S-1 1 v199084_s1.htm Unassociated Document
As filed with the Securities and Exchange Commission on October 15, 2010

Registration No. 333- 
   
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 CHINA ELECTRONICS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

Nevada
0273
98-0550385
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)

Building 3, Binhe District, Longhe East Road, Lu’an City, Anhui Province, PRC 237000
011-86-564-3224888
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
 
Vcorp Services, LLC
20 Robert Pitt Drive, Suite 214
Monsey, New York 10952
(845)425-0077
 (Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:
Darren Ofsink, Esq.
Guzov Ofsink, LLC
600 Madison Avenue 14th Floor
New York, New York 10022
(212) 371-8008

Approximate date of commencement of proposed sale to public: as soon as practicable after this Registration Statement is declared effective.
 
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  x
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o __________
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o_________
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering.  o __________

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
¨
 
Accelerated filer
¨
Non-accelerated filer 
¨
 
Smaller reporting company 
x
 (Do not check if a smaller reporting company)
       
 
CALCULATION OF REGISTRATION FEE
   
Title of each class of
securities to be
registered
 
Amount to be
registered (1)
   
Proposed maximum
offering price per
unit
   
Proposed
maximum
aggregate offering
price
   
Amount of 
registration fee
(2)
 
                         
Common Stock, par value $.0001 per share
    2,767,246     $ 3.80 (3)   $ 10,515,535     $ 750  
Common Stock, par value $.0001 per share, underlying Series A Warrants
    314,286 (4)   $ 2.19     $ 688,286     $ 49  
Common Stock, par value $.0001 per share, underlying Series B Warrants
    314,286 (5)   $ 2.63     $ 826,572     $ 59  
Common Stock, par value $.0001 per share, underlying Series C Warrants
    497,303 (6)   $ 3.70     $ 1,840,021     $ 131  
Common Stock, par value $.0001 per share, underlying Series D Warrants
    497,303 (7)   $ 4.75     $ 2,362,189     $ 168  
Common Stock, par value $.0001 per share, underlying Series E Warrants
    1,000,000 (8)   $ 0.25     $ 250,000     $ 18  
                                 
Total
                          $ 1,175  
   
 
(1)
Pursuant to Rule 416 promulgated under the Securities Act of 1933, as amended, there are also registered hereunder such indeterminate number of additional shares as may be issued to the selling stockholders to prevent dilution resulting from stock splits, stock dividends or similar transactions.

(2)
The registration fee is calculated pursuant to Rule 457(g).

(3)
The registration fee is calculated pursuant to Rule 457(c). As of the date of this prospectus, our Common Stock is quoted under the symbol "CEHD.OB" on the Over-the-Counter Bulletin Board (“OTCBB”). The last reported sale price of our Common Stock as of October 14, 2010 was $3.80.

(4)
Consists of shares of Common Stock underlying three year Series A warrants to purchase an aggregate of 314,286 shares of Common Stock with an exercise price of $2.19 per share.

(5)
Consists of shares of Common Stock underlying three year Series B warrants to purchase an aggregate of 314,286 shares of Common Stock with an exercise price of $2.63 per share.

(6)
Consists of shares of Common Stock underlying three year Series C warrants to purchase an aggregate of 497,303 shares of Common Stock with an exercise price of $3.70 per share.

(7)
Consists of shares of Common Stock underlying three year Series D warrants to purchase an aggregate of 497,303 shares of Common Stock with an exercise price of $4.75 per share.

(8)
Consists of shares of Common Stock underlying five year Series E warrants to purchase an aggregate of 1,000,000 shares of Common Stock with an exercise price of $0.25 per share.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.
 
 

 

5,390,424 Shares of Common Stock

CHINA ELECTRONICS HOLDINGS, INC.

Common Stock
  


PROSPECTUS
 
__________, 2010


 

 
 
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting offers to buy these securities in any state where the offer is not permitted.
 
SUBJECT TO COMPLETION, DATED  OCTOBER 15, 2010

PRELIMINARY PROSPECTUS

5,390,424 Shares

China Electronics Holdings, Inc.
 
Common Stock
 
This prospectus relates to the resale by the Selling Stockholders of up to 5,390,424 shares of our Common Stock, $.0001 par value (“Common Stock”), including an aggregate of  778,035 shares issued to 5  Selling Stockholders pursuant to or in connection with a Share Exchange Agreement dated as of July  9, 2010 (the “Share Exchange Agreement”), an aggregate of 1,628,572 shares of common stock issuable to 5 Selling Stockholders upon exercise of warrants to purchase our Common Stock issued pursuant to the Share Exchange Agreement,  an aggregate of 1,989,211 shares of our Common Stock issued  to 105  Selling Stockholders issued in a series of private placements (the “Private Placements”) pursuant to a Subscription Agreement dated as of July 9, 2010 (the “Purchase Agreement”) and an aggregate of  994,606 shares of common stock issuable to 105  Selling Stockholders upon exercise of warrants to purchase our Common Stock issued in the Private Placements.
 
All of such shares may be sold by the Selling Stockholders. It is anticipated that the Selling Stockholders will sell these shares of Common Stock from time to time in one or more transactions, in negotiated transactions or otherwise, at prevailing market prices or at prices otherwise negotiated (see “Plan of Distribution”). We will not receive any proceeds from the sales by the Selling Stockholders.  Under the terms of the warrants, cashless exercise is permitted in certain circumstances. We will not receive any proceeds from any cashless exercise of the warrants, but would receive the exercise price of warrants exercised on a cash basis. We will pay all of the registration expenses incurred in connection with this offering, but the Selling Stockholders will pay any selling commissions, brokerage fees and related expenses.
  
There is a limited market in our Common Stock. The shares are being offered by the Selling Stockholders in anticipation of the continued development of a secondary trading market in our Common Stock. We cannot give you any assurance that an active trading market in our Common Stock will develop, or if an active market does develop, that it will continue.

Our Common Stock is listed on the OTC Bulletin Board and trades under the symbol CEHD.OB.  On October 14, 2010, the closing sale price of our Common Stock was $3.80 per share.

