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EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE AND FINANCIAL OFFICER - China Electronics Holdings, Inc.e611580_ex31-1.htm
EX-32.2 - CERTIFICATION OF CHIEF EXECUTIVE AND FINANCIAL OFFICER - China Electronics Holdings, Inc.e611580_ex32-1.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 June 30, 2013
   
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 November 22, 2013. 
 
 
 

 
 
TABLE OF CONTENTS
 
 
Page
   
PART I—FINANCIAL INFORMATION
 
Item 1. Financial Statements (Unaudited)
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 
Item 4. Controls and Procedures.
 
PART II—OTHER INFORMATION
 
Item 1A. Risk Factors.
 
Item 6. Exhibits.
 
 
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’anGuoying Electronic Sales Co., Ltd., a wholly foreign enterprise under the laws of the People’s Republic of China (“Guoying”), unless otherwise indicated or the context otherwise requires.
 
FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q contains certain forward-looking statements (as such term is defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934).  The statements herein which are not historical reflect our current expectations and projections about the Company’s future results, performance, liquidity, financial condition, prospects and opportunities and are based upon information currently available to us and our management and our interpretation of what we believe to be significant factors affecting our business, including many assumptions about future events.  Such forward-looking statements include statements regarding, among other things:
 
 
our ability to produce, market and generate sales of our private label products;
 
 
our ability to market and generate sales of the products that we sell as a wholesaler;
 
 
our ability to develop, acquire and/or introduce new products;
 
 
our projected future sales, profitability and other financial metrics;
 
 
our future financing plans;
 
 
our plans for expansion of our stores and manufacturing facilities;
 
 
our anticipated needs for working capital;
 
 
the anticipated trends in our industry;
  
 
our ability to expand our sales and marketing capability;
 
 
acquisitions of other companies or assets that we might undertake in the future;
 
 
our operations in China and the regulatory, economic and political conditions in China;
 
 
our ability as a U.S. company to operate our business in China through our subsidiary, Guoying;
 
 
competition existing today or that will likely arise in the future; and
 
 
other factors discussed elsewhere herein.
 
 
i

 
 
Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “should,” “will,” “plan,” “could,” “target,” “contemplate,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” “seek,” or “project” or the negative of these words or other variations on these or similar words.  Actual results, performance, liquidity, financial condition and results of operations, prospects and opportunities could differ materially from those expressed in, or implied by, these forward-looking statements as a result of various risks, uncertainties and other factors, including the ability to raise sufficient capital to continue the Company’s operations.  These statements may be found under Part I, Item 2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as elsewhere in this Quarterly Report on Form 10-Q generally.  Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, matters described in this Quarterly Report on Form 10-Q.  In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Quarterly Report on Form 10-Q will in fact occur.
 
Potential investors should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
 
The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q.  Such statements are presented only as a guide about future possibilities and do not represent assured events, and we anticipate that subsequent events and developments will cause our views to change.  You should, therefore, not rely on these forward-looking statements as representing our views as of any date after the date of this Quarterly Report on Form 10-Q. 
 
This Quarterly Report on Form 10-Q also contains estimates and other statistical data prepared by independent parties and by us relating to market size and growth and other data about our industry. These estimates and data involve a number of assumptions and limitations, and potential investors are cautioned not to give undue weight to these estimates and data. We have not independently verified the statistical and other industry data generated by independent parties and contained in this Quarterly Report on Form 10-Q. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk.
 
Potential investors should not make an investment decision based solely on our projections, estimates or expectations.
 
 
ii

 
 
PART I.
 
FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
CHINA ELECTRONICS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2013 AND DECEMBER 31, 2012
 
 
   
As of
   
As of
 
   
June 30,
   
December 31,
 
   
2013
   
2012
 
Assets
 
[unaudited]
   
[audited]
 
Current assets
           
Cash and cash equivalents
  $ 65,200     $ 9,465  
Accounts receivable, net
    4,125,679       2,331,713  
Other receivable
    712,721       593,850  
Related party receivable
    -       642,000  
Inventory
    8,420,264       956,779  
Advance to suppliers
    8,113,622       17,532,739  
Prepaid expenses
    453,575       -  
Total current assets
    21,891,061       22,066,546  
                 
Non-current assets
               
Property, plant and equipment, net
    68,540       342,705  
Construction in progress
    -       8,196,005  
Intangible assets, net
    -       15,381,250  
Advance
    -       13,954,191  
Long-term assets held for sale
    3,239,810       -  
Total non-current assets
    3,308,350       37,874,151  
                 
Total Assets
  $ 25,199,411     $ 59,940,697  
                 
Liabilities and Stockholders’ Equity
               
                 
Liabilities
               
Current liabilities
               
Bank loans
  $ 1,619,904     $ 1,605,000  
Accounts payable and accrued expenses
    236,824       224,884  
Taxes payable
    -       103  
Other payable
    239,938       3,512,045  
Related party payable
    973,110       964,156  
Unearned revenue
    441,908       430,833  
Total current liabilities
    3,511,684       6,737,021  
                 
Total Liabilities
  $ 3,511,684     $ 6,737,021  
Stockholders’ Equity
           
Preferred stock, $0.0001 par value; 50,000,000 shares authorized; 0 shares issued and outstanding as of June30, 2013 and December 31, 2012
  $ -     $ -  
Common stock, $0.0001 par value; 150,000,000 shares authorized; 16,775,113 shares and 16,775,113 issued and outstanding as of June 30, 2013 and December 31, 2012, respectively
        1,678       1,678  
Additional paid-in capital
    15,341,710       15,341,710  
Statutory reserve
    3,849,684       3,849,684  
Retained earnings/(accumulated deficit)
    (2,051,775 )     29,609,970  
Accumulated other comprehensive income
    4,546,430       4,391,004  
     Total stockholders’ equity
    21,687,727       53,194,046  
Non-controlling interest
    -       9,630  
Total equity
    21,687,727       53,203,676  
                 
Total liabilities and stockholders’ equity
  $ 25,199,411     $ 59,940,697  
 
See accompanying notes to consolidated financial statements
 
 
1

 
 
CHINA ELECTRONICS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS PERIODS ENDED JUNE 30, 2013 AND 2012
(UNAUDITED)
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2013
   
June 30, 2012
   
June 30, 2013
   
June 30, 2012
 
Sales revenue
                       
   Revenue from exclusive franchise stores
  $ 5,486,629     $ 9,105,592     $ 9,395,698     $ 18,886,562  
   Revenue from non-exclusive franchise stores
    446,985       6,451,687       848,675       9,508,915  
   Revenue from company owned stores
    963,235       1,016,850       2,156,736       1,677,148  
Revenue
    6,896,849       16,574,129       12,401,109       30,072,625  
Cost of goods sold
                               
   Cost from exclusive franchise stores
    5,036,891       8,464,752       8,621,222       17,595,082  
   Cost from non-exclusive franchise   stores
    410,072       6,013,542       779,029       8,867,700  
   Cost from company owned stores
    869,612       922,612       1,936,842       1,528,442  
Cost of goods sold
    6,316,575       15,400,906       11,337,093       27,991,224  
Gross profit
    580,274       1,173,223       1,064,016       2,081,401  
                                 
Operating expenses
                               
Selling expenses
    1,192,392       544,530       1,548,957       1,028,304  
General and administrative expenses
    504,971       658,454       964,644       1,175,946  
Bad debt allowance for accounts receivable
    256,068       -       256,068       -  
Bad debt recovery for accounts receivable
    (361,496 )     -       (361,496 )     -  
Bad debt recovery for due from related party
    -       -       (80,103 )     -  
Total operating expenses
    1,591,935       1,202,984       2,328,070       2,204,250  
Operating loss
    (1,011,661 )     (29,761 )     (1,264,054 )     (122,849 )
                                 
Other income/(expense)
                               
Other income
    583       1,756       583       1,756  
Other expense
    -       (201,786 )     (802 )     (201,786 )
Interest income
    208,660       -       470,451       -  
Interest expense
    (90,975 )     (14,525 )     (90,975 )     (15,340 )
Impairment loss for plant and equipment
    (265,822 )     -       (265,822 )     -  
Impairment loss for long-term assets held for sale
    (30,511,118 )     -       (30,511,118 )     -  
 Total other expense
    (30,658,672 )     (214,555 )     (30,397,683 )     (215,370 )
                                 
Net loss before provision for income taxes
    (31,670,333 )     (244,316 )     (31,661,737 )     (338,219 )
Provision for income taxes
    -       287       -       287  
Loss from discontinued operation, net of tax
    (8 )     -       (8 )     -  
Net loss
  $ (31,670,341 )   $ (244,603 )   $ (31,661,745 )   $ (338,506 )
Loss attributable to non-controlling interest
    (375 )     -               -  
Loss attributable to shareholders
    (31,669,966 )     (244,603 )     (31,661,745 )     (338,506 )
                                 
