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EX-23.1 - EXHIBIT 23.1 - China Electronics Holdings, Inc.v244456_ex23-1.htm

As filed with the Securities and Exchange Commission on January 6, 2012

Registration No. 333-169968

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

AMENDMENT NO. 3
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)

Hailong Liu
President and Chief Executive Officer
Building 3, Binhe District, Longhe East Road, Lu’an City
 Anhui Province, PRC 237000
011-86-564-3224888

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:
China Financial Services, Inc.
 87 Dennis Street
Garden City Park, NY 11040
(212) 240-0707

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
(5)
 
                         
Common Stock, par value $.0001 per share
    2,468,059                          
Common Stock, par value $.0001 per share, underlying Series A Warrants
    183,999 (2)                        
Common Stock, par value $.0001 per share, underlying Series B Warrants
    183,999 (3)                        
Common Stock, par value $.0001 per share, underlying Series E Warrants
    585,453 (4)                        
                                 
Total
    3,421,510                          
   
 
 
(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)
Consists of shares of Common Stock underlying three year Series A warrants to purchase an aggregate of 183,999 shares of Common Stock with an exercise price of $2.19 per share.

 
(3)
Consists of shares of Common Stock underlying three year Series B warrants to purchase an aggregate of 183,999 shares of Common Stock with an exercise price of $2.63 per share.

 
(4)
Consists of shares of Common Stock underlying five year Series E warrants to purchase an aggregate of 585,453 shares of Common Stock with an exercise price of $0.25 per share.

 
(5)
$1,711 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.

 
 

 

3,421,510 Shares of Common Stock

CHINA ELECTRONICS HOLDINGS, INC.

Common Stock

PROSPECTUS

__________, 2011

 
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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 DECEMBER 30, 2011

PRELIMINARY PROSPECTUS

3,421,510 Shares

China Electronics Holdings, Inc.

Common Stock

This prospectus relates to the resale by the Selling Stockholders of up to 3,421,510 shares of our Common Stock, $.0001 par value (“Common Stock”), including an aggregate of  495,588 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 953,451 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 1,122,641 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”), and an aggregate of 849,830 shares of our Common Stock issued to 4 Selling Stockholders pursuant to the Share Exchange Agreement.

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 $1,033,238.  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 quoted on OTCQB and trades under the symbol CEHD.QB.  On May 6, 2011, the closing sale price of our Common Stock was $1.70 per share.

Investing in our Common Stock involves risks. See “Risk Factors” beginning on page 8.

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

 
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TABLE OF CONTENTS

 
Page
 
 
Prospectus Summary
4
Risk Factors
8
Cautionary Note Regarding Forward-Looking Statements
15
Use of Proceeds
16
Market for Common Equity and Related Stockholder Matters
17
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
Organizational History of the Company and its Subsidiaries
31
Business
32
Description of Property
39
Directors, Executive Officers, Promoters and Control Persons
39
Transactions With Related Persons, Promoters And Control Persons; Corporate Governance
41
Legal Proceedings
41
Security Ownership of Certain Beneficial Owners and Management
41
Selling Stockholders
43
Description of Securities
52
Shares Eligible for Future Sale
55
Material United States Federal Income Tax Considerations
55
Material PRC Income Tax Considerations
58
Plan of Distribution
60
Legal Matters
61
Experts
61
Changes in and Disagreements With Accountants
62
Where You Can Find More Information
62
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 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.

 
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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 collectively  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”).

Overview

We are a significant retailer of consumer electronics and appliances in certain rural markets in the People’s Republic of China (the “PRC” or “China”).  Our retail stores operate under the Guoying brand name. Such stores include locations that are owned and operated by us as well as locations that we exclusively franchise pursuant to cooperation agreements that franchisees sign with us.  Both our Company-owned stores and our exclusive franchise stores only sell merchandise that we provide to them as their exclusive wholesaler, and such merchandise includes Guoying branded products as well as products from major wholesalers such as Sony, Samsung and LG.  In addition to our Company-owned stores and our exclusive franchise stores, we provide Guoying branded merchandise as a wholesaler or distributor to other stores to which we are a non-exclusive wholesaler of consumer electronics and appliances.

As of September 30, 2011:

 
We were the exclusive wholesaler to 561 exclusive franchise stores operating under the Guoying brand name;

 
We provided Guoying branded merchandise as well as merchandise from well known companies including Sony, Samsung and LG to 716 non-exclusive stores; and

 
We owned 2 stores both of which operate in Lu’An City, Anhui Province, that operate under the Guoying brand name and to which we are the exclusive wholesaler and distributor.

As of September 30, 2011, we provided merchandise to 1,279 stores located in Anhui, Henan and Hubei provinces.

We are the world-wide exclusive distributor for Guoying branded merchandise, which currently includes refrigerators and in the future will include consumer LED products.  We are also a wholesaler in the Lu’an area for products under the brand names, Sony, LG, Samsung, Tsinghua Tongfang, Haier, Shanghai Shangling, Chigo, Huayang and Huangming.  Guoying is a general sales agency of Sino-Japan Sanyo electronic products, such as Sanyo televisions, air conditioners, washing machines and micro-wave ovens.  Currently, our products are supplied to us by large distributors, including the brand names Sony, Samsung, LG, Tsinghua Tongfang, Haier. Guoying has partnered 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 the periods ended September 30, 2011 and 2010, we generated net revenues of approximately $87.61 million and approximately $89.36 million, respectively, and net income attributable to us of approximately $16.22 million and approximately $15.09 million, respectively.  In the periods ended September 30, 2011 and 2010, we generated net revenues derived from sales to our exclusive franchise business of approximately $36.92 million and approximately $47.29 million respectively, representing 42.1% and 52.9% of our total net revenues; net revenues derived from sales to our non-exclusive stores of approximately $42.64 million and approximately $35.37 million, representing 48.7% and 39.6%, respectively, of our total revenues; and net revenues derived from sales by our company-owned stores of approximately $8.05 million and approximately $6.70 million, representing 9.2% and 7.5%, respectively, of our total revenues.
 
Industry

According to the 2010 PRC Census, more than 50% of China’s population resides in rural areas of China and rural purchasers are 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, and according to the National Bureau of Statistics of China, the per capita net income of rural residents increased 10.9% in 2010. Based on this increase in average income, we believe that such area has significant growth potential, and it does not appear that many of the urban chains have expanded into the rural communities.

 
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First, 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 taxes paid by farmers.  As a result of this increase in income, such people have more disposable income for discretionary spending.
 
Second, the Chinese government has initiated a rural home appliance and electronics rebate program, called the “Rural Consumer Electronics” plan. This plan (a) 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 and (b) grants rural consumers 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 results in limited margins. While we have some competitors in the rural markets, we believe that the retail chains that exist in larger cities have not established any significant name recognition in the rural markets.  Therefore, we believe that such stores’ success in larger cities will not necessarily result in success in the rural areas where we operate.  We believe that significant opportunity remains due to the increased per capita income of rural residents.

Our Competitive Strengths

We believe that the following strengths differentiate us from our competitors and enable us to maintain a leading position as a rural retailer and wholesale distributor of electronics and consumer appliances in China:

 
We are a wholesaler in the Lu’an area for products under the brand name Sony, LG, Samsung, Tsinghua Tongfang, Haier, Shanghai Shangling;

 
We are a rural based business and we understand the preferences of a rural customers; and

 
We are the exclusive retail seller in the Lu’an area for Huangming and Huayang, each are well-regarded PRC companies that manufacture solar-powered products for consumer usage.