Investing in our Common Stock involves risks. See “Risk Factors”.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. 

The date of this prospectus is ______, 2010
 
 

 

TABLE OF CONTENTS

   
Page
   
Prospectus Summary
1
Risk Factors
6
Special Note Regarding Forward-Looking Statements
16
Use of Proceeds
17
Market for Common Equity and Related Stockholder Matters
17
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
Organizational History of the Company and its Subsidiaries
23
Business
26
Description of Property
31
Directors, Executive Officers, Promoters and Control Persons
32
Transactions With Related Persons, Promoters and Control Persons; Corporate Governance
33
Security Ownership of Certain Beneficial Owners and Management
34
Selling Stockholders
35
Description of Securities
46
Shares Eligible for Future Sale
49
Material United States Federal Income Tax Considerations
50
Material PRC Income Tax Considerations
54
Plan of Distribution
56
Legal Matters
58
Experts
58
Changes in and Disagreements With Accountants
58
Where You Can Find More Information
58
Index to Consolidated Financial Statements
F-1



ABOUT THIS PROSPECTUS

You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us or to which we have referred you. We and the underwriter have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to offer or sell these securities. This prospectus does not constitute an offer to sell or the solicitation of an offer to buy these securities in any jurisdiction in which such offer or solicitation may not be legally made.  If any other information or representation is given or made, such information or representation may not be relied upon as having been authorized by us or the underwriter, and neither we nor the underwriter accepts any liability in relation thereto.

We obtained statistical data, market data and other industry data and forecasts used throughout, or incorporated by reference in, this prospectus from market research, publicly available information and industry publications. Industry publications generally state that they obtain their information from sources that they believe to be reliable, but they do not guarantee the accuracy and completeness of the information. Similarly, while we believe that the statistical data, industry data and forecasts and market research are reliable, we have not independently verified the data, and we do not make any representation as to the accuracy of the information. We have not sought the consent of the sources to refer to their reports appearing or incorporated by reference in this prospectus.

 

 

PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in this prospectus.  This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the “Risk Factors” section and our consolidated financial statements and the related notes appearing at the end of this prospectus, before making an investment decision.  Unless the context otherwise requires, the "Company", "we," "us," and "our," refer to (i) China Electronics Holdings, Inc., a Nevada corporation (“China Electronics”), (ii) China Electronic Holdings, Inc., a Delaware corporation (“CEH Delaware”), and (iii) Lu’an Guoying Electronic Sales Co., Ltd. , a wholly foreign enterprise (“WOFE”), under the laws of the People’s Republic of China (“Guoying”).
 
Our Business
 
Through our subsidiary, CEH Delaware, we are engaged in the retail sale of consumer electronics and appliances in the People’s Republic of China (the “PRC”), such as solar heaters, refrigerators, air conditioners, televisions, and etc. We are targeting the rural market in Anhui Province.

We started sales of home appliances and electronics in 2001. During the fiscal year ended December 31, 2009 (“fiscal 2009”), approximately 66% of our revenues were from the sale of solar water heaters, approximately 10.5% of our revenues were from the sale of refrigerators  and approximately 6.5% of our revenues were generated from the sale of televisions. Approximately 69% of our net income for fiscal 2009 was from the sale of solar water heaters, approximately 12.7% of our 2009 net income was from the sale of refrigerators and approximately 8.0% of our 2009 net income was profit from sales of televisions.
 
We operate 3 company owned stores, all of which are located in Lu’an City, Anhui Province. As of October 12, 2010, we also operate 458 exclusive franchise stores and 600 non-exclusive franchise stores, which are located in the rural areas around Lu’an. Approximately 3.3% of our revenues for fiscal 2009 were from the company owned stores, approximately 88.9% of our 2009 revenues were from the exclusive franchise stores and approximately 7.8% of our 2009 revenues were generated from the non-exclusive franchise stores.

We purchase the consumer electronics and appliances we sell directly from the manufacturers thereof or large distributors. Currently, 30% of the products are supplied to us by large distributors, mainly under the brand names Samsung and LG.  Guoying is the exclusive wholesaler in the Lu’an area for products under the brand names, Sony, LG, Samsung, Shanghai Shangling, Chigo, Huayang and Huangming.  Guoying is the general sales agency of Sino-Japan Sanyo electronic products, such as Sanyo TVs, air conditioners, washing machines and micro-wave ovens.  Guoying has teamed up with Huangming and Huayang, the 2 largest manufacturers of solar thermal products in China, to be their exclusive retail outlet in Lu’an, Anhui. Some of their energy efficient, “green” products include:  solar thermal water heaters, solar panels (photovoltaic) and energy saving glass.

In addition to purchasing from the manufacturers or distributors, we have refrigerators manufactured by an OEM manufacturer under the Company’s own trademark “Guoying”. Guoying refrigerators have “3C” quality national authentication certificates. During fiscal year 2009, approximately 2 % of our 2009 revenues and 2.5% of our net income were from the sale of Guoying brand refrigerators. In August 2007, Guoying entered into a 5 year OEM agreement with Shanghai Pengpai Electronic Co., Ltd. (“Pengpai”), under which Pengpai will manufacture refrigerators for Guoying to sell under its own trademark. Guoying sold a total of 30,000 refrigerators in 2007, 46,000 in 2008, and 62,000 in 2009, and expects to sell 77,000 in 2010 and 100,000 in 2011, in Anhui, Henan and Hubei provinces in the PRC. On October 2, 2006, Guoying entered into a loan agreement with Pengpai where Guoying loaned to Pengpai a total of RMB 80 million (approximately $ 11.76 million) from year 2006 to 2010. In exchange, Pengpai sells refrigerators to Guoying at a discounted price. Pengpai is required to repay the loan within 4 years, starting from October 2013. The loan is secured by all the assets of Pengpai

 
1

 

Our Industry
 
Approximately 56% of China’s population still resides in rural areas of China, making rural residents the largest consumer group in China. After many years of economic reforms, the average income of people living in China's rural areas has gradually increased. The rural market is largely untapped and has enormous potential for growth. The rural consumer group has tremendous purchasing power and is increasing as the Chinese government encourages rural communities to modernize.