Other comprehensive income
                               
Foreign currency adjustment
    (10,795 )     (473,857 )     155,426       6,950  
Comprehensive income
  $ (31,681,136 )   $ (718,460 )   $ (31,506,319 )   $ (331,556 )
                                 
Earnings per share
                               
- Basic
  $ (1.89 )   $ (0.01 )   $ (1.89 )   $ (0.02 )
- Diluted
  $ (1.89 )   $ (0.01 )   $ (1.89 )   $ (0.02 )
                                 
Weighted average shares outstanding
                               
- Basic
    16,775,113       16,775,113       16,775,113       16,775,113  
- Diluted
    16,775,113       16,775,113       16,775,113       16,775,113  
 
See accompanying notes to consolidated financial statements
 
 
2

 

CHINA ELECTRONICS HOLDINGS, INC.
CONSOLIDATED  STATEMENTS OF CASH FLOWS
FOR THE SIX  MONTHS ENDED JUNE 30, 2013 AND 2012
(UNAUDITED)

   
Six months ended
 
   
June 30, 2013
   
June 30, 2012
 
             
Net Income/(loss)
$ (31,661,745 )   $ (338,506 )
Adjustments to reconcile net income to net cash from operations:
               
Bad debt provision
    256,068       -  
Bad debt recovery
    (441,598 )     -  
Impairment loss for plant and equipment
    265,822       -  
Impairment loss for long-term assets held for sale
    30,511,118       -  
Amortization and depreciation
    280,826       321,408  
Changes in operating assets and liabilities:
               
Increase in accounts and other receivables
    (1,727,308 )     (1,507,920 )
Increase in inventories
    (7,463,485 )     (880,839 )
decrease in advance to suppliers
    9,419,117       2,995,639  
Increase in prepaid expenses
    (453,574 )     -  
Increase/(decrease) in accounts payables and accruals
    9,223       (1,216,023 )
Increase in unearned revenue
    11,075       288,538  
Net cash used in operating activities
    (994,461 )     (337,703 )
                 
Cash flows from investing activities
               
Payments for purchases of plant and equipment
    -       (55,496 )
Payments for construction in progress
    -       (555,217 )
Net cash used in investing activities
    -       (610,713 )
                 
Cash flows from financing activities
               
Discontinued operation of subsidiary
    (9,630 )     -  
Proceeds from bank loans
    801,346       791,000  
Repayments of bank loans
    (801,346 )     -  
Proceeds from related party loans
    650,954       -  
Net cash provided by financing activities
    641,324       791,000  
                 
Effect of foreign currency translation on cash
    408,872       755  
Net increase/(decrease) of cash and cash equivalents
    55,735       (156,661 )
Cash and cash equivalents at beginning of periods
    9,465       171,838  
Cash and cash equivalents at end of periods
  $ 65,200     $ 15,177  
                 
Supplementary cash flow information:
               
Interest received
  $ 470,451     $ -  
Interest paid
  $ (90,975 )   $ 14,010  
Income tax paid
  $ -     $ 287  
 
See accompanying notes to consolidated financial statements
 
 
3

 
 
CHINA ELECTRONICS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANICAL STATEMENTS
(UNAUDITED)
 
1.  
Nature of Operations

China Electronics Holdings, Inc (“CEHD Nevada” or the “Company”), formerly named Buyonate, Inc. and the public company, was incorporated in the State of Nevada on July 9, 2007. China Electronic Holdings, Inc (“CEH Delaware”) was organized on November 15, 2007 in Delaware as a development stage company. Lu’an Guoying Electronic Sales Co., Ltd. (“Guoying”), a domestic PRC corporation, was established on January 4, 2002 to engage in wholesale and retail of electronics consumer products to rural areas in Anhui province. CEH Nevada owns 100% equity interest in CEH Delaware which owns 100% equity interest in Guoying. Mr. Hailong Liu is the CEO and Chairman of Guoying. In August 2012, Guoying and Mr. Hailing Liu contributed $945,054 and $9,546, representing 99% and 1% registered capital respectively, to establish Lu’an Guoying Opto-Electronics Technology Co., Ltd. (“Opto-Electronics”).
 
Share Exchange between Guoying and CEH Delaware
 
On December 26, 2008, pursuant to the Share Transfer Agreement entered into (the “2008 Share Transfer”) between the shareholders of Guoying (the “Guoying Shareholders”) and CEH Delaware, CEH Delaware agreed to acquire 40% of the outstanding equity securities of Guoying (the “Guoying Shares”) from Guoying Shareholders in consideration for RMB 400,000 contribution of registered capital from CEH Delaware to Guoying.
 
On December 31, 2009, pursuant to the Share Transfer Agreement entered into (the “2009 Share Transfer”) between Guoying Shareholders and CEH Delaware, CEH Delaware agreed to acquire the remaining 60% of Guoying Shares from Guoying Shareholders in consideration for RMB 600,000 contribution of registered capital from CEH Delaware to Guoying.
 
The amount of RMB400, 000 was paid in February 2010 and the amount of RMB 600,000 was paid in July 2010 by CEH.   The 40% and 60% Guoying shares were actually transferred from Guoying Shareholders to CEH Delaware on September 29, 2009 and November 25, 2010 respectively and registered with local government authority. 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 subsequent to the 2010 PIPE financing. The transaction was approved by Ministry of Commerce of Anhui Province and registered with Administration and Industry of Commerce of Lu An City.

On January 4, 2010, the Board of Directors of CEH Delaware adopted a board resolution and resolved that it is in the best interest of CEH Delaware to issue 13,213,268 CEH Delaware shares pursuant to a call option agreement which provides that Sherry Li is the call option holder on behalf of Guoying Shareholders.
 
In February 2010, as a result of 2008 and 2009 Share Transfer Agreements, CEHD Delaware issued 13,213,268 CEH Delaware Shares, constituting 96.6% of issued and outstanding shares of CEH Delaware to Sherry Li, the nominee shareholder on behalf of Mr. Hailong Liu who is the nominee shareholder on behalf of Guoying Shareholders concurrent with the 2008 and 2009 Shares Transfers.
 
On February 10, 2010, Mr. Hailong Liu entered into a call option agreement (the “2010 February Call Option Agreement”) and voting trust agreement (the “2010 February Voting Trust Agreement) with Sherry Li.  Pursuant to the 2010 February Call Option and Voting Trust Agreement, Ms. Sherry Li agreed to serve as nominee shareholder for Mr. Liu and grant Mr. Hailong Liu the voting power and call option to acquire 13,213,268 CEH Delaware shares held by Ms. Sherry Li.   The Voting Trust Agreements provide 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 Agreements 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.
 
Mr. Hailong Liu indirectly controlled CEH Delaware on February 10, 2010 through the Call Option Agreement and Voting Trust Agreement, as of the same date that CEH Delaware issued 13, 213, 268 CEH Delaware Shares to Sherry Li, the nominee shareholder of Mr. Hailong Liu who is the nominee shareholder of former Guoying Shareholders in February 2010, as a result of the 2008 and 2009 Share Transfer Agreements.
 
The 2008 and 2009 Share Transfer Transaction was accounted for as a reverse acquisition at historical costs since Guoying Shareholders obtained control of 96.6% 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.

Share Exchange between CEH Delaware and CEHD Nevada
 
On July 9, 2010, the Company entered into a Share Exchange Agreement (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 and warrants to purchase an aggregate of 1,628,570 shares of the Company’s 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 former Guoying Shareholders) 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.
 
On July 9, 2010, Mr. Hailong Liu entered into a call option agreement (the “2010 July Call Option Agreement”) and voting trust agreement (the “2010 July Voting Trust Agreement”) with Sherry Li.  Pursuant to the 2010 July Call Option Agreements, Mr. Liu received two-year options exercisable for 11,556,288 shares of common stock (the Option Shares) from Sherry Li concurrent with the 2010 July Share Exchange 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. The Voting Trust Agreements provide 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 Agreements 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. Pursuant to the terms of the Call Option Agreement, Mr. Liu received 5,778,144 shares in August 2010 and 5,778,144 shares in January 2013 from Ms. Sherry Liu pursuant to the vesting schedule set forth in the Call Option Agreement.
 
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 the Company’s 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.

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 Guoying 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 2009 Share Transfer, effectively obtained control of the Company upon completion of 2010 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.

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.
 
 
4

 
 
2010 PIPE Transaction
 
On July 15, 2010, the Company 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 the Company sold units (the “Units”) to such Selling Stockholders.  Each Unit consists of four shares of the Company’s  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 the Company’s common stock and (c) Series D Warrants to purchase an aggregate of 497,303 shares of the Company’s  common stock was sold. 

2.  
Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income, stockholders’ equity and cash flows are prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”). The financial statements and notes are representations of management.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries, CEH Delaware, Guoying and Opto-Electronics. All significant inter-company transactions and balances, such as due to/due from, investment in subsidiaries, and subsidiaries’ capitalization have been eliminated.