Our Strategy

Our goal is to become the dominant rural retailer and wholesale distributor of electronics and consumer appliances in China.  The principal components of the business strategy we plan to implement to attain our goals include the following:

 
Develop New Exclusive Franchise Stores;

 
Develop New Company-Owned Stores;

 
Develop New Non-Exclusive Stores;

 
Be the Exclusive Rural Distributor for Well-Known Electronic and Consumer Appliance Manufactures; and

 
Develop an LED Wholesale and Manufacturing Business.
 
We anticipate funding our growth strategy primarily from our working capital and below is a summary of approximately how much we anticipate spending in order to achieve our growth strategies:

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 and wholesale business
 
$
8 million
 
Construction completed by 06/30/12
Commence manufacturing by 7/31/2012

 
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Risks and Challenges

We believe that the following are some of the major risks and uncertainties that may materially and adversely affect our business, financial condition, results of operations and prospects:

 
Poor performance or sales by our exclusive franchise stores or non-exclusive stores;

 
Our dependence on a limited number of suppliers for our wholesale business;

 
Our ability to manage the growth and expansion of our operations;

 
Demand for electronics and consumer appliances in China may not continue to grow;

 
Our ability to develop new exclusive franchise stores; and

 
Adverse changes in the Chinese economy.

See “Risk Factors”  beginning on page 8 and other information contained in this prospectus for a detailed discussion of these risks and uncertainties.

Our Corporate Structure

Our current structure is set forth in the diagram below:


Company Information

Our principal executive offices are located at Building G-08, Guangcai Market, Foziling West Road, Lu’an City, Anhui Province, PRC 237001, 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 (including 13,665,902 shares of common stock issued pursuant to the Share Exchange Agreement dated July 22, 2010, and 120,000 shares of common stock issued to consultants related to their professional services) 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 314,285 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 314,285 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 as many shares as permitted of Common Stock issuable upon the exercise of the warrants.

 
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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 from 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 499,403 shares of our Common Stock and (c) Series D Warrants to purchase an aggregate of 499,403 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, as many shares as permitted of Common Stock issuable upon exercise of the warrants are required to be registered pursuant to Section 9(d) of the Purchase Agreement.
 
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 3,421,510 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
 
3,421,510 shares
     
Total shares of Common Stock to be outstanding after the Offering assuming exercise of the Series A, B and E warrants registered on this Registration Statement
 
17,728,564 shares
     
Use of Proceeds
 
We will not receive any proceeds from the sale of the shares of Common Stock.
     
Our OTCQB Trading Symbol
 
CEHD.QB
     
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 December 31, 2011, and gives effect to the issuance of an aggregate of 953,451 shares of Common Stock to the Selling Stockholders upon exercise of the Series A, B 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 130,286 shares of our Common Stock that are currently issuable upon exercise of our Series A warrants, 130,286 shares of our Common Stock that are currently issuable upon exercise of our Series B warrants, 499,403 shares of our Common Stock that are currently issuable upon exercise of our Series C warrants, 499,403 shares of our Common Stock that are currently issuable upon exercise of our Series D warrants, 414,547 shares of our Common Stock that are currently issuable upon exercise of our Series E warrants, 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.

 
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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 fiscal year ended December 31, 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 fiscal year ended December 31, 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;

 
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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

 
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.

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.

 
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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.

We currently do not have accounting personnel that have adequate knowledge of U.S. generally accepted accounting principles.  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. As a result of our lack of U.S. GAAP trained personnel and our lack of familiarity with U.S. GAAP, our internal control over financial reporting may be deficient. 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.

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.

 
10

 

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.

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.

 
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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.
 
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.

 
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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%.
 
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.

 
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RISKS RELATED TO OUR COMMON STOCK

Our common stock is quoted on the OTCQB which may have an unfavorable impact on our stock price and liquidity.

Our common stock is quoted on the OTCQB.  The OTCQB is a significantly more limited market than the New York Stock Exchange or NASDAQ.  The quotation of our shares on the OTCQB 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 OTCQB 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 August 1, 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 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 December 30, 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 the market price of our Common Stock.

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.

 
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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 subsidiary 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;

 
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;

 
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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 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, 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.

Potential investors should not make an investment decision based solely on 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 $1,033,238.

 
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MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
Market Information

Our Common Stock is quoted on the OTCQB under the symbol “CEHD.QB.” There were no reported quotations for our Common Stock during calendar year 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 the four quarters of the fiscal year ending December 31, 2011,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  
                 
Fiscal Year 2011
               
First quarter
  $ 4.95     $ 1.46  
Second quarter
  $ 2.75     $ 0.6  
Third quarter
  $ 1.32     $ 0.25  
Fourth quarter
  $ 0.51     $ 0.17  

As of December 30, 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 securities 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.

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.

 
17

 

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 audited condensed consolidated financial statements of the Company for the fiscal years ended December 31, 2010 and 2009, and 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 “Cautionary Note on Forward Looking Statements” set forth elsewhere in this prospectus.

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.

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 and February 2010, CEH Delaware entered into Share Transfer Agreements 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.

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, and to its exclusive franchise stores and non-exclusive stores.

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 (including 13,665,902 shares of common stock issued pursuant to the Share Exchange Agreement dated July 22, 2010, and 120,000 shares of common stock issued to consultants related to their professional services) and warrants to purchase an aggregate of 1,628,570 shares of our Common Stock. The shares of our Common Stock acquired by the CEH Stockholders in such transactions constitute approximately 86% of our issued and outstanding Common Stock, giving effect to the share and warrant exchange and the sale of our Common Stock pursuant to the Subscription Agreement discussed below, but not including any outstanding purchase warrants to purchase shares of our common stock, including the warrants issued pursuant to the Subscription Agreement. In connection with the closing of the Share Exchange Agreement, 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.

Results of Operations

We operate 2 company owned stores under the Guoying brand name (the “Company Owned Stores”). As of September 30, 2011, we have signed exclusive franchise agreements with 561 stores operating under the Guoying brand name (the “Exclusive Franchise Stores”).  There are 225 exclusive franchise stores that were opened prior to 2009 and have been in continuance operation throughout the years 2009, 2010 and 2011 (the “Same Exclusive Franchise Stores”). We opened 247 new exclusive franchise stores in 2009, 61 new franchise stores in 2010 and 75 new exclusive franchise stores in 2011 (the “New Exclusive Franchise Stores”). Both our Company-owned stores and our exclusive franchise stores only sell merchandise that we provide to them as their exclusive wholesaler, and such merchandise includes Guoying branded products as well as products from major wholesalers such as Sony, Samsung and LG. As of September 30, 2011, we have signed non-exclusive franchise agreements with 716 stores (the “Non-Exclusive Franchise Stores”) to which we provide Guoying branded merchandise on a non-exclusive wholesale basis. There are 80 non-exclusive franchise stores that were opened prior to 2009 that have been in continuance operation throughout year 2009, 2010 and 2011 (the “Same Non-Exclusive Franchise Stores”). We opened 111 new non-exclusive franchise stores in 2009, 557 new non-exclusive franchise stores in 2010 and 1 new non-exclusive franchise store in 2011 (the “New Non-Exclusive Franchise Stores”).

