China Electronics Holdings, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.1 - EXHIBIT 31.1 - China Electronics Holdings, Inc.	v241035_ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - China Electronics Holdings, Inc.	v241035_ex32-1.htm
EX-31.2 - EXHIBIT 32.1 - China Electronics Holdings, Inc.	v241035_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2011
		or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to

Commission File Number: 333-152535

CHINA ELECTRONICS HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Nevada (State of Other Jurisdiction of Incorporation or Organization)		98-0550385 (I.R.S. Employer Identification No.)

Building 3, Binhe District, Longhe East Road, Lu’an City, Anhui Province, PRC (Address of Principal Executive Offices)		237000 (ZIP Code)

011-86-564-3224888

(Registrant’s Telephone Number, Including Area Code)

None

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No 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 o		Accelerated filer o
Non-accelerated filer o		Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 16,775,113 as of November 15, 2011.

TABLE OF CONTENTS

	Page

Forward-Looking Statements		3
PART I—FINANCIAL INFORMATION		5
Item 1. Financial Statements.		5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3. Quantitative and Qualitative Disclosures About Market Risk.		25
Item 4. Controls and Procedures.		25
PART II—OTHER INFORMATION		27
Item 1. Legal Proceedings.		27
Item 6. Exhibits.		27

Throughout this Quarterly Report on Form 10-Q, 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 under the laws of the People’s Republic of China (“Guoying”), unless otherwise indicated or the context otherwise requires.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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;

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;

competition existing today or that will likely arise in the future; and

other factors discussed elsewhere herein.

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 Part I, Item 2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as elsewhere in this Quarterly Report on Form 10-Q generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, matters described in this Quarterly Report on Form 10-Q. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q.

This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q. 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.

Potential investors should not make an investment decision based solely on the our projections, estimates or expectations.

PART I.

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CHINA ELECTRONICS HOLDINGS, INC AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

AS OF SEPTEMBER 30, 2011 AND DECEMBER 31, 2010

(Unaudited)

	September 30, 2011		December 31, 2010
Assets
Current assets
Cash and cash equivalents	$	481,815	$	1,226,101
Restricted Cash		-		75,850
Trade accounts receivable, net of allowance for doubtful accounts of $2,185,797 and $2,065,683, respectively		18,204,463		8,365,389
Other receivable		-		4,126,240
Due from Related Parties		-		63,866
Advances		4,374,050		993,941
Inventories, net		9,366,442		1,396,585
Total current assets		32,426,771		16,247,972

Noncurrent assets
Property and equipment, net		420,874		42,709
Construction in progress		678,773		-
Advances for land		20,338,716		21,459,193
Intangible assets		1,067,283		-
Total noncurrent assets		22,505,646		21,501,902

Total assets	$	54,932,416	$	37,749,874

Liabilities and Stockholders' Equity
Current liabilities :
Accounts payable and accrued expenses	$	397,648	$	283,385
Unearned revenue		1,395,703		1,926,811
Total current liabilities		1,793,351		2,210,196

Total liabilities		1,793,351		2,210,196

Stockholders' equity
Preferred stock, $0.0001 par value; 50,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2011 and December 31, 2010		-		-
Common stock, $0.0001 par value; 150,000,000 shares authorized; 16,775,113 shares and 16,775,113 issued and outstanding as of September 30, 2011 and December 31, 2010, respectively		1,678		1,678
Additional paid in capital		15,341,710		15,341,710
Retained earnings		30,689,164		15,996,480
Statutary reserve		3,966,090		2,434,146
Accumulated other comprehensive income		3,140,424		1,765,664
Total stockholders' equity		53,139,065		35,539,678

Total liabilities and stockholders' equity	$	54,932,416	$	37,749,874

The accompanying notes are an integral part of this consolidated statement.

CHINA ELECTRONICS HOLDINGS, INC AND SUBSIDIARIES

CONSOLIDATED CONDENSED INCOME STATEMENTS AND COMPREHENSIVE INCOME STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010

Net revenue		28,672,866			33,579,597			87,613,954			89,364,902

Cost of goods sold		24,263,558			27,414,701			73,608,767			73,013,309

Gross profit		4,409,308			6,164,897			14,005,187			16,351,593
											.
Operating expenses:
Selling expense		619,212			768,344			1,808,825			1,561,949
General and administrative expenses		525,204			1,424,764			1,121,587			1,469,436
Total Operating Expenses		1,144,416			2,193,108			2,930,412			3,031,385

Net operating income		3,264,892			3,971,788			11,074,775			13,320,208

Other income (expense):
Financial expense		(24	)		(4,244	)		(11,784	)		(5,419	)
Other income		5,162,350			1,824,223			5,162,350			1,824,223
Other expense		-			(41,956	)		-			(41,956	)
Total other income (expense)		5,162,326			1,778,023			5,150,566			1,776,848

