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EX-31.1 - China Electronics Holdings, Inc.e610228_ex31-1.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2012
   
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from           to
 
Commission File Number: 333-152535
 
CHINA ELECTRONICS HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Nevada
(State of Other Jurisdiction of Incorporation or Organization)
 
98-0550385
(I.R.S. Employer Identification No.)
     
Building 3, Binhe District, Longhe East Road,
Lu’an City, Anhui Province, PRC
(Address of Principal Executive Offices)
 
237000
(ZIP Code)
 
011-86-564-3224888
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x   No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes x   No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o  No x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 16,775,113 as of August 8, 2012. 
 
 
 

 
 
TABLE OF CONTENTS
 
 
Page
   
PART I—FINANCIAL INFORMATION
 
Item 1. Financial Statements.
1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
30
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
65
Item 4. Controls and Procedures.
66
PART II—OTHER INFORMATION
 
Item 1A. Risk Factors.
67
Item 6. Exhibits.
67
 
Throughout this Quarterly Report on Form 10-Q, the “Company”, “we,” “us,” and “our,” refer to (i) China Electronics Holdings, Inc., a Nevada corporation (“China Electronics”), (ii) China Electronic Holdings, Inc., a Delaware corporation (“CEH Delaware”), and (iii) Lu’an Guoying Electronic Sales Co., Ltd., a wholly foreign enterprise under the laws of the People’s Republic of China (“Guoying”), unless otherwise indicated or the context otherwise requires.
 
FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q contains certain forward-looking statements (as such term is defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934).  The statements herein which are not historical reflect our current expectations and projections about the Company’s future results, performance, liquidity, financial condition, prospects and opportunities and are based upon information currently available to us and our management and our interpretation of what we believe to be significant factors affecting our business, including many assumptions about future events.  Such forward-looking statements include statements regarding, among other things:
 
 
our ability to produce, market and generate sales of our private label products;
 
 
our ability to market and generate sales of the products that we sell as a wholesaler;
 
 
our ability to develop, acquire and/or introduce new products;
 
 
our projected future sales, profitability and other financial metrics;
 
 
our future financing plans;
 
 
our plans for expansion of our stores and manufacturing facilities;
 
 
our anticipated needs for working capital;
 
 
the anticipated trends in our industry;
 
 
i

 
 
 
our ability to expand our sales and marketing capability;
 
 
acquisitions of other companies or assets that we might undertake in the future;
 
 
our operations in China and the regulatory, economic and political conditions in China;
 
 
our ability as a U.S. company to operate our business in China through our subsidiary, Guoying;
 
 
competition existing today or that will likely arise in the future; and
 
 
other factors discussed elsewhere herein.
 
Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “should,” “will,” “plan,” “could,” “target,” “contemplate,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” “seek,” or “project” or the negative of these words or other variations on these or similar words.  Actual results, performance, liquidity, financial condition and results of operations, prospects and opportunities could differ materially from those expressed in, or implied by, these forward-looking statements as a result of various risks, uncertainties and other factors, including the ability to raise sufficient capital to continue the Company’s operations.  These statements may be found under Part I, Item 2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as elsewhere in this Quarterly Report on Form 10-Q generally.  Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, matters described in this Quarterly Report on Form 10-Q.  In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Quarterly Report on Form 10-Q will in fact occur.
 
Potential investors should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
 
The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q.  Such statements are presented only as a guide about future possibilities and do not represent assured events, and we anticipate that subsequent events and developments will cause our views to change.  You should, therefore, not rely on these forward-looking statements as representing our views as of any date after the date of this Quarterly Report on Form 10-Q.
 
 
ii

 
 
This Quarterly Report on Form 10-Q also contains estimates and other statistical data prepared by independent parties and by us relating to market size and growth and other data about our industry. These estimates and data involve a number of assumptions and limitations, and potential investors are cautioned not to give undue weight to these estimates and data. We have not independently verified the statistical and other industry data generated by independent parties and contained in this Quarterly Report on Form 10-Q. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk.
 
Potential investors should not make an investment decision based solely on the our projections, estimates or expectations.
 
 
iii

 
PART I.
 
FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
CHINA ELECTRONICS HOLDINGS, INC AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF SEPTEMBER 30, 2012 AND DECEMBER 31, 2011
(Unaudited)
 
             
   
SEPTEMBER 30,
   
DECEMBER 31,
 
   
2012
   
2011
 
             
Assets
           
Current assets
           
Cash and cash equivalents
  $ 654,133     $ 171,838  
Trade accounts receivable, net of allowance for doubtful accounts of $2,578,083 and $2,198,376, respectively
    11,514,735       9,431,556  
Other receivable
    2,254,447       4,753,480  
Advances
    4,233,469       6,722,052  
Inventories, net
    2,562,089       1,804,870  
Total current assets
    21,218,873       22,883,796  
                 
Noncurrent assets
               
Property and equipment, net
    595,643       531,107  
Construction in progress
    8,118,886       5,704,347  
Advances - Long term
    13,609,732       13,464,311  
Intangible assets
    15,405,632       15,711,584  
Total noncurrent assets
    37,729,893       35,411,349  
                 
Total assets
  $ 58,948,766     $ 58,295,145  
Liabilities and Stockholders' Equity
               
Current liabilities :
               
Accounts payable and accrued expenses
  $ 216,514     $ 237,482  
Short term bank loans
    1,591,000       -  
Other payable
    3,648,463       4,806,278  
Total current liabilities
    5,455,977       5,043,760  
                 
Total liabilities
    5,455,977       5,043,760  
                 
Equity
               
Stockholders' equity
               
Preferred stock, $0.0001 par value; 50,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2012 and December 31, 2011
    -       -  
Common stock, $0.0001 par value; 150,000,000 shares authorized; 16,775,113 shares and 16,775,113 issued and outstanding as of September 30, 2012 and December 31, 2011, respectively
    1,678       1,678  
Additional paid in capital
    15,341,710       15,341,710  
Retained earnings
    30,253,475       30,602,014  
Statutary reserve
    3,958,981       3,958,981  
Accumulated other comprehensive income
    3,927,399       3,347,001  
Total stockholders' equity
    53,483,242       53,251,385  
                 
    Non controlling interest
    9,546       -  
    Total equity
    53,492,788       53,251,385  
Total liabilities and stockholders' equity
  $ 58,948,766     $ 58,295,145  
The accompanying notes are an integral part of this unaudited consolidated condensed statement.
 
 
1

 
 
CHINA ELECTRONICS HOLDINGS, INC AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(Unaudited)
 
                         
   
THREE MONTHS ENDED SEPTEMBER 30,
   
NINE MONTHS ENDED SEPTEMBER 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net revenue from exclusive franchise stores
  $ 8,013,254     $ 10,384,790     $ 26,899,816     $ 36,922,525  
Net revenue from non-exclusive franchise stores
    4,657,161       13,923,823       14,166,076       42,636,865  
Net revenue from company owned stores
    1,754,835       4,364,253       3,431,983       8,054,564  
Net Revenue
    14,425,250       28,672,866       44,497,875       87,613,954  
                                 
Cost of goods sold from exclusive franchise stores
    7,346,134       8,767,963       24,941,217       31,014,921  
Cost of goods sold from non-exclusive franchise stores
    4,270,260       11,727,137       13,137,960       35,814,966  
Cost of goods sold from company owned stores
    1,564,432       3,768,458       3,092,874       6,778,880  
Cost of goods sold
    13,180,826       24,263,558       41,172,050       73,608,767  
                                 
Operating expenses:
                               
Selling expense
    522,486       619,212       1,550,790       1,808,825  
General and administrative expenses
    343,426       525,204       1,519,372       1,121,587  
Bad debt (recovery) expense
    353,511       (5,162,350 )     353,511       (5,162,350 )
Total Operating Expenses
    1,219,423       (4,017,934 )     3,423,673       (2,231,938 )
                                 
Net operating income (loss)
    25,001       8,427,242       (97,849 )     16,237,125  
                                 
Other income (expense):
                               
Financial expense
    (33,786 )     (24 )     (49,126 )     (11,784 )
Other expense
    (1,248 )     -       (203,031 )     -  
Other income
    -       -       1,753       -  
Total other (expense) income
    (35,034 )     (24 )     (250,404 )     (11,784 )
                                 
Net (loss) income before provisions for income taxes
    (10,034 )     8,427,218       (348,252 )     16,225,341  
                                 
Provision for income taxes
    (0 )     334       287       714  
                                 
Net (loss) income
    (10,034 )     8,426,885       (348,539 )     16,224,628  
                                 
Foreign currency translation adjustment
    573,448       594,404       580,398       1,374,760  
                                 
Comprehensive income
  $ 563,414     $ 9,021,288     $ 231,859     $ 17,599,387  
                                 
(Loss) earnings per share - basic
  $ (0.001 )   $ 0.50     $ (0.02 )   $ 0.97  
                                 
(Loss) earnings per share - diluted
  $ (0.001 )   $ 0.48     $ (0.02 )   $ 0.92  
                                 
Basic weighted average shares outstanding
    16,775,113       16,783,113       16,775,113       16,783,113  
                                 
Diluted weighted average shares outstanding
    16,775,113       17,634,910       16,775,113       17,634,910  
                                 
The accompanying notes are an integral part of this unaudited consolidated condensed statement.
 
 
 
2

 
 
CHINA ELECTRONICS HOLDINGS, INC AND SUBSIDIARIES
CONSOLIDATED CONDENSED  STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(Unaudited)
 
   
SEPTEMBER 30,
 
   
2012
   
2011
 
             
Net (loss) income
  $ (348,539 )   $ 16,224,628  
Adjustments to reconcile net (loss) income to net cash used in operations:
               
Amortization
    472,357       75,124  
Depreciation
    10,842       7,487  
Changes in operating liabilities and assets:
               
Trade accounts receivable
    (1,967,615 )     (14,598,866 )
Advances
    2,543,477       (3,297,306 )
Inventories
    (734,825 )     (7,804,124 )
Other receivables
    2,538,849       9,589,729  
Other payables
    (1,201,595 )     (451,115 )
Customer deposit
    -       (306,205 )
Accounts payable and accrued expenses
    (21,617 )     20,324  
Net cash provided by (used in) operating activities
    1,291,334       (540,326 )
                 
Cash flows from investing activities:
               
Property, plant, and equipment additions
    (69,236 )     (378,522 )
Construction in Progress
    (2,336,662 )     (668,363 )
Restricted cash
    -       77,050  
Reduction of intangible assets
    -       6,754,334  
Acquisation of intangible assets
    -       (6,108,494 )
Net cash used in investing activities
    (2,405,898 )     (323,995 )
                 
Cash flows from financing activities
               
Proceeds from short term loans
    1,580,000       -  
Related party receivable
    -       64,876  
Contribution from noncontrolling interests
    9,546       -  
Net cash provided by financing activities
    1,589,546       64,876  
                 
Effect of rate changes on cash
    7,313       55,159  
                 
Increase (decrease) in cash and cash equivalents
    482,295       (744,286 )
Cash and cash equivalents, beginning of period
    171,838       1,226,101  
Cash and cash equivalents, end of period
  $ 654,133     $ 481,815  
                 
Supplemental disclosures of cash flow information:
               
Interest paid in cash
  $ 46,818     $ -  
Income taxes paid in cash
  $ 287     $ 714  
The accompanying notes are an integral part of this unaudited consolidated condensed statement.
 