 
18

 

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 televisions increased during the nine months ended September 30, 2011 compared to the same period last year. The decrease in solar power products is the result of lower demand during the nine months ended September 30, 2011 compared to the same period last year. Solar power products are mainly used by bungalows in the rural area of Lu’An City. In connection with the development and expansion of urban areas of Lu’An city, there has been an increase in the construction of high rise commercial properties built as opposed to bungalows which can make better use of our solar products. Therefore the demand for solar power products  in the nine months ended September 30, 2011 was lower than the demand in the same period last year. The increase of television sales during the nine months ended September 30, 2011 is due to high market demand by customers during Chinese New Year and Duan Wu festival within the first two quarters of the year 2011. The increase is also because that the Company had conducted more promotions of television sales to meet customers’ increasing demand during the holiday seasons in the first two quarters of 2011 compared to the same period last year.
 
As of September 30, 2011, there were 561 exclusive franchise stores, an increase of 136, or 32.0%, compared to 425 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%,  in business and generating revenues to us as of September 30, 2011 compared to 553 non-exclusive stores as of September 30, 2010.  Thus, although we opened only 1 non-exclusive store in the first nine months of 2011, we opened 167 in the last three months of 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 mainly due to the increasein the volume of televisions sold offset by the decrease in the volume of solar power products.

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 decrease is mainly caused by our decrease in revenues and 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 decreased margin as a result of lower prices  for our solar powered products and due to the lower margin of new product lines under the Haier brand name. In the nine months ended September 30, 2011, we began to y new product lines under the brand Haier. These product lines are very popular in the PRC. We have taken a more aggressive pricing strategy for our new and existing product lines to expand our customer base and to increase our sales. This aggressive pricing strategy results in lower margins.
 
Operating Expenses

Operating expenses for the nine months ended September 30, 2011 were $2,930,412, an increase of $1,723,250, or 142.8%, from $1,207,162 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 resulting from increases in the price of gas and oil, and due to market competition.  In response to marke competition the Company offered free delivery of products to some of our exclusive and non-exclusive franchise stores that previously bore the transportation costs.
 
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.  On December 31, 2008, Guoying’s board approved a resolution granting RMB 12,401,245 (approximately $1.8 million) as bonus payable to certain employees. However, in May 2010, the board of Guoying passed a resolution canceling the bonus. The reversal of the bonus has been recorded as a reduction of general and administrative expenses in 2010. The absence of such a reduction in 2011 is the main reason for the increased general and administrative expenses for the nine months ended September 30, 2011 compared to the same period last year. The increase was partially offset by a decrease in professional costs, such as audit and attorney fees.. 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.
 
 
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Net Operating Income

Our net operating income for the nine months ended September 30, 2011 was $11,074,775, a decrease of $4,069,656, or 26.9%, from $15,144,431 for the same period in 2010. The decrease was mainly due to decreased sales and increased operating expenses.

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 an increase in Other Income during the nine months ended September 30, 2011. During the quarter ended September 30, 2011, the Company collected an 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.

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 06/30/11
Commence manufacturing by 7/31/12

 
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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 focus on the LED manufacturing business.

Operating Activities

Net cash used in operating activities was $3,360,770 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. The use of cash in operating activities during the 2011 period was primarily due to an increase in 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 the fact that $5.8 million was spent as an advance for the acquisition of land use right during the nine months ended September 30, 2010 and there was no comparable use of cash in 2011.
 
Financing Activities

Net cash provided by financing activities was $64,876 for the nine months ended September 30, 2011, compared to net cash provided 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.

Year Ended December 31, 2010 Compared with Year Ended December 31, 2009

Revenues

Our net revenue for the year ended December 31, 2010 was $114,171,446, an increase of 139.5%, or $66,500,065, from $47,671,380 for the year ended December 31, 2009.

For the year ended December 31, 2010, net revenue from exclusive franchise stores was $41,106,879, an increase of 112.4%, or $21,748,645, from $19,358,234 for the year ended December 31, 2009. There were 61, or 14%, more exclusive franchise stores as of December 31, 2010, compared to the number of exclusive franchise stores as of December 31, 2009.

For the year ended December 31, 2010, net revenue from non-exclusive stores was $48,576,322, an increase of 285.9%, or $35,986,920, from $12,589,402 for the year ended December 31, 2009. There were 539, or 306%, more non-exclusive stores as of December 31, 2010 compared to the number of non-exclusive stores as of December 31, 2009.

For the year ended December 31, 2010, net revenue from company-owned stores was $24,488,245, an increase of 55.7%, or $8,764,501, from $15,723,744 for the year ended December 31, 2009. The increased revenue from company-owned stores was mainly because the Company opened two new company-owned stores in 2010.

Revenue Classified by Store Type

We have standardized our non-accounting information system into electronic format and updated our store records and information in July 2011. Our disaggregation of revenue and cost of sales by each store type in the past two years as of December 31, 2010 and 2009 are as follows:

2009
Presentation
 
Non-Exclusive Franchise
Stores
   
Exclusive Franchise
Stores
   
Company-Owned Stores
   
Total
 
Revenue
  $ 12,589,402     $ 19,358,234     $ 15,723,744     $ 47,671,380  
Cost of Sales
  $ 9,800,013     $ 17,427,871     $ 10,538,585     $ 37,766,469  
Gross Profit
  $ 2,789,389     $ 1,930,363     $ 5,185,159     $ 9,904,911  

 
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2010
Presentation
 
Non-Exclusive
Franchise Stores
   
Exclusive Franchise
Stores
   
Company-Owned Stores
   
Total
 
Revenue
  $ 48,576,322     $ 41,106,879     $ 24,488,245     $ 114,171,446  
Cost of Sales
  $ 37,053,955     $ 33,182,505     $ 24,674,320     $ 94,910,780  
Gross Profit
  $ 11,522,367     $ 7,924,374     $ (186,075 )   $ 19,260,666  

Sales and Average Per Store Sales of Same Stores

The amount of revenue generated by the Same Stores operating in both 2010 and 2011, and the increase experiences at a percentage are as follows:

Same Store Sales
 
2010 Sales
   
2009 Sales
   
Difference
   
Change
 
Non-Exclusive Franchise Stores
  $ 33,294,500     $ 8,991,503     $ 24,302,997       270 %
Exclusive Franchise Stores
  $ 39,909,643     $ 14,969,234     $ 24,940,409       167 %
Company-Owned Stores
  $ 21,296,731     $ 15,723,745     $ 5,572,986       35 %
Total
  $ 94,500,874     $ 39,684,482     $ 54,816,392       138 %

The primary drivers of the increase in Same Stores sales were due to increases in our expansion of offered products lines, as well as, and to a lesser extent, 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. The large increase in non-exclusive franchise same store sales relates directly to our continued efforts to offer more attractive products, which has led to success in occupying additional shelf space in these non-exclusive stores. This relationship is unique to these non-exclusive franchise stores as we do not have direct control over the totality of products offered at these stores. Generally speaking, the greater sales of our products as a result of offering more sought-after electronics, leads to greater success at these stores and a greater share of space occupied solely by our products. The increase in revenue related to exclusive franchise stores is primarily a function of pricing strategies. The Company continues to expand our sales network as well as products offered, which continuously requires us to review pricing on existing products and existing sales channels. These strategies have led to improvements in revenue at our exclusive franchise stores, as noted.
 
The amount of average sales of per-store of Same Stores and its trend of increase or decrease are as follows:

Average Per-Store Same Store Sales
 
2010 Sales
   
2009 Sales
   
Difference
   
Change
 
Non-Exclusive Franchise Stores
  $ 456,089     $ 123,171     $ 332,918       270 %
Exclusive Franchise Stores
  $ 205,720     $ 77,161     $ 128,559       167 %
Company-Owned Stores
  $ 21,296,731     $ 15,723,745     $ 5,572,986       35 %

The discussion related to average sales of per-store of Same Stores is the same as can be found above for same store sales discussion.