Net income before income taxes		8,427,218			5,749,811			16,225,341			15,097,056

Income taxes		334			1,485			714			2,436

Net income		8,426,885			5,748,327			16,224,628			15,094,620

Foreign currency translation adjustment		594,404			573,511			1,374,760			675,543

Comprehensive income	$	9,021,288		$	6,321,838		$	17,599,387		$	15,770,162

Earnings per share - basic	$	0.50		$	0.35		$	0.97		$	1.74

Earnings per share - diluted	$	0.48		$	0.33		$	0.92		$	1.50

Basic weighted average shares outstanding		16,783,113			16,273,027			16,783,113			8,672,998

Diluted weighted average shares outstanding		17,634,910			17,686,830			17,634,910			10,086,801

The accompanying notes are an integral part of this consolidated statement.

CHINA ELECTRONICS HOLDINGS, INC AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Unaudited)

	September 30,
	2011			2010

Net income	$	16,224,628		$	15,094,620
Adjustments to reconcile net income to net cash (used in) provided by operations:
Amortization		75,124			-
Bad debt expenses		-			419,899
Depreciation		7,487			9,005
Changes in operating liabilities and assets:
Trade accounts receivable		(14,598,866	)		(1,259,589	)
Advances		(3,297,306	)		(5,856,446	)
Inventories		(7,804,124	)		(7,004,046	)
Other receivables		9,589,729			7,942,726
Trade accounts payable		3,697			1,311,771
Other payables		(451,115	)		(4,515,834	)
Customer deposit		(306,205	)		(1,336,727	)
Accrued expenses		16,627			2,700,141
Net cash (used in) provided by operating activities		(540,326	)		7,505,520

Cash flows from investing activities:
Property, plant, and equipment additions		(378,522	)		(5,416	)
Deposit		-			(5,884,000	)
Construction in Progress		(668,363	)		-
Restricted cash		77,050			-
Reduction of intangible assets		6,754,334			-
Acquisation of intangible assets		(6,108,494	)		-
cash received in reverse acquisition		-			136,643
Net cash used in investing activities		(323,995	)		(5,752,773	)

Cash flows from financing activities
Restricted cash		-			(50,014	)
Share issued for cash		-			4,154,069
Related party receivable		64,876			(35,304	)
Related party payable		-			-
Net cash provided by financing activities		64,876			4,068,751

Effect of rate changes on cash		55,159			90,039

Increase/(decrease) in cash and cash equivalents		(744,286	)		5,911,537
Cash and cash equivalents, beginning of period		1,226,101			64,736
Cash and cash equivalents, end of period	$	481,815		$	5,976,273

Supplemental disclosures of cash flow information:
Interest paid in cash	$	-		$	4,431
Income taxes paid in cash	$	714		$	2,436
Non-cash investing activities:
Reclassification of dividend payable from liability to additional paid in capital	$	-		$	10,915,576

The accompanying notes are an integral part of this consolidated statement.

CHINA ELECTRONICS HOLDINGS, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 AND NINE MONTHS ENDED SEPTEMBER 30, 2011

(Unaudited)



																Accumulated		Total
	Preferred				Common				Additional		Retained					Other		Stockholders'
	Stock				Stock				Paid		Earnings			Statutory		Comprehensive		Equity
	Number		Amount		Number		Amount		In Capital		Unrestricted			Reserve		Income		(deficit)

Balance: December 31, 2009		-		-		13,785,902		1,379		135,721		4,216,433			978,777		689,084		6,021,393

Recapitalization due to reverse merger in February 2010		343,750		34		-		0		136,609		0			0		0		136,643

Reclass dividend payable to shareholders		-		-		-		-		10,915,576		0			-		-		10,915,576

Recapitalization due to reverse merger in July 2010		-343,750		-34		999,991		100		-66		-			-		-		-

Share issuance for cash		-		-		1,989,220		199		4,153,870		0			0		0		4,154,069

Net income		-		-		-		-		-		13,235,416			-		-		13,235,416

Allocation to statutory reserve		-		-		-		-		-		(1,323,542	)		1,323,542		-		-

Foreign currency translation adjustment		-		-		-		-		0		0			0		1,076,580		1,076,580


Balance: December 31, 2010		0	$	0		16,775,113		1,678		15,341,710		16,128,307			2,302,318		1,765,664		35,539,678

Net income		-		-		-		-		-		16,224,628					-		16,224,628

Allocation to statutory reserve		-		-		-		-		-		-1,663,771			1,663,771		-		-

Foreign currency translation adjustment		-		-		-		-		-		-			-		1,374,760		1,374,760

Balance: September 30, 2011		0	$	0		16,775,113	$	1,678	$	15,341,710	$	30,689,164		$	3,966,090	$	3,140,424	$	53,139,065

The accompanying notes are an integral part of this consolidated statement.