 
 
3

 
 
CHINA ELECTRONIC HOLDINGS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2012
(Unaudited)
 
 

 
1.
Nature of Operations
 
China Electronics Holdings, Inc (the “Company” or “CEHD Nevada”), formerly named Buyonate, Inc., was a development stage company incorporated in the State of Nevada on July 9, 2007. Upon consummation of Share Transfer and Share Exchange transactions, the Company currently engages in wholesale and retail business of consumer electronics and appliances in certain rural markets in the People’s Republic of China.
 
In August 2012, Guoying contributed $945,054 registered capital to Lu An Guoying Opto-Electronics Technology Co., Ltd. (“Opto-Electronics”) which is 99% owned by Guoying. Mr. Hailong Liu, the CEO and Chairman of the Company, contributed $9,546 registered capital in cash and owned 1% of Opto-Electronics.
 
2008, 2009, and 2010 Share Transfer Agreements
 
China Electronic Holdings, Inc (“CEH Delaware”) was organized on November 15, 2007 in Delaware as a development stage company.
 
Lu’anGuoying Electronic Sales Co., Ltd., a domestic PRC corporation, (“Guoying”) was established on January 4, 2002 to engage in wholesale and retail of electronics consumer products to rural areas in An Hui province. Mr. Hailong Liu is the CEO and Chairman of Guoying. Pursuant to the Share Transfer Agreement entered into on December 26, 2008 (the “2008 Share Transfer Agreement”) between the shareholders of Guoying (the “Guoying Shareholders”) and CEH Delaware, CEH Delaware acquired 40% of the outstanding equity securities of Guoying (the “Guoying Shares”) from all of the Guoying Shareholders in consideration for $60,000, equivalent to RMB 400,000. Guoying Shareholders entered into a Share Transfer Agreement with Sherry Li, the then officer and director of CEH Delaware on May 30, 2009 and agreed to transfer 100% of outstanding shares of Guoying to CEH Delaware in exchange for contribution of RMB 1 million of registered capital from CEH Delaware and 11,566,288 CEH Delaware Shares issued by CEH Delaware to Guoying Shareholders, constituting 84.6% of issued and outstanding shares of CEH Delaware and held under the name of Sherry Li, the nominee shareholder on behalf of Guoying Shareholders. Pursuant to the Share Transfer Agreement entered into on February 2010 (the “2010 Share Transfer Agreement”) between Guoying Shareholders and CEH Delaware, CEH Delaware acquired the remaining 60% of the outstanding equity securities of Guoying Shares from all of the Guoying Shareholders in consideration for RMB 600,000 and Guoying Shareholders transferred and contributed all of their Guoying Shares to CEH Delaware. As a result of the transactions, Guoying became a wholly foreign-owned subsidiary (“WFOE”) of CEH Delaware with registered capital of RMB 1,000,000 and subsequently increased its paid-in capital to $2,838,653 in 2010. The transaction was approved by Ministry of Commerce of Anhui Province and registered with Administration and Industry of Commerce of Lu An City.
 
 
4

 
 
Guoying Shareholders contributed the Purchase Price to Guoying for working capital and general corporate purpose and as a result of the 2008 and 2010 Share Transfers, Guoying became a wholly foreign-owned subsidiary (“WFOE”) of CEH Delaware. The exchange of shares pursuant to the 2008 and 2010 Share Transfers was accounted for as a reverse acquisition at historical costs since the stockholders of Guoying obtained control of CEH Delaware and the management of Guoying became the management of CEH Delaware with the appointment of Mr. Hailong Liu (Chief Executive Officer of Guoying) as CEH Delaware’s sole director and officer. Accordingly, the merger of Guoying into CEH Delaware was recorded as a recapitalization of Guoying, with Guoying being treated as the continuing entity.  The historical financial statements presented are the financial statements of Guoying.
 
2008 and 2010 Bridge Financings
 
On January 30, 2008, CEH Delaware consummated a bridge financing in amount of $275,000 made pursuant to a Securities Purchase Agreement with a bridge investor, pursuant to which it sold 343,750 Series A Convertible Preferred Stock par value $0.00001 per share and common stock Warrant E to purchase one million shares of common stock (“CEH Delaware Shares”) at $1 per share. On January 5, 2010, CEH Delaware consummated a second bridge financing in amount of $550,000 made pursuant to Securities Purchase Agreements with four bridge investors (together collectively referred to as “Bridge Investors”), pursuant to which it sold 314,285 shares of CEH Delaware Shares, 314,285 common stock underlying Warrant A and 314,285 common stock underlying Warrant B. Upon consummation of 2008 and 2010 bridge financings, the Bridge Investors constitute 8.58% of issued and outstanding shares of CEH Delaware. Guoying Shareholders, Bridge Investors, China Financial Services and its affiliates are together referred to as CEH Delaware Shareholders.
 
2010 Share Exchange between CEH Delaware and CEHD Nevada
 
The Company entered into a Share Exchange Agreement, dated as of July 9, 2010 (the “Share Exchange Agreement”) with CEH Delaware and CEH Delaware Stockholders.  Pursuant to the Share Exchange Agreement, on July 15, 2010, 10 CEH Delaware Stockholders transferred 100% of the outstanding shares of common stock and preferred stock and 100% of the warrants to purchase common stock of CEH Delaware held by them, in exchange for an aggregate of 13,785,902   newly issued shares of the Company’s 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 the Company’s common stock acquired by the CEH Delaware Stockholders in such transactions constitute approximately 82.2% of the Company’s issued and outstanding Common Stock (including 68.9% owned by Guoying Shareholders through Ms. Sherry Li”) giving effect to the share and warrant exchange and the sale of the Company’s Common Stock pursuant to the Subscription Agreement, but not including any outstanding purchase warrants to purchase shares of the Company’s common stock, including the warrants issued pursuant to the Subscription Agreement. In connection with the closing of the Share Exchange Agreement, CEH Delaware purchased from the former principal stockholder of Buyonate an aggregate of 4 million shares of our common stock and then agreed to the cancellation of such shares.
 
The Share Exchange resulted in (i) a change in our control with a shareholder of CEH Delaware owning approximately 82.2% of issued and outstanding shares of the Company’s common stock, including the shares of common stock sold to PIPE investors pursuant to the Subscription Agreement, (ii) CEH Delaware becoming our wholly-owned subsidiary, and (iii) appointment of Mr. Hailong Liu as the Company’s sole director, Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer.
 
 
5

 
 
2010 PIPE Transaction
 
On July 15, 2010 we 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 497,303 shares of our Common Stock and (c) Series D Warrants to purchase an aggregate of 497,303 shares of our Common Stock was sold. 
 
Call Option Agreement and Reverse Acquisition
 
Mr. Hailong Liu is the CEO and chairman of Guoying. Mr. Liu is also CEO and Chairman of CEH Delaware upon consummation of 2009 Share Transfer and CEO and Chairman of CEHD Nevada upon consummation of 2010 Share Exchange. Ms. Sherry Li serves as nominee shareholder to hold our Common Stock on behalf of Guoying Shareholders to be in compliance with the PRC M&A rules and regulations.
 
Mr. Hailong Liu entered into a call option agreement (the “Call Option Agreement”) and voting trust agreement (the “Voting Trust Agreement”) with Sherry Li, dated July 9, 2010. Pursuant to the Call Option Agreement, Mr. Liu received two-year options exercisable for 11,556,288 shares of common stock (the Option Shares) from Sherry Li and 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 received 5,778,144 shares in August 2010 from Ms. Sherry Liu pursuant to the vesting schedule set forth in the Call Option Agreement. Upon exercise of the options, Mr. Liu may purchase each share for $0.001 and if Mr. Liu exercises all of his options, he will own a majority of the Company’s outstanding shares of Common Stock. The Call Option Agreement provides that Ms. Sherry Li shall not vote or dispose of the respective portion of the shares of common stock without Mr. Liu’s prior written consent and is obligated to transfer Option Shares to Mr. Liu at nominal consideration of $0.001 per share par value. The Voting Trust Agreement further provides that, Sherry Li, the nominee shareholder, has no decision power to vote or dispose of the Option Shares without Mr. Liu’s consent.
 
The 2009 Share Transfer Transaction was accounted for as a reverse acquisition at historical costs since Guoying Shareholders obtained control of 84.6% of outstanding CEH Delaware Shares through Sherry Li as nominee shareholder and Guoying management, Mr. Hailong Liu, became the management of CEH Delaware. Accordingly, the merger of Guoying into CEH Delaware was recorded as a recapitalization of Guoying, with Guoying being treated as the continuing entity.  The historical financial statements presented are the financial statements of Guoying.
 
The exchange of shares pursuant to the July 10, 2010 Share Exchange was accounted for as a reverse acquisition at historical cost since CEH Delaware Shareholders obtained control of 82.2% of outstanding shares of the Company, including 68.9% of outstanding shares of the Company owned by Guoyoing Shareholders,and the management of CEH Delaware, Mr. Hailong Liu, became the management of the Company. Mr, Liu, who maintained control of Guoying prior to the mergers and subsequently, obtained control of CEH Delaware pursuant to 2009Share Transfer, effectively obtained control of the Company upon completion of Share Exchange subject to the Voting Trust Agreement and Call Option Agreement. Accordingly, the merger of CEH Delaware into the Company was recorded as a recapitalization of CEH Delaware, with CEH Delaware being treated as the continuing entity.  The historical financial statements presented are the financial statements of CEH Delaware which are in essence the financial statements of Guoying.
 
 
6

 
 
2.
Summary of Significant Accounting Policies
 
Construction in Progress
 
Construction in progress at September 30, 2012 amounted to$8,118,886. During 2011, the Company started construction of four buildings, 4,800 square meters each and 19,200 square meters in total, on Pingqiao land to be used as warehouses to build the Company’s logistic center. The Company has completed construction under and above the ground, and the Company anticipates that the construction of four buildings to be used as warehouses to be completed by December 2012.
 
Basis of Presentation
 
In the opinion of management, the accompanying balance sheets and related interim statements of income and comprehensive income, and cash flows include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).The functional currency is the Chinese Renminbi (“RMB”); however the accompanying financial statements have been translated and presented in United States Dollars (“USD”).Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Company’s 2011 Form 10-K filed on April 16, 2012 with the U.S. Securities and Exchange Commission.
 
Economic and Political Risks
 
The Company faces a number of risks and challenges as a result of having primary operations and marketing in the PRC. Changing political climates in the PRC could have a significant effect on the Company’s business.
 
Principles of Consolidation
 
The consolidated financial statements include the financial statements of the company, its wholly owned subsidiary CEH Delaware, and its wholly owned subsidiary Guoying. The financial statements of co-operative stores (exclusive franchise stores and non-exclusive franchise stores) are not consolidated as these stores are independently managed and they have no right to return their purchased goods.
 
All significant inter-company balances and transactions have been eliminated in consolidation.
 