Weighted Average Sales Per New Store

The number of New Stores opened during a particular period in the table below reflects when each store started generating revenue to us rather than when the contract was entered into:

 
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New Stores
 
Non-Exclusive
Franchise Stores
   
Exclusive
Franchise Stores
   
Company-Owned
Stores
   
Total
 
Quarter-Ended 3/31/2009
    27       0       0       27  
Quarter-Ended 6/30/2009
    2       30       0       32  
Quarter-Ended 9/30/2009
    36       80       0       116  
Quarter-Ended 12/31/2009
    46       137       0       183  
Total New Stores 2009
    111       247       0       358  
                                 
Quarter-Ended 3/31/2010
    91       0       0       91  
Quarter-Ended 6/30/2010
    100       0       0       100  
Quarter-Ended 9/30/2010
    199       0       0       199  
Quarter-Ended 12/31/2010
    167       61       2       230  
Total New Stores 2010
    557       61       2       620  

The weighted average amount of new store sales for fiscal years end 2010 and 2009 are as follows:

Weighted Average New Store
Sales
 
Non-Exclusive
Franchise Stores
   
Exclusive 
Franchise Stores
   
Company-Owned 
Stores
   
Total
 
Average 2009
  $ 195,216     $ 115,026     $ -     $ 310,242  
Average 2010
  $ 301,357     $ 19,627     $ 1,595,757     $ 1,916,740  
Difference
  $ 106,140     $ (95,399 )   $ 1,595,757     $ 1,606,498  
Change
    54 %     -83 %  
100%
      518 %

The weighted average amount of new store sales is determined by annualizing new store sales on a quarterly basis. The increase in the weighted average new store sales of non-exclusive franchise stores results from our expanded products lines and the more attractive product lines we carried, the better promotion of our products in the non-exclusive franchise stores, and the improved economic environment in China. The decrease in the weighted average new store sales for exclusive franchise stores results from a decision by the Company to put more effort in developing its non-exclusive franchise network with a reduction in less effort to develop its new exclusive franchise network.

We believe that the difference in changing sales rates in same store sales and new store sales will stabilize to reflect economic environment drivers in future periods, continued enhancement in our sales networks and to a lesser extent, changes in product mixes.

The increased revenue from new product lines carried in 2010 was approximately $43,334,079, of this amount our exclusive franchise stores, non-exclusive stores and company-owned stores increased revenue from new product lines by approximately $5,091,614, $18,523,563 and $19,718,902, respectively.

The increased revenue from new exclusive franchise stores opened in 2010 was approximately $1,197,236 for the year ended December 31, 2010. The increased revenue from new non-exclusive stores opened in 2010 was approximately $14,803,345 for the year ended December 31, 2010.

 
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The following is a summary of revenue by product line for the years ended December 31, 2010 and 2009:

   
2010 Sales
   
2009 Sales
 
Solar Power Products
  $ 70,163,637     $ 29,204,304  
Air Conditioner
  $ 6,736,700     $ 3,682,511  
Refrigerator
  $ 11,729,480     $ 2,803,622  
TV
  $ 21,789,429     $ 7,447,247  
DVD
  $ 302,245     $ 146,956  
Washer
  $ 3,114,900     $ 2,707,858  
Others
  $ 335,055     $ 1,678,883  
Total
  $ 114,171,446     $ 47,671,381  

The increase in sales of televisions and refrigerators was primarily due to new product lines and new brands that we carried in 2010. In 2010, we increased our sales of LG televisions, Sony televisions, Qinghuatongfang televisions, and Shangling refrigerators. These brands are international brands for which there is a strong demand in China. Prior to 2010, we only carried Haier televisions and refrigerators. We decided to cease carrying Haier televisions and refrigerators in 2010 based on our estimate of market demand and use of our resources. Our sales of solar power products also increased in 2010 because the Company was approved for government subsidized sales for its solar power products. In order to encourage sales of electronic products to rural areas in China, since 2008, the government has adopted a policy that for certain products, consumers in rural areas can be refunded up to 13% of the total purchase price. During 2010 sales of air conditioners increased by $3.05 million compared to 2009. The changes in sales amounts for 2009 to 2010 of air conditioners was due to fact that we terminated the Haier air conditioner product line and replaced this product line with the Zhigao brand which has been a better match for the demand of our market. The total Haier product line contributed $14.41 million in sales for 2009, of which $3.67 million was generated from sales of Haier air conditioners.

Our increased revenues due to sales of these products were approximately $3.96 million from LG televisions, approximately $14.35 million from Sony televisions, approximately $3.48 million from Qinghuatongfang televisions, approximately $9.90 million from Shangling refrigerators, and approximately $6.74 million from Zhigao air conditioners.

Cost of Goods Sold

Our cost of goods sold for the year ended December 31, 2010 was $94,910,780, an increase of $57,144,311, or 151.3%, compared to $37,766,469 for the year ended December 31, 2009. The increase was mainly due to the increase in sales.
 
   
2010
   
2009
 
             
Cost of goods sold from exclusive franchise stores
  $ 33,182,505     $ 17,427,871,  
Cost of goods sold from non-exclusive stores
    37,053,955       9,800,013  
Cost of goods sold from company-owned stores
    24,674,320       10,538,585  
Cost of goods sold
  $ 94,910,780     $ 37,766,469  

For the year ended December 31, 2010, cost of goods sold from exclusive franchise stores was $33,182,505, an increase of 90.4%, or $15,754,634, from $17,427,871 for the year ended December 31, 2009. The increase was due to the increase in revenue. The increase was also because in 2010 we started to carry more expensive brands, such as Sony and LG, which generate higher revenues and have a higher cost of goods sold.

For the year ended December 31, 2010, cost of goods sold from non-exclusive stores was $37,053,955, an increase of 278.1%, or $27,253,942, from $9,800,013 for the year ended December 31, 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, which generate higher revenues and have a higher cost of goods sold.

 
24

 

For the year ended December 31, 2010, cost of goods sold from company-owned stores was $24,674,320, an increase of 134.1%, or $14,135,735, from $10,538,585 for the year ended December 31, 2009. The increase was due to the increase in sales from company-owned stores. The increase was also because in 2010 we started to carry more expensive brands, such as Sony and LG, which generate higher revenues and have a higher cost of goods sold.

The increased cost of goods sold from new product lines carried in 2010 was approximately $34,422,088 for the year ended December 31, 2010. For the year ended December 31, 2010, the increased cost of goods sold from new product lines carried by exclusive franchise stores, non-exclusive stores and company-owned stores was $2,442,747, $15,374,557 and $16,604,784, respectively.

The increased cost of goods sold by new exclusive franchise stores opened in 2010 was approximately $931,147 for the year ended December 31, 2010. The increased cost of goods sold by new non-exclusive stores opened in 2010 was approximately $11,310,229 for the year ended December 31, 2010.

Gross Profit

Gross profit for the year ended December 31, 2010 was $19,260,667, an increase of $9,355,754, or approximately 94.5%, compared to $9,904,912 for the year ended December 31, 2009.

For the year ended December 31, 2010, gross profit for exclusive franchise stores was $7,924,374, an increase of 310.51%, or $5,994,011, from $1,930,363 for the year ended December 31, 2009. The increase was due to the increased revenue from exclusive stores.

For the year ended December 31, 2010, gross profit for non-exclusive stores was $11,522,367, an increase of 313.08%, or $8,732,978, from $2,789,389 for the year ended December 31, 2009. The increase was due to the increased revenue from non-exclusive stores.

