural areas, since the Company targets rural residents who are
often distant from local bank branches. The Company loaned operating
cash to these stores ranging from approximately $7,000 to $15,000 (RMB 50,000 to
100,000) per store per annum. These loans were interest free and due
upon demand (within one year).
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.
F-48
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.
F-49
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.
F-50
Part
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution.
The
expenses payable by us in connection with this offering are as
follows:
Amount
|
||||
Securities
and Exchange Commission Registration fee
|
$ | 1,175 | ||
Accountants’
fees and expenses
|
$ | * | ||
Legal
fees and expenses
|
$ | * | ||
Blue
Sky fees and expenses
|
$ | * | ||
Transfer
Agent’s fees and expenses
|
$ | * | ||
Total
Expenses
|
$ | * |
* To be
included by amendment.
All
expenses are estimated except for the Securities and Exchange Commission fee.
None of the expenses from the offering will be borne by the selling
stockholders.
Item
14. Indemnification of Directors and Officers.
Nevada
law allows us to indemnify our directors, officers, employees, and agents, under
certain circumstances, against attorney's fees and other expenses incurred by
them in any litigation to which they become a party arising from their
association with or activities on our behalf, and under certain circumstances to
advance the expenses of such litigation upon securing their promise to repay us
if it is ultimately determined that indemnification will not be allowed to an
individual in that litigation.
Our
By-laws provide that every person who was or is a party or is threatened to be
made a party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he or a
person of whom he is the legal representative is or was a director or officer of
the corporation or is or was serving at the request of the corporation or for
its benefit as a director or officer of another corporation, or as its
representative in a partnership, joint venture, trust or other enterprise, shall
be indemnified and held harmless to the fullest extent legally permissible under
the law of the State of Nevada from time to time against all expenses, liability
and loss (including attorneys' fees, judgments, fines and amounts paid or to be
paid in settlement) reasonably incurred in defending a civil or criminal action,
suit or proceeding. The indemnification must be paid by us as the expenses are
incurred and in advance of the final disposition of the action, suit or
proceeding upon receipt of an undertaking by or on behalf of the director or
officer to repay the amount if it is ultimately determined by a court of
competent jurisdiction that he is not entitled to be indemnified by the
corporation. Such right of indemnification shall be a contract right which may
be enforced in any manner desired by such person. Such right of indemnification
shall not be exclusive of any other right which such directors, officers or
representatives may have or hereafter acquire and, without limiting the
generality of such statement, they shall be entitled to their respective rights
of indemnification under any bylaw, agreement, vote of stockholders, provision
of law or otherwise, as well as their rights under the By-laws.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons, pursuant to the
foregoing provisions or otherwise, we have been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by us of
expenses incurred or paid by a director, officer or controlling person in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, we will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by us is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
67
Item
15. Recent Sales of Unregistered Securities.
On
July 15, 2010, we consummated a Share Exchange Agreement with 10 stockholders
and warrantholders of CEH Delaware (the “CEH Stockholders”) (the “Share Exchange
Agreement”). Pursuant to the Share Exchange Agreement, the CEH
Stockholders transferred to us 100% of the outstanding shares of common stock of
CEH Delaware and 100% of the warrants to purchase shares of common stock of CEH
Delaware 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 1,628,572 shares of our Common
Stock. CEH Delaware’s outstanding Series A warrants were exchanged on
a one-for-one basis for Series A warrants of the Company to purchase an
aggregate of 314,286 shares of Common Stock, with an exercise price of $2.19 per
share. CEH Delaware’s outstanding Series B warrants were exchanged on
a one-for-one basis for Series B warrants of the Company to purchase an
aggregate of 314,286 shares of Common Stock, with an exercise price of $2.63 per
share. CEH Delaware’s outstanding $1.00 warrants were exchanged on a
one-for-one basis for Series E warrants of the Company to purchase an aggregate
of 1,000,000 shares of Common Stock, with an exercise price of $0.25 per
share.
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 because they were issued to
investors who were not U.S. Persons and the sale occurred outside of the U.S. or
were issued pursuant to 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 because all of the persons acquiring the
securities were accredited investors and the securities were not offered or sold
by means of general advertising or other general solicitation and a Form D
pertaining to such transaction was filed with the Commission.
On
July 15, 2010, July 26, 2010 and August 17, 2010, we also consummated Private
Placements made pursuant to a Subscription Agreement dated as of July 9, 2010
(the “Purchase Agreement”) with 105 of the Selling Stockholders, pursuant to
which we sold units (the “Units”) to such Selling Stockholders. Each
Unit consists of four shares of our Common Stock, a warrant to purchase one
share of Common Stock at an exercise price of $3.70 per share (a “Series C
Warrant”) and a warrant to purchase one share of Common Stock at an
exercise price of $4.75 per share (a “Series D Warrant”). The
aggregate gross proceeds for the sale of the Units was $5,251,548 and in such
private placements, an aggregate of (a) 1,989,211 shares of our Common Stock,
(b) Series C Warrants to purchase an aggregate of 497,303 shares of our Common
Stock and (c) Series D Warrants to purchase an aggregate of 497,303 shares of
our Common Stock was sold.
The
shares of Common Stock, Series C Warrants and Series D Warrants were either
issued in accordance with (i) a safe harbor from the registration requirements
of the Securities Act under Regulation S because they were purchased
by investors who were not U.S. Persons and the sale occurred outside
of the U.S. or (ii) 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. Such exemption was available
because all of the investors were accredited investors, the securities were not
offered or sold by means of general advertising or other general solicitation
and a Form D pertaining to such offering was filed with the
Commission.