Use of Estimates
 
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
 
 
7

 
 
Cash and Cash Equivalents
 
For purposes of the statements of cash flows, cash and cash equivalents includes cash on hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. Deposits held in financial institutions in the PRC are not insured by any government entity or agency. The Company issues acceptance bills to its suppliers through Chinese banks from time to time. Acceptance bills are in the form of notes payables that are written promises to pay stated sums of money at future dates. Standard practice in China requires Companies to maintain restricted deposits at those banks that issue acceptance bills to suppliers of the Company to ensure sufficient payment on demand.
 
Trade Accounts Receivable
 
The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. Trade accounts receivable are recognized and carried at original invoice amount less an allowance for any uncollectible amounts. An allowance for doubtful accounts is established and determined based on management’s regular assessment of known requirements, aging of receivables, payment history, the customer’s current credit worthiness and the economic environment. These factors continuously change, and can have an impact on collections and the Company’s estimation process. These impacts may be material. Management reviews and maintains an allowance for doubtful accounts that reflects the management’s best estimate of potentially uncollectible trade receivables. Certain accounts receivable amounts are charged off against allowances after a designated period of collection efforts. Subsequent cash recoveries are recognized as income in the period when they occur. Allowance for doubtful debts amounted for accounts receivable to $2,578,083 and $2,198,376 as of September 30, 2012 and December 31, 2011, respectively. The company does not set a specific date for payments from customers. The Company reviews the balance periodically and decides the collection time based on the market condition, the Company’s cash position, the potential purpose from the customers, the amount of the sales, and other conditions.
 
   
Beginning
balance
   
Cost charged to
expense
   
Reduction from
reverses
   
Ending balance
 
December 31, 2011
 
$
2,065,683
   
$
132,693
   
$
-
   
$
2,198,376
 
September 30, 2012
 
$
2,198,376
   
$
379,707
   
$
-
   
$
2,578,083
 
 
Advances
 
As is customary in the PRC, the Company makes advances to its suppliers for inventory and property and equipment.  Advances are classified as current assets when the advances relates to the purchase of inventory.  The Company also makes advances to suppliers for construction of its property and equipment.  Such advances are classified as long-term since the assets to which the advances relate are long-term assets. If the Company determines that the products for which it prepaid will not be delivered then an impairment charge is taken.
 
Inventories
 
Inventories are stated at the lower of cost, determined on a weighted average basis, and net realizable value. The cost of the inventory includes that costs of acquiring electronic products sold plus freight in costs incurred acquiring the inventory.  The freight costs are allocated to the individual products purchased.  Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose. Inventories consist of the following:
 
   
September 30,2012
   
December 31,
2011
 
Electronic products
 
$
2,562,089
   
$
1,804,870
 
 
 
8

 
 
Property, Plant and Equipment
 
Property, plant and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the useful lives of the assets. Major renewals are capitalized and depreciated; maintenance and repairs that do not extend the life of the respective assets are charged to expense as incurred. Upon disposal of assets, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in income. Depreciation related to manufacturing is reported in cost of revenues. Depreciation not related to manufacturing is reported in selling, general and administrative expenses. Property, plant and equipment are depreciated over their estimated useful lives as follows:
 
Furniture and office equipment
5 years
Motor vehicles
10 years
 
Impairment of Long-Lived and Intangible Assets
 
Long-lived assets of the Company are reviewed annually to assess whether the carrying value has become impaired according to the guidelines established in FASB Codification (ASC) 360The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of depreciation to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of September 30, 2012, the Company expects these assets to be fully recoverable. No impairment of assets was recorded in the periods reported.
 
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 our sales to exclusive franchise stores and non-exclusive franchise stores when the products are delivered to the respective store. Product sales to all co-operative 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 their purchased inventories to the 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. 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 unearned revenue. Unearned revenue amounted to $0as of September 30, 2012 and December 31, 2011.
 
 
9

 
 
Our products delivered to franchise stores would be checked on site by such stores and, once the products are accepted by such stores, they will sign the acceptance notice. Rewards or incentives given to our retail franchise stores are an adjustment of the selling prices of our products sold to our customers; therefore, the consideration is characterized as a reduction of revenue when recognized in our income statement.
 
The Company recognizes its revenues net of value-added taxes (“VAT”). Currently, the Company is subject to beneficial treatment of income tax and VAT approved by the local Government and hence, a reduced fixed annual tax rate in amount of no more than approximately $1,200 cover income tax and value added taxes. 
 
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 co-operative stores (exclusive franchise stores and non-exclusive franchise stores) for the purpose of establishing 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 exclusive stores.
 
Cost of Goods Sold
 
Cost of goods sold consists primarily of the costs of the products sold, including freight in charges on those goods.
 
Selling Expenses
 
Selling expenses include costs incurred in connection with performing general selling activities, such as sales commissions, freight-out charges, marketing and advertisement costs, shipping and handling costs, and sales salaries.
 
General and Administrative Expenses
 
General and administrative expenses include the costs of non-selling related salaries and related employee benefits, professional service fees, rent and depreciation, warehousing costs, office supplies, bad debts expense, and amortization of intangible assets (land).
 
 
10

 
 
Shipping and Handling Costs
 
ASC 605-45-20 (formely EITF No. 00-10, “Accounting for Shipping and Handling Fees and Costs” ) establishes standards for the classification of shipping and handling costs.Shipping and Handling costs include shipping and handling costs related to shipping and handling our products from our warehouses to buyers’ designated locations at our exclusive or non-exclusive franchise stores, and company owned stores (collectively referred to as the “Stores”). Shipping and handling costs that are billed to Stores are classified as revenue, while those costs not billed to Stores are classified as selling expenses. Shipping and handling costs billed to Stores and included within revenue for the three and nine months ended September 30, 2012 and 2011 were $0 because the Company did not charge any shipping and handling expenses from Stores. Shipping and handling costs not billed to Stores and included within selling expenses for the three months ended September 30, 2012 and 2011 were$226,862 and $255,659, respectively. Shipping and handling costs not billed to Stores and included within selling expenses for the nine months ended September 30, 2012 and 2011 were $645,185and $578,179, respectively.
 
Advertising Costs
 
The Company expenses advertising costs as incurred. Advertising costs of$30,987 and $19,881 are included in selling expense for the three months ended September 30, 2012 and 2011, respectively. Advertising costs of $84,210 and $495,902 are included in selling expense for the nine months ended September 30, 2012 and 2011, respectively.
 
Foreign Currency and Comprehensive Income
 
The accompanying financial statements are presented in US dollars. The functional currency is the Renminbi (“RMB”) of the PRC. The financial statements are translated into US dollars from RMB at period-end exchange rates for assets and liabilities, and weighted average exchange rates for revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.
 
RMB is not freely convertible into the currency of other nations. All such exchange transactions must take place through authorized institutions. There is no guarantee the RMB amounts could have been, or could be, converted into US dollars at rates used in translation. At September 30, 2012 and December 31, 2011, the accumulated other comprehensive gain of $3,927,399 and $3,347,001, respectively, was classified as an item of other comprehensive income in the stockholders’ equity section of the consolidated balance sheet. For the three months ended September 30, 2012 and 2011, translation adjustmentwas $573,448and $594,404, respectively. For the nine months ended September 30, 2012 and 2011, translation adjustment was $580,398 and $1,374,760, respectively.
 
Income Taxes
 
The Company accounts for income taxes in accordance with ASC 740 (formerly SFAS 109, “Accounting for Income Taxes.”) Under the asset and liability method as required by ASC 740, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Under ASC 740, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all of, a deferred tax asset will not be realized. As of September 30, 2012 and December 31, 2011, the Company did not have any deferred tax assets or liabilities, and as such, no valuation allowances were recorded at September 30, 2012 and December 31, 2011.
 
 
11

 
 
ASC 740 clarifies the accounting and disclosure for uncertain tax positions and prescribes a recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
 
Under ASC 740, evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met.
 
The Company’s operations are subject to income and transaction taxes in the United States and the PRC jurisdictions. Significant estimates and judgments are required in determining the Company’s worldwide provision for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations, and as a result the ultimate amount of tax liability may be uncertain. However, the Company does not anticipate any events that would lead to changes to these uncertainties.
 
Restrictions on Transfer of Assets Out of the PRC
 
Dividend payments by the Company are limited by certain statutory regulations in the PRC. No dividends may be paid by the Company without first receiving prior approval from the Foreign Currency Exchange Management Bureau. However, no such restrictions exist with respect to loans and advances.
 
Financial Instruments
 
ASC 825 (formerly SFAS 107, “Disclosures about Fair Value of Financial Instruments”) defines financial instruments and requires disclosure of the fair value of those instruments. ASC 820 (formerly SFAS 157, “Fair Value Measurements”), adopted July 1, 2008, defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The carrying amounts reported in the balance sheets for current receivables and payables, including short-term loans, qualify as financial instruments and are a reasonable estimate of fair value because of the short period of time between the origination of such instruments, their expected realization and, if applicable, the stated rate of interest is equivalent to rates currently available. The three levels are defined as follows: 
 
 
o
Level 1: inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
 
 
o
Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
 
 
12

 
 
 
o
Level 3: inputs to the valuation methodology are unobservable and significant to the fair value.
 
The Company did not identify any assets or liabilities that are required to be presented on the balance sheet at fair value in accordance with ASC 820.
 
Stock-Based Compensation
 
The Company records stock-based compensation expense pursuant to ASC 718 (formerly SFAS 123R, “Share Based Payment.”) The Company uses the Black-Scholes option pricing model which requires the input of highly complex and subjective variables including the expected life of options granted and the Company’s expected stock price volatility over a period equal to or greater than the expected life of the options. Because changes in the subjective assumptions can materially affect the estimated value of the Company’s employee stock options, it is management’s opinion that the Black-Scholes option pricing model may not provide an accurate measure of the fair value of the Company’s employee stock options. Although the fair value of employee stock options is determined in accordance with ASC 718 using an option pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
 
Stock-based compensation expense is recognized based on awards expected to vest, and there were no estimated forfeitures as the Company has a short history of issuing options. ASC 718 (formerly SFAS 123R) requires forfeitures to be estimated at the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates.
 
There was no stock based compensation for the three and nine months ended September 30, 2012 and 2011.
 
Statement of Cash Flows
 
In accordance with ASC 230 (formerly SFAS No. 95 “Statement of Cash Flows”) cash flows from the Company's operations is calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.
 
Segment Reporting
 
ASC 280 (formerly SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information”) requires use of the management approach model for segment reporting.The Company uses the management approach model for segment reporting, which is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. The Company has determined that its operations consist of three reportable business segments as all revenue is derived from customers in the People’s Republic of China (PRC) and all of the Company’s assets are located in PRC.
 
 
13

 
 
Recent Accounting Pronouncements
 
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.
 
In July 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment. The ASU provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise, it would be required to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under US GAAP. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this pronouncement is not expected to have a material impact on the Company’s financial statements.
 
In December 2011, the FASB issued guidance on offsetting (netting) assets and liabilities. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The new guidance is effective for annual periods beginning after January 1, 2013
 
3.
Basic and Diluted Earnings (Loss) Per Share
 
Basic and Diluted Earnings (Loss) Per Share
 
Basic earnings (loss) per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings (loss) per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. At September 30, 2012 and September 30, 2011, the Companyhad 0 and 851,797 warrants outstanding that were anti-dilutive.
 