For the year ended December 31, 2010, gross profit for company-owned stores was a loss of $186,075, a decrease of 103.59%, or $5,371,235, from a profit of $5,185,160 for the year ended December 31, 2009. The decrease was due to a change of the products that we sell and our selling strategy. In 2010, the Company had put more effort in developing its exclusive and non-exclusive store network thus causing the decreased gross profit of company owned stores compared with 2009.

The increased gross profit from new product lines carried in 2010 was approximately $8,911,991 for the year ended December 31, 2010. For the year ended December 31, 2010, the increased gross profit from new product lines carried by exclusive franchise stores, non-exclusive stores and company-owned stores was$2,648,867, $3,149,006 and $3,114,118, respectively.

The increased gross profit from products sold by new exclusive franchise stores opened in 2010 was approximately $266,089 for the year ended December 31, 2010. The increased gross profit from products sold by new non-exclusive stores opened in 2010 was approximately $3,493,116 for the year ended December 31, 2010.

Gross Profit Rate

Gross profit rate for the year ended December 31, 2010 was 16.87%, a decrease of approximately 18.81%, compared to 20.78% for the year ended December 31, 2009. The decrease was mainly due to the change in the mix of the products that we sell and our selling strategy.  In 2010, we started carrying new product lines and new brands. We also opened 61 additional exclusive franchise stores and 539 additional non-exclusive stores. The new brands that we carry are international 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.

For the year ended December 31, 2010, gross profit rate for exclusive franchise stores was 19.28 %, an increase of approximately 93.32 %, compared to 9.97 % for the year ended December 31, 2009. The increase in gross profit rates related to exclusive franchise stores is primarily a function of pricing strategies. The Company continues to expand our sales network as well as products offered, which continuously requires us to review pricing on existing products and existing sales channels. These strategies have led to improvements in gross profit rates at our exclusive franchise stores, as noted. We expect that our pricing strategies will continue to evolve to market conditions and expect improvements to have a marginalizing effect on the noted increase in gross profit rates at exclusive franchise stores as changes in product offerings mature along with their related pricing strategies.

 
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For the year ended December 31, 2010, gross profit rate for non-exclusive stores was 23.72%, a decrease of approximately 7.06%, compared to 22.16% for the year ended December 31, 2009. With respect to the relatively flat year-over-year change in non-exclusive franchise store gross profit rates, we have less flexibility of our pricing strategies at these stores, as these stores carry products from other companies, and in order to remain competitive at these stores, we must reflect strategies in pricing and products offered that successfully compete with other company products offered at these locations.

For the year ended December 31, 2010, gross profit rate for company-owned stores was (0.76)%, a decrease of approximately 102.30%, compared to 32.98% for the year ended December 31, 2009. The decrease was due to a change of the products that we sell and our selling strategy. In 2010, the Company had put more effort in developing its exclusive and non-exclusive store network thus causing the decreased gross profit of company owned stores compared with 2009.

Gross profit rate from new product lines carried in 2010 was approximately 20.57% for the year ended December 31, 2010. Gross profit rate from new product lines carried in 2010 sold by exclusive franchise stores was approximately 52.02% for the year ended December 31, 2010. Gross profit rate from new product lines carried in 2010 sold by non-exclusive stores was approximately 17% for the year ended December 31, 2010. Gross profit rate from new product lines carried in 2010 sold by company owned stores was approximately 15.79% for the year ended December 31, 2010.

Gross profit rate from new stores opened in 2010 was approximately 14.80% for the year ended December 31, 2010. Gross profit rate from new exclusive franchise stores opened in 2010 was approximately 22.23% for the year ended December 31, 2010. Gross profit rate from new non-exclusive stores opened in 2010 was approximately 23.60% for the year ended December 31, 2010.

Operating Expenses

Operating expenses for the year ended December 31, 2010 were $5,977,575, an increase of $5,819,990, or 3,693.2%, from $157,585 for the year ended December 31, 2009.

Selling expenses for the year ended December 31, 2010 were $4,041,199, an increase of $3,993,361, or 8,347.7%, from $47,838 for the year ended December 31, 2009. The increase was due to the increase in sales and business expansion. The increase of selling expenses relates primarily to significant increases in sales commissions (83% of the year-over year increase) as a result of the increases in revenue from the sales of our products as well as to a lesser extent, increases in shipping and handling expenses (8% of the year-over-year increase). As we expand our sales network, we have had to rely more heavily on the support of a greater network, the increases in costs for which are greater in the short-term than the associated increases in revenue. We expect the costs for network expansion to marginalize over the next year such that growth in related costs will approximate related growth in revenue. The remaining components of the increase relate to our increase in related revenues, none of which were individually significant.

General and administrative expenses for the year ended December 31, 2010 were$3,770,521, an increase of $3,660,774, or 3,335.6%, for the year ended December 31, 2009. On December 31, 2008, Guoying’s board approved a resolution granting RMB 12,401,245 (approximately $1,819,263) as bonus payable to certain employees. However, in May 2010, the Guoying board passed a resolution canceling the bonus. The reversal of the bonus payable to employees has been recorded as a reduction of general and administrative expenses in 2010. The absence of a similar reversal is the main reason for the increased general and administrative expenses in 2012 for the year ended December 31, 2011 compared to the year ended December 31, 2010. The increase of general and administrative expenses also relates primarily to a significant increase in bad debts. The significant increase in bad debts expense relates to our expanding sales networks and significant increases in associated stores. Other components of the increase in general and administrative expenses included professional fees incurred related to 2010 transactions, which are one-time fees and are not expected to recur. These professional fees contributed 29% of the year-over-year increase. Additionally, we incurred network expansion-related fees, including training and travel expenses related to our increase in sales networks. Lastly, we incurred additional rental charges as a result of our growth and need for administrative space, which represented 2% of the year-over-year increase in general and administrative costs. The remaining components of the increase relate to general growth, none of which were individually significant.

Net Operating Income

Our net operating income for the year ended December 31, 2010 was $13,283,092, an increase of $3,535,765, or 36.3%, from $9,747,327 for the same period in 2009. The increase was due to increased sales, offset by increased costs of goods sold and operating expenses.

 
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Net Income

Our net income for the year ended December 31, 2010 was $13,235,416, an increase of $3,492,172, or 35,84%, from $9,743,245 for the same period in 2009. The increase resulted from increased sales and the reversal of a bonus 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 bonus payable to employees. In May 2010, Guoying’s board passed a resolution cancelling 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 were re-classed as equity. The forgiveness of the bonuses payable to employees were recorded as other income. There is no dividend declared for the year ended December 31, 2009 or for the year ended December 31, 2010.

Income Taxes Expense

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. The State Tax Bureau of Lu’An City, Anhui province issued an income tax benefit approval to Guoying on December 10, 2011 providing that Guoying is subject to income tax and VAT benefit treatment out of a reduced rate of RMB 7,500 tax payment per year (including income tax and VAT) valid from December 1, 2011 until December 31, 2013 subject to Guoying's option to pay more in taxesshould it elect to do so. Therefore, currently, Guoying is charged at a fixed annual reduced tax rate no less than RMB7, 500 per year that changes every year to cover all types of taxes including income taxes. The income tax expenses for the years ended December 31, 2010 and 2009 are $4,073 and $2,083, respectively. There were no significant book and tax basis differences.

Off-Balance Sheet Arrangements

There were no off-balance sheet arrangements during the year ended December 31, 2009 or during the year ended December 31, 2010 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 December 31, 2010, we had cash and cash equivalents of $1,226,101. 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.