CHINA ELECTRONIC HOLDINGS, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(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.

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, 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 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 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.

CHINA ELECTRONIC HOLDINGS, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

The exchange of shares between Guoying and CEH Delaware has been accounted for as a reverse acquisition 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

In the opinion of management, the accompanying balance sheets and related interim statements of income and comprehensive income, and cash flows include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Company’s 2010 Form 10-K filed on April 18, 2011 with the U.S. Securities and Exchange Commission.

Principles of Consolidation

The consolidated financial statements include the financial statements of the company, its wholly owned subsidiary CEH Delaware, and its wholly owned subsidiary Guoying. All significant inter-company balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

CHINA ELECTRONIC HOLDINGS, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Recent Accounting Pronouncements

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.

In September 2011, the FASB issued guidance on testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines that the fair value of a reporting unit is less than its carrying amount, the two-step goodwill impairment test is not required. The new guidance will be effective for us beginning July 1, 2012.

In June 2011, the FASB issued guidance on presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity will be required to present either a continuous statement of net income and other comprehensive income or in two separate but consecutive statements. The new guidance will be effective for us beginning July 1, 2012 and will have financial statement presentation changes only.

In May 2011, the FASB issued guidance to amend the accounting and disclosure requirements on fair value measurements. The new guidance limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, the new guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. The new guidance will be effective for us beginning January 1, 2012. Other than requiring additional disclosures, we do not anticipate material impacts on our financial statements upon adoption.

3.	Basic and Diluted Earnings Per Share

Basic and Diluted 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,
	2011		2010
Net income for earnings per share	$	16,224,628	$	15,094,620

Weighted average shares used in basic computation		16,783,113		8,672,998

Diluted effect of preferred stock		-		-

Diluted effect of warrants		851,797		1,413,803

Weighted average shares used in diluted computation		17,634,910		10,086,801

Earnings per share, basic	$	0.97	$	1.74

Earnings per share, diluted	$	0.92	$	1.50

4.	Property and Equipment

CHINA ELECTRONIC HOLDINGS, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Property and equipment consisted of the following:

	September 30, 2011			December 31, 2010
Vehicle	$	57,136		$	38,426
Furniture and office equipment		383,096			15,677
Biological assets		-			-
Total property and equipment		440,232			54,103
Accumulated depreciation		(19,358	)		(11,394	)
Net property and equipment	$	420,874		$	42,709

Depreciation expense included in selling, general and administrative expenses for the three months ended September 30, 2011 and 2010 was $2,998 and $1,879, respectively. Depreciation expense included in selling, general and administrative expenses for the nine months ended September 30, 2011 and 2010 was $7,487 and $9,005, respectively.

5.	Loans Receivable

Loans receivable consisted of the following:

	September 30, 2011		December 31, 2010
Shanghai Pengbai Electronic Co., Ltd.	$	-	$	2,154,140
Anhui JuNeng Investment Security Co,.Ltd.		-		1,972,100
		-		4,126,240
Less amounts due within one year		-		1,972,100
	$	-	$	2,154,140

As of December 31, 2010, loans receivable included two loans to two different parties. The loan receivable from Shanghai Pengbai Electronic Co., Ltd. (“Pengpai”) is secured by assets of Pengbai, interest free, with original payments due in four equal installments of approximately $2.9 million from October 2013 to October 2017. The loan receivable from Anhui JuNeng Investment Security Co,.Ltd. (“Anhui”) is secured by assets of Anhui, bearing interest at 8.5% and is due on December 31, 2011.

An allowance for loans receivable is recorded when circumstances indicate that collection of all or a portion of a specific balance is unrecoverable. The Company provides for allowances on other accounts receivable on a specific identification basis. Certain other loans receivable amounts are charged off against the allowance after a sufficient period of collection efforts. Subsequent cash recoveries are recognized as other income in the period when they occur. The Company determined that no allowance was necessary as of September 30, 2011 and December 31, 2010.

CHINA ELECTRONIC HOLDINGS, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Pengbai is an original equipment manufacturer (“OEM”) who manufactures electronic products under our brand. We advanced money to Pengbai without interest in order to facilitate an ongoing relationship so that our private label business will continue to run smoothly and without interruption.

6.	Due From Related Parties

Due from related parties amounted $0 and $63,866 as of September 30, 2011 and December 31, 2010, respectively. Related party receivables are mainly travel expenses to CEO, interest free, unsecured, due on demand.

7.	Advances to Suppliers

Advances to suppliers amounted to $4,374,050 and $993,941 as of September 30, 2011 and December 31, 2010, respectively.