Use of Estimates

The preparation of the financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Significant estimates and assumptions are used for, but not limited to: (1) allowance for trade receivables, (2) economic lives of property, plant and equipment, (3) asset impairments, and (4) contingency reserves. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ materially from those estimates

Economic and Political Risks

The Company’s operations are conducted in the People’s Republic of China (the “PRC”). Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.
 
 
5

 
 
Cash and Cash Equivalents

The Company classifies the following instruments as cash and cash equivalents: cash on hand, unrestricted bank deposits, and all highly liquid investments purchased 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.

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. Accounts receivable are recognized and carried at gross invoice amounts less an allowance for any doubtful accounts. Management understands and expects the Company’s credit sales outstanding to vary from period to period within a given range. Based on the credit terms the Company grants to its customers, management expects credit sales outstanding not to exceed 90 days by any large margin. Management regularly reviews outstanding accounts and provides an allowance for doubtful accounts for any specific aging of receivables over 90 days. In a situation, management uses all its efforts, such as having internal staff call for payment, hiring collection agent and filing legal pledge to pursue payment, but the collection is no longer probable. The Company will then write off the certain accounts receivable amounts against the allowance for doubtful accounts. On the contrary, if payments are collected in subsequent period, management will reverse the doubtful accounts. Subsequent cash recoveries are recognized as income in the period it occurs.

Inventory

Inventory is stated at the lower of cost determined on a weighted average basis or net realizable value. Cost of inventory is comprised of the cost of acquiring electronic products sold plus freight in cost incurred acquiring the electronic products.  The freight in cost is allocated to the individual product purchased.  Net realizable value is equal to the estimated selling price, in the ordinary course of business, less estimated selling costs, completion and disposal. Inventory as of June 30, 2013 and December 31, 2012 consisted of:

Description
 
At
June 30,
2013
   
At
December 31,
2012
 
Electronic products
  $ 8,420,264     $ 956,779  
 
Advances

Advances represent the cash paid in advance to suppliers for: a) the purchase of inventory and b) the construction of property and equipment. Advance related to the purchase of inventory is classified as current assets. Advance to suppliers for the construction of property and equipment is classified as non-current assets.

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 revenue. Depreciation not related to manufacturing is reported in selling, general and administrative expenses. Estimated useful lives of the property, plant and equipment are as follows:

Furniture
  5  years
Motor vehicles
10 years
Office equipment
  5 years
 
 
6

 
 
Intangible assets

The Company individually tracks and accounts for each intangible asset.  Each intangible asset is carried at its original acquisition cost less accumulated amortization. The Company provides amortization for each intangible asset using the straight line method over its estimated useful life.

Construction in Progress

During 2011, the Company started construction of four buildings, 4,800 square meters each and 19,200 square meters in total, on its Pingqiao land. These four buildings were intended to be used as warehouses to build the Company’s logistic center.  However, the Company did not have sufficient capital to continue building the construction and has reclassified the construction in progress as long-term assets held for sale as of June 30, 2013. See Note 18 - Subsequent Events.

Accounting for the Impairment or Disposal of Long-Lived Assets

The Company has adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), ASC 360-10-35. The Company evaluates its long-lived assets for impairment when indicators of impairment are present or annually, whichever occurs sooner. When there are indications of impairment, the Company will record a loss to statement of operations equal to the difference between the carrying value and the fair value of the long-lived assets.  The Company typically, but not exclusively uses the expected future discounted flows method to determine fair value of long-lived assets subject to impairment.  The fair value of long-lived assets that held for disposition will include the cost of disposal.

The Company’s long-lived assets are grouped by their presentation on the consolidated balance sheets, and further segregated by their operating and asset type. Long-lived assets subject to impairment include property, plant and equipment, intangible assets, construction in progress, and advance for the construction of property and equipment. The Company makes its determinations based on various factors that impact those assets.

At June 30, 2013, the Company assessed its long-lived assets and has concluded that cash flows generated by its ongoing business, which incorporate significant use of the property, plant and equipment, did not provide sufficient profit. Therefore, the Company recorded $265,822 impairment loss for its plant and equipment. Simultaneously, the Company also recorded $30,511,118 impairment loss for long-term assets held for sale for the six months ended June 30, 2013. See Note 18 - Subsequent Events.

Revenue Recognition-Product Sales

The Company recognizes 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.

Electronic products are mainly sold to: a) exclusive franchise stores, b) non-exclusive franchise stores (collectively referred to as “co-operative stores”), and c) company-owned stores.

Product sales to all co-operative stores are recorded at the gross amount billed to the stores. The Company is not obliged to provide any further services to be entitled to payment by co-operative stores. The products are fully functional upon shipment. The Company’s products delivered to Co-operative stores will be checked on site by such stores and, once the products are accepted by such stores, co-operative stores will sign the acceptance notice. No return rights are granted to co-operative stores if such stores are unable to sell their purchase to the end users. Rewards or incentives given to co-operative stores are an adjustment of the selling prices. The consideration of the adjustment is characterized as a reduction of revenue when recognized in the income statement.

Additionally, product sales from company-owned stores are covered by the respective manufacturers’ return and warranty policies and the Company will receive full reimbursement for any costs associated with returns and warranty payments. Therefore, revenue from company-owned stores sales is presented as gross amount and the Company does not estimate deductions or allowance for company-owned stores sales return.
 
 
7

 
 
Payments received before all of the relevant criteria for revenue recognition satisfied are recorded as unearned revenue. Unearned revenue amounted to $441,908 and $430,833 as of June 30, 2013 and December 31, 2012, respectively.
 
Product sales revenue represents the invoice value of goods, net of the value-added taxes (“VAT”). The Company has been giving tax holiday status by the PRC local government. The Company benefits a reduced fixed annual tax rate in amount of no more than approximately $1,200 for both its income tax and value added taxes. 

Revenue Recognition-Franchise Fees

Franchise fees, including area development and initial franchise fee, continuing fee, and royalty (collectively referred to as “franchise fees”), are revenue received from co-operative stores. Initial fee is recorded as unearned franchise revenue when payment received from a franchisee. When the Company has fulfilled all significant obligations to establish a new franchise for the franchisee, unearned franchise revenue is recognized as franchise fees. Royalty is charged to the franchisee based on a percentage of the franchised store’s sales. Continuing fee and royalty revenue are recognized in the period earned.

Currently, in connection with promotional efforts aimed at network growth, the Company has ceased charging initial franchise fee, continuing fee and royalty to exclusive franchise stores. As such, total franchise fees for the six months ended June 30, 2013 and 2012 were $0.

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.

Shipping and Handling Costs
 

ASC 605-45-20 (formerly 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 customers and included within revenue for the six months periods ended June 30, 2013 and 2012 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 six months ended June 30, 2013 and 2012 were $179,526 and $418,323, respectively.
 
Advertising Costs
 
The Company expenses advertising costs as incurred. Advertising costs of $973,780 and $53,223 were included in selling expenses for the six months ended June 30, 2013 and 2012, respectively.
 
 
8

 
 
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 June 30, 2013 and December 31, 2012, the Company did not have any deferred tax assets or liabilities, and as such, no valuation allowances were recorded at June 30, 2013 and December 31, 2012.

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.

Foreign currency translation
 
The accompanying financial statements are presented in United States dollars. The functional currency of the Company is the Renminbi (RMB). The financial statements are translated into United States dollars from RMB at year-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.

Exchange Rates
 
6/30/2013
   
12/31/2012
   
6/30/2012
 
Period/year end RMB: US$ exchange rate
    6.1732       6.3011       6.3197  
Average RMB: US$ exchange rate
    6.2395       6.3034       6.3257  

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions.  No representation is made that the RMB amounts could have been, or could be, converted into US Dollar at the rates used in translation.
 
 
9

 
 
Earnings per share

The Company computes earnings per share (“EPS”) in accordance with FASB ASC 260 “Earnings per share”.  SFAS No. 128 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as the income or loss available to common shareholders divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., contingent shares, convertible securities, options, and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

Statutory Reserve

As stipulated by the Company Law of PRC as applicable to Chinese companies with foreign ownership, net income after taxation can only be distributed as dividends after appropriation has been made to the statutory reserve. Statutory reserve refers to the appropriation from net income to be used for recovery of prior years’ losses, increase of capital and for future company development, as approved, to expand production or operations. PRC laws prescribe that an enterprise operating at a profit, must appropriate, on an annual basis, an amount equal to 10% of its profit. Such an appropriation is necessary until the reserve reaches a maximum that is equal to 50% of the enterprise’s PRC registered capital. The Company cannot pay dividends out of statutory reserves or paid in capital registered in PRC.

Comprehensive income

Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners.  The Company presents components of comprehensive income with equal prominence to other financial statements. The Company’s current component of other comprehensive income is the foreign currency translation adjustment.

Fair Value of Financial Instruments
 
The Company has adopted ASC 820-10, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. ASC 820-10 applies whenever other statements require or permit assets or liabilities to be measured at fair value. 

ASC 820-10 includes a fair value hierarchy that is intended to increase the consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing an asset or liability based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
 
Level 1–inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
 
Level 2–observable inputs other than level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
Level 3–instrument valuations are obtained without observable market values and require a high-level of judgment to determine the fair value.