The following is a reconciliation of the basic and diluted earnings (loss) per share:
 
   
For the nine months ended September 30,
   
2012
   
2011
 
Net (loss) income for earnings per share
 
$
(348,539
 
$
16,224,628
 
                 
Weighted average shares used in basic computation
   
16,775,113
     
16,783,113
 
                 
Diluted effect of warrants
   
-
     
851,797
 
                 
Weighted average shares used in diluted computation
   
16,775,113
     
17,634,910
 
                 
(Loss) earnings  per share, basic
 
$
(0.02
 
$
0.97
 
                 
(Loss) earnings per share, diluted
 
$
(0.02
 
$
0.92
 
 
 
14

 
 
4.
Property and Equipment
 
Property and equipment consisted of the following:
 
   
September 30,2012
   
December 31,2011
 
Vehicle
 
$
73,279
   
$
57,465
 
Furniture and office equipment
   
195,148
     
353,651
 
Other assets
   
361,854
     
143,458
 
Total property and equipment
   
630,281
     
554,574
 
Accumulated depreciation
   
(34,638
)
   
(23,467
)
Net property and equipment
 
$
595,643
   
$
531,107
 
 
Depreciation expense included in selling, general and administrative expenses for the three months ended September 30, 2012 and 2011was $4,737 and $2,998, respectively. Depreciation expense included in selling, general and administrative expenses for the nine months ended September 30, 2012 and 2011 was $10,842 and $7,487, respectively.
 
5.
Other Receivables
 
Other receivables consisted of the following:
 
   
September 30,2012
   
December 31,2011
 
Hongrong Real Estate Company
 
$
2,222,627
   
$
-
 
Youbang Pharmaceutical
   
-
     
4,722,000
 
Deposit for office rent
   
31,820
     
31,480
 
   
$
2,254,447
   
$
4,753,480
 
 
 
15

 
 
The Company loaned $2,222,627 to Hongrong Real Estate Company (“Hongrong”), an unrelated party, on August 20, 2012. The loan is due on August 19, 2013 and secured by a building owned by Hongrong as a collateral.
 
An allowance for loans receivable is recorded when circumstances indicate that collection of all or a portion of a specific balance is unrecoverable. The Company provides for allowances on other accounts receivable on a specific identification basis. Certain other loans receivable amounts are charged off against the allowance after a sufficient period of collection efforts. Subsequent cash recoveries are recognized as a reduction in general and administrative expenses in the period when they occur. The Company determined that no allowance was necessary as of September 30, 2012 and December 31, 2011.
 
6.
Advances
 
The current advances to suppliers amounted to $4,233,469 and $6,722,052 as of September 30, 2012 and December 31, 2011, respectively.
 
Long term advances related to construction amounted to $13,609,732 and $13,464,311 as of September 30, 2012 and December 31, 2011, respectively. The advances to suppliers for construction of its property and equipment are classified as long-term since the assets to which the advances relate are long-term assets. If the Company determines that the products for which it prepaid will not be delivered then an impairment charge is taken. The Company transfers long term advances related to construction to construction in progress once used in construction.
 
7.
Intangible Assets
 
Intangible assets amounted to $15,405,632 and $15,711,584 as of September 30, 2012 and December 31, 2011, respectively. Intangible assets consisted of the following:
 
   
September 30,
2012
   
December 31,
2011
 
Trade mark
 
$
1,336
   
$
1,322
 
Land use rights
   
17,064,851
     
16,890,153
 
Less accumulated amortization
   
(1,660,555
)
   
(1,179,891
)
Land use rights, net
 
$
15,405,632
   
$
15,711,584
 
 
 
16

 
 
The Chinese government owns all land in the PRC. However, the government grants "land use rights" for terms ranging from 20 to 50 years. The Company is amortizing the cost of land use rights over the usage terms. Intangible assets are reviewed at least annually and more often if circumstances dictate, to determine whether their carrying value has become impaired. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of September 30, 2012, the Company determined that there had been no impairment.
 
Approximately $15,740,000 was paid to an unrelated party - Pingqiao Industrial Park in Luan city, Anhui Province, China - for acquiring land use rights. The Company intends to construct a factory, research and development center and a commercial center on this land.
 
Approximately $6,296,000 was paid to Youbang Pharmaceuticals Co., Ltd., an unrelated party for acquiring land use rights as of December 31, 2010. The Company intended to build a warehouse and distribution center on this land.$6,296,000 was returned to the Company as of September 30, 2012. The agreement was canceled due to the seller’s failure to provide land use right certificate.
 
As of September 30, 2012, the Company leased a land use right of 503 Chinese acres of land with a twenty years term for the company’s agricultural and forestry business with a cost of approximately $189,000, and the Company leased another 5,006 Chinese acres of land located in Yumin Village, Sun Gang County, Jin An District with a thirty years term with a cost of approximately $961, 000, as Guoying agricultural and forestry land to grow oil-tea camellia plants.
 
Amortization expenses amounted $157,054 and $50,245 for the three months ended September 30, 2012 and 2011, respectively. Amortization expenses amounted $472,357 and $75,124 for the nine months ended September 30, 2012 and 2011, respectively.
 
8.
Accounts Payable and Accrued Expenses
 
Accounts payable and accrued expenses consisted of the following:
 
   
September 30,2012
   
December 31,2011
 
Accounts payable
 
$
4,824
   
$
-
 
Accrued payroll
   
66,382
     
94,482
 
Claimed unpaid legal fee in dispute
   
145,308
     
143,000
 
Total
   
216,514
     
237,482
 
 
 
17

 
 
9.
Short Term Bank Loan
 
As of September 30, 2012, the Company has a short term bank loans of $1,591,000.
 
One loan is from Rural Credit Cooperatives Of Luan, amounting to $795,500 as of Sept 30, 2012, starting on April 28, 2012 and due on April 28, 2013, with an interest rate of 11.808% per annual, and collateralized with land use right.
 
The other loan is from Rural Credit Cooperatives Of Luan, amounting to $795,500 as of Sept 30, 2012, starting on August 17, 2012 and due on August 17, 2013, with an interest rate of 11.7% per annual, and guaranteed by Anhui Juneng Guarantee Company.
 
Additional loan might be obtained to fund operating activities by the Company in the future.
 
10.
 Other Payables
 
Other payable amounted to $3,648,463 and $4,806,278 as of September 30, 2012 and December 31, 2011, respectively.
 
Other payables consisted of the following:
 
   
September 30,
2012
   
December 31,
2011
 
Shanghai Pengbai Electronic Co., Ltd.
 
$
3,245,640
   
$
3,210,960
 
Others
   
402,823
     
1,595,318
 
 Total
 
$
3,648,463
   
$
4,806,278
 
 
11.
 Stockholders’ Equity
 
Pursuant to a Share Transfer Agreement dated May 30, 2009, Mr. Hailong Liu transferred 100% of sharesof Guoying Electronic Group Co, Ltd. to CEH Delaware in exchange for an aggregate of 11,566,288 CEH Delaware Shares, constituting 84.6% of issued and outstanding shares of CEH Delaware and for a consideration of RMB 1,000,000 (the “Purchase Price”). Guoying Shareholders contributed the Purchase Price to Guoying for working capital and general corporate purpose and as a result of the 2009 Transfer, Guoying became a wholly foreign-owned subsidiary (“WFOE”) of CEH Delaware.
 
 
18

 
 
The Company entered into a Share Exchange Agreement, dated as of July 9, 2010 (the “Share Exchange Agreement”) with CEH Delaware and certain stockholders and warrant holders of CEH Delaware (the “CEH Delaware Stockholders”). Pursuant to the Share Exchange Agreement, on July 15, 2010, 10 CEH Delaware Stockholders transferred 100% of the outstanding shares of common stock and preferred stock and 100% of the warrants to purchase common stock of CEH Delaware held by them, in exchange for an aggregate of 13,785,902 newly issued shares of the Company’s 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 company’s common stock. The shares of the Company’s common stock acquired by the CEH Delaware Stockholders in such transactions constitute approximately 86% of the Company’s issued and outstanding common stock giving effect to the share and warrant exchange and the sale of the Company’s common stock pursuant to theSubscription Agreement, but not including any outstanding purchase warrants to purchase shares of the Company’s common stock, including the warrants issued pursuant to the Subscription Agreement. In connection with the closing of the Share Exchange Agreement, CEH Delaware purchased from the former principal stockholder of Buyonate an aggregate of 4 million shares of company’s common stock and then agreed to the cancellation of such shares.
 
The Share Exchange resulted in (i) a change in company’s control with a shareholder of CEH Delaware owning approximately 86%of issued and outstanding shares of the Company’s common stock, including the shares of common stock sold to PIPE investors pursuant to the Subscription Agreement, (ii) CEH Delaware becoming our wholly-owned subsidiary, and (iii) appointment of Mr. Hailong Liuas as the Company’s sole director, Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer.
 
The exchange of shares pursuant to the July 10, 2010 Share Exchange was accounted for as a reverse acquisition at historical cost since the controlling stockholder and beneficial owner of CEH Delaware obtained control of the Company and the management of CEH Delaware became the management of the Company. Mr, Liu, who maintained control of Guoying prior to the mergers and subsequently, obtained control of CEH Delaware pursuant to 2008 and 2010 Share Transfers, effectively obtained control of the Company upon completion of Share Exchange subject to the Voting Trust Agreement and Call Option Agreement.
 
Shares issued for cash
 
There were no stock issuances during the nine months ended September 30, 2012.
 
Warrants
 
On July 9, 2010, in connection with the Share Exchange Agreement between the Company and CEH Delaware, the Company issued 314,285 series A warrants to CEH Delaware shareholders. The series A warrants carry an exercise price of $2.19 and a 3-year term. The Company also issued 314,285 series B warrants to CEH Delaware shareholders. The series B warrants carry an exercise price of $2.63 and a 3-year term. The Warrants contain standard adjustment provisions upon stock dividend, stock split, stock combination, recapitalization, and a change of control transaction.
 
On July 9, 2010, in connection with the Share Subscription, the Company issued 497,303 series C warrants with an exercise price of $3.70 and a 3-year term to investors. The Warrants contain standard adjustment provisions upon stock dividend, stock split, stock combination, recapitalization, and a change of control transaction.
 
The Warrants contain standard adjustment provisions upon stock dividend, stock split, stock combination, recapitalization, and a change of control transaction.
 
 
19

 
 
On July 9, 2010, in connection with the Share Purchase Agreement, the Company issued 497,303series D warrants with an exercise price of $4.75 and a 3-year term to a professional who held warrants with CEH Delaware. The Warrants contain standard adjustment provisions upon stock dividend, stock split, stock combination, recapitalization, and a change of control transaction.
 
On July 9, 2010, in connection with the Share Exchange Agreement between the Company and CEH Delaware, the Company issued 1,000,000 series E warrants with an exercise price of $0.25. The Warrants contain standard adjustment provisions upon stock dividend, stock split, stock combination, recapitalization, and a change of control transaction.
 
