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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2014, 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 October 14, 2014
 
 
 

 
 
TABLE OF CONTENTS
 
 
Page
   
PART I—FINANCIAL INFORMATION
4
Item 1. Financial Statements (Unaudited)
4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
32
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
72
Item 4. Controls and Procedures.
72
PART II—OTHER INFORMATION
73
Item 1A. Risk Factors.
73
Item 6. Exhibits.
73
 
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;
 
 
2

 
 
 
our operations in China and the regulatory, economic and political conditions in China;
 
 
our ability as a U.S. company to operate our business in China through our subsidiary, Guoying;
 
 
competition existing today or that will likely arise in the future; and
 
 
other factors discussed elsewhere herein.
 
Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “should,” “will,” “plan,” “could,” “target,” “contemplate,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” “seek,” or “project” or the negative of these words or other variations on these or similar words.  Actual results, performance, liquidity, financial condition and results of operations, prospects and opportunities could differ materially from those expressed in, or implied by, these forward-looking statements as a result of various risks, uncertainties and other factors, including the ability to raise sufficient capital to continue the Company’s operations.  These statements may be found under Part I, Item 2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as elsewhere in this Quarterly Report on Form 10-Q generally.  Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, matters described in this Quarterly Report on Form 10-Q and in the Company’s Annual Report for the year ended December 31, 2013 on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 31, 2014.  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.
 
 
3

 
 
PART I.
 
FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
China Electronics Holdings, Inc.

Consolidated Financial Statements

September 30, 2014 and December 31, 2013

(Stated in US Dollars)
 
 
4

 
 
China Electronics Holdings, Inc.
 
Table of Contents  Page
   
Consolidated Balance Sheets
2 - 3
   
Consolidated Statements of Operations and Comprehensive Income
4
   
Consolidated Statements of Stockholders’ Equity
5
   
Consolidated Statements of Cash Flows
6
   
Notes to Consolidated Financial Statements
7 - 29
 
 
5

 
 
China Electronics Holdings, Inc.
Consolidated Balance Sheets
As of September 30, 2014 and December 31, 2013
(Stated in US Dollars)
 
   
As of
   
As of
 
   
September 30,
   
December 31,
 
   
2014
   
2013
 
Assets
 
(Unaudited)
   
(Audited)
 
Current assets
           
Cash and cash equivalents
  $ 50,034     $ 26,269  
Accounts receivable, net
    5,753,290       1,099,118  
Other receivable
    2,142,590       3,544,942  
Related party receivable
    670,292       -  
Inventory
    6,198,758       5,449,341  
Advance to suppliers
    3,389,614       7,432,827  
Prepaid expenses
    -       226,204  
Total current assets
    18,204,578       17,778,701  
                 
Non-current assets
               
Property, plant and equipment, net
    46,076       57,890  
Security deposit
    32,562       32,315  
Total non-current assets
    78,638       90,205  
                 
Total Assets
  $ 18,283,216     $ 17,868,906  
                 
Liabilities and Stockholders’ Equity
               
                 
Liabilities
               
Current liabilities
               
Bank loans
  $ 3,256,215     $ -  
Accounts payable and accrued expenses
    107,107       203,316  
Other payable
    89,384       54,144  
      3,452,706       257,460  
                 
Total Liabilities
  $ 3,452,706     $ 257,460  
 
 
6

 
 
China Electronics Holdings, Inc.
Consolidated Balance Sheets
As of September 30, 2014 and December 31, 2013
(Stated in US Dollars)
 
   
As of
   
As of
 
   
September 30,
   
December 31,
 
   
2014
   
2013
 
   
(Unaudited)
   
(Audited)
 
Stockholders’ Equity
           
Preferred stock, $0.0001 par value; 50,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2014 and December 31, 2013 respectively
  $ -     $ -  
Common stock, $0.0001 par value; 150,000,000 shares authorized; 16,775,113 shares issued and outstanding as of September 30, 2014 and December 31, 2013 respectively
    1,678         1,678  
Additional paid-in capital
    15,341,710       15,341,710  
Statutory reserve
    3,849,684       3,849,684  
Accumulated deficit
    (9,682,989 )     (6,768,251 )
Accumulated other comprehensive income
    5,320,427       5,186,625  
     Total Stockholders’ Equity
    14,830,510       17,611,446  
                 
Total Liabilities and Stockholders’ Equity
  $ 18,283,216     $ 17,868,905  
 
 
7

 
 
China Electronics Holdings, Inc.
Consolidated Statements of Operations and Comprehensive Income
For the three months and nine months ended September 30, 2014 and 2013
(Stated in US Dollars)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30, 2014
   