8.	Advances for Land

Advances for land amounted to $20,338,716 and $21,459,193 as of September 30, 2011 and December 31, 2010, respectively. An advance of $15,650,000 was paid to Pingqiao Industrial Park in Luan city, Anhui Province, China for acquiring land use rights. The Company intends to construct a factory, research and development center and a commercial center on this land. An advance of $6,068,000 was paid to an unrelated party for acquiring land use rights as of December 31, 2010. Then $1,373,000 of this $6,068,000 was returned to the Company during the nine months ended September 30, 2011. As of September 30, 2011, $4,695,000 was the balance for this advance for land. The Company intends to build a warehouse and distribution center on this land. Lastly, an advance for $221,193 was paid to an unrelated party for acquiring land use rights to be used for general commercial purposes in the future as of December 31, 2010, This $221,193 was returned to the Company during the nine months ended September 30, 2011 due to cancelation of this agreement.

9.	Intangible Assets

Intangible assets consisted of the following:

	September 30, 2011			December 31, 2010
Land use rights	$	1,143,577		$	-
Less accumulated amortization		(76,294	)		-
Land use rights, net	$	1,067,283		$	-

In January 2011, the Company acquired a land use right with a two-year term and a cost of approximately $203,500. The Company paid an additional amount of approximately $940,077 during the nine months ended September 31, 2011 also related to this land use right.

The Chinese government owns all land in the PRC. However, the government grants "land use rights" for terms ranging from 20 to 50 years. The Company is amortizing the cost of land use rights over the usage terms. Intangible assets are reviewed at least annually and more often if circumstances dictate, to determine whether their carrying value has become impaired. 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 amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of September 30, 2011, the Company determined that there had been no impairment.

CHINA ELECTRONIC HOLDINGS, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Amortization expenses amounted $50,245 and $0 for the three months ended September 30, 2011 and 2010, respectively. Amortization expenses amounted $75,124 and $0 for the nine months ended September 30, 2011 and 2010, respectively.

10.	Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following:

	September 30, 2011		December 31, 2010
Accounts payable	$	4,389	$	615
Accrued payroll		83,505		64,576
Accrued litigation		143,000		143,000
Other payable		166,754		75,194
	$	397,648	$	283,385

11.	Stockholders’ Equity

There were no stock issuances during the nine months ended September 30, 2011.

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 499,403 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 499,403 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.

CHINA ELECTRONIC HOLDINGS, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

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.

Warrants consisted of the following:

	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, December 31, 2010		2,903,526		2,903,526	$	2.30		3.41		-
Granted		-		-		-		-		-
Forfeited		-		-		-		-		-
Exercised		-		-		-		-		-
Outstanding, September 30, 2011		2,903,526		2,903,526	$	2.30		2.66	$	-

Warrants referred to in the preceding paragraphs do not trade in an active securities market, and as such, the Company estimates the fair value of these warrants using the Black-Scholes option pricing model using the following assumptions:

	September 30, 2011			December 31, 2010
Series A, B, C, D, G
Annual dividend yield		-			-
Expected life (years)		3.00			3.00
Risk-free interest rate		0.30	%		0.30	%
Expected volatility		12	%		12	%

	September 30, 2011			December 31, 2010
Series E, F
Annual dividend yield		-			-
Expected life (years)		5.00			5.00
Risk-free interest rate		0.30	%		0.30	%
Expected volatility		12	%		12	%

12.	Statutory 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.

CHINA ELECTRONIC HOLDINGS, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

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, 2011 and 2010, the Company transferred $899,564 and $654,537, respectively, to this reserve. For the nine months ended September 30, 2011 and 2010, the Company transferred $1,663,771 and $1,589,145, 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, 2011 and 2010, the Company transferred $0 and $0, respectively, to this reserve. For the nine months ended September 30, 2011 and 2010, the Company transferred $0 and $0, respectively, to this reserve.

13.	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 $10,600 and $554 for the three months ended September 30, 2011 and 2010, respectively. The total expense for the above plan was $25,106and $8,372 for the nine months ended September 30, 2011 and 2010, respectively.

14.	Other Income (Expense)

Other income (expense) for the three and nine months ended September 30, 2011 and 2010 are as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Other income (expense):
Financial expense	$	(24	)	$	(4,244	)	$	(11,784	)	$	(5,419	)
Other income		5,162,350			1,824,223			5,162,350			1,824,223
Other expense		-			(41,956	)		-			(41,956	)
Total other income (expense)	$	5,162,326		$	1,778,023		$	5,150,566		$	1,776,848

CHINA ELECTRONIC HOLDINGS, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

The Company received approximately $5,162,350 from Pengbai during the quarter ended September 30, 2011. The amount was written off in prior year. This recovery has been booked as other income for the three and nine months ended September 30, 2011.

Other income for the three and nine months ended September 30, 2011 amounted to $1,824,223. It mainly includes bonus payable to employees that were forgiven by the employees.