The Warrants contain standard adjustment provisions upon stock dividend, stock split, stock combination, recapitalization, and a change of control transaction.
 
On July 13, 2010, in connection with the Share Subscription Agreement, the Company issued to Hunter Wise, a placement agent series F(i) warrants to purchase 31,429 shares of Common Stock exercisable for a period of five years at an exercise price of $1.75 per share and series F(ii) warrants to purchase 94,329 shares of Common Stock exercisable for a period of five years at an exercise price of $2.64 per share. In connection with the subscription, the Company issued to American Capital Partners, a placement agent series F(iii) warrants to purchase 104,592 shares of Common Stock exercisable for a period of five years at an exercise price $2.64 per share.
 
On July 9, 2010, in connection with share issuance, the Company issued 50,000 series G warrants with an exercise price of $2.64 and a 3-year term to a professional firm. The Warrants contain standard adjustment provisions upon stock dividend, stock split, stock combination, recapitalization, and a change of control transaction.
 
The Company is not required to register the shares of Common Stock issuable upon exercise of our Series F and Series G warrants at this time and the Company cannot estimate when or whether it will be required to register such shares.
 
The fair value of the Series C and Series D warrants that were issued as part of the Company’s July 2010 private placements were $393,592 and $113,680, respectively. The fair value of the Series E and Series F warrants that were issued to the placement agent in July 2010 were $4,119,275 and $435,901, respectively. The fair value of the Series G warrants that were issued to a professional firm in July 2010 was $87,538. The total fair value of the warrant issued was $5,149,986, however, all of these warrants were issued to investors in the private placement, the placement agent or a professional firm that performed services directly related to the private placement. The recording of the value of these warrants had no impact in the financial statements as the entry was to debit and credit additional paid in capital for the value of the warrants of $5,149,986.
 
 
20

 
 
Warrants consisted of the following:
 
   
Warrants
Outstanding
   
Warrants
Exercisable
   
Weighted
Average
Exercise
Price
   
Average
Remaining
Contractual
Life
   
Intrinsic
Value
 
Outstanding, December 31, 2010
   
2,903,526
     
2,903,526
   
$
2.30
     
3.41
   
$
-
 
Granted
   
-
     
-
     
-
     
-
     
-
 
Forfeited
   
-
     
-
     
-
     
-
     
-
 
Exercised
   
-
     
-
     
-
     
-
     
-
 
Outstanding, December 31, 2011
   
2,903,526
     
2,903,526
     
2.30
     
2.41
     
-
 
Granted
   
-
     
-
     
-
     
-
     
-
 
Forfeited
   
-
     
-
     
-
     
-
     
-
 
Exercised
   
-
     
-
     
-
     
-
     
-
 
Outstanding, September 30, 2012
   
2,903,526
     
2,903,526
   
$
2.30
     
1.66
   
$
-
 
 
Warrants referred to in the preceding paragraphs do not trade in an active securities market, and as such, the Company estimates the fair value of these warrants using the Black-Scholes option pricing model using the following assumptions:
 
   
September 30,2012
   
December 31,2011
 
Series A, B, C, D, G
               
Annual dividend yield
   
-
     
-
 
Expected life (years)
   
1.25
     
2.00
 
Risk-free interest rate
   
0.30
%
   
0.30
%
Expected volatility
   
12
%
   
12
%
 
   
September 30,2012
   
December 31, 2011
 
Series E, F
               
Annual dividend yield
   
-
     
-
 
Expected life (years)
   
3.25
     
4.00
 
Risk-free interest rate
   
0.30
%
   
0.30
%
Expected volatility
   
12
%
   
12
%
 
 
21

 
 
12.
 Statutory Reserve Fund
 
The laws and regulations of the PRC require that before a Sino-foreign cooperative joint venture enterprise distributes profits to its partners, it must first satisfy all tax liabilities, provide for losses in previous years, and make allocations in proportions determined at the discretion of the board of directors, after the statutory reserves. The statutory reserves include the surplus reserve fund, the common welfare fund, and the enterprise fund. These statutory reserves represent restricted retained earnings.
 
The Company is required to transfer 10% of its net income, as determined in accordance with the PRC’s accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the Company’s registered capital.
 
The transfer to this reserve must be made before distribution of any dividends to shareholders. For the three months ended September 30, 2012 and 2011, the Companytransferred $0 and $899,564, respectively, to this reserve. For the nine months ended September 30, 2012 and 2011, the Company transferred $0 and $1,663,771, respectively, to this reserve. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholdersin proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.
 
Enterprise fund
 
The enterprise fund may be used to acquire fixed assets or to increase the working capital to expand production and operations of the Company. No minimum contribution is required and the Company has not made any contribution to this fund. For the three months ended September 30, 2012 and 2011, the Company transferred$0 and $0, respectively, to this reserve. For the nine months ended September 30, 2012 and 2011, the Company transferred $0 and $0, respectively, to this reserve.
 
13.
 Employee Welfare Plan
 
The Company has established its own employee welfare plan in accordance with Chinese law and regulations. TheCompany makes contributions to an employee welfare plan. The total expense for the above plan was $17,733 and $10,600 for the three months ended September 30, 2012 and 2011, respectively. The total expense for the above plan was $60,813 and $25,106 for the nine months ended September 30, 2012 and 2011, respectively.
 
 
22

 
 
14.
 Other Expense
 
Other expense for the three and nine months ended September 30, 2012amounted to $35,034 and $250,404, respectively.Other income for the three and nine months ended September 30, 2011amounted to $24 and $11,784, respectively.Other expense for the three and nine months ended September 30, 2012 and 2011 are as follows: 
 
   
For the three months ended September 30,
   
For the nine months ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Other expense:
                               
Financial expense
 
 $
(33,786
)
 
 $
(24
)
 
 $
(49,126
)
 
 $
(11,784
)
Other income
   
-
     
-
     
1,753
     
-
 
Other expense
   
(1,248
)
   
-
     
(203,031
)
   
-
 
Total other expense
 
 $
(35,034)
   
 $
(24
)  
 $
(250,404)
   
 $
(11,784
)
 
15.
 Income Tax
 
Our effective tax rates were approximately 0% and 0% for the nine months ended September 30, 2012 and 2011, respectively. Currently the local government and central government tax benefit will expire on December 31, 2012 and December 31, 2013 respectively. Our effective tax rate was lower than the U.S. federal statutory rate due to the fact that our operations are carried out in foreign jurisdictions, which are subject to lower income tax rates.
 
16.
 Concentration of Credit Risks and Uncertainties and Commitments and Contingencies
 
Credit Risk
 
The Company’s practical operations are all carried out in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC's economy.
 
The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
 
Concentration of credit risk exists when changes in economic, industry or geographic factors similarly affect groups of counter parties whose aggregate credit exposure is material in relation to the Company’s total credit exposure.
 
For the nine months ended September 30, 2012 and 2011, there is no major customer that individually comprised more than 10% of the Company’s total sales.
 
 
23

 
 
There are four major vendors accounting for over 10% of the Company’s total purchases for the nine months ended September 30, 2012, with Shandong Huangming Solar Power Sales Co. accounting for 19%, Shenzhen Tongfang Multimedia Technology Co. accounting for 11%, Guangdong Zhigao air conditioners Co. accounting for 15%, Lu’AnZhongxing Trade Co. accounting for 11%. The accounts payable balance as of September 30, 2012 for these four vendors was $0. There are one major vendor each accounting for over 10% of the Company’s total purchases for the nine months ended September 30, 2011, with Shandong Huangming Solar Power Sales Co. accounting for 47%. The accounts payable balance as of September 30, 2011 for this one vendor was $0.
 
The Company’s exposure to foreign currency exchange rate risk primarily relates to cash and cash equivalents and short-term investments, denominated in the U.S. dollar. Any significant revaluation of RMB may materially and adversely affect the cash flows, revenues, earnings and financial position of the Company.
 
Contingency
 
The Company is in litigation with its prior attorney, who commenced an action against the company in the Supreme Court of the State of New York County of New York for approximately $145,308 plus accrued interest for legal services provided to China Financial Services, a financial advisory firm, on behalf of the Company. The Company believes that there are defenses available to the Company and intends to contest this action. This amount has been accrued as of September 30, 2012 and is included in accrued expenses.
 
In connection with our private placement in July and August 2010, we entered into a Subscription Agreement with the investors which sets forth the rights of the investors to have the registrable shares registered with the SEC for public resale. Pursuant to the registration rights provisions, we agreed to file the registration statement pursuant to the Subscription Agreement to be declared effective by the Securities and Exchange Commission (the “Commission”) by the date (the “Required Effectiveness Date”) which is not later than the earlier of (x) one hundred eighty (180) calendar days after the final closing date of the Offerings dated July 9, 2010, or (y) ten (10) business days after oral or written notice to the Company or its counsel from the Commission that it may be declared effective. The registration statement has not been declared effective before the Required Effectiveness Date (the “Required Effectiveness Failure”). As liquidated damages (“Liquidated Damages”), the Company shall deliver to the Subscribers, as on a pro-rata basis (determined by dividing each Subscriber’s Issue Price by the aggregate Issue Price delivered to the Company by the Subscribers hereunder) an amount equal to one-half percent (0.5%) of the aggregate Issue Price of the Purchased Securities owned of record by such Subscribers on the first business day after the Non-Registration Event and for each subsequent thirty (30) day period (pro rata for any period less than thirty days) which are subject to non-registration event. The maximum aggregate Liquidated Damages payable to the Subscriber under this Agreement shall be five percent (5%) of the aggregate Issue Price paid by the Subscribers. The registration statement was not declared effective by Required Effectiveness Date, as such an Effectiveness Failure occurred and the Company made an estimate of the probable amount it would pay in damages and accrued $262,500. 
 
As of September 30, 2012, The Company has made payment of Liquidated Damages in amount of $262,500. In consideration of such amount the investors waived their right to bring full payment of liquidated damages, the investors forever releases and discharges the Company, its shareholders, subsidiaries, affiliates, successors, and assigns (collectively, the "Releasees") from any actions against the Company, CEH Delaware or Guoying for damages due to the Company’s inability to cause the Registration Statement to be effective in a timely manner and all claims, demands, causes of action, and liabilities of any subsequent damages that might have become due under Section 9(d) of their kind whatsoever arising out of or in connection with the Subscription Agreements and Share Exchange Agreement, and the failure of the Company to perform any of its obligations thereunder up to the execution date of the Amended Settlement Agreement. In particular, the investors agreed to waive their rights to claim any more liquidated damages and declare any future Event of Default under Section 7(o) “Further Registration Statements”, Section 7(r) “Uplisting” and Section 9(d) “Non-Registration Events” of their Subscription Agreements.  
 
 
24

 
 
Further, pursuant to Section 7(d) of the Subscription Agreement, the Company has right to terminate or suspend registration statement or its reporting and filing obligations, unless relevant securities laws and regulations provide otherwise, until the later to occur of (i) two (2) years after the Final Closing Date by August 2012, or (ii) the Purchased Securities can be resold or transferred by the Subscribers pursuant to Rule 144(b)(1)(i) since August 2011.  
 
Operating Leases
 
The Company leases various facilities under operating leases that terminate on various dates.
 