September 30, 2013
   
September 30, 2014
   
September 30, 2013
 
Sales revenue
                       
   Revenue from exclusive franchise stores
  $ 7,327,816     $ 7,187,992     $ 14,297,143     $ 16,583,690  
   Revenue from non-exclusive franchise stores
    705,171       666,932       1,247,499       1,515,606  
   Revenue from company owned stores
    617,502       501,950       1,396,737       2,658,686  
Revenue
    8,650,489       8,356,874       16,941,379       20,757,982  
Cost of goods sold
                               
   Cost from exclusive franchise stores
    6,568,332       6,607,101       12,966,789       15,228,323  
   Cost from non-exclusive franchise  stores
    632,707       612,369       1,299,351       1,391,398  
   Cost from company owned stores
    547,658       459,675       1,372,619       2,396,516  
Cost of goods sold
    7,748,697       7,679,145       15,638,759       19,016,237  
Gross profit
    901,792       677,729       1,302,620       1,741,745  
                                 
Operating expenses
                               
Selling expenses
    188,320       401,403       951,406       1,950,360  
General and administrative expenses
    129,935       146,829       497,363       1,111,472  
Inventory loss of lower cost or market value
    -       -       1,662,099       -  
Bad debt allowance for receivables
    565,700       2,339,300       3,898,386       2,595,368  
Bad debt recovery for receivables
    (163,513 )     (1,530 )     (1,747,260 )     (363,026 )
Bad debt recovery for other receivables
    (814,372 )     (121,050 )     -       (201,152 )
Adjustment of pending and litigation accruals
    (115,308 )     -       (115,308 )     -  
Total operating expenses
    (209,238 )     2,764,952       5,146,686       5,093,022  
Operating income/(loss)
    1,111,030       (2,087,223 )     (3,844,066 )     (3,351,277 )
                                 
Other income/(expense)
                               
Other income
    390       1,294       32,587       1,075  
Other expense
    -       (132,030 )     (179 )     -  
Interest income
    1,038,706       2,034       1,038,768       472,485  
Interest expense
    (64,926 )     (33,236 )     (141,848 )     (124,211 )
Impairment loss for plant and equipment
    -       -       -       (268,677 )
Impairment loss for long-term assets held for sale
    -       -       -       (30,640,293 )
 Total other income/(expense)
    974,170       (161,938 )     929,328       (30,559,621 )
                                 
Net Income/(loss) before provision of income taxes
    2,085,200       (2,249,161 )     (2,914,738 )     (33,910,898 )
Provision for income taxes
    -       -       -       -  
Loss from discontinued operations, net of tax
    -       -       -       (8 )
Net income/(loss)
  $ 2,085,200     $ (2,249,161 )   $ (2,914,738 )   $ (33,910,906 )
                                 
Other comprehensive income
                               
Foreign currency adjustment
    23,346       227,764       133,802       393,985  
Comprehensive income/(loss)
  $ 2,108,546     $ (2,021,397 )   $ (2,780,936 )   $ (33,516,921 )
                                 
Earnings per share
                               
-Basic
  $ 0.12     $ (0.13 )   $ (0.17 )   $ (2.02 )
-Diluted
  $ 0.12     $ (0.13 )   $ (0.17 )   $ (2.02 )
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  
 
 
8

 
 
China Electronics Holdings, Inc.
Consolidated Statements of Stockholders’ Equity
As of September 30, 2014 and December 31, 2013
 
                           
Retained
   
Accumulated
             
   
Number
         
Additional
         
Earnings
   
Other
         
Non-
 
   
Of
   
Common
   
Paid in
   
Statutory
   
(Accumulated
   
Comprehensive
         
controlling
 
   
Shares
   
Stock
   
Capital
   
Reserve
   
Deficit)
   
Income
   
Total
   
Interest
 
Balance at January 01, 2013
    16,775,113     $ 1,678     $ 15,341,710     $ 3,849,684     $ 29,609,970     $ 4,391,004     $ 53,194,046     $ 9,630  
Net income
    -       -       -       -       (36,378,221 )     -       (36,378,221 )     -  
Discontinued operations of subsidiary
    -       -       -       -       -       -       -       (9,630 )
Foreign currency translation adjustment
    -       -       -       -       -       795,621       795,621       -  
Balance at December 31, 2013
    16,775,113     $ 1,678     $ 15,341,710     $ 3,849,684     $ (6,768,251 )   $ 5,186,625     $ 17,611,446     $ -  
                                                                 
Balance at January 01, 2014
    16,775,113     $ 1,678     $ 15,341,710     $ 3,849,684     $ (6,768,251 )   $ 5,186,625     $ 17,611,446     $ -  
Net income
    -       -       -       -       (2,914,738 )     -       (2,914,738 )     -  
Foreign currency translation adjustment
    -       -       -       -       -       133,802       133,802       -  
Balance at September 30, 2014
    16,775,113     $ 1,678     $ 15,341,710     $ 3,849,684     $ (9,682,989 )   $ 5,320,427     $ 14,830,510     $ -  
 
 
9

 