15.	Income Tax

Our effective tax rates were approximately 0% and 0% for the nine months ended September 30, 2011 and 2010, respectively. Currently the local government and central government tax benefit will expire on December 31, 2012 and December 31, 2013 respectively. Our effective tax rate was lower than the U.S. federal statutory rate due to the fact that our operations are carried out in foreign jurisdictions, which are subject to lower income tax rates.

16.	Concentration of Credit Risks and Uncertainties and Commitments and Contingencies

Credit Risk

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, 2011and 2010, there is no major customer that individually comprised more than 10% of the Company’s total sales.

There is one major vendor accounting for over 10% of the Company’s total purchases for the nine months ended September 30, 2011, with Shangdong Huangming Solar Power Sales Co. accounting for 47%. The accounts payable balance as of September 30, 2011 for this one vendor was $0. 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 for 12%, and Shangling Refrigerator accounting for 10%. The accounts payable balance as of September 30, 2010 for these four vendors was $0.

CHINA ELECTRONIC HOLDINGS, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

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.

Contingency

The Company is in litigation with its prior attorney, who has sued the company for approximately $143,000 of unpaid legal fees. This amount has been accrued as of September 30, 2011 and is included in accrued expenses.

In connection with our private placement in July and August 2010, we entered into a Subscription Agreement with the investors which sets forth the rights of the investors to have the registrable shares registered with the SEC for public resale. Pursuant to the registration rights provisions, we agreed to file the registration statement pursuant to the Subscription Agreement to be declared effective by the Securities and Exchange Commission (the “Commission”) by the date (the “Required Effectiveness Date”) which is not later than the earlier of (x) one hundred eighty (180) calendar days after the final closing date of the Offerings dated July 9, 2010, or (y) ten (10) business days after oral or written notice to the Company or its counsel from the Commission that it may be declared effective. The registration statement has not been declared effective before the Required Effectiveness Date (the “Required Effectiveness Failure”). As liquidated damages (“Liquidated Damages”), the Company shall deliver to the Subscribers, as on a pro-rata basis (determined by dividing each Subscriber’s Issue Price by the aggregate Issue Price delivered to the Company by the Subscribers hereunder)an amount equal to one-half percent (0.5%) of the aggregate Issue Price of the Purchased Securities owned of record by such Subscribers on the first business day after the Non-Registration Event and for each subsequent thirty (30) day period (pro rata for any period less than thirty days) which are subject to non-registration event. The maximum aggregate Liquidated Damages payable to the Subscriber under this Agreement shall be five percent (5%) of the aggregate Issue Price paid by the Subscribers. The registration statement was not declared effective by Required Effectiveness Date, as such an Effectiveness Failure occurred and the Company made an estimate of the probable amount it would pay in damages and accrued $262,500. The Company will continue to assess the likelihood of payments under this arrangement.

Operating Leases

The Company leases various facilities under operating leases that terminate on various dates.

The Company incurred rent expenses of $12,158 and $15,948 for the three months ended September 30, 2011 and 2010 respctively. The Company incurred rent expenses of $41,221 and $38,601 for the nine months ended September 30, 2011 and 2010 respectively.

The lease expenses for the next five years are estimated to be as follows:

2011	$	25,599
2012		19,440
2013		12,205
2014		12,205
2015		12,205
Thereafter		11,188
Total	$	92,842

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the unaudited condensed consolidated financial statements of the Company for the nine months ended September 30, 2011 and 2010, and should be read in conjunction with such financial statements and related notes included in this report. Those statements in the following discussion that are not historical in nature should be considered to be forward looking statements that are inherently uncertain. Actual results and the timing of the events may differ materially from those contained in these forward looking statements due to a number of factors, including those discussed in the “Forward-Looking Statements” set forth elsewhere in this Quarterly Report on Form 10-Q.

Overview

China Electronics Holdings, Inc. 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, ten 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.

Results of Operations

Three Months Ended September 30, 2011 Compared with Three Months Ended September 30, 2010

Revenues

Our net revenue for the three months ended September 30, 2011 was $28,672,866, a decrease of 14.6%, or $4,906,731, from $33,579,597 for the three months ended September 30, 2010.

The reason for the decrease of revenue mainly includes $7 million decreased sales from television offset by the increased $3 million increased sales from air conditioner. . The increase of the air conditioner is due to the reason that there are more new constructions for residential buildings in urban area of Lu’An city and more immigrant populations moving into Lu’An City during the third quarter ended September 30, 2011 compared to the same period last year. Therefore there is increasing demand of air conditioners for this quarter and we have added a new brand Haier Tongshuai Air Conditioner to meet our customers need. The decrease of the sales from television is due to the reason that the Company had promotions for television sales to meet customers’ increasing demand during Chinese new year and Duan Wu festival within the first two quarters of the year. The third quarter is slow season for television sales and the Company has shifting its business development focus to LED manufacturing and promotions for air conditioners. Therefore the sales of televisions for the third quarter decreased. We plan to shift our business focus to LED manufacturing and solar power products in the future, and we plan to gradually terminate our franchise contracts with our non-exclusive franchise stores that are located in remote rural areas that have ordered few products from us and have been generating limited revenue in the past years.