The Company incurred rent expensesof $39,859 and $12,158 for the three months ended September 30, 2012 and 2011, respectively. The Company incurred rent expenses of $119,882 and $41,221 for the nine months ended September 30, 2012 and 2011, respectively.
 
The lease expenses for the next five years are estimated to be as follows:
 
2013
 
$
144,594
 
2014
   
69,394
 
2015
   
12,514
 
2016
   
12,514
 
2017
   
11,471
 
Thereafter
   
-
 
Total
 
$
250,487
 
 
Obligations for Land Use Rights
 
The Company entered into a Land Investment  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 is obligated to assist the Company to obtain a land use right for 164,983 square meters (approximately 300 Chinese acres) to be issued by local people's government where our construction and investment project will be built.  The Land Use Right Certificate is to be approved and issued by People’s Government of Yu An District and Pingqiao Committee is the management committee in charge of project investment on this parcel of land. 120 Chinese acres of this land is for commercial use and 180 Chinese acres of this land is for industrial use. The Company paid RMB 100 million (approximately $15.74 million) of the purchase price as of December 31, 2010. The Company is not obligated to pay the remaining $3.7 million until it receives the land use right certificate issued by relevant PRC government pursuant to the Land Investment Agreement. The Company believes that if the land use right certificate is not granted to the Company by the local government, the Company will get a refund of the retainer from Pingqiao Committee pursuant to its contractual rights.
 
 
25

 
 
17.
 China Electronics Holdings, Inc (Parent Company)
 
Under PRC regulations, the Company’s operating subsidiary, Guoying, may pay dividends only out of its accumulated profits, if any, determined in accordance with the accounting standards and regulations prevailing in the PRC (“PRC GAAP”). In addition, Guoying is required to set aside at least 10% of its accumulated profits each year, if any, to fund the statutory general reserve until the balance of the reserve reaches 50% of its registered capital. The amount in excess of 10% of income tax to be contributed to the statutory general reserve is at Guoying’s discretion. The statutory general reserve is not distributable in the form of cash dividends to the Company and can be used to make up cumulative prior year losses, if any, and may be converted into share capital by the issue of new shares to shareholders in proportion to their existing shareholdings, or by increasing the par value of the shares currently held by them, provided that the reserve balance after such issue is not less than 25% of the registered capital. Further, Guoying is also required to allocate 5% of the profit after tax, determined in accordance with PRC GAAP, to the statutory public welfare fund which is restricted to be used for capital expenditures for staff welfare facilities owned by the Company. The statutory public welfare fund is not available for distribution to equity owners (except in liquidation) and may not be transferred in the form of loans, advances, or cash dividends. As of September 30, 2012, an aggregate amount of$3,958,981has been appropriated from retained earnings and set aside for statutory general reserve and public welfare fund, by Guoying.
 
As of September 30, 2012, the amount of restricted net assets of Guoying, which may not be transferred to the Company in the form of loans, advances or cash dividends by the subsidiaries without the consent of a third party, was approximately 7.43% of the Company’s consolidated net assets as discussed above. In addition, the current foreign exchange control policies applicable in the PRC also restrict the transfer of assets or dividends outside the PRC.
 
The following presents condensed unaudited unconsolidated financial information of the Parent Company only.
 
Condensed unaudited Balance Sheet as of September 30, 2012 and December 31, 2011
 
   
September 30, 2012
   
December 31, 2011
 
Current assets
 
$
3,333,144
   
$
3,339,253
 
                 
Current liabilities
 
$
145,308
   
$
143,000
 
Total stockholders' equity
   
3,187,836
     
3,196,253
 
Total liabilities and shareholders’ equity
 
$
3,333,144
   
$
3,339,253
 
 
Condensed unaudited Statements of Operations (For the nine months ended September 30, 2012 and 2011)
 
   
2012
   
2011
 
Revenues
 
$
-
   
$
-
 
General and administrative expenses
   
8,417
     
413,287
 
Loss before equity in undistributed earnings of subsidiaries
   
(8,417
)
   
(413,287
)
Equity in earnings of subsidiaries
   
(340,122
   
16,637,915
 
Net income (loss)
 
$
(348,539
 
$
16,224,628
 
 
 
26

 
 
Condensed unaudited Statement of Cash Flows (For the nine months ended September 30, 2012 and 2011)
 
   
2012
   
2011
 
Net (Loss) Income
 
$
(348,539
 
$
16,224,628
 
Adjustments to reconcile net (loss) income to net cash provided by operations:
               
Equity in earnings of subsidiaries
   
340,122
     
(16,637,915
)
Changes in operating liabilities and assets:
               
                 
Other receivable
   
8,417
     
413,287
 
                 
Net cash provided by operating activities
   
-
     
-
 
                 
Effect of rate changes on cash
   
-
     
-
 
                 
Increase in cash and cash equivalents
   
-
     
-
 
Cash and cash equivalents, beginning of period
   
-
     
-
 
Cash and cash equivalents, end of period
 
$
-
   
$
-
 
 
 
27

 
 
18.
Segment information
 
ASC 280 requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
 
During 2012 and 2011, the Company was organized into three main business segments: (1) Exclusive franchise stores, (2) Non-exclusive franchise stores, and (3) Company owned stores. The following table presents a summary of operating information and certain nine months-end balance sheet information as of September 30, 2012 and September 30, 2011, respectively.
 
   
For the nine months ended September 30,
 
   
2012
   
2011
 
Revenues from unaffiliated customers:
           
Exclusive franchise stores
 
$
26,899,816
   
$
36,922,525
 
Non-exclusive stores
   
14,166,076
     
42,636,865
 
Company owned stores
   
3,431,983
     
8,054,564
 
Consolidated
 
$
44,497,875
   
$
87,613,954
 
Gross Profit:
               
Exclusive franchise stores
 
$
1,958,599
   
$
5,907,604
 
Non-exclusive stores
   
1,028,117
     
6,821,899
 
Company owned stores
   
339,109
     
1,275,684
 
Consolidated
 
$
3,325,825
   
$
14,005,187
 
                 
Depreciation and amortization:
               
Exclusive franchise stores
 
$
-
   
$
-
 
Non-exclusive stores
   
-
     
-
 
Company owned stores
   
-
     
-
 
Corporate
   
483,199
     
82,611
 
Consolidated
 
$
483,199
   
$
82,611
 
Capital expenditures:
               
Exclusive franchise stores
 
$
-
   
$
-
 
Non-exclusive stores
   
-
     
-
 
Company owned stores
   
-
     
-
 
Corporate
 
2,405,898
   
323,995 
 
Consolidated
 
$
2,405,898
   
$323,995 
 
 
Identifiable assets:
 
As of September
30, 2012
   
As of December
31, 2011
 
Exclusive franchise stores
 
$
-
   
$
-
 
Non-exclusive stores
   
-
     
-
 
Company owned stores
   
-
     
-
 
Corporate
   
58,948,766
     
58,295,145
 
Consolidated
 
$
58,948,766
   
$
58,295,145
 
 
 
28

 
 
 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the unaudited condensed consolidated financial statements of the Company for the nine months ended September 30, 2012 and 2011, and should be read in conjunction with such financial statements and related notes included in this report. Those statements in the following discussion that are not historical in nature should be considered to be forward looking statements that are inherently uncertain. Actual results and the timing of the events may differ materially from those contained in these forward looking statements due to a number of factors, including those discussed in the “Forward-Looking Statements” set forth elsewhere in this Quarterly Report on Form 10-Q.
 
Overview
 
China Electronics Holdings, Inc (the “Company”, “We”, “Our”, “Us”), formerly named Buyonate, Inc., was incorporated in the State of Nevada on July 9, 2007 to engage in developing user-friendly/child friendly interactive digital software for children. The Company was in the development stage through December 31, 2008. The year 2009 is the first year during which the Company is considered an operating company engaging in retail and wholesale distribution of consumer electronics and appliances in certain rural markets in the People’s Republic of China.
 
China Electronic Holdings, Inc. (“CEH Delaware”) was organized on November 15, 2007, as a Delaware corporation. Prior to February 10, 2010, CEH Delaware was a development stage company attempting to manufacture and sell carbon and graphite electrodes and planning to manufacture and sell electronic products in the People’s Republic of China through its own stores and franchise stores.
 
 
29

 
 
Lu’an Guoying Electronic Sales Co., Ltd., a PRC corporation, (“Guoying”) was established on January 4, 2002. Guoying sells electronic products in the PRC through its company-owned stores, exclusive franchise stores and non-exclusive stores.
 
In August 2012, Guoying contributed $945,054 registered capital to Lu An Guoying Opto-Electronics Technology Co., Ltd. (“Opto-Electronics”) which is 99% owned by Guoying. Mr. Hailong Liu, the CFO and Chairman of Guoying, contributed $9,546 registered capital in cash and owned 1% of Opto-Electronics.
 
Pursuant to the Share Transfer Agreement dated May 30, 2009 between the shareholders of Guoying (the “Guoying Shareholders”) and CEH Delaware, CEH Delaware acquired 100% of the outstanding equity securities of Guoying (the “Guoying Shares”) from Guoying Shareholders in consideration for RMB 1,000,000 and the Guoying Shareholders transferred and contributed all of their Guoying Shares to CEH Delaware in 2010. The Guoying Shareholders contributed the cash portion of the price for their shares to Guoying for working capital and general corporate purpose and as a result of the 2009 Share Transfer, Guoying became a wholly foreign-owned subsidiary (“WFOE”) of CEH Delaware.
 
On July 9, 2010 we consummated the Share Exchange Agreement with certain Selling Stockholders. Pursuant to the Share Exchange Agreement, 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 1,628,570 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 Share Exchange and pursuant to the Articles of Merger filed with the Nevada Secretary of State, Buyonate, Inc. changed its name to China Electronics Holdings, Inc. 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.
 
Results of Operations
 
Wholesale and Retail of Consumer Electronics Appliances
 
We operated 2 company-owned stores as of September 30, 2012. We opened our headquarter company-owned store located in Guangcai Big Market in the second quarter of 2011.
 
As of September 30, 2012, we have franchise agreements with 296 exclusive franchise stores operate under Guoying brand name (the “Exclusive Franchise Stores”). We entered into franchise agreements with 247, 61, 93, 5, 76 and 0 new exclusive franchise stores in 2009, 2010, 2011, first quarter of 2012, second quarter of 2012 and third quarter of 2012. We terminated our exclusive franchise agreement with 47, 0, 233, 75, 28 and 28 exclusive franchise stores in 2009, 2010, 2011, first quarter of 2012, second quarter of 2012 and third quarter of 2012, respectively. 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. 
 
 
30

 
 
As of September 30, 2012, we have non-exclusive franchise agreements with 175 stores (the “Non-Exclusive Franchise Stores”) to which we provide Guoying branded merchandise on a non-exclusive wholesale basis. We entered into franchise agreements with 111, 557, 1, 0, 19 and 0 non-exclusive franchise stores in 2009, 2010, 2011, first quarter of 2012, second quarter of 2012 and third quarter of 2012. We terminated our non-exclusive franchise agreements with 15, 18, 362, 158, 40 and 0 non-exclusive franchise stores in 2009, 2010, 2011, first quarter of 2012, second quarter of 2012 and third quarter of 2012, respectively.
 