China Electronics Holdings, Inc.
Consolidated Statements of Cash Flows
For the three months and nine months ended September 30, 2014 and 2013
(Stated in US Dollars)

   
Three months ended
   
Nine months ended
 
   
September 30,
 2014
   
September 30,
2013
   
September 30, 2014
   
September 30,
 2013
 
                         
Net Income/(loss)
  $ 2,085,200     $ (2,249,161 )   $ (2,914,738 )   $ (33,910,906 )
Adjustments to reconcile net income to net cash from operations:
                               
Bad debt provision
    565,700       2,339,300       3,898,386       2,595,368  
Impairment loss for plant and equipment
    -       2,855       -       268,677  
Impairment loss for long-term assets held for sale
    -       129,175       -       30,640,293  
Inventory loss of lower cost or market value
    -       -       1,662,099       -  
Amortization and depreciation
    5,549       6,994       16,466       287,819  
Adjustment of pending and litigation accruals
    (115,308 )     -       (115,308 )     -  
Changes in operating assets and liabilities:
                               
Accounts and other receivables
    (2,858,444 )     (4,708,166 )     (7,150,206 )     (6,877,070 )
Inventories
    (3,418,035 )     (1,101,608 )     (2,411,516 )     (8,565,093 )
Advance to suppliers
    3,562,171       5,768,069       4,043,213       15,187,186  
Prepaid expenses
    -       111,354       226,204       (342,220 )
Accounts payables and accruals
    3,096       (108 )     54,339       9,113  
Unearned revenue
    -       (383,966 )     -       (372,891 )
Net cash used in operating activities
    (170,071 )     (85,262 )     (2,691,061 )     (1,079,724 )
                                 
Cash flows from investing activities
                               
Payments for purchase of plant and equipment
    -       -       (4,652 )     -  
Net cash used in investing activities
    -       -       (4,652 )     -  
                                 
Cash flows from financing activities
                               
Discontinued operations of subsidiary
    -       -       -       (9,630 )
Proceeds from bank loans
    819,252       808,130       3,256,215       1,609,477  
Repayments of bank loans
    -       (808,130 )     -       (1,609,477 )
Loans to related party
    (670,292 )     -       (670,292 )     -  
Proceeds from related party loans
    -       5,835       -       656,789  
Net cash provided by financing activities
    148,960       5,835       2,585,923       647,159  
                                 
Effect of foreign currency translation on cash
    23,012       80,920       133,555       489,794  
Net increase/(decrease) of cash and cash equivalents
    1,901       1,493       23,765       57,229  
Cash and cash equivalents at beginning of periods
    48,133       65,201       26,269       9,465  
Cash and cash equivalents at end of periods
  $ 50,034     $ 66,694     $ 50,034     $ 66,694  
                                 
Supplementary cash flows information:
                               
Interest received
  $ 1,038,706     $ 2,034     $ 1,038,768     $ 472,485  
Interest paid
  $ 64,926     $ 33,236     $ 141,848     $ 124,211  
Income tax paid
  $ -     $ -     $ -     $ -  
 
 
10

 
 
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 incorporated 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. The Company 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”). On June 29, 2013, the Company through its indirectly wholly owned subsidiary Guoying executed a share transfer agreement (the “Transfer Agreement”) with Mr. Li Xiaoyu (“Buyer of Opto-Electronics”) to sell its 99% ownership interest in Opto-Electronics for a total consideration of $962,224 (RMB 5,940,000).

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 RMB 400, 000 was paid in February 2010 and the amount of RMB 600,000 was paid in July 2010 by CEH Delaware. 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 to RMB 19,302,687 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 was in the best interest of CEH Delaware to issue 13,213,268 CEH Delaware Shares pursuant to a call option agreement, which provided that Sherry Li was 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 its issued and outstanding shares to Sherry Li, the nominee shareholder on behalf of Mr. Hailong Liu who was 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 Agreements, 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 Agreement provided that Ms. Sherry Li should not vote or dispose of the respective portion of the shares of common stock without Mr. Liu’s prior written consent and was obligated to transfer Option Shares to Mr. Liu at nominal consideration of par value $0.001 per share. The Voting Trust Agreements further provided that, Sherry Li, the nominee shareholder, had 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 CEH Delaware issued 13,213,268 CEH Delaware shares to Sherry Li.
 
 
11

 
 
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 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 were 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 Warrants 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 Warrants A and 314,285 common stock underlying Warrants 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 were together referred to as CEH Delaware Shareholders.

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 Shareholders.  Pursuant to the Share Exchange Agreement, on July 15, 2010, 10 CEH Delaware Shareholders 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 shareholders 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 should 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 provided that Ms. Sherry Li should not vote or dispose of the respective portion of the shares of common stock without Mr. Liu’s prior written consent and was obligated to transfer Option Shares to Mr. Liu at nominal consideration of par value $0.001 per share. The Voting Trust Agreements further provides that, Sherry Li, the nominee shareholder, had 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 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 CEHD Nevada'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.
 