There were 561 exclusive franchise stores as of September 30, 2011, an increase of 133 exclusive franchise stores, or 31.1%, more exclusive franchise stores as of September 30, 2011, compared to 428 exclusive franchise stores as of September 30, 2010. We had 328 exclusive franchise stores that were opened in 2009 and are in business operation throughout 2010 and 2011 (the “ Same Exclusive Franchise Stores ”). We had 428 exclusive franchise stores as of September 30, 2010 and opened 58 new exclusive franchise stores in the fourth quarter of 2010, 73 new stores in the first quarter of 2011, 2 new stores in the second quarter of 2011, 0 new store in the third quarter of 2011, a total of 133 new exclusive franchise stores opened since September 30, 2010 (the “ New Exclusive Franchise Stores ”).

We have signed franchise contracts with 600 non-exclusive franchise stores by the end of 2009. Among the 600 non-exclusive franchise stores contracted in 2009, there are 104 stores that have been in business and generated sales revenue to us by the end of first quarter of 2009, 176 stores that have been in business and generated sales revenue to us by the end of fourth quarter of 2009, 553 stores that have been in business and generated sales revenue to us as of September 30, 2010. As of the fourth quarter of 2010, we have 162 new non-exclusive franchise stores that are in business and generated sales revenue to us, including 48 stores that we contracted in 2009 and 114 new stores that we entered into franchise contracts with during the fourth quarter of 2010. We also opened 1 new store in the nine months ended September 30, 2011, total 163 new non-exclusive franchise stores opened since September 30, 2010 until today. We had 716 and 715 non-exclusive franchise stores as of September 30, 2011 and as of December 31, 2010, respectively. There were 716 non-exclusive franchise stores, an increase of 163, or 29.5%, more stores as of September 30, 2011 compared to 553 non-exclusive franchise stores as of September 30, 2010

We opened our first self-owned store (the “ Longhe Store ”) located on Longhe Road in 2006, our second self-owned stores located on Guangcai Road (the “ Guangcai Store ”) and third self-owned store on Haomen Road (the “ Haomen Store ”) in 2010, and our new Guoying branded LED products flagship store and headquarter (the “ Guoying LED Store ”) in May 2011 and we are currently relocating our products sold in Longhe Store to the new Guoying LED Store.

Cost of Goods Sold

Our cost of goods sold for the three months ended September 30, 2011 was $24,263,558, a decrease of $3,151,143, or 11.5%, compared to $27,414,701 for the three months ended September 30, 2010. The decrease was due to the decrease in sales.

Gross Profit

Gross profit for the three months ended September 30, 2011 was $4,409,308, a decrease of $1,755,588, or approximately 28.5%, compared to $6,164,896 for the three months ended September 30, 2010. The decreased gross profit is due to decreased sales.

Gross Profit Rate

Gross profit rate for the three months ended September 30, 2011 was 15.38%, a decrease of approximately 16.24%, compared to 18.36% for the three months ended September 30, 2010. The consistency is because the Company is pricing its products to maintain a consistent margin during the quarter ended September 31, 2011.

Operating Expenses

Operating expenses for the three months ended September 30, 2011 were $1,144,416, a decrease of $1,048,692, or 47.8%, from $2,193,108 for the three months ended September 30, 2010.

Selling expenses for the three months ended September 30, 2011 were $619,212, a decrease of $149,132, or 19.4%, from $768,344 for the three months ended September 30, 2010. The decrease was due to decreased sales. The shipping and handling expenses were increased due to the reason that the increased gas and oil price, and due to market competition, now the Company needs to bear more transportation expenses to free deliver products to some of our exclusive and non-exclusive franchise stores that used to self pick up products from us in the past. The decreased shipping and handling expenses are caused by decreased sales for the three months ended September 30, 2011, compared to the same period last year.

General and administrative expenses for the three months ended September 30, 2011 were $525,204, a decrease of $899,560, or 63.1%, from $1,424,764 for the three months ended September 30, 2010. The decrease was mainly because the Company incurred more professional expenses during the quarter ended September 30, 2010 as a result of initially becoming a public company starting in July 2010, such as audit and attorney fees.

Net Operating Income

Our net operating income for the three months ended September 30, 2011 was $3,264,892, a decrease of $706,896, or 17.8%, from $3,971,788 for the same period in 2010. The decrease was mainly due to the decrease in sale is more than the decrease in operating expenses .

Net Income

Our net income for the three months ended September 30, 2011 was $8,426,885, an increase of $2,678,558, or 46.6%, from $5,748,326 for the same period in 2010. The increase was mainly due to decreased operating expenses during the three months ended September 30, 2011 compared to the same period last year. It is also due to decreased sales offset by increased other income. During the quarter ended September 30, 2011, the Company has collected approximately $5 million receivable that was written off before.