There are several reasons for the potential development of rural consumer electronics and appliances market.

First, the central government has decided to expand internal demand by increasing the income of the rural population by reducing tax for farmers. The continuous improvements in the rural power network, rural transportation, and rural communication make the rural market extremely favorable for home appliances and electronics.

Second, the Chinese government has initiated a rural home appliance and electronics rebate program, called “Rural Consumer Electronics” plan. The plan provides that the maximum sales price of electronics is fixed, at a price which is usually equal to or less than the market price in urban areas of the same product. Meanwhile, rural consumers can get a 13% government rebate on their purchases of electronics.

Third, the current consumer electronics and appliances markets in big PRC cities like Beijing, Shanghai, and Shenzhen are already saturated by an over abundance of competitors – leading to very lean margins. Although some competitors have announced interest in the rural market, none of the current competitors have established any significant presence in the rural markets. Successful brand names typically established in cities are not an indicator of automatic success in the rural. A majority of the population from the rural market has not seen or heard of the retail chains that exist in the cities.

              Additionally, the rural consumers have different tastes and values in making their purchases. For example, when it comes to appliances, functionality to cost is the most important factor in deciding which product to purchase. However, product colors have a significant impact in decision making. Most rural consumers prefer certain colors, such as red, over colors like black, silver, and white that are successful in the city. As a result, much research has to be carried out to fully understand the outlook of the rural consumer.

            Guoying is the first rural home appliance and electronics retailer in Anhui Province.

Our Principal Competitive Strengths

·
Rural market.  We have hundreds of franchise stores in rural markets, which are markets with high potential margin, but which markets are ignored by the big retail chain stores.

·
Flexibility. We are running 24/7 in making deliveries. After receiving an order, we can make delivery as soon as within 2 hours. Huge state-owned retail stores, such as Guosheng, usually take 2-3 days to deliver after receipt of orders.

·
Sales Networking. We have 27 sales persons visiting the franchise stores each week, which serves to keep a good relationship between Guoying and the stores.

 
2

 

Our Growth Strategies

·
Developing Company-owned Stores. We will develop 6-7 company-owned stores in Lu’an City with at least one store located in each major county of Lu’an such as Shucheng, Huoshan, Huoqiu and Jinzhai. A 1000-square-meter shopping mall will be established in Lu’an City in mid 2011.

·
Developing Direct Sales. We plan to develop direct sales stores with total 600 direct stores in service by the end of 2011, over 20% of which will be located in Henan and Hubei provinces. The area, delivery, service quality of stores will be enhanced.

·
Developing Franchise Stores. We will establish franchise stores in 2011 with total of 700 franchise stores in service by the end of 2011.

·
Partnering with well-known electric appliance manufactures. We will negotiate with well-known brands for sales of products of theses brands. We currently present and sell washing machines of Samsung and have achieved successful progress for partnering with Samsung to sell refrigerators, air conditioners and video-related products of Samsung. We are now in the negotiating process with other famous electric appliance manufactures for sales of their products.

·
Merger and Acquisition. We also consider merger and acquisition opportunities in 2011.
 
 
3

 

Our Corporate Structure

 Our current structure is set forth in the diagram below:

 
Company Information

Our principal executive offices are located at Building 3, Binhe District, Longhe East Road, Lu’an City, Anhui Province, PRC 237000, and our telephone number is 011-86-564-3224888.

THE OFFERING

On July 15, 2010 we entered into and consummated the Share Exchange Agreement, dated as of July 9, 2010 with certain of the Selling Stockholders. Pursuant to the Share Exchange Agreement, on July 15, 2010, 10 former stockholders of our subsidiary, CEH Delaware, transferred to us 100% of the outstanding shares of common stock and preferred stock and 100% of the warrants to purchase common stock of CEH Delaware held by them, in exchange for an aggregate of 13,785,902 newly issued shares of our Common Stock and warrants to purchase an aggregate of 1,628,572 shares of our Common Stock.

 On July 15, 2010 we also consummated the first of the Private Placements made pursuant to the Purchase Agreement with certain of the Selling Stockholders.  Additional Private Placements were consummated on July 26, 2010 and August 17, 2010. In the Private Placements we issued to Selling Stockholders for an aggregate gross purchase price of $ 5,251,548 an aggregate of (a) 1,989,211 shares of our Common Stock, (b) three year warrants (“Series C Warrants”) to purchase an aggregate of 497,303 shares of our Common Stock for $3.70 per share and (c) three year warrants (“Series D Warrants”) to purchase an aggregate of 497,303 shares of our Common Stock for $4.75 per share.

 
4

 

This prospectus relates to the resale of the 5,390,424 shares of our Common Stock issued to the Selling Stockholders and issuable to the Selling Stockholders upon exercise of all of the warrants referred to in the preceding paragraphs.
 
Issuer
 
China Electronics Holdings, Inc.
     
Common Stock outstanding prior to the Offering
 
16,775,113 shares
     
Common Stock offered by the Selling Stockholders
 
5,390,424 shares
     
Total shares of Common Stock to be outstanding after the Offering assuming exercise of all outstanding warrants
 
19,398,291 shares
     
Use of Proceeds
 
We will not receive any proceeds from the sale of the shares of Common Stock.
     
Our OTC Bulletin Board Trading Symbol
 
CEHD.OB
     
Risk Factors
 
You should read the “Risk Factors” section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our Common Stock.
 
The number of shares of our Common Stock to be outstanding after this offering is based on 16,775,113  shares of our Common Stock outstanding as of October 12, 2010,  and gives effect to the issuance of an aggregate of 2,623,178 shares of Common Stock to the Selling Stockholders upon exercise of warrants to purchase our Common Stock held by them.

SUMMARY CONSOLIDATED FINANCIAL DATA
 
The following tables summarize our consolidated financial data for the periods presented. You should read these tables together with the consolidated financial statements and related notes appearing at the end of this prospectus, as well as “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other financial information included elsewhere in this prospectus. We have derived the consolidated statement of operations data for the six months ended June 30, 2010 and 2009 from our unaudited consolidated financial statements included in this prospectus.  Our historical results are not necessarily indicative of the results to be expected in any future period.