The Company’s financial instruments consist mainly of cash, restricted cash, bank notes receivable, and debt obligations. Bank notes receivable are reflected in the accompanying financial statements at historical cost, which approximates fair value due to the short-term nature of these instruments. Based on the borrowing rates currently available to the Company for loans with similar terms and average maturities, the fair value of debt obligations also approximates its carrying value due to the short-term nature of the instruments. While the Company believes its valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
 
 
10

 
 
The following table presents the Company’s financial assets and liabilities in accordance with the hierarchy set forth in ASC 820-10:

   
Quoted in
   
Significant
             
   
Active Markets
   
Other
   
Significant
       
   
For Identical
   
Observable
   
Unobservable
       
   
Assets
   
Inputs
   
Inputs
       
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
At June 30, 2013
                       
Financial assets:
                       
Cash
  $ 65,200     $ -     $ -     $ 65,200  
Total financial assets
  $ 65,200     $ -     $ -     $ 65,200  
                                 
Financial Liabilities:
                               
Total financial liabilities
  $ -     $ -     $ -     $ -  

In January 2008, the Company adopted ASC 825-10, Fair Value Option for Financial Assets and Financial Liabilities, and has elected not to measure any of SC Coke’s current eligible financial assets or liabilities at fair value. ASC 825-10 was issued to allow entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, ASC 825-10 specifies that unrealized gains and losses for that instrument shall be reported in earnings at each subsequent reporting date. ASC 825-10 became effective January 1, 2008. The Company did not elect the fair value option for its financial assets and liabilities existing on January 1, 2008, and did not elect the fair value option for any financial assets or liabilities transacted during the six months ended June 30, 2013.

Share-Based Compensation
 
The Company records share-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 six months ended June 30, 2013 and 2012.

Employee Welfare Plan
The employees of the Company participate in the defined contribution welfare plan managed by the local government authorities whereby the Company is required to contribute to the schemes at fixed rates of the employees’ salary. The Company’s contributions to this plan are charged to profit or loss when incurred. The Company has no obligations for the payment of retirement and other post-retirement benefits of staff other than the contributions described above. The total expenses for the welfare plan were $22,832 and $43,080 for the six months  ended June 30, 2013 and 2012, respectively.
 
 
11

 

Subsequent events

The Company evaluates subsequent events that have occurred after the consolidated balance sheet date but before the consolidated financial statements are issued. There are two types of subsequent events:  (1) recognized, or those that provide additional evidence with respect to conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements, and (2) non-recognized, or those that provide evidence with respect to conditions that did not exist at the date of the balance sheet but arose subsequent to that date. The Company has evaluated subsequent events, and based on this evaluation, the Company identified a recognized subsequent event that would require adjustments to the consolidated financial statements. See Note 18 – Subsequent Events.

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 February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02, which requires entities to present information about significant items reclassified out of accumulated other comprehensive income (loss) by component either on the face of the statement where net income is presented or as a separate disclosure in the notes to the financial statements. This ASU is effective for the Company in the first quarter of fiscal 2014. The Company does not expect the adoption will have a significant impact on the consolidated financial statements.
 
In July 2012, the FASB issued ASU 2012-02, which amends how companies test for impairment of indefinite-lived intangible assets. The new guidance permits a company to assess qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount as a basis for determining whether it is necessary to perform the annual impairment test. The ASU is effective for the Company in the first quarter of fiscal 2014. The Company does not expect the adoption will have a significant impact on the consolidated financial statements.

3.  
Accounts Receivable

Accounts receivable
 
At
June 30,
2013
   
At
December 31,
2012
 
Exclusive franchise stores
  $ 4,205,183     $ 2,693,729  
Non-exclusive franchise stores
    179,314       -  
Accounts receivable, gross
    4,384,497       2,693,729  
Less: allowance for doubtful accounts
    (258,818 )     (362,016 )
Accounts receivable, net
  $ 4,125,679     $ 2,331,713  
                 
Allowance for doubtful accounts
 
At
June 30,
2013
   
At
December 31,
2012
 
Beginning balance
  $ (362,016 )   $ (2,198,376 )
Allowance provided
    (256,068 )     (43,288 )
Recovery
    361,496       1,897,648  
Foreign currency adjustment
    (2,230 )     -  
Ending Balance
  $ (258,818 )   $ (362,016 )
 
 
12

 
 
   
At
   
At
 
   
June 30,
   
December 31,
 
Accounts receivable aging analysis
 
2013
   
2012
 
1-30 Days
  $ 4,080,862     $ 2,084,751  
30-60 Days
    671       -  
61-90 Days
    44,146       246,962  
Over 90 Days
    -       -  
Total
  $ 4,125,679     $ 2,331,713  
 
4.  
Other Receivables

Description
 
Note
   
At
June 30,
2013
   
At
December 31,
2012
 
Hongrong Real Estate Company
    (1)     $ 2,263,008     $ 2,242,185  
Mr. Li Xiaoyu (Buyer of Opto-Electronics)
    (2)       638,243       -  
Others
            74,478       593,850  
Subtotal
            2,975,729       2,836,035  
Less: allowance
    (1)       (2,263,008 )     (2,242,185 )
Total
          $ 712,721     $ 593,850  

(1) 
The Company loaned $2,242,185 to Hongrong Real Estate Company (“Hongrong”), an unrelated party, on August 20, 2012. The loan was due on August 19, 2013 and secured by a building owned by Hongrong. The building was still under construction in progress in 2012 and as of today. As completion of substantial building construction was required to evaluate the value of the security under the loan, the Company reserved full amount of $2,242,185 of other receivable from Hongrong as of December 31, 2012. An allowance for loans receivables is recorded when circumstances indicate that collection of all or a portion of a specific balance is unrecoverable. The Company provides for allowance on a specific identification basis. Certain other loans receivable amounts are charged off against the allowance after a sufficient period of collection efforts.  Subsequent loan repayment from Hongrong to the Company will be recognized as reduction of operating expense in the period when it occurs.
s
(2).
See Note 17 - Discontinued Operations

5.  
Related Party Receivable and Payable

Related Party Receivable
 
At
June 30,
2013
   
At
December 31,
2012
 
Due from Mr. Hailong Liu
  $ -     $ 642,000  
Due from Shenyuan
    1,133,934       1,123,500  
Subtotal
    1,133,934       1,765,500  
Less: allowance
    (1,133,934 )     (1,123,500 )
Related party receivable, net
  $ -     $ 642,000  

Allowance for Related Party Receivable
 
At
June 30,
2013
   
At
December 31,
2012
 
Beginning balance
  $ (1,123,500 )   $ -  
Allowance provided
    -       (1,123,500 )
Recovery
    -       -  
Foreign currency adjustment
    (10,434 )     -  
Ending Balance
  $ (1,133,934 )   $ (1,123,500 )
 
 
13

 
 
Related Party Payable
 
At
June 30,
2013
   
At
December 31,
2012
 
Yumin Village
  $ 973,110     $ 964,156  

(1)  
Related party receivable from the Company’s CEO Mr. Hailong Liu was a company loan to the CEO for operating advance collateralized with the CEO’s personal property. This loan carried a 10% annual interest rate. The term of the loan was from August 28, 2012 to May 27, 2013.

(2)  
On January 3, 2011, the Company leased 503 Chinese acres of land with twenty years term from Yumin Village, Sun Gang County, Jin An District (“Yumin Village”) for the Company’s agricultural and forestry business at an annual rent of approximately $94,500. The Company has paid $94,500 and $94,500 rents for the years ended December 31, 2011 and 2012, respectively.

On January 1, 2011, the Company leased 5,006 Chinese acres of land from Yumin Village for thirty years at an annual rent of approximately $961,000 (RMB 6,007,200). The Company paid $961,000 and $0 rent for the years ended December 31, 2011 and 2012, respectively. 

In order to improve the Company’s cash flows from operations and working capital to support its business strategy to 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. On December 9, 2012, the Company’s board of directors approved the decision to transfer the leases of the 5,006 and 503 Chinese acres of lands together with plants grown on the leased lands to Lu’an Senyuan Ecological Park Ltd. (“Senyuan”), an affiliated company controlled and owned by the father and ex-wife of the CEO of the Company, for approximately $1,123,500, due by October 2015. The Company will make payment of the unpaid rent of $964,156 (RMB 6,007,200) of the 5,006 Chinese acres of land for year 2012 due to Yumin Village from the receivable due from Senyuan.

At December 31, 2012, the Company has fully reserved an allowance for the balance of related party receivable from Senyuan due to the uncertainty of the collection because no collateral was provided to secure the payment from Senyuan to the Company. Simultaneously, management pursued Shenyuan to repay the loans immediately. As of June 30, 2013, Shenyuan has returned $80,103 to the Company which has been recorded as reduction of operating expense in the consolidated statements of operations and comprehensive income.
 