Nine Months Ended September 30, 2011 Compared with Nine Months Ended September 30, 2010

Revenues

Our net revenue for the nine months ended September 30, 2011 was $87,613,954, a decrease of 2.0%, or $1,750,948, from $89,364,902 for the nine months ended September 30, 2010. The sales of our solar power products decreased but the sales of our television during the nine months increased. The decrease of the solar power products is because of less demand from the market during the nine months ended September 30, 2011 compared to the same period last year. Solar power products are most used by bungalows in rural area of Lu’An City. As the development and expansion from urban to rural areas in Lu’An city, there are increasing high rise commercial constructions built with decreasing bungalows in rural area and therefore the demand for solar power products are decreasing and result in less market demand of solar power products in this quarter compared to the same period last year. The increase of the television sales during the nine months ended is due to high market demand by customers during Chinese new year and Duan Wu festival within the first two quarters of the year and the Company had conducted promotions of television sales to meet customers’ increasing demand during holiday season of first two quarters of 2011.

There were 561 exclusive franchise stores, an increase of 133, or 31.1%, New Exclusive Franchise Stores as of September 30, 2011, compared to 428 exclusive franchise stores as of September 30, 2010. There were 716 and 715 non-exclusive stores as of September 30, 2011 and as of December 31, 2010, respectively. There were 716 non-exclusive stores, an increase of 163, or 29.5%, of New Non-Exclusive Franchise Stores that are in business and generate revenue to us as of September 30, 2011 compared to 553 non-exclusive stores as of September 30, 2010.

Cost of Goods Sold

Our cost of goods sold for the nine months ended September 30, 2011 was $73,608,767, an increase of $595,458, or 0.8%, compared to $73,013,309 for the nine months ended September 30, 2010. The increase was due to change of the products mix sold. During the nine months ended September 30, 2011, more higher cost products were sold. .

Gross Profit

Gross profit for the nine months ended September 30, 2011 was $14,005,187, a decrease of $2,346,406, or approximately 14.4%, compared to $16,351,593 for the nine months ended September 30, 2010. The decreased is mainly caused by the increased cost of goods sold.

Gross Profit Rate

Gross profit rate for the nine months ended September 30, 2011 was 15.99%, a decrease of approximately 12.62%, compared to 18.30% for the nine months ended September 30, 2010. The decrease was mainly due to the change of the products that we sell and our selling strategy. Compared to nine months ended September 30, 2010, in nine months ended September 30, 2011, we carried new product lines and new brands. The new brands we carry are brands that carry a lower profit margin for us compared to our historic brands. However, such brands are very popular in the PRC and we began carrying them in order to sell more items and increase our customer base. In order to market the new product lines and increase our sales to new stores, we have taken a more aggressive pricing strategy which results in lower margins.

Operating Expenses

Operating expenses for the nine months ended September 30, 2011 were $2,930,412, a decrease of $100,973, or 3.3%, from $3,031,385 for the nine months ended September 30, 2010.

Selling expenses for the nine months ended September 30, 2011 were $1,808,825, an increase of $246,876, or 15.8%, from $1,561,949 for the nine months ended September 30, 2010. The increase was due to increased shipping and handling expenses due to the reason that the gas and oil price has been increasing, and due to market competition, now the Company needs to bear more transportation expenses to free deliver products to some of our exclusive and non-exclusive franchise stores that used to self pick up products from us in the past.

General and administrative expenses for the nine months ended September 30, 2011 were $1,121,587, a decrease of $347,849, or 23.7%, from $1,469,436 for the nine months ended September 30, 2010. The decrease was mainly because the Company incurred more professional costs, such as audit and attorney fees, of becoming a public company initially starting in July 2010. We incurred approximately $317,630 and $796,827 in professional expenses, including legal, accounting and audit expenses, for the nine months ended September 30, 2011 and 2010, respectively.

Net Operating Income

Our net operating income for the nine months ended September 30, 2011 was $11,074,775, a decrease of $2,245,433, or 16.9%, from $13,320,208 for the same period in 2010. The decrease was mainly due to decreased sales.

Net Income

Our net income for the nine months ended September 30, 2011 was $16,224,628, an increase of $1,130,008, or 7.5%, from $15,094,620 for the same period in 2010. The increase was mainly due to decreased sales offset by increased other income during the nine months ended September 30, 2011. During the quarter ended September 30, 2011, the Company has collected approximately $5 million receivable that was written off before.

Off-Balance Sheet Arrangements

There were no off-balance sheet arrangements during the nine months ended September 30, 2010 or during the nine months ended September 30, 2011 that have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Liquidity and Capital Resources

As of September 30, 2011, we had cash and cash equivalents of $481,815. 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 have a commitment to pay approximately $3.6 million to Pingqiao Industrial Park for land use rights by the end of December 31, 2011.