 
5

 

   
 
Six months 
ended June 30, 2010
   
Six months
ended June 30, 2009
 
   
(Unaudited)
   
(Unaudited)
 
Net Revenue
  $ 55,785,305     $ 11,565,688  
                 
Cost of goods sold
    45,598,608       9,784,586  
                 
Gross profit
    10,186,697       1,781,102  
                 
Operating expenses:
               
Selling expenses
    793,606       25,075  
General and administrative expenses
    44,672       31,413  
Total operating expenses
    838,278       56,489  
                 
Net Operating income
    9,348,419       1,724,613  
                 
Other income (expenses):
               
Financial income (expense)
    (1,176 )     576  
Total other income (expense)
    (1,176 )     576  
                 
Net income before income taxes
    9,347,243       1,725,189  
                 
Income taxes
    952       1,323  
Net income
  $ 9,346,292     $ 1,723,866  
                 
Foreign currency translation adjustment
    102,033       33,402  
                 
Comprehensive income
  $ 9,448,324       1,757,269  
                 
Earnings per share - basic
  $ 0.67     $ 0.13  
Earnings per share - diluted
  $ 0.63     $ 0.13  
                 
Weighted average shares outstanding -basic
    14,035,369       13,213,268  
Weighted average shares outstanding - diluted
    14,807,691       13,213,268  

Balance Sheet Data:

   
  
June 30, 2010
  
  
December 31, 2009
  
  
  
(Unaudited)
  
  
(Audited)
  
Cash and cash equivalents
 
$
155,529
   
$
64,736
 
Trade accounts receivable, net
 
$
22,289,993
   
$
6,295,375
 
Advance to Suppliers
 
$
2,972,207
   
$
-
 
Inventories, net
 
$
3,473,699
     
992,090
 
Property and equipment, net
 
$
9,798
   
$
11,733
 
Other receivables - Long term
 
$
2,091,660
   
$
12,831,849
 
Total assets
 
$
30,992,886
   
$
20,195,783
 
Total current liabilities
 
$
2,683,309
   
$
14,174,389
 
                 
Total stockholders' equity
 
$
28,309,577
   
$
6,021,394
 
Total liabilities and stockholders’ equity
 
$
30,992,886
   
$
20,195,783
 
 
RISK FACTORS
 
An investment in our Common Stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this prospectus, before making an investment decision. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

 
6

 

RISKS RELATED TO OUR BUSINESS

We may not be able to effectively control and manage our growth, and a failure to do so could adversely affect our operations and financial condition.
 
We plan to expand our company-owned stores. Planned expenditures for the stores are $8-10 million. Even if we are able to secure the funds necessary to implement these expenditures (of which there is no assurance), we will face management, resource and other challenges in expanding our current facilities, integrating acquired assets or businesses with our own, and managing expanding product offerings. Failure to effectively deal with increased demands on our resources could interrupt or adversely affect our operations and cause production backlogs, longer product development time frames and administrative inefficiencies. Other challenges involved with expansion, acquisitions and operation include:
 
unanticipated costs;
the diversion of management’s attention from other business concerns;
potential adverse effects on existing business relationships with suppliers and customers;
obtaining sufficient working capital to support expansion;
expanding our product offerings and maintaining the high quality of our products;
    
 ●
maintaining adequate control of our expenses and accounting systems;
   
successfully integrating any future acquisitions; and
anticipating and adapting to changing conditions in the electronics retail industry, whether from changes in government regulations, mergers and acquisitions involving our competitors, technological developments or other economic, competitive or market dynamics.
 
Even if we do obtain benefits of expansion in the form of increased sales, there may be a lag between the time when the expenses associated with an expansion or acquisition are incurred and the time when we recognize such benefits, which would affect our earnings.

We may not be able to hire and retain qualified personnel to support our growth and if we are unable to retain or hire such personnel in the future, our ability to implement our business objectives could be limited. Difficulties with hiring, employee training and other labor issues could disrupt our operations.

Our operations depend on the work of our sales persons and other employees. We may not be able to retain those employees, successfully hire and train new employees or integrate new employees into the programs and policies of the Company. Any such difficulties would reduce our operating efficiency and increase our costs of operations, and could harm our overall financial condition.

If one or more of our senior executives or other key personnel are unable or unwilling to continue in their present positions, we may not be able to replace them within a reasonable time, and our business may be disrupted and our financial condition and results of operations may be materially and adversely affected. Competition for senior management and personnel is intense, the pool of qualified candidates is very limited, and we may not be able to retain the services of our senior executives or senior personnel, or attract and retain high-quality senior executives or senior personnel in the future. This failure could limit our future growth and reduce the value of our common stock.

 
7

 

The consumer electronics and appliances retail industry in the PRC is becoming increasingly competitive and, unless we are able to compete effectively with competitor retailers, our profits could suffer.

The consumer electronics and appliances retail industry in the PRC is highly and increasingly competitive. Giant national retailers such as Suning Appliance and Guomei Appliance have expanded, and local and regional competition has grown. Some of these companies have substantially greater financial, marketing, personnel and other resources than we do.

Our competitors could adapt more quickly than we do to evolving consumer preferences or market trends, have more success than we do in their marketing efforts, control supply costs and operating expenses more effectively than we do, or do a better job than we do in formulating and executing expansion plans. Increased competition may also lead to price wars, counterfeit products or negative brand advertising, all of which may adversely affect our market share and profit margins. Expansion of large retailers into new locations may limit the locations into which we may profitably expand. To the extent that our competitors are able to take advantage of any of these factors, our competitive position and operating results may suffer.

Because we face intense competition, we must anticipate and quickly respond to changing consumer demands more effectively than our competitors. In order to succeed in implementing our business plan, we must achieve and maintain favorable recognition of our private label brands, effectively market our products to consumers, competitively price our products, and maintain and enhance a perception of value for consumers. We must also source and distribute our merchandise efficiently. Failure to accomplish these objectives could impair our ability to compete successfully and adversely affect our growth and profitability.