 
12

 
 
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 were the financial statements of CEH Delaware which were in essence the financial statements of Guoying.
 
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 Warrants”) and a warrant  to purchase one share of common stock at an exercise price of $4.75 per share (a “Series D Warrants”). 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 the Company’s 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.
Significant Accounting Policies

 
A.
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 representation of management.

 
B.
Principles of Consolidation

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

 
C.
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
 
 
13

 
 
 
D.
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.

 
E.
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.

 
F.
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 accounts receivable amounts against the allowance for doubtful accounts. On the contrary, if payment is collected in subsequent period, management will reverse the doubtful accounts. Subsequent cash recovery is recognized as income in the period it occurs.

 
G.
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 September 30, 2014 and December 31, 2013 consisted of:

Description
 
As of
September 30,
 2014
   
As of
December 31,
2013
 
Electronic products
  $ 6,198,758     $ 5,449,341  
 
 
H.
Advance

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

 
I.
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:
 
 
14

 

 
Furniture
  5  years
Motor vehicles
10 years
Office equipment
  5 years

 
J.
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.

 
K.
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. The Company did not have sufficient capital to continue building the construction and has disposed the construction of logistics center on July 28, 2013. See Note 15 – Discontinued Operations.

 
L.
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 December 31, 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 $271,256 impairment loss for its plant and equipment. Simultaneously, the Company also recorded $31,134,887 impairment loss for long-term assets held for sale. See Note 15 – Discontinued Operations.
 
 
M.
Revenue Recognition

 
a)
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.
 
 
15

 

 
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.

Payments received before all of the relevant criteria for revenue recognition satisfied are recorded as unearned revenue. Unearned revenue amounted to $0 as of September 30, 2014 and December 31, 201.
 
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 less than RMB 7,500 (approximately $1,200) for both income taxes and VAT. 

 
b)
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 co-operative stores. As such, total franchise fees for the nine months ended September 30, 2014 and 2013 were $0.
 
 
N.
Cost of Goods Sold

Cost of goods sold consists primarily of the costs of the products sold, including freight in charges on those goods.

 
O.
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.
 
 
16

 

 
 
P.
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, warehouse costs, office supplies, bad debt expense, and amortization of intangible assets.

 
Q.
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 the Company's products from  warehouse to buyers’ designated locations at 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 nine months ended September 30, 2014 and 2013 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 nine months ended September 30, 2014 and 2013 were $199,601 and $317,722 respectively.
 
 
R.
Advertising Costs

The Company records advertising costs as incurred. Advertising costs in the amounts of $275,460 and $1,108,263 were included in selling expenses for the nine months ended September 30, 2014 and 2013 respectively.

 
S.
Income Taxes
 
The Company accounts for income taxes in accordance with ASC 740 (formerly SFAS 109, “Accounting for Income Taxes.”) Under the asset and liability method as required by ASC 740, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Under ASC 740, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all of, a deferred tax asset will not be realized. As of September 30, 2014 and December 31, 2013, the Company did not have any deferred tax assets or liabilities, and as such, no valuation allowances were recorded at September 30, 2014 and December 31, 2013.

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.
 
 
17

 

 
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.

 
T.
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.

 
U.
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
9/30/2014
 
12/31/2013
 
9/30/2013
Year end RMB: US$ exchange rate
6.1421
 
6.1891
 
6.1364
Average RMB: US$ exchange rate
6.1465
 
6.1145
 
6.2132

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.

 
V.
Earnings Per Share

The Company computes earnings per share (“EPS”) in accordance with FASB ASC 260 “Earnings per share”.  FASB ASC 260 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.


 
W.
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.
 
 
18

 

 
 
X.
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.

 
Y.
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 and bank loans. Bank loans 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.

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
       
As of
 
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
September 30, 2014
                       
Financial assets:
                       
Cash
  $ 50,034     $ -     $ -     $ 50,034  
Total financial assets
  $ 50,034     $ -     $ -     $ 50,034  
                                 
Financial Liabilities:
                               
Bank loan
  $ 3,256,215     $ -     $ -     $ 3,256,215  
Total financial liabilities
  $ 3,256,215     $ -     $ -     $ 3,256,215  
 
 
19

 

 
   
Quoted in
   
Significant
             
   
Active Markets
   
Other
   
Significant
       
   
For Identical
   
Observable
   
Unobservable
       
   
Assets
   
Inputs
   
Inputs
       
As of
 
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
December 31, 2013
                       
Financial assets:
                       
Cash
  $ 26,269     $ -     $ -     $ 26,269  
Total financial assets
  $ 26,269     $ -     $ -     $ 26,269  
                                 
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 the Company’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 nine months ended September 30, 2014.
 
 
Z.
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.
 
 
20

 
 
Stock-based compensation expense is recognized based on awards expected to vest, and there were no estimated forfeitures as the Company has a short history of issuing options. ASC 718 (formerly SFAS 123R) requires forfeitures to be estimated at the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates.