6.  
Advances

Advances to Suppliers - Short Term

The current advance to suppliers amounted to $8,113,622 and $17,532,739 as of June 30, 2013 and December 31, 2012, respectively. As a wholesaler of consumer electronics and appliances, the Company purchased products from large distributors, including Sony, Samsung, LG, Haier, etc. Pursuant to purchase agreements with these large suppliers, advance deposit in the full amount of following entire year purchase is mandatory. As the Company agreed to deposit advances to suppliers for a substantial amount of the purchase orders for 2013 at the end of year 2012 and the beginning of 2013 in order to be contracted as distributor to certain top domestic brands of electronic appliances in China such as Ge Li, a top domestic brand in China. Simultaneously, the Company purchased insurance to secure its advances.

Advances - Long Term

Long term advances related to construction amounted to $0 and $13,954,191 as of June 30, 2013 and December 31, 2012, 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. The Company will transfer long term advances into construction in progress once consummated in construction. If the Company determines that the products for which it prepaid will not be delivered, an impairment charge is taken. Because the Company does not have sufficient capital to continue building the construction and intends to discontinue the construction of logistics center, the Company has classified advance to construction for property and equipment as long-term assets held for sale as of June 30, 2013. See Note 18 - Subsequent Events.
 
 
14

 
 
7.  
Property, Plant and Equipment

At
June 30, 2013
       
Accumulated
       
Category of Asset
 
Cost
   
Depreciation
   
Net
 
Vehicle
  $ 74,610     $ (28,833 )   $ 45,777  
Furniture and equipment
    45,105       (22,342 )     22,763  
    $ 119,715     $ (51,175 )   $ 68,540  
                         
At
                       
December 31, 2012
         
Accumulated
         
Category of Asset
 
Cost
   
Depreciation
   
Net
 
Vehicle
  $ 73,924     $ (27,089 )   $ 46,835  
Furniture and equipment
    365,147       (69,277 )     295,870  
    $ 439,071     $ (96,366 )   $ 342,705  

Depreciation expenses were $10,842 and $6,105 for the six months periods ended June 30, 2013 and 2012 respectively.

8.  
Intangible Assets

At
                 
June 30, 2013
       
Accumulated
       
Category of Asset
 
Cost
   
Amortization
   
Net
 
Land use rights
  $ -     $ -     $ -  
Trade mark
    1,361       (1,361 )     -  
    $ 1,361     $ (1,361 )   $ -  
                         
At
                       
December 31, 2012
         
Accumulated
         
Category of Asset
 
Cost
   
Amortization
   
Net
 
Land use rights
  $ 17,215,013     $ (1,833,763 )   $ 15,381,250  
Trade Mark
    1,348       (1,348 )     -  
    $ 17,216,361     $ (1,835,111 )   $ 15,381,250  
 
(1). 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 acquired through Pingqiao Industrial Park in Lu’an City the land use rights for a parcel of land for $17,215,013 (RMB 100,000,000). The Company was amortizing the cost of land use rights over the usage terms of 30 years. The Company has amortized land use right for a portion of the Pingqiao land for the period before it received a land use rights certificate because the Company has advanced a down payment for the land, built constructions on the land, and received the land use rights for a parcel of the land. The Company initially intended to construct a factory, research and development center and a commercial center on this land. However, the Company does not have sufficient capital to continue building the construction and intends to dispose the land use rights. Therefore, as of June 30, 2013, the land use rights have been classified as long-term assets held for sale. See Note 18 - Subsequent Events.
 
 
15

 
 
(2). The Company through its subsidiary Guoying entered into a land use rights Purchase Agreement (“Purchase Agreement”) in 2010 with Youbang Pharmaceuticals Co., Ltd., (“Youbang”). Pursuant to the purchase agreement, Youbang agreed to grant a 200 Chinese acres commercial use land use rights to Guoying for a consideration of $6,296,000 (RMB 40,000,000). Guoying planned to use the land to build its department office and a logistics center. As of December 31, 2011, Guoying has advanced $6,296,000 to Youbang and Youbang promised to transfer the land use rights certificate to Guoying by December 31, 2011 or no later than December 31, 2012. Subsequently, Youbang identified it had difficulty to transfer the land use rights certificate to Guoying because the PRC local government regulated the zoning plan of the land use rights. Therefore, Guoying and Youbang agreed to cancel the Purchase Agreement. $1,574,000 (RMB 10,000,000) and $4,722,000 (RMB 30,000,000) were refunded by Youbang to Guoying in September 2011 and December 2012 respectively.

Amortization expenses amounted $269,984 and $315,303 for the six months periods ended June 30, 2013 and 2012, respectively.
 
9.  
Bank Loans

                   
At
   
At
 
         
Interest Rate
       
June 30,
   
December 31,
 
Name of Creditor
 
Note
   
Per Annum
   
Maturity
 
2013
   
2012
 
Rural Credit Cooperatives of Lu’an
    (1)       10.08 %  
4/27/2014
  $ 809,952     $ 802,500  
Rural Credit Cooperatives of Lu’an
    (2)       11.70 %  
8/17/2013
    809,952       802,500  
                        $ 1,619,904     $ 1,605,000  

(1)  
The loan from Rural Credit Cooperatives of Lu’an is secured by the Company’s land use rights.

(2)  
The other loan from Rural Credit Cooperative of Lu’an is guaranteed by Anhui Juneng Guarantee Company. Rural Credit Cooperative of Lu’an did not implement restrictive covenants such as minimum bank balance, level of working capital, or net income requirement on above loans.

10.  
Accounts Payable and Accrued Expenses

Description
 
At
June 30,
2013
   
At
December 31,
2012
 
Accrued payroll
  $ 91,516     $ 79,576  
Claimed unpaid legal fee in dispute
    145,308       145,308  
Total
  $ 236,824     $ 224,884  


11.  
Other Payables

Description
 
At
June 30,
2013
   
At
December 31,
2012
 
HaiFeng Trading Company
  $ -     $ 3,274,200  
Others
    239,938       237,845  
Total
  $ 239,938     $ 3,512,045  
 
 
16

 
 
12.  
Capitalization

The Company’s outstanding securities at June 30, 2013 are shown in the following table:

 
Authorized Shares
Shares issued and outstanding
Common Stock
150,000,000
16,775,113
Preferred Stock
50,000,000
-

   
Strike Price
 
Contractual Life
 
 Expiration Date
 
Shares issued and outstanding
   
Weighted Average Fair Value
 
Series A Warrants
  $ 2.19  
3 years
 
07/09/2013
    314,285     $ 2.20  
Series B Warrants
  $ 2.63  
3 years
 
07/09/2013
    314,285     $ 1.76  
Series C Warrants
  $ 3.70  
3 years
 
07/09/2013
    497,303     $ 0.79  
Series D Warrants
  $ 4.75  
3 years
 
07/09/2013
    497,303     $ 0.23  
Series E Warrants
  $ 0.25  
5 years
 
07/13/2015
    1,000,000     $ 4.12  
Series F(i) Warrants
  $ 1.75  
5 years
 
07/13/2015
    31,429     $ 2.64  
Series F(ii) Warrants
  $ 2.64  
5 years
 
07/13/2015
    94,329     $ 1.77  
Series F(iii) Warrants
  $ 2.64  
5 years
 
7/13/2015
    104,592     $ 1.77  
Series G Warrants
  $ 2.64  
3 years
 
07/09/2013
    50,000     $ 1.75  

Common Stock

Total 150,000,000 shares of common stock, par value $0.0001 per share, are authorized. 16,775,113 shares were issued and outstanding at June 30, 2013.

Preferred Stock

Total 50,000,000 shares of preferred stock, par value $0.0001 per share, are authorized. 0 share was issued and outstanding at June 30, 2013.

Warrants
Total 2,903,526 warrants were outstanding at June 30, 2013. The Company used the Black-Scholes option pricing model to calculate the values of these warrants. The following table depicts the assumptions that were employed in the model:
 
Warrants
Series: A, B, C, D, G
Series: E and F(i,ii,iii)
Annual dividend yield
-
-
Risk-free interest rate
0.30%
0.30%
Expected volatility
12%
12%
Year to maturity
0.25
2.25
 
 
17

 
 
13.  
Income Taxes

The Company is registered in the State of Nevada and has operations in primarily two tax jurisdictions – the PRC and the United States. For operation in the US, the Company has incurred net accumulated operating losses for income tax purposes. The Company believes that it is more likely than not that these net accumulated operating losses will not be utilized in the future. Therefore, the Company has provided full valuation allowance for the deferred tax assets arising from the losses at these locations as of June 30, 2013. Accordingly, the Company has no net deferred tax assets.
 
Effective tax rates were approximately 0% and 0% for the six months ended June 30, 2013 and 2012, respectively. Central government and local government tax benefits, which have been granted to Guoying, will expire on December 31, 2013 and 2016, respectively. The Company’s effective tax rate was lower than the U.S. federal statutory rate due to the fact that its operations are carried out in foreign jurisdictions, which are subject to lower income tax rates.