On
August 17, 2010, in connection with the Private Placement, we issued to Hunter
Wise Financial Group, LLC Series F warrants to purchase 31,429 shares of Common
Stock at an exercise price of $1.75 per share and Series F warrants to purchase
94,329 shares of Common Stock at an exercise price of $2.64 per share. On August
17, 2010 in connection with the Private Placement, we issued to American Capital
Partners Series F warrants to purchase 104,592 shares of Common Stock at an
exercise price of $2.64 per share. On July 9, 2010, the Company
issued Series G warrants to purchase 50,000 shares of Common Stock with an
exercise price of $2.64 to Guzov Ofsink, LLC, the Company’s prior
counsel. The Series F warrants were issued pursuant to the terms of
advisory agreements between the Company and the placement
agents.
The
Series F warrants and Series G warrants were either issued in accordance with
(i) a safe harbor from the registration requirements of the Securities Act under
Regulation S because they were purchased by investors who were not
U.S. Persons and the sale occurred outside of the U.S. or (ii) 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. Such exemption was available because all of the investors were
accredited investors, the securities were not offered or sold by means of
general advertising or other general solicitation and a Form D pertaining to
such offering was filed with the Commission.
68
Item 16.
|
Exhibits
and Financial Statement Schedules.
|
(a) Exhibits.
The
exhibits to the registration statement are listed in the Exhibit Index to
this registration statement and are incorporated herein by
reference.
Item
17. Undertakings.
The
undersigned registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933;
(ii) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the “Calculation of
Registration Fee” table in the effective registration statement;
and
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement;
(2) That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof;
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering;
(4) Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the provisions described in this registration statement, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(5) That,
for the purpose of determining liability under the Securities Act of 1933 to any
purchaser, each prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such first use, supersede or modify any statement
that was made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to such
date of first use.
69
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Lu’an, PRC on this
10th day of February,
2011.
CHINA
ELECTRONICS HOLDINGS, INC.
|
|
By:
|
/s/ Hailong Liu
|
Hailong
Liu
Chief
Executive Officer (Principal Executive
Officer)
and Director
|
Pursuant
to the requirements of the Securities Act of 1933, this registration statement
was signed by the following persons in the capacities and on the dates
indicated.
Name
and Title
|
Date
|
|
/s/ Hailong Liu
|
February
10, 2011
|
|
Hailong
Liu
|
||
Chief
Executive Officer, Chairman, Chief Financial
Officer
and Director
|
||
(Principal
Executive Officer, Principal Financial
Officer
and Principal Accounting Officer)
|
||
/s/ Haibo Liu
|
February
10, 2011
|
|
Haibo
Liu, Vice President and Director
|
70
Exhibit
Index
Number
|
Description
|
|
2.1
|
Share
Exchange Agreement by and among China Electronics Holdings, Inc.
(formerly, Buyonate, Inc.), China Electronic Holdings, Inc. and the CEH
Stockholders dated as of July 9, 2010. Incorporated by reference to
Exhibit 2.1 to our Current Report on Form 8-K filed with the Commission on
July 22, 2010 (the “July 2010 8-K”).
|
|
3.1
|
Articles
of Incorporation of the Company. Incorporated by reference to Exhibit 3.1
to our Registration Statement on Form S-1 (File No. 333-152535) filed on
July 25, 2008 (the “2008 S-1”).
|
|
3.2
|
By-laws
of the Company. Incorporated by reference to Exhibit 3.2 to the 2008
S-1.
|
|
4.1
|
Subscription
Agreement between among China Electronics Holdings, Inc. (formerly,
Buyonate, Inc.) and certain investors, dated as of July 9, 2010.
Incorporated by reference to Exhibit 4.1 to the July 2010
8-K.
|
|
4.2
|
Form
of Warrant of China Electronics Holdings, Inc. (formerly, Buyonate, Inc.)
issued on July 15, 2010. Incorporated by reference to Exhibit 4.2 to the
July 2010 8-K.
|
|
4.3
|
Chairman
Lock-up Agreement between China Electronics Holdings, Inc. (formerly,
Buyonate, Inc.) and Hailong Liu, dated July 9,
2010. Incorporated by reference to Exhibit 4.3 to the July 2010
8-K.
|
|
4.4
|
Specimen
of Common Stock certificate. Incorporated by reference to Exhibit 4.4 to
our Registration Statement on Form S-1 (File No. 333-169968) filed on
October 15, 2010.
|
|
5.1
|
Opinion
of Katten Muchin Rosenman LLP.**
|
|
10.1
|
Call
Option Agreement between Sherry Li and Hailong Liu, dated as July 9, 2010.
Incorporated by reference to Exhibit 10.1 to the July 2010
8-K.
|
|
10.2
|
Voting
Trust Agreement between Sherry Li and Hailong Liu, dated as July 9, 2010
Incorporated by reference to Exhibit 10.2 to the July 2010
8-K.
|
|
10.3
|
OEM
Agreement between Lu’an Guoying Electronic Sales Co., Ltd. and Shanghai
Pengbai Electronic Co., Ltd., dated July 2, 2010.**
|
|
10.4
|
Loan
Agreement between Lu’an Guoying Electronic Sales Co., Ltd. and Shanghai
Pengbai Electronic Co., Ltd., dated October 2,
2006.**
|
|
23.1
|
Consent
of Kabani & Company, Inc. *
|
|
23.2
|
Consent
of GBH CPAs, PC*
|
|
23.3
|
Consent
of Katten Muchin Rosenman LLP (contained in Exhibit
5.1)**
|
*Filed
herewith
**To
be filed by subsequent amendment
71