There was no stock based compensation for the nine months ended September 30, 2014 and 2013.

AA.
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 statement of operations 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 $47,740 and $53,247 for the nine months ended September 30, 2014 and 2013 respectively.

BB.
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 concludes that there is no subsequent event that would require adjustment or disclosure to the consolidated financial statements as of and for the nine months ended September 30, 2014.

CC.
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. 

On July 18, 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carry forward, a Similar Tax Loss, or a Tax Credit Carry forward Exists (a consensus of the FASB Emerging Issues Task Force)” (“ASU 2013-11”). The ASU presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carry forward, a Similar Tax Loss, or a Tax Credit Carry forward Exists (a consensus of the FASB Emerging Issues Task Force), which requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for an net operating loss (NOL) carry forward, or similar tax loss or tax credit carry forward, rather than as a liability when (1) the uncertain tax position would reduce the NOL or other carry forward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. The ASU does not require new recurring disclosures. It is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013 and December 15, 2014, for public and nonpublic entities, respectively. Early adoption and retrospective application are permitted. Management does not expect the adoption of this standard will have a significant effect on the Company’s consolidated financial position or results of operations.
 
 
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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. Management does not expect the adoption will have a significant impact on the Company’s consolidated financial statements.
 
3.
Accounts Receivable

Accounts receivable
 
As of
September 30,
 2014
   
As of
December 31,
2013
 
Exclusive franchise stores
  $ 8,831,733     $ 2,633,882  
Non-exclusive franchise stores
    822,736       200,470  
Accounts receivable, gross
    9,654,469       2,834,352  
Less: allowance for doubtful accounts
    (3,901,179 )     (1,735,234 )
Accounts receivable, net
  $ 5,753,290     $ 1,099,118  
                 
Allowance for doubtful accounts
 
As of
September 30,
 2014
   
As of
December 31,
2013
 
Beginning balance
  $ (1,735,234 )   $ (362,016 )
Allowance provided
    (3,898,386 )     (1,756,405 )
Recovery
    1,746,260       368,886  
Foreign currency adjustment
    (13,819 )     14,301  
Ending Balance
  $ (3,901,179 )   $ (1,735,234 )

Accounts receivable aging analysis
 
As of
September 30,
 2014
   
As of
December 31,
2013
 
1-30 Days
  $ 2,233,383     $ 718,809  
30-60 Days
    1,850,102       190,477  
61-90 Days
    1,669,805       189,832  
Over 90 Days
    -       -  
Total
  $ 5,753,290     $ 1,099,118  
 
4.
Other Receivables

Description
 
Note
   
As of
September 30,
 2014
   
As of
December 31,
2013
 
Hongrong Real Estate Company
    (1)     $ 2,274,466     $ 2,257,194  
Mr. Li Xiaoyu (Buyer of Opto-Electronics)
    (2)       1,815,340       3,544,942  
Anhui Houdezaiwu Technology Cooperatives
    (3)       325,622       -  
Others
            1,628       -  
Subtotal
            4,417,056       5,802,136  
Less: allowance
    (1)       (2,274,466 )     (2,257,194 )
Total
          $ 2,142,590     $ 3,544,942  
 
 
22

 
 
(1).  The Company loaned RMB 13,970,000 (approximately $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 Company reserved full amount of $2,242,185 receivable from Hongrong as of December 31, 2012. Subsequent loan repayment from Hongrong to the Company will be recognized as reduction of operating expense in the period when it occurs. As of December 31, 2013, Hongrong has not settled the loan. However, for the nine months ended September 30, 2014, the Company received $1,038,706 interest payment from Hongrong.

(2). See Note 15 - Discontinued Operations

(3). The Company lent $325,622 (RMB 2,000,000) to Anhui Houdezaiwu Technology Cooperatives on May 16, 2014 for purpose of establishment of tea plantation base. The loan is due on November 15, 2014. The loan is unsecured and interest free.
 
5.
Related Party Receivable

A related party company Anhui Dayun Hengtong Ecommerce Co., Ltd. (“Dayun Hengtong) on August 8, 2014, August 21, 2014 and August 22, 2014 entered into three loan agreements with the Company to borrow $325,622 (RMB 2,000,000), $455,382 (RMB 2,797,000) and $214,910 (RMB 1,320,000) respectively. Pursuant to the loan agreements, these loans are due on September 7, 2014, August 20, 2015 and August 21, 2015 respectively. These loans are interest free and unsecured. As of September 30, 2014 Dayun Hengtong has repaid the Company $325,622. The Company’s chairman and Chief Executive Officer (CEO) Mr. Liu Hailong is a shareholder of Dayun Hengtong.
 