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the six months  ended June 30, 2013 and 2012:

   
June 30,
2013
 
June 30,
2012
U.S. Statutory rates
    34.00 %     34.00 %
Foreign income not recognized in USA
    (34.00 %)     (34.00 %)
China income taxes
    25.00 %     25.00 %
China income tax exemption
    (25.00 %)     (25.00 %)
Total provision for income taxes
    0.00 %     0.00 %

The provision for income taxes from continuing operations on income consists of the following for the six months  ended June 30, 2013 and 2012:

   
June 30,
2013
   
June 30,
2012
 
US current income tax expense
  $ -     $ -  
Federal
    -       -  
State
    -       -  
PRC current income tax expense
    -       287  
Total provision for income tax
  $ -     $ 287  
 
United States of America
 
As of June 30, 2013, the Company in the United States had approximately $2,378,190 in net operating loss carry forwards available to offset future taxable income. Federal net operating losses can generally be carried forward 20 years. The deferred tax assets for the United States entities at June 30, 2013 consists mainly of net operating loss incurred in 2011 and were fully reserved as the management believes it is more likely than not that these assets will not be realized in the future.
 
The following table sets forth the significant components of the net deferred tax assets for operation in the US as of June 30, 2013 and December 31, 2012.

   
At
June 30,
2013
   
At
December 31,
2012
 
Net operation loss carry forward
  $ (2,378,190 )   $ (2,378,190 )
Total deferred tax assets
    784,803       784,803  
Less: valuation allowance
    (784,803 )     (784,803 )
Net deferred tax assets
    -       -  
Change in valuation allowance
  $ -     $ -  
 
 
18

 
 
People’s Republic of China (PRC)

Under the Income Tax Laws of the PRC, the Company’s subsidiaries are generally subject to an Enterprise Income Tax (EIT) at a standard rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments. The State Tax Bureau of Lu’An City, Anhui province issued an income tax benefit approval to Guoying on September 2, 2007 providing that Guoying is subject to income tax and VAT benefit treatment of reduced rate of RMB 7,500 tax payment per year (including income tax and VAT) valid from October 1, 2007 until December 31, 2010. The State Tax Bureau of Lu’an City has renewed the tax benefit approval. Guoying will be subject to the tax benefit until December 31, 2016. The State Tax Bureau of Lu’An City, Anhui province issued an income tax benefit approval to Guoying on December 10, 2011 providing that Guoying is subject to income tax and VAT benefit treatment of reduced rate of RMB 7,500 tax payment per year (including income tax and VAT) valid from December 1, 2011 until December 31, 2013. However, according to the approval, Guoying has option to pay more tax per year at its discretion. Therefore, currently, Guoying is charged at a fixed annual amount of reduced tax rate of no less than RMB7, 500 per year that changes every year to cover all types of taxes including income taxes. The income tax expenses for the six months  ended June 30, 2013 and December 31, 2012 were $0 and $288, respectively. There were no significant book and tax basis differences.
 
14.  
Concentration of Credit Risks, Uncertainties, Contingencies, and Commitments

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 six months periods ended June 30, 2013, there is no major customer that individually comprised more than 10% of the Company’s total sales. There are three major suppliers individually accounting for over 10% of the Company’s total purchase. These three major suppliers accounted for 56.79% of total purchase:

Suppliers
 
Six Months Ended
June 30,
2013
   
 
%
 
Shenzhen Tongfang Multimedia Technology Co., Ltd.
  $ 2,220,529       11.87 %
Shenzhen Skyworth - RGB Electronics Co., Ltd.
    3,058,683       16.35 %
Lu’an ZhongXing Trading Co., Ltd.
    5,346,145       28.57 %
    $ 10,625,356       56.79 %

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.
    
 
19

 
 
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 on February 2011 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 intends to contest this action and believes that there are defenses available to the Company. This amount has been accrued as of June 30, 2013 and is included in accrued expenses.
 

Operating Leases
 
The Company leases various facilities under operating leases that terminate on various dates. The Company incurred rent expenses of $74,723 and $80,023 for the six months  ended June 30, 2013 and 2012, respectively.
 
The lease expenses for the next five years are estimated to be as follows:  

2014
  $ 117,418  
2015
    17,106  
2016
    -  
2017
    -  
2018
    -  
Total   $ 134,524  
 
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 received a land use right certificate issued by Yu An people’s government on April 16, 2012 with a term of 50 years until 2062 for a 38,449 square meter portion of the land which has been collateralized for a loan of RMB 10 million to a bank, including the 19,200 square meters where the four warehouses are built. The Company is waiting to receive the land use right certificate for the remaining 126,534 square meters of Pingqiao land. The government may not remove the Company’s facilities from the land which the Company has obtained the land use right certificate but could remove any future constructions that the Company builds on the land which the Company has not obtained land use right certificate. Due to burdensome and repetitive approval procedures, the Company has not been granted land use right certificate for the rest of land.  The Company is currently negotiating with the local government to obtain a Land Use Right Certificate for rest of the land but the Company is  not certain when such land use right certificate will be granted. 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.   
 
15.  
Operating Segments

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: (1) exclusive franchise stores, (2) non-exclusive franchise stores, and (3) company owned stores, 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.
 
 
20

 
 
The following table presents a summary of operating information for the three months and six months  ended June 30, 2013 and 2012, and certain year-end balance sheet information as of June 30, 2013 and December 31, 2012, respectively.

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
2013
   
June 30,
2012
   
June 30,
2013
   
June 30,
2012
 
Revenues from unaffiliated customers:
                       
Exclusive franchise stores
  $ 5,486,629     $ 9,105,592     $ 9,395,698     $ 18,886,562  
Non-exclusive stores
    446,985       6,451,687       848,675       9,508,915  
Company owned stores
    963,235       1,016,850       2,156,736       1,677,148  
Consolidated
    6,896,849       16,574,129       12,401,109       30,072,625  
Gross Profit:
                               
Exclusive franchise stores
    449,737       640,840       774,476       1,291,480  
Non-exclusive stores
    36,912       438,145       69,646       641,215  
Company owned stores
    93,624       94,238       219,894       148,706  
Consolidated
    580,273       1,173,223       1,064,016       2,081,401  
                                 
Depreciation and amortization:
                               
Exclusive franchise stores
    -       -       -       -  
Non-exclusive stores
    -       -       -       -  
Company owned stores
    -       -       -       -  
Corporate
    126,219       159,431       280,826       321,408  
Consolidated
    126,219       159,431       280,826       321,408  
                                 
Capital expenditures:
                               
Exclusive franchise stores
    -       -       -       -  
Non-exclusive stores
    -       -       -       -  
Company owned stores
    -       -       -       -  
Corporate
    -       -       -       7,056,124  
Consolidated
  $ -     $ -     $ -     $ 7,056,124  

   
At
June 30,
2013
   
At
December 31,
2012
 
Identified Assets:
           
Exclusive franchise stores
  $ -     $ -  
Non-exclusive stores
    -       -  
Company owned stores
    -       -  
Corporate
    25,199,411       59,940,697  
Consolidated
  $ 25,199,411     $ 59,940,697  
 
 
21

 
 
16.  
Earnings Per Share

Components of basic and diluted earnings per share were as follows:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
2013
   
June 30,
2012
   
June 30,
2013
   
June 30,
2012
 
                         
Net loss
  $ (31,670,341 )   $ (244,603 )   $ (31,661,745 )   $ (338,506 )
Loss attributable to non-controlling interest
    (375 )     -       -       -  
Loss attributable to Common Stockholders
    (31,669,966 )     (244,603 )     (31,661,745 )     (338,506 )
                                 
Original Shares of Common Stock
    16,775,113       16,775,113       16,775,113       16,775,113  
New Issuance of Common Stock
    -       -       -       -  
Basic Weighted Average Shares Outstanding
    16,775,113       16,775,113       16,775,113       16,775,113  
                                 
Addition to Common Stock from exercise of Warrant
    -       -       -       -  
Diluted Weighted Average Shares Outstanding
    16,775,113       16,775,113       16,775,113       16,775,113  
                                 
Earnings Per Share
                               
-  Basic
  $ (1.89 )   $ (0.01 )   $ (1.89 )   $ (0.02 )
-  Diluted
  $ (1.89 )   $ (0.01 )   $ (1.89 )   $ (0.02 )
                                 
Weighted Average Shares Outstanding
                               
-  Basic
    16,775,113       16,775,113       16,775,113       16,775,113  
-  Diluted
    16,775,113       16,775,113       16,775,113       16,775,113  
 
17.  
Discontinued Operations

On June 29, 2013, the Company through its indirectly wholly owned subsidiary Guoying executed share transfer agreement (the “Transfer Agreement”) with Mr. Li Xiaoyu (“Buyer of Opto-Electronics”) to sell assets and ownership of its subsidiary Opto-Electronics for total consideration of $962,224 (RMB 5,940,000). The Company has accounted for the disposition of the assets of discontinued operation in accordance with SFAS 144 (“FASB ASC 360”), “Accounting for the Impairment or Disposal of Long-Lived Assets”. No gain or loss was recognized for this disposal in the Company’s consolidated statements of operation and comprehensive income for the six months ended June 30, 2013.
 