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

   
December 31,
2010
   
December 31,
2009
 
Net cash provided by (used in) operating activities
  $ 17,875,958     $ (3,249 )
Net cash used in investing activities  
    (20,858,995 )     (4,692 )
Net cash provided by financing activities
    4,091,803       -  
Effect of rate changes on cash  
    52,603       39,076  
Increase in cash and cash equivalents  
    1,161,365       31,136  
Cash and cash equivalents, beginning of period  
    64,736       33,600  
Cash and cash equivalents, end of period  
  $ 1,226,101     $ 64,736  

Net cash provided by operating activities was $17,875,958 for the year ended December 31, 2010, compared to net cash used in operating activities of $3,249 for the year ended December 31, 2009, an increase of $17,879.207. The increase of net cash used in operating activities was primarily due to a 20% increase in net income resulting from greater sales, and cash receipts for receivables and other receivables – long-term. During the year ended December 31, 2010, the Company developed its sales network by increasing the number of 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. In addition, and as a result of the noted significant increase in the number of stores and new product offerings, the Company also established a reserve for credit losses, which had the effect of increasing net cash by operating activities presented in the statement of cash flows by $2,065,683.

During 2011, we plan to develop new exclusive franchise stores, company-owned stores and non-exclusive 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:

 
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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
(1)
Phase I construction to be completed  by 06/30/2012
Phase II construction  commencing by 7/31/2012

(1)
The $8M planned expenditures related to the development of our LED business includes approximately $3M for construction of the facility in which to produce our products and the remaining $5M for purchase of machinery and equipment for the production of the products, In addition to these costs, we expect payment of approximately $18.9M for the purchase of the respective land-use-right with Pingqiao Industrial Park on which we will conduct operations, and further anticipate $2.8 million in expenses associated with the new OEM contract, including market research and investigation, product research and development, as well as marketing and advertisements for our future “Guoying” branded LED products.

The prioritization of our growth strategy projects includes first to continue to develop our exclusive and non-exclusive franchise store networks concurrent with the development of our LED manufacturing business. Our second priority will be to continue to negotiate OEM contracts to further our product offerings, followed by future openings of company-owned stores in prime-market locations. In the event that our working capital is insufficient to support planned expenditures, we will continue to work with our current OEM relationships to assist in furthering sales of their products via our store networks, and we expect to go to investors through future registration offerings.

Operating Activities

Net cash provided by operating activities was $17,875,958 for the year ended December 31, 2010, compared to net cash used in operating activities of $3,249 for the year ended December 31, 2009, an increase of $17,879.207, or 550,312%. The increase of net cash used in operating activities was primarily due to increased net income resulting from greater sales, and a decrease of accounts receivable due to collection of accounts receivable. During the year ended December 31, 2010, the Company developed its sales network by increasing the number of 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. Sales increased and our accounts receivable were collected faster compared to the same period last year.

Investing Activities

Net cash provided by investing activities was $20,858,995 for the year ended December 31, 2010, compared to cash used in investing activities of $4,692 for the year ended December 31, 2009, an increase of $20,854,303, or 4,44465%. The increase of cash provided by investing activities was mainly because $20,883,480 was advanced to acquire land use right during the year ended December 31, 2010.

Financing Activities

Net cash provided by financing activities was $4,091,803 for the year ended December 31, 2010, compared to $0 for the year ended December 31, 2009. The increase was mainly due to the $4,154,069 in cash that was received through share issuance during the year ended December 31, 2010.

 
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Inflation and Changing Prices

While inflation has increased in China over the past two years, such inflation has not had a material effect on the Company’s net revenues because the Rural Consumer Electronics Plan grants a government sponsored rebate to our rural customers.  Pursuant to the terms of the policy, our prices are competitive with the prices of the same goods in urban areas, however our customers are not required to pay a market driven price.  As a result of this rebate, the actual cost incurred by our customers has not materially increased despite inflation.

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 – Product Sales

The Company receives revenue from sale of electronic products. The Company's revenue recognition policies are in compliance with ASC 605 (previously Staff Accounting Bulletin 104). The Company recognizes all product sales revenue 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. The Company recognizes product sales revenue from exclusive franchise stores and non-exclusive franchise stores when the products are delivered to the respective store. Product sales to all franchise stores are recorded at the gross amount billed to the store as we have determined that we are principal to the transaction because we are the primary obligor in the arrangement.

No return rights are granted to franchise stores if they are unable to sell purchased inventories to end users. Additionally, our product sales from company-owned stores are covered by the respective manufacturers’ return and warranty policies and we receive full reimbursement for any costs associated with returns and warranty payments. As such, we do not estimate deductions or allowance for sales returns.

Our sales are covered by the manufacturers’ return and warranty policies and we receive a full reimbursement for costs associated with returns and warranty payments. 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.

Our products delivered to customers are checked on site by the customers and, once the products are accepted by customers, they 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 in our income statement.
 
The Company recognizes its revenues net of value-added taxes (“VAT”). 

Revenue Recognition – Franchise Fees

Franchise fees, including area development and initial franchise fees, continuing fees, and royalties (collectively referred to as “franchise fees”) received from exclusive franchise stores and non-exclusive franchise stores for the right to establish new stores and royalties are charged to franchisees based on a percentage of a franchised store’s sales.

Franchise fees are accrued as unearned franchise revenue when received and are recognized as revenue when the respective franchised store opens, which is generally when we have fulfilled all significant obligations to the franchisee. Continuing fees and royalties are recognized in the period earned.

Currently, in connection with promotional efforts aimed at network growth, the Company has ceased charging franchise fees, continuing fees and royalties to our franchisees.

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.

 
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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

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.

In December 2010, the FASB issued amended guidance related to Business Combinations. The amendments affect any public entity that enters into business combinations that are material on an individual or aggregate basis. The amendments specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company will assess the impact of these amendments on its consolidated financial statements if and when an acquisition occurs.

In December 2010, the FASB issued amended guidance related to intangibles—goodwill and other. The amendments modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.

The FASB has issued amended guidance for subsequent events. The amendment removes the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The FASB also clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The FASB believes these amendments remove potential conflicts with the SEC's literature. All of the amendments were effective upon issuance (February 24, 2010). The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

 
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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 314,285 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 314,285 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.

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 499,403 shares of our Common Stock for $3.70 per share and (c) three year Series D Warrants to purchase an aggregate of 499,403 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.


 
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BUSINESS
 
Overview

Through our subsidiary, Guoying, we are engaged in the wholesale and 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. As of December 31, 2011, approximately 61% of our revenue was due to the sale of solar water heaters (our sole solar power product), approximately 10% of our revenue was due to the sale of refrigerators and approximately 19% of our revenue was due to the sale of televisions.
 
During 2010, we operate 3 company-owned stores, all of which are located in Lu’an City, Anhui Province. During 2010, we closed two of our company-owned stores, Longhe and Guangcai, and opened our new headquarter store located in G-8 Guangcai Big Market in 2011. As of September 30, 2011, we had 561 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 September 30, 2011, 716 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. As of December 31, 2011, approximately 21.4% of our revenue was from the sales by company-owned stores, approximately 36.0% of our 2010 revenue was from the sales to exclusive franchise stores and approximately 42.6% of our 2010 revenue was from sales to the non-exclusive stores.