Our sales market currently mainly targets customers in county, township and villages (the third, fourth and fifth tiers of markets) in rural areas in Anhui Province of China. Our distribution and sales network currently covers twelve districts and counties in Anhui province, namely Shou County, Shu City, Jin An, Yu An, Huo Shan, Jinn Sai, Huo Qiu, Gu Shi, Ye Ji, Fei West, Fei East, and Huai Nan Districts.
 
In August 2011, our Board decided to terminate our exclusive and non-exclusive franchise agreements with a number of carriers in order to strengthen and grow the Company’s business in the long term after concluding that the rapid growth of the company’s number of stores and aggressive business expansion had caused deficiencies in the company’s internal control and management. The following criteria has been used to determine which stores (“Disqualified Exclusive Stores” and “Disqualified Non-Exclusive Stores”) to close (i) exclusive franchise stores that sold merchandise supplied by other wholesalers in breach of the exclusive franchise agreement; (ii) exclusive and non-exclusive franchise stores that failed to obey the Company’s pricing and resulting in lower profit margins; (iii) stores located remotely Lu An City that result in higher transportation and logistics expenses to us; (iv) stores that sold brand of merchandise that not supplied by us and therefore terminate its franchise agreement with us. During the year ended December 31, 2011 and the nine months ended September 30, 2012, we have closed 2 company-owned stores, terminated our contracts with 364 exclusive franchise stores, and terminated our contracts with 560 non-exclusive franchise stores. We do not expect to terminate our franchise contracts with more significant number of non-exclusive stores in the rest of 2012. We believe that we are going to keep our current company-owned stores. We are evaluating about 100 exclusive stores and we might terminate our franchise contracts with these stores if they can not reach our standard by the end of 2012.
 
When we use the terms "open" or "opened" in referring to an exclusive or non exclusive franchise store, we mean that we had entered into a franchise agreement with such store and that it was in operation.  When we use the terms "close," "closed" or "terminated" in reference to an exclusive or non-exclusive franchise store we mean that we had terminated our agreement with such store.
 
Logistics and Transportations
 
We entered into a Land Investment Agreement for 300 Chinese acres (164,983 square meters) land with Pingqiao Industrial Park, portion of which (38,449 square meters) will be used to build our logistics centers located in Lu An City to establish distribution channels and logistics transportation services to deliver merchandise and Guoying branded products to counties, townships and villages in Hubei, Henan and Anhui provinces. We have started construction of four warehouses located on Pingqiao land since October 2011. Each logistics center is 4,800 square meters and total is 19,200 square meters. We anticipate the construction of four logistics centers to be completed by December 2012.
 
LED Manufacturing and Wholesale Business
 
We filed a proposal to obtain permission to enter into LED manufacturing business with the Reform and Development Commission of Yu An District, Lu An City on May 13, 2011. We obtained construction permit issued by Housing and Urban-Rural Development Bureau of Yu An District, Lu An City on October 28, 2011 to build LED manufactures on Pingqiao Land. In August 2012, the Company invested $945,054 to establish Opto-Electronics which is 99% owned by the Company. Mr. Hailong Liu, the CEO and Chairman of the Company, invested $9,546 and owned 1% of Opto-Electronics.
 
 
31

 
 
The Company will continue focusing on becoming a significant retailer and wholesaler of consumer electronics and appliances to rural markets with a goal of having a national distribution network throughout China. The Company’s working capital will continue to be used to develop wholesale and retail business. The Company does not have sufficient capital to build an LED manufacturing and wholesale business at this time. Thus the Company will continue its electronics distribution business while it moves slowly on the development of its LED business by seeking business opportunities, partners and financing.
 
Three months ended September 30, 2012 compared with three months ended September 30, 2011
 
Revenues
 
Our net revenue for the three months ended September 30, 2012 was $14,425,250, a decrease of 49.7%, or $14,247,616, from $28,672,866 for the three months ended September 30, 2011.
 
For the three months ended September 30, 2012, net revenue from exclusive franchise stores was $8,013,254, a decrease of 22.8%, or $2,371,536, from $10,384,790 for the three months ended September 30, 2011. Therewere 296 exclusivefranchise stores as of September 30, 2012, 256 stores or 46% fewer than the 552 exclusive franchise stores as of September 30, 2011. The decrease of revenue from exclusive franchise stores is mainly due to our termination of business with 344 exclusive stores and we have entered into 88 new exclusive franchise agreements from September 30, 2011 to September 30, 2012.
 
For the three months ended September 30, 2012, net revenue from non-exclusive stores was$4,657,161, a decrease of 66.6%, or $9,266,662, from $13,923,823 for the three months ended September 30, 2011.We continued our franchise agreementswith 175 non-exclusive stores as of September 30, 2012, 511 stores or 74% fewer than the 686 non-exclusive stores as of September 30, 2011. The decrease of revenue from non-exclusive franchise stores is mainly due to our termination of business with 530 non-exclusive stores and we have entered into 19 new non-exclusive franchise agreements from September 30, 2011 to 2012.
 
For the three months ended September 30, 2012, net revenue from company owned stores was $1,754,835, a decrease of 59.8%, or $2,609,418, from $4,364,253 for the three months ended September 30, 2011. The decreased revenue from company-owned stores was mainly due to the fact that we closed twocompany-owned stores in the second and fourth quarter of 2011, respectively. 
 
Revenue Classified by Store Type
 
Our disaggregation of revenue and cost of sales by each store type in the three months ended September 30, 2012 and 2011 are as follows:
 
Three Months Ended September 30, 2011
 
Non-Exclusive
Franchise Stores
   
Exclusive Franchise
Stores
   
Company-Owned Stores
   
Total
 
Revenue
 
$
13,923,823
   
$
10,384,790
   
$
4,364,253
   
$
28,672,866
 
Cost of Sales
 
$
11,727,137
   
$
8,767,963
   
$
3,768,458
   
$
24,263,558
 
Gross Profit
 
$
2,196,686
   
$
1,616,827
   
$
595,795
   
$
4,409,308
 
 
 
32

 
 
Three Months Ended September 30, 2012
 
Non-Exclusive
Franchise Stores
   
Exclusive Franchise
Stores
   
Company-Owned Stores
   
Total
 
Revenue
 
$
4,657,161
   
$
8,013,254
   
$
1,754,835
   
$
14,425,250
 
Cost of Sales
 
$
4,270,260
   
$
7,346,134
   
$
1,564,432
   
$
13,180,826
 
Gross Profit
 
$
386,901
   
$
667,120
   
$
190,403
   
$
1,244,424
 
 
Sales and Average Per Store Sales of Same Stores
 
Same Stores are defined as stores that we opened or entered into franchise agreements with prior to 2011 and that have been in continuous operation as of September 30, 2012 and excludes stores that were newly opened or closed or with which we entered into or terminated franchise agreements in 2011 and 2012. Same Store Sales are defined as sales from the Same Stores.
 
Same Stores Sales in the three months ended September 30, 2012 and 2011, and the increase or decrease experienced as a percentage of Same Store Sales are as follows:
 
Same Store Sales
 
Three Months Ended 9/30/2012
   
Three Months
 Ended 9/30/2011
   
Difference
   
Change
 
Non-Exclusive Franchise Stores
 
$
3,674,046
   
$
4,159,672
   
$
(485,626
   
(12
)%
Exclusive Franchise Stores
 
$
3,059,179
   
$
3,410,688
   
$
(351,509
   
(10
)%
Company-Owned Stores
 
$
107,652
   
$
560,345
   
$
(452,693
   
(81
)%
Total
 
$
6,840,877
   
$
8,130,705
   
$
(1,289,828
   
(16
)%
 
The reason for the decrease in Same Stores Sales for the three months ended September 30, 2012 compared to September 30, 2011 was the decrease in sales from non-exclusive stores (“Same Non-Exclusive Franchise Stores”), from exclusive franchise stores (“Same Exclusive Franchise Stores”) and from same company owned stores (“Same Company Owned Stores”). The decrease in our sales in Same Non-Exclusive Franchise stores, Same Exclusive Franchise stores and in Same Company owned Stores is due to decreased demand caused by more competitive market and due to less marketing effort.
 
 
33

 
 
The number of Same Stores included in the calculation of average sales of per-store Same Stores is as follows:
 
Same Stores
 
Three Months Ended
9/30/2012
 
Three Months Ended
9/30/2011
Non-Exclusive Franchise Stores
   
 155
 
   155
Exclusive Franchise Stores
   
161
 
  161
Company-Owned Stores
   
1
 
  1
 
The average sales per-store of Same Stores and its trend up or down are as follows:
 
Average Per-Store Same Store Sales
 
Three Months Ended 9/30/2012
   
Three Months Ended
9/30/2011
   
Difference
   
Change
 
Non-Exclusive Franchise Stores
 
$
23,704
   
$
26,837
   
$
(3,133
   
(12
)%
Exclusive Franchise Stores
 
$
19,001
   
$
21,184
   
$
(2,183
   
(10
)%
Company-Owned Stores
 
$
107,652
   
$
560,345
   
$
(452,693
   
(81
)%
 
Sales and Average Per Store Sales of New Stores
 
New Stores are defined as stores that were newly opened in either 2012 or 2011 and were operating under normal conditions as of September 30, 2012 and excluding stores that closed in 2012 or 2011 (“New Stores”). New Store Sales are defined as sales from New Stores. New Store Sales for the third quarter of 2011 refer to the sales generated in the third quarter of 2011 from New Stores opened in the first three quarters of 2011 that maintain open as of September 30, 2012. New Store Sales for the third quarter of 2012 refer to the sales generated in the third quarter of 2012 from both New Stores opened in 2011 and New Stores opened in the first three quarters of 2012 that are not closed.
 
New Stores Sales operating in both the three months ended September 30, 2012 and 2011, and the increase experiences at a percentage are as follows:
 
New Store Sales
 
Three Months Ended
 9/30/2012
   
Three Months Ended
 9/30/2011
   
Difference
   
Change
 
Non-Exclusive Franchise Stores
 
$
983,115
   
$
46,812
   
$
936,303
     
2,000
%
Exclusive Franchise Stores
 
$
4,278,429
   
$
1,532,934
   
$
2,745,495
     
179
%
Company-Owned Stores
 
$
1,647,183
   
$
3,350,547
   
$
(1,703,364
   
(51
)%
Total
 
$
6,908,727
   
$
4,930,293
   
$
1,978,434
     
40
%
 
 
34

 
 
The primary reason for the increase in New Stores Sales for the three months ended September 30, 2012 compared to September 30, 2011 was the increase of sales from new exclusive stores (the “New Exclusive Franchise Stores”) and from new Non-exclusive stores (the “New Non-exclusive Stores”) offset by the decrease in sales from Company-owned stores. The increase of sales from exclusive and non-exclusive stores is due to the fact there are more new exclusive and non-exclusive stores in the three months ended September 30, 2012 compared to the three months ended September 30, 2011. The decrease of sales from Company-owned stores is due to less marketing effort.
 