6.
Advance to Suppliers

The current advance to suppliers amounted $3,389,614 and $7,432,827 as of September 30, 2014 and December 31, 2013 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 significant amount of following year purchase is mandatory. Therefore, the Company deposited advance to suppliers for 2014 purchase at the end of year 2013 and the beginning of 2014.
 
7.
Property, Plant and Equipment

As of
September 30, 2014
       
Accumulated
       
Category of Asset
 
Cost
   
Depreciation
   
Net
 
Vehicle
  $ 74,988     $ 46,795     $ 28,193  
Furniture and equipment
    49,029       31,146       17,883  
    $ 124,017     $ 77,941     $ 46,076  
                         
As of
                       
December 31, 2013
         
Accumulated
         
Category of Asset
 
Cost
   
Depreciation
   
Net
 
Vehicle
  $ 74,418     $ 35,831     $ 38,587  
Furniture and equipment
    44,947       25,644       19,303  
    $ 119,365     $ 61,475     $ 57,890  

Depreciation expenses were $16,466 and $16,216 for the nine months ended September 30, 2014 and 2013 respectively.
 
8.
Bank Loans

                 
As of
   
As of
 
   
Interest Rate
           
September 30,
   
December 31,
 
Name of Creditor
 
Per Annum
 
Maturity
 
Note
   
2014
   
2013
 
Rural Credit Cooperatives of Lu’an
    10.08%  
1/3/2015
    (1)     $ 1,302,486     $ -  
Rural Credit Cooperatives of Lu’an
    9.00%  
4/24/2015
    (2)       1,139,675       -  
Rural Credit Cooperatives of Lu’an
    11.70%  
9/4/2015
    (2)       814,054       -  
Total
                    $ 3,256,215     $ -  

(1) The loan is guaranteed by Lu'an Senyuan Ecological Park Ltd. ("Senyuan") and secured by the forestry plants grown on its land. Senyuan is an affiliated company controlled and owned by the Company's CEO Mr. Liu’s father and ex-wife.
 
(2) These two loans are one year term secured by the Land Use Rights. See Note 15 – Discontinued Operations.

Rural Credit Cooperative of Lu’an does not implement restrictive covenants such as minimum bank balance, level of working capital, or net income requirement on above loans.
 
9.
Accounts Payable and Accrued Expenses

Description
 
As of
September 30,
2014
   
As of
December 31,
2013
 
Accrued payroll
  $ 87,017     $ 58,008  
Claimed unpaid legal fee in dispute
    20,000       145,308  
Total
  $ 107,017     $ 203,316  
 
10.
Capitalization

The Company’s outstanding securities at September 30, 2014 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       -  
 
 
23

 
 
   
Strike Price
 
Contractual Life
 
Expiration Date
 
Shares Issued and Outstanding
   
Weighted Average Fair Value
 
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
 
07/13/2015
    104,592     $ 1.77  

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 September 30, 2014.

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 September 30, 2014.

Warrants

Total 1,230,350 warrants, including 1,000,000 series warrants E and 230,350 series warrants F, were outstanding at September 30, 2014. 314,285 series warrants A, 314,285 series warrants B, 497,303 series warrants C, 497,303 series warrants D, and 50,000 series warrants G have been expired on July 9, 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: E and F(i,ii,iii)
Annual dividend yield
-
Risk-free interest rate
0.30%
Expected volatility
12%
Year to maturity
5.00
 
11.
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 taxes purpose. The Company believes that it is more likely than not that these net accumulated operating losses will not be utilized in the future. Accordingly, the Company has no deferred tax assets.
 
Effective tax rates were approximately 0% and 0% for the nine months ended September 30, 2014 and 2013 respectively. Central government tax benefits which have been granted to Guoying will expire on December 31, 2017 and local government tax benefits will expire on December 31, 2016. 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 nine months ended September 30, 2014 and 2013:
 
 
24

 

 
   
Nine Months
Ended
   
Nine Months
Ended
 
   
September 30,
2014
   
September 30,
2013
 
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 nine months ended September 30, 2014 and 2013:

   
Nine Months
Ended
September 30,
2014
   
Nine Months
Ended
September 30,
2013
 
US current income tax expense
  $ -     $ -  
Federal
    -       -  
State
    -       -  
PRC current income tax expense
    -       -  
Total provision for income tax
  $ -     $ -  
 
United States of America
 
As of September 30, 2014, the Company in the United States had approximately $1,404,996 in net operating loss carry forwards available to offset future taxable income. Federal net operating losses can generally be carried forward 20 years. As of September 30, 2014 and December 31, 2013, the Company did not have any deferred tax assets or liabilities, and as such, no valuation allowances were recorded at September 30, 2014 and December 31, 2013.
 