The following tabulation presents the calculation of the disposal of the subsidiary Opto-Electronics:

 
Valuation of
 
Buyer’s
   
Subsidiary
Disposition
 
Acquisition Price
 
Gain/(Loss)
 Opto-Electronics
$           962,224
 
$              962,224
 
$                      -
 
 
22

 
 
The following tabulation summarizes the operation results of Opto-Electronics for the period ended June 30, 2013, which was also accounted as loss from discontinued operations, net of tax in the consolidated statements of operation and comprehensive income.

   
Six Months Ended
 
   
June 30,
2013
 
Revenue
  $ -  
Cost of revenue
    -  
     Gross profit
    -  
         
Operating expenses
    -  
     Operating income
    -  
         
Other expense
    (8 )
     Earnings before tax
    (8 )
         
Provision for income tax
    -  
         
Net income
  $ (8 )
 
18.  
Subsequent Events

In order to improve its cash flows from operations and working capital, the Company decided to redeploy its capital to meet requirements of its business plan. In accordance with SFAS No. 144 (ASC 360-10), “Accounting for the Impairment or Disposal of Long-lived Assets” (“SFAS 144”), the Company classified its logistics and transportation centers which were still under construction as a component of discontinued operation. Accordingly, the assets associated with the logistics and transportation centers have been classified as long-term assets held for sale in the consolidated balance sheets. The long-term assets held for sale includes: a) construction in progress, b) advance for construction of property and equipment, and c) land use rights the Company acquired through Pingqiao Industrial Park in Lu’an City.

On July 28, 2013, the Company through its indirectly wholly owned subsidiary Guoying executed an assets sales agreement (the “Sales Agreement”) with Opto-Electronics. Pursuant to the Sales Agreement, Opto-Electronics agreed to purchase the Company’s assets associated with the logistics and transportation centers for total consideration of $3,239,810 (RMB 20,000,000). Three installments in the amounts of: a) $809,952 (RMB 5,000,000), b) $1,619,906 (RMB 10,000,000) and c) $809,952 (RMB 5,000,000) are due by the ends of December 31, 2013, 2014 and 2015, respectively. In the event that Opto-Electronics does not consummate the payments, Opto-Electronics will be penalized 0.02% of the outstanding balance monthly.

The land use rights acquired through Pingqiao Industrial Park in Lu’an City were re-appraised by an independent appraisal firm Luan Shiji Land Price Evaluation Consultantive Co., Ltd. on April 24, 2013. The appraisal firm concluded the fair value of the 38,449 square meter portion of the land that the Company has received a land use rights certificate issued by Yu An people’s government on April 16, 2012 with a term of 50 years until 2062 was $1,774,722 (RMB 11,073,378). The appraisal firm further concluded that pursuant to the Sales Agreement, Opto-Electronics will carry a contractual obligation to negotiate with the Yu An government for purchase price to be paid to the Company to obtain the land use rights certificate of the remaining126, 534 square meters of Pingqiao land.

 
The Company assessed its long-term assets held for sale associated with the logistics and transportation centers based on above mentioned subsequent events and determined that write-down is necessary because the sales price of the long-term assets held for sale is significant less than its carrying value. As of June 30, 2013, the Company has written-down the long-term assets held for sale to $3,239,810 (RMB 20,000,000), the same value as sales price, in the consolidated balance sheets and has recorded $30,511,118 impairment loss in the consolidated statements of operations and comprehensive income.

The following tabulation presents the calculation of the difference between the sales price and the carrying value of the long-term assets held for sale:

   
At
June 30,
2013
 
Land use rights
  $ 15,107,431  
Construction in progress
    8,192,578  
Advance for construction of plant and equipment
    10,450,920  
      33,750,929  
Less: Impairment loss
    (30,511,118 )
         
Long-term assets held for sale, net
  $ 3,239,811  
 
 
23

 
 
19.  
Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As of June 30, 2013, the Company had an accumulated deficit of $2,051,775 because the Company continued to incur losses over the past several periods
 
The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to retain its current financing, to obtain additional financing, and ultimately to attain profitability. If the Company is unable to generate profits and is unable to continue to obtain financing for its working capital requirements, it may have to curtail its business sharply or cease business altogether.
 
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that could result from the outcome of this uncertainty.

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 six months ended June 30, 2013 and 2012, 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 Electronic Holdings, Inc (“CEH Delaware”) was organized on November 15, 2007 in Delaware as a development stage company. China Electronics Holdings, Inc (“CEHD Nevada” or the “Company”), formerly named Buyonate, Inc. and the public company, was incorporated in the State of Nevada on July 9, 2007. Lu’an Guoying 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. CEH  Nevada owns 100% equity interest in CEH Delaware which owns 100% equity interest in Guoying.
 
Share Exchange between Guoying and CEH Delaware
 
On December 26, 2008, pursuant to the Share Transfer Agreement entered into (the “2008 Share Transfer”) between the shareholders of Guoying (the “Guoying Shareholders”) and CEH Delaware, CEH Delaware agreed to acquire 40% of the outstanding equity securities of Guoying (the “Guoying Shares”) from Guoying Shareholders in consideration for RMB 400,000 contribution of registered capital from CEH Delaware to Guoying.
 
On December 31, 2009, pursuant to the Share Transfer Agreement entered into (the “2009 Share Transfer”) between Guoying Shareholders and CEH Delaware, CEH Delaware agreed to acquire the remaining 60% of Guoying Shares from Guoying Shareholders in consideration for RMB 600,000 contribution of registered capital from CEH Delaware to Guoying.
 
 
24

 
 
The amount of RMB400, 000 was paid in February 2010 and the amount of RMB 600,000 was paid in July 2010 by CEH.  The 40% and 60% Guoying shares were actually transferred from Guoying Shareholders to CEH Delaware on September 29, 2009 and November 25, 2010 respectively and registered with local government authority. 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 subsequent to the 2010 PIPE financing. The transaction was approved by Ministry of Commerce of Anhui Province and registered with Administration and Industry of Commerce of Lu An City.
 
On January 4, 2010, the Board of Directors of CEH Delaware adopted a board resolution and resolved that it is in the best interest of CEH Delaware to issue 13,213,268 CEH Delaware shares pursuant to a call option agreement which provides that Sherry Li is the call option holder on behalf of Guoying Shareholders.
 
In February 2010, as a result of 2008 and 2009 Share Transfer Agreements, CEHD Delaware issued 13,213,268 CEH Delaware Shares, constituting 96.6% of issued and outstanding shares of CEH Delaware to Sherry Li, the nominee shareholder on behalf of Mr. Hailong Liu who is the nominee shareholder on behalf of Guoying Shareholders concurrent with the 2008 and 2009 Shares Transfers.
 
On February 10, 2010, Mr. Hailong Liu entered into a call option agreement (the “2010 February Call Option Agreement”) and voting trust agreement (the “2010 February Voting Trust Agreement) with Sherry Li.  Pursuant to the 2010 February Call Option and Voting Trust Agreement, Ms. Sherry Li agreed to serve as nominee shareholder for Mr. Liu and grant Mr. Hailong Liu the voting power and call option to acquire 13,213,268 CEH Delaware shares held by Ms. Sherry Li.   The Voting Trust Agreements provide 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 Agreements 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.
 
Mr. Hailong Liu indirectly controlled CEH Delaware on February 10, 2010 through the Call Option Agreement and Voting Trust Agreement, as of the same date that CEH Delaware issued 13, 213, 268 CEH Delaware Shares to Sherry Li, the nominee shareholder of Mr. Hailong Liu who is the nominee shareholder of former Guoying Shareholders in February 2010, as a result of the 2008 and 2009 Share Transfer Agreements.
 
The 2008 and 2009 Share Transfer Transaction was accounted for as a reverse acquisition at historical costs since Guoying Shareholders obtained control of 96.6% 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.
 
Share Exchange between CEH Delaware and CEHD Nevada
 
On July 9, 2010, the Company entered into a Share Exchange Agreement, dated (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 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 former Guoying Shareholders) 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.
 
On July 9, 2010, Mr. Hailong Liu entered into a call option agreement (the “2010 July Call Option Agreement”) and voting trust agreement (the “2010 July Voting Trust Agreement”) with Sherry Li.  Pursuant to the 2010 July Call Option Agreements, Mr. Liu received two-year options exercisable for 11,556,288 shares of common stock (the Option Shares) from Sherry Li concurrent with the 2010 July Share Exchange 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. The Voting Trust Agreements provide 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 Agreements 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. Pursuant to the terms of the Call Option Agreement, Mr. Liu received 5,778,144 shares in August 2010 and 5,778,144 shares in January 2013 from Ms. Sherry Liu pursuant to the vesting schedule set forth in the Call Option Agreement.
 
 
25

 
 
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.
 