The number of new stores included in the calculation of average per store sales of New Stores is as follows:
 
New Stores
 
Three Months Ended 9/30/2012
 
Three Months
Ended 9/30/2011
Non-Exclusive Franchise Stores
 
20
 
  1
Exclusive Franchise Stores
   
137
 
  49
Company-Owned Stores
   
1
 
  1
 
The average sales per-store of New Stores and its trend as a percentage of New Store Sales are as follows:
 
Average Per-Store New Store Sales
 
Three Months Ended 9/30/2012
   
Three Months Ended
9/30/2011
   
Difference
   
Change
 
Non-Exclusive Franchise Stores
 
$
49,156
   
$
46,812
   
$
2,344
     
5
%
Exclusive Franchise Stores
 
$
31,229
   
$
31,284
   
$
(55
)
   
(0
)%
Company-Owned Stores
 
$
1,647,183
   
$
3,350,547
   
$
(1,703,363
   
(51
)%
 
Sales and Average Per Store Sales of Closed Stores
 
Closed Stores are stores that were closed or with which the Company terminated its agreement in either 2012 or 2011 (the “Closed Stores”). Closed Store Sales are defined as sales from the Closed Stores. Closed Store Sales for the third quarter of 2011 refer to sales generated in the third quarter of 2011 from stores whose franchise agreements were terminated or which closed in 2011 or in the first three quarters of 2012. Closed Store Sales for the third quarter of 2012 refer to sales generated in the third quarter of 2012 from stores whose franchise agreements were terminated or which closed in the first three quarters of 2012.
 
 
35

 
 
Closed Store Sales in the three months ended September 30, 2011 and the three months ended September 30, 2012, and the change experienced as a percentage are as follows:
 
Closed Store Sales
 
Three Months Ended 9/30/2012
   
Three Months Ended
9/30/2011
   
Difference
   
Change
 
Non-Exclusive Franchise Stores
 
$
-
   
$
9,717,339
   
$
(9,717,339
   
(100
)%
Exclusive Franchise Stores
 
$
675,646
   
$
5,441,168
   
$
(4,765,522
   
(88
)%
Company-Owned Stores
 
$
-
   
$
453,361
   
$
(453,361
   
(100
)%
Total
 
$
675,646
   
$
15,611,868
   
$
(14,936,222
   
(96
)%
 
The decrease in Closed Store Sales results from the fact that stores whose franchise agreements were terminated or which closed in 2011 or in the first three quarters ended September 30, 2012 generated no or very little sales for the Company in the three months ended September 30, 2012. The Company resolved to close (i) exclusive franchise stores that sold merchandise supplied by other wholesalers in breach of the exclusive franchise agreement; (ii) exclusive and non-exclusive franchise stores that failed to obey the Company’s pricing strategies, resulting in lower profit margins; (iii) stores located remotely from Lu An City that resulted in higher transportation and logistics expenses to us; and (iv) stores that sold brands of merchandise not supplied by us.
 
The number of closed stores included in the calculation of average per-store sales of Closed Stores is as follows:
 
Closed Stores
 
Three Months Ended
9/30/2012
 
Three Months Ended
9/30/2011
Non-Exclusive Franchise Stores
   
560
 
560
Exclusive Franchise Stores
   
364
 
364
Company-Owned Stores
   
2
 
2
 
The 560 closed non-exclusive franchise stores and 364 closed exclusive franchise stores and 2 closed company-owned stores in the quarter ended9/30/2011 refer to the total number of stores closed from January 1, 2011 to September 30, 2012 that generated revenue to the Company in the third quarter of 2011.
 
The average per-store sales of Closed Stores and its trend of increase or decrease are as follows:
 
Average Per-Store Closed Store Sales
 
Three Months Ended
9/30/2012
   
Three Months Ended
9/30/2011
   
Difference
   
Change
 
Non-Exclusive Franchise Stores
 
$
-
   
$
17,352
   
$
(17,352
   
(100)
%
Exclusive Franchise Stores
 
$
1,856
   
$
14,948
   
$
(13,092
   
(88
)%
Company-Owned Stores
 
$
-
   
$
226,681
   
$
(226,681
   
(100
)%
 
 
36

 
 
Other information
 
The following is a summary of revenue by product line for the three months ended September 30, 2012 and 2011:
 
   
Three Months Ended September 30, 2012
   
Three Months Ended September 30, 2011
 
Solar Power Products
 
$
(761,005
 
$
12,419,105
 
Air Conditioner
 
$
8,425,676
   
$
4,641,936
 
Refrigerator
 
$
1,233,048
   
$
4,370,335
 
TV
 
$
4,949,391
   
$
5,977,050
 
Washer
 
$
382,836
   
$
881,387
 
Others
 
$
195,304
   
$
383,053
 
Total
 
$
14,425,250
   
$
28,672,866
 
 
The increased revenue from new product lines carried in the three months ended September 30, 2012 was $8,417,808, of this amount our exclusive franchise stores, non-exclusive stores and company-owned stores increased revenue from new product lines by $4,934,287, $2,507,139 and $976,382, respectively. New product lines carried in the three months ended September 30, 2012 but not in the same period last year includes Oulin appliances, Gree Air Conditioner, Skyworth TV, Meiling Washer and AUX Air Conditioner.
 
The increased revenue in the three months ended September 30, 2012 from new exclusive franchise stores whose franchise agreements were executed or which opened in the three months ended September 30, 2012 was $1,506,892. The increased revenue in the three months ended September 30, 2012 from new non-exclusive stores was $306,980 as we entered into franchise agreements with new 19 non-exclusive stores in the third quarter of 2012. The increased revenue in the three months ended September 30, 2012 from new company-owned stores was $0 as we did not open new company-owned stores in the first three quarters of 2012.
 
Solar-powered products sales decreasedby $13,180,110, or 106.1%, from $12,419,105in the three months ended September 30, 2011 to $(761,005) in the same period 2012. The decrease is mainly due to returns for products sold in this and prior period, due to decreased solar-powered products sales caused by decreased market demand of solar-powered products and caused by closing one of our company-owned stores that specialized in selling solar-powered products in the three months ended September 30, 2012 compared to the same period last year. Because of the decreased market demand, the Company agreed to take back some solar-powered products from exclusive franchise stores and non-exclusive franchise stores.
 
 
37

 
 
Television products sales decreasedby $1,027,659, or 17.2%, from $5,977,050in the three months ended September 30, 2011 to $4,949,391 inthe same period in 2012. The decrease is mainly due to the Company sold fewer brands of TV products and also due to increased market competition, decreased number of exclusive and non-exclusive franchise stores that are selling our products, and decreased market demand in the three months ended September 30, 2012 compared to the same period last year.
 
Refrigerator products sales decreasedby $3,137,287, or 71.8%, from $4,370,335 in the three months ended September 30, 2011 to $1,233,048 inthe same period in 2012. The decrease is mainly due to decreased number of exclusive and non-exclusive franchise stores that are selling our products, and decreased market demand in the three months ended September 30, 2012 compared to the same period last year.
 
Air conditioner products sales increasedby $3,783,740, or 81.5%, from $4,641,936 in the three months ended September 30, 2011 to $8,425,676 inthe same period in 2012. The increase is mainly due to the Company carried new air conditioner brands in the three months ended September 30, 2012 compared to the same period last year.
 
Cost of Goods Sold
 
Our cost of goods sold for the three monthsended September 30, 2012 was $13,180,826, a decrease of $11,082,732, or 45.7%, compared to $24,263,558 for the three months ended September 30, 2011. The decrease was mainly due to the decrease in sales.
 
   
Three Months Ended September 30, 2012
   
Three Months Ended September 30, 2011
 
             
Cost of goods sold from non-exclusive stores
 
$
4,270,260
   
$
11,727,137
 
Cost of goods sold from exclusive franchise stores
   
7,346,134
     
8,767,963
 
Cost of goods sold from company-owned stores
   
1,564,432
     
3,768,458
 
Cost of goods sold
 
$
13,180,826
   
$
24,263,558
 
 
For the three months ended September 30, 2012, cost of goods sold from exclusive franchise stores was $7,346,134, a decrease of 16.2%, or $1,421,829, from $8,767,963 for the three months ended September 30, 2011. The decrease was in line with the decrease in revenue.
 
For the three months ended September 30, 2012, cost of goods sold from non-exclusive stores was $4,270,260, a decrease of 63.6%, or $7,456,877, from $11,727,137 for the three months ended September 30, 2011. The decrease was in line with the decrease in revenue.
 
For the three months ended September 30, 2012, cost of goods sold from company-owned stores was $1,564,432, a decrease of 58.5%, or $2,204,026, from $3,768,458 for the three months ended September 30, 2011. The decrease was in line with the decrease in revenue.
 
 
38

 
 
Cost of goods sold and Average Per Store Cost of goods sold of Same Stores
 
Same Store Cost of Goods Sold
 
Three Months Ended 9/30/2012
   
Three Months Ended 9/30/2011
   
Difference
   
Change
 
Non-Exclusive Franchise Stores
 
$
3,368,294
   
$
3,526,888
   
$
(158,594
   
(4
)%
Exclusive Franchise Stores
 
$
2,806,344
   
$
2,882,458
   
$
(76,114
   
(3
)%
Company-Owned Stores
 
$
94,579
   
$
465,460
   
$
(370,881
   
(80
)%
Total
 
$
6,269,217
   
$
6,874,806
   
$
(605,589
   
(9
)%
 
The average cost of goods sold per-store of same Stores and its trend as a percentage of Same Store Cost of goods sold are as follows:
 
Average Per-Store Same Store Cost of Goods Sold
 
Three Months Ended 9/30/2012
   
Three Months Ended 9/30/2011
   
Difference
   
Change
 
Non-Exclusive Franchise Stores
 
$
21,731
   
$
22,754
   
$
(1,023
   
(4
)%
Exclusive Franchise Stores
 
$
17,431
   
$
17,903
   
$
(472
   
(3
)%
Company-Owned Stores
 
$
94,579
   
$
465,460
   
$
(370,881
   
(80
)%
 
Cost of goods sold and Average Per Store Cost of goods sold of New Stores
 
New Store Cost of Goods Sold
 
Three Months Ended 9/30/2012
   
Three Months Ended 9/30/2011
   
Difference
   
Change
 
Non-Exclusive Franchise Stores
 
$
901,966
   
$
40,408
   
$
861,558
     
2,132
%
Exclusive Franchise Stores
 
$
3,919,276
   
$
1,290,038
   
$
2,629,238
     
204
%
Company-Owned Stores
 
$
1,469,853
   
$
2,741,427
   
$
(1,271,574
   
(46
)%
Total
 
$
6,291,095
   
$
4,071,873
   
$
2,219,222
     
55
%
 
 
39

 
 
The average cost of goods sold per-store of New Stores and its trend as a percentage of New Store cost of goods sold are as follows:
 
Average Per-Store New Store Cost of Goods Sold
 
Three Months Ended 9/30/2012
   
Three Months Ended 9/30/2011
   
Difference
   
Change
 
Non-Exclusive Franchise Stores
 
$
45,098
   
$
40,408
   
$
4,690
     
12
%
Exclusive Franchise Stores
 
$
28,608
   
$
26,327
   
$
2,281
     
9
%