We 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.  Guoying is a wholesaler in the Lu’an area for products under the brand names, Sony, LG, Samsung, Shanghai Shangling, Tsinghua Tongfng, Chigo, Huayang and Huangming.  Guoying is a 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 large 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 original equipment manufacturer (“OEM”), 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 2010, 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. 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. Pengbai is required to repay the loan by October 2017, with payments in four equal installments of RMB 20 million (approximately $2.9 million) beginning in October 2013. The loan is secured by all the assets of Pengbai and is interest free. In March 2011, the Company received $2,154,140 from Pengbai as full repayment of the loan.

Retail Operations

The various types of stores are described below:

 
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Company-owned stores

We now own and operate 2 company-owned stores, which sell Guoying branded products as well as other merchandise that we provide as the exclusive wholesaler. We owned and operated 3 company-owned stores as of December 2010 and closed two of our company-owned stores, Longhe and Guangcai, and opened our new headquarter store in 2011 located in G-08 Guangcai Market, Foziling West Road, Lu’An City, Anhui Province. Our company-owned stores focus on the sale of solar thermal products, refrigerators, air conditioners, televisions and other products. Our administrative offices are located on the second floor of our new headquarter store. We currently lease our two company-owned stores.

Exclusive Franchise Stores

As of September 30, 2011, 561 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 2 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 average amount of each loan is approximately RMB 58,286 (approximately $8,967). However, 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 341,548 (approximately $20,000 to $50,000) and varies based on the factors discussed above and the total amount of the loan.  As of April 25, 2011, the total outstanding amount of such loans was RMB 80,436,957 (approximately $12,374,916). In consideration of the loans, the exclusive franchise stores exclusively purchase products from Guoying.

Non-exclusive stores

As of September 31, 2011, we provided merchandise to 716 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 are retailers and 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, or Guoying extends unsecured credit to such stores in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts.  Under the franchise agreements, each non-exclusive store pays Guoying an annual fee of RMB 5,000 (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
 
2
 
540
 
685
Henan
     
12
 
12
Hubei
  
 
  
9
  
19

 
33

 
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 an agreement with one OEM, Pengbai, pursuant to which it manufactures 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.

We are currently negotiating an OEM contract with Shandong Huangming to manufacture “Guoying” branded LED products and plan to recruit sales agents in various provinces in China to distribute “Guoying” branded LED products in the future. We anticipate $2.8 million in expenses associated with the new OEM contract, including market research and investigation, product research and development, as well as marketing and advertisements for our future “Guoying” branded LED products.

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 acres of this land is for commercial use and 180 Chinese acres of this land is for industrial use. The total purchase price of the land is RMB 122.88 million (approximately $18.9 million), and we paid RMB 100 million (approximately $15.2 million) of the purchase price as of December 31, 2010. We are not obligated to pay the remaining $3.6 million until we receive the land use right certificate issued by relevant PRC government pursuant to the Land Use Right Purchase Agreement.  We plan to construct our own facilities to manufacture LED products under the Guoying brand name on this parcel of land and we expect the construction of such manufacturing facilities to be completed by mid 2012 and manufacturing to be commenced shortly thereafter.
 
Industry Background

According to the 2010 PRC Census, more than 50% of China’s population resides in rural areas of China and they comprise 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, and according to the National Bureau of Statistics of China, the per capita net income of rural residents increased 10.9% in 2010. Based on this increase in average income, we believe that such area has significant growth potential, and it does not appear that many of the urban chains have expanded into the rural communities.

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. We believe that the 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.

 
34

 

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 results in limited margins. While we have some competitors in the rural markets, we believe that the retail chains that exist in larger cities have not established any significant name recognition in the rural markets.  Therefore, we believe that such stores’ success in larger cities will not necessarily result in success in the rural areas where we operate.  We believe that significant opportunity remains due to the increased per capita income of rural residents.

Our Growth Strategies

Partnering with well-known electric appliance manufacturers. 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.

Exclusive Franchise Stores and Non-Exclusive Stores. We plan to terminate our relationship with exclusive franchise stores and non-exclusive stores that are in contract with us but that have generated insignificant revenues to us in past years due to distance or lack of purchase orders.  By focusing on profitable exclusive and non-exclusive franchise stores and by closing non-profitable exclusive and non-exclusive 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. Further, we plan to shift our business focus to LED wholesaling and manufacturing.

Company-Owned Stores. We closed two of our company-owned stores, Longhe and Guangcai, in 2010 and opened our new headquarter store in the centre business district of Lu’an City in 2011 that focuses on the sale of solar thermal products, refrigerators, air conditioners, televisions and other products.

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:

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 06/31/12
Commence manufacturing by 7/31/12

 
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Raw Materials and Suppliers

Approximately 95% of the cost of sales is the purchase price of products.

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. We are responsible for cost of marketings of our Guoying brand products and Guoying franchise brand. Under contracts we have with our suppliers, our suppliers are responsible for the costs of all discounts and promotions of sales and distribution of products sold from the suppliers to us.

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. Due to the Rural Consumer Electronics Plan, our rural customers are not affected by such inflation as greatly as urban customers.  However, the selling prices of some older models of products have decreased since such models are being discontinued.

 
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Employees

As of September 30, 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.

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

 
37

 

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.

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.

 
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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  
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

 
39

 

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.  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. We believe his knowledge of our company and years of experience in our industry give him the ability to guide our company as a director and executive officer.

Haibo Liu became our Director and Vice President on July 15, 2010. Mr.Liu has been 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. We believe we can benefit from his intimate knowledge of the business and operations of Guoying and his leadership skills.

Family Relationships

Hailong Liu and Haibo Liu are brothers

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 2011 and 2010, 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,
 
12/31/2011
  $ 48,530                                         $ 48,530  
Chairman, President, CEO and CFO
 
12/31/2010
  $ 48,530                                         $ 48,530  
Haibo Liu,
 
12/31/2011
  $ 32,835                                                     $ 32,835  
Vice President
 
12/31/2010
  $ 32,835                                         $ 32,835  

The Company does not have any equity compensation plans.  The Company does not currently pay any compensation to its non-officer directors.

 
40

 

TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CONTROL PERSONS;
CORPORATE GOVERNANCE

Transactions with related persons

On July 9, 2010, Hailong Liu (“Mr. Liu”), our Chairman, President, Chief Executive Officer and Chief Financial Officer, entered into a Call Option Agreement with Sherry Li (the “Ms. Li”), the holder of 11,556,288 shares of our Common Stock (the “Option Shares”).  Under the Call Option Agreement, the Mr. Liu shall have right and option to acquire 50% of Option Shares upon first filing of a quarterly report on Form 10-Q with the SEC on August 23, 2010 following the execution of the Share Exchange Agreement and 50% of the remaining Option Shares 2 years after such filing by August 23, 2012. Pursuant to the terms of the Call Option Agreement, Mr. Liu acquired 5,778,144 shares in August 2010.

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.

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 material 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 December 31, 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.

 
41

 

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
   
5,778,144
     
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
%

(1)  Unless otherwise provided, the address of each person is G-8, Guangcai Big Market, Foziling West Road, Lu’An City, Anhui Provice, 237001.

(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 December 31, 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.

 
42

 

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 499,403 shares of Common Stock for $3.70 per share and (c) Series D Warrants to purchase an aggregate of 499,403 shares of Common Stock for $4.75 per share.

At the time they acquired the securities pursuant to the Purchase Agreement, all of the Selling Stockholders were “accredited investor” 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.