Our limited operating history makes it difficult to evaluate our future prospects and results of operations; our business could fail, and you could lose some or all of your investment.

We have a limited operating history and the PRC consumer electronics and appliances retail industry is young and continually growing. Accordingly, you should consider our future prospects in light of the risks and uncertainties experienced by early-stage companies in evolving markets. Some of these risks and uncertainties relate to our ability to:
 
§
Offer new products to attract and retain a larger customer base;

§
Respond to competitive and changing market conditions;

§
Maintain effective control of our costs and expenses;

§
Attract additional customers and increase spending per customer;

§
Increase awareness of our brand and continue to develop customer loyalty;

§
Attract, retain and motivate qualified personnel;

§
Raise sufficient capital to sustain and execute our expansion plan;

§
Respond to changes in our regulatory environment;

§
Manage risks associated with intellectual property rights; and

§
Foresee and understand long-term trends.

Because we are a relatively new company, we may not be experienced enough to address all the risks in our business or in our expansion plan. If we are unsuccessful in addressing any of these risks and uncertainties, our business may fail.

 
8

 

Economic conditions that affect consumer spending could limit our sales and increase our costs.

Our results of operations are sensitive to changes in overall economic conditions that affect consumer spending, including discretionary spending. Inflation and adverse changes to employment levels, business conditions, interest rates, energy and fuel costs and tax rates can, in addition to causing the supply chain cost challenges described above, reduce consumer spending and change consumer purchasing habits.

We rely on the performance of our sales persons and direct stores and franchise stores managers for our sales, and should any or all of them perform poorly for any reason, our sales results, reputation and competitive position would suffer.

We sell most of our products through our franchise stores, with our sales persons visiting the stores each week. The store managers make the decision as to order quantities and are responsible for the daily operation of the store. If factors either in or out of a store manager’s control reduce a store’s business, the individual store’s income could fall, which would negatively impact our sales.

We do not presently maintain product liability insurance or business interruption insurance, and our property and equipment insurance does not cover the full value of our property and equipment, which leaves us with exposure in the event of loss or damage to our properties or claims filed against us.
 
We currently do not carry any product liability or other similar insurance or business interruption insurance. Unlike in the United States and many other countries, product liability claims and lawsuits in the PRC are rare. Product liability exposures and litigation, however, could become more commonplace in the PRC. Moreover, we could have more product liability exposure and liability as we expand our sales into international markets, like the United States, where product liability claims are more prevalent.
 
            We may be required from time to time to recall products entirely or from specific markets or batches.  We do not maintain recall insurance. In the event we do experience product liability claims or a product recall, or suffer from natural or other unexpected disaster, business or government litigation, or any uncovered risks of operation our financial condition and business operations could be materially adversely affected.

We may not have adequate or effective internal accounting controls.
 
The PRC has not adopted a Western style of management and financial reporting concepts and practices. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors, we may experience difficulty in establishing accounting and financial controls, collecting financial data, budgeting, managing our funds and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards.
 
Our lack of familiarity with Western practices generally and Section 404 specifically may unduly divert management’s time and resources, which could have a material adverse effect on our operating results. Further, if material weaknesses in our internal controls over financial reporting are identified, this could result in a loss of investor confidence in our financial reports, have an adverse effect on our stock price and/or subject us to sanctions or investigation by regulatory authorities.

Our revenue will decrease if economical climate goes bad in China or if we are significantly affected by financial crisis.

We are subject to the general changes in economic conditions affecting many segments of the economy.  Demand for the electronics sold in our stores is typically affected by a number of economic factors, including, but not limited to, the termination of  “Rural Consumer Electronics” in the rural regions or termination of other tax exemption for the rural area.

 
9

 

Competition in the retail electronics industry could adversely affect our results of operations.

We operate in local and regional markets in China, and many factors affect the competitive environments we face in any particular market. These factors include the number of competitors in the market, the pricing policies and financial strength of those competitors, the total production capacity serving the market, the barriers to enter the market and the proximity of natural resources, as well as general economic conditions and demand for construction materials within the market. There is no assurance that existing or new competitors may not receive contracts for which we compete by reason of events and factors beyond our control.
 
Our growth strategy is capital intensive; without additional capital on favorable terms we may not accomplish our strategic plan.

Our expansion plans are premised upon our raising sufficient capital. There can be no assurance that we will do so. Our inability to raise sufficient capital or inability to raise capital on acceptable terms to fund these new production plants would negatively impact our projected revenues and our projected growth.
 
Long-term collection of accounts receivable and potential bad debts may impose a threat to our operations and expansion.

At certain times we may have a large amount of accounts receivable, which account for over 72% of our total assets. A substantial majority of our outstanding trade receivables are not secured by any collateral or credit insurance. While we have procedures to monitor and limit exposure to credit risk on our trade and non-trade receivables, there is no assurance that such procedures will effectively limit our risks of bad debts and avoid losses, which could have a material adverse effect on our financial condition, operating results and business expansion.

We depend heavily on key personnel, and turnover of key employees and senior management could harm our business.

Our future business and results of operations depend in significant part upon the continued contributions of our key technical and senior management personnel, including Mr. Hailong Liu. They also depend in significant part upon our ability to attract and retain additional qualified management, technical, marketing and sales and support personnel for our operations.  If we lose a key employee, or if we are not able to attract and retain skilled employees as needed, our business could suffer.  Significant turnover in our senior management could significantly deplete our institutional knowledge held by our existing senior management team.  We depend on the skills and abilities of these key employees in managing the technical, marketing and sales aspects of our business, any part of which could be harmed by turnover in the future.

We expect our sales revenues mainly be derived from our franchise stores and direct stores as our customers a large drop of of these stores would reduce our revenues and net income.

            We believe we are favorably diversifying our customer base to put less reliance on any one customer; however, a drop of a large number of these stores at the same time could materially decrease our revenues and net income.

We depend heavily on large suppliers if we lose any of the largest suppliers could harm our business.