 
 
   
As of
 September 30,
2014
   
As of
December 31,
2013
 
Net operation loss carry forward
  $ (1,404,996 )   $ (1,404,996 )
Total deferred tax assets
    -       -  
Less: valuation allowance
    -       -  
Net deferred tax assets
    -       -  
Change in valuation allowance
  $ -     $ -  
 
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 and VAT benefit approval to Guoying on September 2, 2007 providing that Guoying was eligible to enjoy a reduced tax rate valid from October 1, 2007 until December 31, 2010. On January 10, 2011, the State Tax Bureau of Lu’an City renewed the term of tax benefit approval until December 31, 2013. However, according to the approval, Guoying has an 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 RMB 7,500 per year that changes to cover all types of taxes including income taxes and VAT. There were no significant book and tax basis differences. On January 1, 2014, the State Tax Bureau of Lu'an City renewed the term of tax benefit approval. Pursuant to the renewal approval, Guoying is continuing to enjoy the same income tax and VAT benefits until December 31, 2017.
 
 
25

 
 
12.
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 nine months ended September 30, 2014, 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 87.71% of total purchase:

Suppliers
 
Nine Months Ended
September 30,
2014
   
 
%
 
Lu’an Jinan District Shenfa Electronics Co., Ltd.
  $ 8,638,286       47.98 %
Lu'an Future Star Co., Ltd.
    4,939,326       27.43 %
Shanghai Shangling Electronics Manufacture Co., Ltd. - Hefei Branch
    2,213,897       12.30 %
    $ 15,791,509       87.71 %

The Company’s exposure to foreign currency exchange rate risk primarily relates to cash and cash equivalents and short-term investments, denominated in the U.S. dollar. Any significant revaluation of RMB may materially and adversely affect the cash flows, revenues, earnings and financial position of the Company.
    
Contingency

The Company was in litigation with its prior attorney ("Plaintiff"), 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. This amount has been accrued as of December 31, 2011.
 
 
26

 
 
The Company and its Plaintiff entered into a settlement agreement dated July 25, 2014, whereas the Company agreed to pay Plaintiff total sum of $30,000 in three installments, of $10,000 each installment by August 31, October 31 and December 31, 2014 respectively. The Company has made payment of first installment of settlement fee in amount of $10,000 by early September, 2014. In consideration of the settlement, Plaintiff released the Company all claims ever had by Plaintiff against the Company. A Stipulation of Discontinuance was filed with New York County Supreme Court on August 7, 2014. The difference between accrual pending litigation expense and settlement payment in the amount of $115,308 was recorded as a reduction of operation expense for the nine monthly ended September 30, 2014.

Operating Leases
 
The Company leases various facilities under operating leases that terminate on various dates. The Company incurred rent expenses of $105,482 and $144,086 for the nine months ended September 30, 2014 and 2013 respectively.
 
The lease expenses for the next three years are estimated to be as follows:  

Nine Months
Ended
September 30,
     
2015
  $ 128,629  
2016
    117,140  
2017
    58,570  
    $ 304,339  
 
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 rights 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 rights certificate issued by PRC government pursuant to the Land Investment Agreement.  The Company 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 for a 38,449 square meter portion of the land which has been collateralized for a loan of RMB 5 million to a bank, including the 19,200 square meters where the four warehouses were built. This loan was paid back by the Company on December 21, 2013. The Company waited to receive the land use rights 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 rights certificate. Due to burdensome and repetitive approval procedures, the Company has not been granted land use rights certificate for the rest of land. The Company disposed the land use rights on July 28, 2013. Buyer carries a contractual obligation to obtain a land use rights certificate for the remaining 126,534 square meters of Pingqiao land. The Company is no longer obligated to pay the remaining $3.7 million. See Note 15 – Discontinued Operations.
  
 
27

 
 
13.
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.

The following table presents a summary of operating information and balance sheet information:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
2014
   
September 30,
2013
   
September 30,
2014
   
September 30,
2013
 
Revenues from unaffiliated customers:
                       
Exclusive franchise stores
  $ 7,327,816     $ 7,187,992     $ 14,297,143     $ 16,583,690  
Non-exclusive stores
    705,171       666,932       1,247,499       1,515,606  
Company owned stores
    617,502       501,950       1,396,738       2,658,686  
Consolidated
    8,650,489       8,356,874       16,941,379       20,757,982  
Gross Profit:
                               
Exclusive franchise stores
    759,484       580,891       1,330,354       1,355,367  
Non-exclusive stores
    72,464       54,563       (51,852 )     124,208  
Company owned stores
    69,844       42,275       24,118       262,170  
Consolidated
    901,792       677,729       1,302,620       1,741,745  
                                 
Depreciation and amortization:
                               
Exclusive franchise stores
    -               -          
Non-exclusive stores
    -               -          
Company owned stores
    -               -          
Corporate
    5,549       6,994       16,466       287,819  
Consolidated
    5,549       6,994       16,466       287,819  
                                 
Capital expenditures:
                               
Exclusive franchise stores
    -       -       -       -  
Non-exclusive stores
    -       -       -       -  
Company owned stores
    -       -       -       -  
Corporate
    -       -       -       -  
Consolidated
  $ -     $ -     $ -     $ -  
 