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 All
of the Shares
Registered in
the Offering
Are Sold(2)(3)
 
Chestnut Ridge Partners, LP (4)  
    170,454 (5) 1.0 %     66,528       103,926       *  
Silver Rock II Limited (6)  
    428,571 (7) 2.7 %     250,908       177,663       1.1 %
The Bosphorous Group, Inc. (8)  
    85,731 (9) *       50,191       35,540       *  
Jayhawk Private Equity Fund II, L.P. (10)  
    342,858 (11) 2.0 %     200,727       142,131       *  
Professional Capital Partners, Ltd. (12)  
    1,463,750 (13) 8.7 %     856,956       606,794       3.5 %
John Baldwin  
    28,410 (14) *       11,088       17,322       *  
DNST Properties, LLC (15)  
    56,820 (16) *       22,177       34,643       *  
The Burke Family Trust (17)  
    143,533 (18) *       72,943       70,590       *  
SEL Private Trust Co. FAO JM Smucker Co. Master Trust (19)  
    284,094 (20) 1.7 %     110,882       173,212       1.0 %
Coronado Capital Partners LP (21)  
    85,230 (22) *       33,265       51,965       *  
Lazy Bear, LLC (23)  
    22,728 (24) *       8,871       13,857       *  
 
 
43

 
 
Lee Bear I, LLC (25)  
    71,022 (26) *       27,720       43,302       *  
Joseph R. Lee  
    198,864 (27) 1.2       77,617       121,247       *  
Chris Clayton  
    34,092 (28) *       13,306       20,786       *  
Bear Marsh, LLC (29)  
    14,202 (30) *       5,543       8,659       *  
Harry Unger Jr.  
    12,000 (31) *       4,684       7,316       *  
Denise Scarpelli  
    12,000 (32) *       4,684       7,316       *  
Thomas H. Burke  
    60,000 (33) *       23,418       36,582       *  
RBC Capital Markets, Custodian for Bruce R. Schafer IRA (34)  
    16,800 (35) *       6,557       10,243       *  
                                     
 Randall M. Toig Family Posterity Trust (36)
    90,000 (37) *       35,127       54,873       *  
Arthur A. Mitchell, Jr.
    12,000 (38) *       4,684       7,316       *  
Scott Sammis
    30,000 (39) *       11,709       18,291       *  
Craig Sherlock
    60,000 (40) *       23,418       36,582       *  
Frank P. Cutrone
    30,000 (41) *       11,709       18,291       *  
John W. Trone
    60,000 (42) *       23,418       36,582       *  
Gregory T. Jones
    24,000 (43) *       9,367       14,633       *  
Randy Hyland
    15,000 (44) *       5,855       9,145       *  
John J. DiLorenzo
    12,000 (45) *       4,684       7,316       *  
Norman J. Ferenz
    6,000 (46) *       2,342       3,658       *  
Barry A. Morguelan
    30,000 (47) *       11,709       18,291       *  
William M. Rogers
    6,000 (48) *       2,342       3,658       *  
Mark L. Bumler
    30,000 (49) *       11,709       18,291       *  
Stanley & Suzanne Dorf
    12,000 (50) *       4,684       7,316       *  
Susan Hardesty
    6,000 (51) *       2,342       3,658       *  
Lawrence R. Clarke, M.D.
    15,000 (52) *       5,855       9,145       *  
Thomas Scott Deal
    24,000 (53) *       9,367       14,633       *  
George Eilers Living Trust (54)
    30,000 (55) *       11,709       18,291       *  
Joseph Tolliver
    18,000 (56) *       7,025       10,975       *  
Jan Dauer
    6,000 (57) *       2,342       3,658       *  
Dean N. Browning
    18,000 (58) *       7,025       10,975       *  
                                     
Larry & Diane Zimmerman
    12,000 (59) *       4,684       7,316       *  
Steven Hribar
    60,000 (60) *       23,418       36,582       *  
Frank Krawiecki Profit Sharing Plan (61)
    60,000 (62) *       23,418       36,582       *  
A. Sam Coury
    15,000 (63) *       5,855       9,145       *  
Miles Blacksberg
    30,000 (64) *       11,709       18,291       *  
Henry & Trisha Ihnfeldt
    12,000 (65) *       4,684       7,316       *  
John M. Grenfell
    15,000 (66) *       5,855       9,145       *  
David Sutherlan
    6,000 (67) *       2,342       3,658       *  
Matt Kinchen
    12,000 (68) *       4,684       7,316       *  
Arthur Goldstein
    15,000 (69) *       5,855       9,145       *  
Barney Evangelista
    6,000 (70) *       2,342       3,658       *  
Ron Dilks
    30,000 (71) *       11,709       18,291       *  
Anthony R. Bartolo
    12,000 (72) *       4,684       7,316       *  
Phil & Denise Fortuna
    15,000 (73) *       5,855       9,145       *  
Atlas Tubular LP (74)
    30,000 (75) *       11,709       18,291       *  
Jeffrey Webster
    6,000 (76) *       2,342       3,658       *  
Wade M. Harris and Tracy L. Harris JTWROS
    60,000 (77) *       23,418       36,582       *  
Daniel W. Gottlieb
    60,000 (78) *       23,418       36,582       *  
David L. Erickson
    6,000 (79) *       2,342       3,658       *  
Bill Campbell and Edda Campbell JTWROS
    18,000 (80) *       7,025       10,975       *  
 
 
44

 
 
Daniel & Deborah Gibson
    30,000 (81) *       11,709       18,291       *  
James J. Roberts
    12,000 (82) *       4,684       7,316       *  
                                     
 Walter French
    6,000 (83) *       2,342       3,658       *  
LJW Partnership (84)
    18,000 (85) *       7,025       10,975       *  
John S. Harris
    18,000 (86) *       7,025       10,975       *  
William Lurie
    25,200 (87) *       13,583       11,617       *  
David J. Beyer
    18,000 (88) *       7,025       10,975       *  
James E. Mattutat
    6,000 (89) *       2,342       3,658       *  
Neil T. Gutekunst
    21,600 (90) *       8,431       13,169       *  
Dale Cripps
    30,000 (91) *       11,709       18,291       *  
Troy Stubbs
    144,000 (92) *       56,203       87,797       *  
Steven Stubbs
    31,800 (93) *       6,206       25,594       *  
Vincent Cafici
    6,000 (94) *       2,342       3,658       *  
Paul Sipple
    6,000 (95) *       2,342       3,658       *  
Andrew Pace
    6,000 (96) *       2,342       3,658       *  
Bhajan Singh
    6,000 (97) *       2,342       3,658       *  
Byron D. Winans
    6,000 (98) *       2,342       3,658       *  
Charles Landrum
    6,000 (99) *       2,342       3,658       *  
Dean Krutty
    6,000 (100) *       2,342       3,658       *  
Derek Polk
    18,000 (101) *       7,025       10,975       *  
Garry Blandford
    18,000 (102) *       7,025       10,975       *  
Gary L. Olshansky and Jeanie H. Olshansky JTWROS
    6,000 (103) *       2,342       3,658       *  
Giuseppe Surace
    6,000 (104) *       2,342       3,658       *  
Greg Kromminga
    30,000 (105) *       11,709       18,291       *  
Howard R. Adrian and Debora J. Adrian JTWROS
    6,000 (106) *       2,342       3,658       *  
Howard Reinsch
    12,000 (107) *       4,684       7,316       *  
ISSC Management (108)
    9,000 (109) *       3,513       5,487       *  
James A. Quesenberry
    12,000 (110) *       4,684       7,316       *  
Jeffrey & Tessa Fitzgerald
    18,000 (111) *       7,025       10,975       *  
Jeffrey Jutras
    5,682 (112) *       2,218       3,464       *  
Jerry D. Daugherty
    6,000 (113) *       2,342       3,658       *  
Jonathan Belding
    12,000 (114) *