             The top 10 major vendors accounted for 100% of the Company’s total purchases for the six months ended June 30, 2010, with three major vendors, Shangdong Huangming Solar Power Sales Co., Jiangsu Huayang Solar Power Sales Co. and Shangling Refrigerator accounting for 52%, 20% and 10% of the total purchases. The top five major vendors accounted for 100% of the Company’s total purchases for the six months ended June 30, 2009, with three major vendors, Shangdong Huangming Solar Power Sales Co. Hier Hefei Ririshun Sales Co., and Sanyo Electronics Co. accounting for %, 51%, 36%and 6% and of the total purchases. Any drop off these venders will significantly reduce our sales and income.

 
10

 

Our continuing rapid expansion could significantly strain our resources, management and operational infrastructure which could impair our ability to meet increased demand for our products and hurt our business results.

To accommodate our anticipated growth and to build additional facilities, we will need to expend capital resources and dedicate personnel to implement and upgrade our accounting, operational and internal management systems and enhance our record keeping and contract tracking system.  If we cannot successfully implement these measures efficiently and cost-effectively, we will be unable to satisfy the demand for our products, which will impair our revenue growth and hurt our overall financial performance.

Certain of our existing stockholders have substantial influence over our company, and their interests may not be aligned with the interests of our other stockholders.

Sherry Li is the owner of 11,556,288 shares of our Common Stock (approximately 68.9 % of the outstanding shares of Common Stock as of October 12, 2010). As more particularly described in footnote (3) and (4) to the table contained in “Security Ownership of Certain Beneficial Owners and Management,” Ms. Li has granted options to our Chairman, Hailong Liu, to purchase all 11,556,288 of her shares. As a result, Mr. Liu may have significant influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. This concentration of ownership may also have the effect of discouraging, delaying or preventing a future change of control, which could deprive our stockholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our shares.
  
Environmental claims or failure to comply with any present or future environmental regulations may require us to spend additional funds and may harm our results of operations.

Our business is subject to environmental, health and safety laws and regulations that affect our operations, facilities and products in each of the jurisdictions in which we operate. We believe that we are in compliance with all material environmental, health and safety laws and regulations related to our products, operations and business activities. Although we have not suffered material environmental claims in the past, the failure to comply with any present or future regulations could result in the assessment of damages or imposition of fines against us, suspension of production, cessation of our operations or even criminal sanctions.   The enacting of new regulations could also require us to acquire costly equipment or to incur other significant expenses.

Our holding company structure may limit the payment of dividends.

We have no direct business operations, other than our ownership of our subsidiaries.  While we have no current intention of paying dividends, should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries and other holdings and investments.  In addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions as discussed below.  If future dividends are paid in RMB, fluctuations in the exchange rate for the conversion of RMB into U.S. dollars may reduce the amount received by U.S. stockholders upon conversion of the dividend payment into U.S. dollars.

Chinese regulations currently permit the payment of dividends only out of accumulated profits as determined in accordance with Chinese accounting standards and regulations.  Our subsidiaries in China are also required to set aside a portion of their after tax profits according to Chinese accounting standards and regulations to fund certain reserve funds.  Currently, our subsidiary in China is the only source of revenues or investment holdings for the payment of dividends.  If they do not accumulate sufficient profits under Chinese accounting standards and regulations to first fund certain reserve funds as required by Chinese accounting standards, we will be unable to pay any dividends.

 
11

 

RISKS RELATED TO DOING BUSINESS IN CHINA

Risks Related to Doing Business in the PRC

The Company faces the risk that changes in the policies of the PRC government could have a significant impact upon the business that the Company may be able to conduct in the PRC and the profitability of such business.

The PRC economy is in a transition from a planned economy to a market oriented economy subject to five-year and annual plans adopted by the government that set national economic development goals. Policies of the PRC government can have significant effects on the economic conditions of the PRC. The PRC government has confirmed that economic development will follow the model of a market economy. Under this direction, the Company believes that the PRC will continue to strengthen its economic and trading relationships with foreign countries and business development in the PRC will follow market forces. While the Company believes that this trend will continue, there can be no assurance that this will be the case.  A change in policies by the PRC government could adversely affect the Company’s interests by, among other factors: changes in laws, regulations or the interpretation thereof, confiscatory taxation, restrictions on currency conversion, imports or sources of supplies, or the expropriation or nationalization of private enterprises. Although the PRC government has been pursuing economic reform policies for more than two decades, there is no assurance that the government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting the PRC political, economic and social life.

The PRC laws and regulations governing the Company’s current business operations are sometimes vague and uncertain. Any changes in such PRC laws and regulations may have a material and adverse effect on the Company’s business.

There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including but not limited to the laws and regulations governing the Company’s business, or the enforcement and performance of the Company’s arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. The Company and any future subsidiaries are considered foreign persons or foreign funded enterprises under PRC laws, and as a result, the Company is required to comply with PRC laws and regulations. These laws and regulations are sometimes vague and may be subject to future changes, and their official interpretation and enforcement may involve substantial uncertainty.  

The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. The Company cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on the Company’s businesses.

A slowdown or other adverse developments in the PRC economy may materially and adversely affect the Company’s customers, demand for the Company’s products and the Company’s business.

All of the Company’s operations are conducted in the PRC and all of its revenue is generated from sales in the PRC. Although the PRC economy has grown significantly in recent years, the Company cannot assure investors that such growth will continue. A slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in the PRC could materially reduce the demand for our products and materially and adversely affect the Company’s business.

Inflation in the PRC could negatively affect our profitability and growth.

In recent years, the Chinese economy has experienced periods of rapid expansion and highly fluctuating rates of inflation.  During the past ten years, the rate of inflation in China has been as high as 20.7% and as low as -2.2%.  These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation.  High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, reduce demand, materially increase our costs, and thereby harm the market for our products and our Company.

 
12

 
 
Governmental control of currency conversion may affect the value of an investment in the Company and may limit our ability to receive and use our revenues effectively.