The following table sets forth a summary of our cash flows for the periods indicated:

	September 30, 2011			September 30, 2010
Net cash provided by (used in) operating activities	$	(3,360,770	)	$	7,505,520
Net cash provided by (used in) investing activities		(323,995	)		(5,752,773	)
Net cash provided by financing activities		2,885,320			4,068,751
Effect of rate changes on cash		55,159			90,039
Increase (decrease) in cash and cash equivalents		(744,286	)		5,911,537
Cash and cash equivalents, beginning of period		1,226,101			64,736
Cash and cash equivalents, end of period	$	481,815		$	5,976,273

During 2011, we plan to develop new non-exclusive stores and exclusive franchise stores, develop additional OEM contracts, and develop a new LED wholesale and manufacturing business. We anticipate funding these growth strategies from our working capital and below is a summary of approximately how much we anticipate spending in order to achieve our growth strategies and our anticipated timing of such expenditures:

Growth Strategies	Approximate Expenditures		Timing

Develop new exclusive franchise stores	$	0.6 million	Ongoing

Develop new company-owned stores	$	3.4 million	Ongoing

Develop new non-exclusive stores	$	1.7 million	Ongoing

Develop additional OEM contracts	$	2.8 million	Ongoing

Develop LED manufacturing business	$	8 million	Construction completed by 12/31/11 Commence manufacturing by 7/31/12

Our priority is to develop the LED manufacturing business, new non-exclusive stores and exclusive franchise stores. If our working capital is insufficient to fund all of these endeavors we will prioritize the LED manufacturing business.

Operating Activities

Net cash used in operating activities was $540,326 for the nine months ended September 30, 2011, compared to net cash provided by operating activities of $7,505,520 for the nine months ended September 30, 2010, a decrease of $8,045,846 or 107.2 %. The decrease of net cash provided by operating activities was primarily due to increased accounts receivable during the nine months ended September 30, 2011 compared to the same period last year.

Investing Activities

Net cash used in investing activities was $323,995 for the nine months ended September 30, 2011, compared to net cash used in investing activities $5,752,773 for the nine months ended September 30, 2010, a decrease of $5,428,778, or 94.4%. The decrease of cash used in investing activities was mainly due to $5.8 million was invested in advance for land use right acquisition during the nine months ended September 30, 2010.

Financing Activities

Net cash provide by financing activities was $64,876 for the nine months ended September 30, 2011, compared to net cash provide by financing activities $4,068,751 for the nine months ended September 30, 2010, a decrease of $4,003,875, or 98.4%. The decrease was because of the cash received by share issuances during the nine months ended September 30, 2010.

Application of Critical Accounting Policies

Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Critical accounting policies for us include revenue recognition, contingencies, income taxes, and stock-based compensation.

See Note 2, Summary of Significant Accounting Policies, to the Notes to Consolidated Financial Statements for a complete discussion of related accounting policies.

Revenue Recognition

We recognize revenue, net of estimated returns, at the time the customer takes possession of the merchandise or receives services. We estimate the liability for sales returns based on our historical return levels. We record an allowance for doubtful accounts receivable for amounts due from third parties that we do not expect to collect. We estimate the allowance based on historical write offs and charge backs as well as aging trends. Our revenue recognition accounting methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the amount and timing of future sales returns and uncollectible accounts. Additionally, a portion of the revenue related to franchise fees is recorded as unearned revenue due to non-fulfillment of all the required recognition criteria, which also requires management judgment.

Legal and Other Contingencies

The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. An estimated loss from a loss contingency such as a legal proceeding or claim is accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred. In determining whether a loss should be accrued we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial statements.

Income Taxes

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Accounting literature also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial statements.

Stock-Based Compensation

Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating expected dividends. In addition, judgment is also required in estimating the amount of stock-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be impacted.

Recent Accounting Pronouncements

Recent Accounting Pronouncement:

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures.

The Company maintains disclosure controls and procedures as required under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of September 30, 2011, the Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures. Based on the foregoing, its Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2011.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. 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 material legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.

Item 6. Exhibits.

See Exhibit Index.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CHINA ELECTRONICS HOLDINGS, INC.

	By:	/s/ Hailong Liu
	Name:	Hailong Liu
	Title:	Chairman, Chief Executive Officer and President (principal executive officer) & Chief Financial Officer (principal financial officer and principal accounting officer)

Date: November 17, 2011

EXHIBIT INDEX

	31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.*

	31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.*

	32.1		Section 1350 Certification, Chief Executive Officer and Chief Financial Officer.*

* filed herewith

China Electronics Holdings, Inc. - FORM 10-Q - November 18, 2011

Attached files

China Electronics Holdings, Inc. Reports