   
As of
September 30,
2014
   
As of
December 31,
2013
             
Identified Assets:
                           
Exclusive franchise stores
  $ -     $ -                  
Non-exclusive stores
    -       -                  
Company owned stores
    -       -                  
Corporate
    18,283,216       17,868,906                  
Consolidated
  $ 18,283,216     $ 17,868,906                  
 
 
28

 
 
14.
Earnings Per Share

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

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
2014
   
September 30,
2013
   
September 30,
2014
   
September 30,
2013
 
                         
Net Income/ (Loss)
  $ 2,085,200     $ (2,249,161 )   $ (2,914,738 )   $ (33,910,906 )
                                 
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
  $ 0.12     $ (0.13 )   $ (0.17 )   $ (2.02 )
-  Diluted
  $ 0.12     $ (0.13 )   $ (0.17 )   $ (2.02 )
                                 
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  
 
15.
Discontinued Operations

 
(1)
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 RMB 5,940,000 (approximately $969,479), including RMB 2,000,000 worth of products. The Company received RMB 2,000,000 payment from Li Xiaoyu in 2013 and additional 990,000 RMB payment from Mr. Li Xiaoyu on May 16, 2014 and has not received any further payments thereafter. 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 operations and comprehensive income for the year ended December 31, 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
  $ 969,479     $ 969,479     $ -  

The following tabulation summarizes the operation results of Opto-Electronics, which was accounted as discontinued operation for the year ended December 31, 2013 in the consolidated statements of operations and comprehensive income.

   
For Year
Ended
 
   
December 31, 2013
 
Revenue
  $ -  
Loss from discontinued operation before income tax
    (8 )
         
Provision for income tax
    -  
Gain on disposal
    -  
Loss from discontinued operation, net of tax
  $ (8 )
 
 
29

 

 
The following table presents Opto-Electronics' aggregate carrying amounts of the major assets and liabilities:
 
   
As of
 
   
December 31,
2013
 
Assets:
     
Cash
  $ -  
Other receivable
    646,319  
Inventory
    323,160  
Total Assets
  $ 969,479  
         
Liabilities:
  $ -  

 
(2)
In order to improve its cash flows from operations and working capital, the Company decided to redeploy its capital to meet the 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 operations on June 30, 2013. 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 included: a) construction in progress, b) advances for the 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 asset 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 RMB 20,000,000 (approximately $3,239,810) to be paid in three installments of: a) RMB 5,000,000 (approximately $809,952), b) RMB 10,000,000 (Approximately $1,619,904) and c) RMB 5,000,000 (approximately $809,952) due on 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% monthly of the outstanding balance. On December 26, 2013, the Company agreed Mr. Li Xiaoyu's request on behalf of Opto-Electronics to extend the payment schedule. The first RMB 5,000,000 (approximately $812,321) installment should be paid by May 2014. For the nine months ended September 30, 2014, the Company received RMB 10,790,000 (approximately $1,756,728) payment from Mr. Li Xiaoyu.

The Company’s business strategy has been to become a significant retailer and wholesaler of consumer electronics and appliances to rural markets in China with a goal of having a national distribution network throughout China. The Company’s decision to discontinue and sell its Opto-Electronics subsidiary and its logistics business on the Pingqiao land reflects its belief that:  a) The industry in which Opto-Electronics was to compete has become more competitive and less profitable; b) the Company would like to continue using its working capital to focus on developing its wholesale and retail business; c) the Company does not have sufficient capital to complete the construction of its logistics facility.
 
 
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The sales price of the 38,449 square meters land with land use rights certificate was appraised by an independent appraisal firm, Luan Century Price Evaluation Consultative Co., Ltd., on April 24, 2013. The appraisal firm concluded the fair market value of the 38,449 square meter portion of the land for which the Company has received a land use rights certificate with a term of 50 years until 2062 was RMB 11,073,378 (approximately $1,774,722). The appraised value excluded the remaining 126,534 square meters of Pingqiao Land for which the Company has not received a land use rights certificate. Further, pursuant to Article 2 of the Sales Agreement, 1) Opto-Electronics is obligated to negotiate with the Yu An government to: a) obtain the land use rights certificate for  the remaining 126,534 square meters of land and b) pay to the Company the  agreed upon purchase price of the remaining land up to the amount which the Company has advanced to the Pingqiao Committee; and 2) upon completion of the logistics center by Opto-Electronics, the Company has a right of first refusal to lease the building at a favorable rent. The Company won’t transfer the land use rights certificate to Opto-Electronics until it receives the full payment RMB 20,000,000 from Opto-Electronics. The Company’s two bank loans from Rural Credit Cooperatives of Lu’an were secured by the Land Use Rights as of September 30, 2014. See Note 8 - Bank Loans.

Constructions by the Company of its logistics c