The Company receives all of its revenues in Renminbi, which is currently not a freely convertible currency. The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of the PRC. Any future restrictions on currency exchanges may limit our ability to use revenue generated in Renminbi to fund any future business activities outside China or to make dividend or other payments in U.S. dollars.  Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the Renminbi for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises may only buy, sell or remit foreign currencies after providing valid commercial documents, at those banks in China authorized to conduct foreign exchange business. In addition, conversion of Renminbi for capital account items, including direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the Renminbi.

The fluctuation of the Renminbi may materially and adversely affect investments in the Company and the value of our securities.

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions. As the Company relies principally on revenues earned in the PRC, any significant revaluation of the Renminbi may materially and adversely affect the Company’s cash flows, revenues and financial condition, and the price of our common stock may be harmed. For example, to the extent that the Company needs to convert U.S. dollars it receives from an offering of its securities into Renminbi for the Company’s operations, appreciation of the Renminbi against the U.S. dollar could have a material adverse effect on the Company’s business, financial condition and results of operations. Conversely, if the Company decides to convert its Renminbi into U.S. dollars for the purpose of making payments for dividends on its common stock or for other business purposes and the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent of the Renminbi that the Company converts would be reduced. In addition, the depreciation of significant U.S. dollar denominated assets could result in a charge to the Company’s income statement and a reduction in the value of these assets.

PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to penalties and limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us, or otherwise adversely affect us.

On October 21, 2005, the PRC State Administration of Foreign Exchange, referred to as  SAFE, issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Notice 75, which became effective as of November 1, 2005. According to Notice 75, prior registration with the local SAFE branch is required for PRC residents to establish or to control an offshore company for the purposes of financing such offshore company with assets or equity interests in an onshore enterprise located in the PRC, or an offshore special purpose company.  An amendment to registration or filing with the local SAFE branch by such PRC resident is also required for the injection of equity interests or assets of an onshore enterprise in the offshore special purpose company or overseas funds raised by such offshore company, or any other material change involving a change in the capital of the offshore special purpose company. Moreover, Notice 75 applies retroactively. As a result, PRC residents who have established or acquired control of offshore special purpose companies that have made onshore investments in the PRC in the past are required to have completed the relevant registration procedures with the local SAFE branch by March 31, 2006. To further clarify the implementation of Circular 75, the SAFE issued Circular 106 on May 29, 2007. Under Circular 106, PRC subsidiaries of an offshore special purpose company are required to coordinate and supervise the filing of SAFE registrations by the offshore holding company’s shareholders or beneficial owners who are PRC residents in a timely manner.

 
13

 
 
Our current shareholders and/or beneficial owners may fall within the ambit of the SAFE notice and be required to register with the local SAFE branch as required under the SAFE notice. If so required, and if such shareholders and/or beneficial owners fail to timely register their SAFE registrations pursuant to the SAFE notice, or if future shareholders and/or beneficial owners of our company who are PRC residents fail to comply with the registration procedures set forth in the SAFE notice, this may subject such shareholders, beneficial owners and/or our PRC subsidiaries to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute dividends to our company, or otherwise adversely affect our business.

We may be exposed to liabilities under the Foreign Corrupt Practices Act, and any determination that we violated the Foreign Corrupt Practices Act could hurt our business.

Although we are currently not subject to these regulations, we anticipate to become subject to the Foreign Corrupt Practices Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining business. Our activities in China create the risk of unauthorized payments or offers of payments by one of the employees, consultants, sales agents or distributors of our Company, even though these parties are not always subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents or distributors of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition.

Because the Company’s principal assets are located outside of the United States and the Company’s officers and directors reside outside of the United States, it may be difficult for investors to enforce their rights in the U.S. based on U.S. federal securities laws against the Company and the Company’s officers and directors or to enforce U.S. court judgments against the Company or them in the PRC.

The Company is located in the PRC and substantially all of its assets are located outside of the United States; it may therefore be difficult or impossible for investors in the United States to enforce their legal rights based on the civil liability provisions of the U.S. federal securities laws against the Company in the courts of either the U.S. or the PRC and, even if civil judgments are obtained in U.S. courts, to enforce such judgments in PRC courts. Further, it is unclear if extradition treaties now in effect between the United States and the PRC would permit effective enforcement against the Company or its officers and directors of criminal penalties, under the U.S. federal securities laws or otherwise.

PRC regulations also involve complex procedures for acquisitions conducted by foreign investors that could make it more difficult for us to grow through acquisitions.

Pursuant to the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, effective as of September 8, 2006 and revised as of June 22, 2009, additional procedures and requirements were established that are expected to make merger and acquisition activities in China by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of Commerce of the PRC (“MOFCOM”) be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise, or that the approval from MOFCOM be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies and special anti-monopoly submissions for parties meeting certain reporting thresholds. We may grow our business in part by acquiring other companies engaged in aquaculture in the PRC. Complying with the requirements of the new regulations to complete such transactions could be time-consuming, and any required approval processes, including approval from MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

 
14

 
 
There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations governing the validity and legality of  call options to purchase of our Common Stock which are held by our Chairman and others and there can be no assurance that the call options held by such persons are not in breach of such laws and regulations.

Under a call option agreement with Hailong Liu our Chairman, Sherry Li, the holder of 11,556,288 shares of our Common Stock, has granted to Mr. Liu an option to purchase all of such 11,556,288 shares held by her over the course of two years in installments upon achievement of certain performance milestones by the Company. While we believe that this arrangement shall not be governed by PRC laws and regulations and therefore is not in breach of any PRC laws and regulations, there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations, including regulations governing the validity and legality of such call options. Accordingly, we cannot assure you that PRC government authorities will not ultimately take a view contrary to our view. If such certain call option agreement is deemed to be governed by PRC laws and regulations, our Chairman may be required to register with the local SAFE branch for his overseas direct investment in the Company. Failure to make such SAFE registration may subject our Chairman to fines and legal sanctions, and may also limit his ability to receive dividends from our PRC subsidiaries and remit his proceeds from their overseas investment into the PRC as a result of foreign exchange control under PRC laws and regulations.