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 Guoying 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 2009 Share Transfer, effectively obtained control of the Company upon completion of 2010 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.
 
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 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. 
 
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.
 
 
26

 
 
Results of Operations
 
Wholesale and Retail of Consumer Electronics Appliances
 
We operated 2 company-owned stores as of June 30, 2013.
 
As of June 30, 2013, we have exclusive franchise agreements with 306 exclusive franchise stores operated under the Guoying brand name (the “Exclusive Franchise Stores”). We entered into franchise agreements with 247, 61, 93, 91, 0 and 0 new exclusive franchise stores in 2009, 2010, 2011, 2012, first quarter of 2013 and Second quarter of 2013, respectively. We terminated our exclusive franchise agreement with 47, 0, 233, 131, 0 and 0 exclusive franchise stores in 2009, 2010, 2011, 2012, first quarter of 2013 and Second quarter of 2013, respectively. Both our Company-owned stores and our exclusive franchise stores only sell merchandise that we provide as their exclusive wholesaler, and such merchandise includes Guoying branded products as well as products from major wholesalers and manufacturers, such as Sony, Samsung and LG. 
 
As of June 30, 2013, we have non-exclusive franchise agreements with 177 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, 20, 0 and 1 non-exclusive franchise stores in 2009, 2010, 2011, 2012, first quarter of 2013 and Second quarter of 2013, respectively. We terminated our non-exclusive franchise agreements with 15, 18, 362, 198, 0 and 0 non-exclusive franchise stores in 2009, 2010, 2011, 2012, first quarter of 2013 and Second quarter of 2013, respectively.
 
We currently target 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, HuoQiu, 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 stores in order to strengthen and grow the Company’s business after concluding that the rapid growth of the number of stores serviced by the Company and aggressive business expansion had caused deficiencies in the Company’s internal controls and management. The following criteria was 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; and (iii) stores located remotely Lu An City that result in higher transportation and logistics expenses to us. During the year ended December 31, 2012, we closed 0 company-owned stores, terminated our contracts with 131 exclusive franchise stores, and terminated our contracts with 198 non-exclusive franchise stores.  During the six months ended June 30, 2013, we closed 0 company-owned stores, terminated our contracts with 0 exclusive franchise stores, and terminated our contracts with 0 non-exclusive franchise stores. We will continue to evaluate and decide if we need to terminate any more stores in 2013.
 
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. We originally planned to build our LED manufacturing facility on the land.  We filed a proposal to obtain permission to enter into the LED manufacturing business with the Reform and Development Commission of Yu An District, Lu An City on May 13, 2011. We obtained a construction permit issued by the Housing and Urban-Rural Development Bureau of Yu An District, Lu An City on October 28, 2011 to build an LED manufacturing facility on the Pingqiao Land.  Due to a change in the Company’s business plans, we determined to build logistic centers on 38,449 square meters of the land.Our plan was  to construct four warehouses/logistics centers to provide 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 the Pingqiao land since October 2011. Each warehouse is 4,800 square meters. We currently stopped the construction of four logistics centers due to lack of sufficient capital.
 
 
27

 
 
In order to improve its cash flows from operations and working capital, the Company decided to redeploy its capital to meet requirements of its business plan. In accordance with SFAS No. 144 (ASC 360-10), “Accounting for the Impairment or Disposal of Long-lived Assets” (“SFAS 144”), the Company classified its logistics and transportation centers which were still under construction as a component of discontinued operation. Accordingly, the assets associated with the logistics and transportation centers have been classified as long-term assets held for sale in the consolidated balance sheets. The long-term assets held for sale includes: a) construction in progress, b) advance for construction of property and equipment, and c) land use rights the Company acquired through Pingqiao Industrial Park in Lu’an City.
 
On July 28, 2013, the Company through its indirectly wholly owned subsidiary Guoying executed an assets sales agreement (the “Sales Agreement”) with Opto-Electronics. Pursuant to the Sales Agreement, Opto-Electronics agreed to purchase the Company’s assets associated with the logistics and transportation centers for total consideration of $3,239,810 (RMB 20,000,000). Three installments in the amounts of: a) $809,952 (RMB 5,000,000), b) $1,619,906 (RMB 10,000,000) and c) $809,952 (RMB 5,000,000) are due by the ends of December 31, 2013, 2014 and 2015, respectively. In the event that Opto-Electronics does not consummate the payments, Opto-Electronics will be penalized 0.02% of the outstanding balance monthly.
 
The land use rights acquired through Pingqiao Industrial Park in Lu’an City were re-appraised by an independent appraisal firm Luan Shiji Land Price Evaluation Consultantive Co., Ltd. on April 24, 2013. The re-appraisal found that the fair value of the land use rights was $1,774,722 (RMB 11,073,378).
 
The Company assessed its long-term assets held for sale associated with the logistics and transportation centers based on above mentioned subsequent event and determined that write-down is necessary because the sales price of the long-term assets held for sale is significant less than its carrying value. As of June 30, 2013, the Company has written-down the long-term assets held for sale to $3,239,810 (RMB 20,000,000), the same value as sales price, in the consolidated balance sheets and has recorded $30,511,118 impairment loss in the consolidated statements of operations and comprehensive income.
 
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.
 
Three months ended June 30, 2013 Compared with Three months ended June 30, 2012
 
Revenues
 
Our net revenue for the three months ended June 30, 2013 was $6,896,849, a decrease of 58.4%, or $9,677,280, from $16,574,129 for the three months ended June 30, 2012.
 
For the three months ended June 30, 2013, net revenue from exclusive franchise stores was $5,486,629, a decrease of 39.7%, or $3,618,963, from $9,105,592 for the three months ended June 30, 2012. There were 306 exclusive franchise stores as of June 30, 2013, compared to 306 exclusive franchise stores as of December 31, 2012 and 324 exclusive franchise stores as of June 30, 2012. The Company entered into franchise agreements with 0 exclusive stores and terminated its agreement with 0 exclusive stores in the second quarter of 2013. The decreased revenue is because of the decreased sales from some of our product lines due to the decreased demand and due to more competition of the market.
 
For the three months ended June 30, 2013, net revenue from non-exclusive stores was $446,985, a decrease of 93.1%, or $6,004,702, from $6,451,687 for the three months ended June 30, 2012. There were 177 non-exclusive stores as of June 30, 2013, compared to the 176 non-exclusive stores as of December 31, 2012 and 175 non-exclusive stores as of June 30, 2012. The Company entered into a non-exclusive franchise agreement with 1 non-exclusive stores and terminated its agreement with 0 non-exclusive stores in the second quarter of 2013. The decreased revenue is because of the decreased sales from some of our product lines due to the decreased demand and due to more competition of the market.
 
For the three months ended June 30, 2013, net revenue from company owned stores was $963,235, a decrease of 5.3%, or $53,615, from $1,016,850 for the three months ended June 30, 2012. The decreased revenue is because of the decreased sales from some of our product lines due to the decreased demand and due to more competition of the market.
 
 
28

 

Revenue Classified by Store Type
 
Our disaggregation of revenue and cost of sales by each store type in the three months ended June 30, 2013 and 2012 are as follows:
 
Three Months Ended 6/30/2012
 
Non-Exclusive
Franchise Stores
   
Exclusive Franchise
Stores
   
Company-Owned Stores
   
Total
 
Revenue
 
$
6,451,687
   
$
9,105,592
   
$
1,016,850
   
$
16,574,129
 
Cost of Sales
 
$
6,013,542
   
$
8,464,752
   
$
922,612
   
$
15,400,906
 
Gross Profit
 
$
438,145
   
$
640,840
   
$
94,238
   
$
1,173,223
 

 
Three months-Ended 6/30/2013
 
Non-Exclusive
Franchise Stores
   
Exclusive Franchise
Stores
   
Company-Owned Stores
   
Total
 
Revenue
 
$
446,985
   
$
5,486,629
   
$
963,235
   
$
6,896,849
 
Cost of Sales
 
$
410,072
   
$
5,036,891
   
$
869,612
   
$
6,316,575
 
Gross Profit
 
$
36,913
   
$
449,738
   
$
93,623
   
$
580,274
 

 
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 2012 and that have been in continuous operation as of June 30, 2013 and excludes stores that were newly opened or closed or with which we entered into or terminated franchise agreements in 2012 or 2013. Same Store Sales are defined as sales from the Same Stores.
 
 
29

 
 
Same Stores Sales in three months ended June 30, 2013 and 2012, and the increase or decrease experienced as a percentage of Same Store Sales are as follows:
 
Same Store Sales
 
Three months-Ended 6/30/2013
   
Three months-Ended 6/30/2012
   
Difference
   
Change
 
Non-Exclusive Franchise Stores
 
$
324,479
   
$
5,803,888
   
$
(5,479,409
   
(94
)%
Exclusive Franchise Stores
 
$
3,642,545
   
$
6,989,098
   
$
(3,346,553
   
(48
)%
Company-Owned Stores
 
$
963,235
   
$
1,016,850
   
$
(53,615