RISKS RELATED TO THE MARKET FOR OUR STOCK

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

Our common stock is quoted on the Over-the-Counter Bulletin Board (the “OTCBB”).  The OTCBB is a significantly more limited market than the New York Stock Exchange or NASDAQ.  The quotation of our shares on the OTCBB may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock, could depress the trading price of our common stock, could cause high volatility and price fluctuations, and could have a long-term adverse impact on our ability to raise capital in the future.

There is currently limited trading market for our common stock and we cannot ensure that one will ever develop or be sustained.

There is currently limited trading market on the OTCBB for our common stock, and there is no assurance that one will develop or be sustained. 

The elimination of monetary liability against the Company’s directors and officers under the Nevada  law and the existence of indemnification rights to the Company’s directors, officers and employees may result in substantial expenditures by the Company and may discourage lawsuits against the Company’s directors and officers.

Under Nevada law, a corporation may indemnify its directors, officers, employees and agents under certain circumstances, including indemnification of such persons against liability under the Securities Act of 1933, as amended. In addition, a corporation may purchase or maintain insurance on behalf of its directors, officers, employees or agents for any liability incurred by him in such capacity, whether or not the corporation has the authority to indemnify such person.

The effect of these provisions may be to eliminate the rights of the Company and its stockholders (through stockholder’s derivative suits on behalf of the Company) to recover monetary damages against a director, officer, employee or agent for breach of fiduciary duty. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be provided for directors, officers, employees, agents or persons controlling an issuer pursuant to the foregoing provisions, the opinion of the Commission is that such indemnification is against public policy as expressed in the Securities Act of 1933, as amended, and is therefore unenforceable. 

 
15

 
 
Shares eligible for future sale may adversely affect the market price of our common stock, as the future sale of a substantial amount of outstanding stock in the public marketplace could reduce the price of our common stock.

As of October 12, 2010, there were issued and outstanding (i) 16,775,113 shares of our Common Stock,and  (ii) immediately exercisable warrants to purchase an aggregate of 2,862,571shares of our Common Stock. We currently have obligation to register the resale of an aggregate of 2,623,178 shares of our Common Stock, including shares issuable upon exercise of warrants. Future sales of substantial amounts of our Common Stock in the trading market could adversely affect market price of our Common Stock.

Provisions in our Articles of Incorporation could prevent or delay stockholders’ attempts to replace or remove current management or otherwise adversely affect the rights of the holders of our common stock.

Under our Articles of Incorporation, our Board of Directors is authorized to issue “blank check” preferred stock, with designations, rights and preferences as they may determine. Any shares of preferred stock that are issued are likely to have priority over our common stock with respect to dividend or liquidation rights.  In the event of issuance, the preferred stock could be utilized under certain circumstances as a method of discouraging, delaying or preventing a change in control, which could have the effect of discouraging bids to acquire us and thereby prevent shareholders from receiving the maximum value for their shares.  We have no present intention to issue any additional shares of preferred stock in order to discourage or delay a change of control or for any other reason.  However, there can be no assurance that preferred stock will not be issued at some time in the future.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus contains certain forward-looking statements (as such term is defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934), which  are based on the beliefs of our management as well as assumptions made by and information currently available to our management.  All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements.  In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words.
 
These forward-looking statements are only predictions.  These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, levels of activity, performance or achievements to materially differ from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.  We have described in the “Risk Factors” section and elsewhere in this prospectus the principal risks and uncertainties that we believe could cause actual results to differ from these forward-looking statements.  Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as guarantees of future events.
 
The forward-looking statements in this prospectus represent our views as of the date of this prospectus.  We anticipate that subsequent events and developments will cause our views to change.  However, while we may elect to update these forward-looking statements at some point in the future, we undertake no obligation to update any forward-looking statement to reflect events or developments after the date on which the statement is made or to reflect the occurrence of unanticipated events except to the extent required by applicable law.  You should, therefore, not rely on these forward-looking statements as representing our views as of any date after the date of this prospectus.

 
16

 
 
This prospectus also contains estimates and other statistical data prepared by independent parties and by us relating to market size and growth and other data about our industry. These estimates and data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates and data. We have not independently verified the statistical and other industry data generated by independent parties and contained in this prospectus, and, accordingly, we cannot guarantee their accuracy or completeness. 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.
 
USE OF PROCEEDS
 
We will not receive any proceeds from the sale of the shares of Common Stock. To the extent the warrants are exercised for cash, if at all, the Company will receive the exercise price for those warrants. Under the terms of the warrants, cashless exercise is permitted in certain circumstances. The Company intends to use any proceeds received from the exercise of warrants for working capital and other general corporate purposes. The Company cannot assure that any of the warrants will ever be exercised for cash or at all. If all of the warrants for which the resale of our Common Stock is covered by this prospectus are exercised for cash, the Company would receive aggregate gross proceeds of $5,967,069 .
 
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
Market Information

Our Common Stock is listed on the OTC Bulletin Board under the symbol “CEHD.OB.” There were no reported quotations for our Common Stock during calendar years 2008 and 2009.

The following table sets forth the high and low inter-dealer prices, without retail mark-up, mark-down or commission, involving our Common Stock during each calendar quarter in the fiscal year ending December 31, 2010, and may not represent actual transactions.

Fiscal Year 2010
   
High
   
Low
 
First quarter
 
$
2.00
   
$
2.00
 
Second quarter
 
$
2.00
   
$
2.00
 
Third quarter
 
$
3.60
   
$
2.00
 

At October 12, 2010, there were 16,775,113 shares of our Common Stock outstanding. Our shares of Common Stock are held by approximately 143 stockholders of record. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of Common Stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.

Securities Authorized for Issuance under Equity Compensation Plans

We do not have any equity compensation plans.

Dividend Policy

There are no restrictions in our Articles of Incorporation or By-laws that prevent us from declaring dividends.  The Nevada Revised Statutes, however, do prohibit us from declaring dividends where after giving effect to the distribution of the dividend:

1. 
we would not be able to pay our debts as they become due in the usual course of business, or;
2. 
our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution.

 
17

 
 
Because we are a holding company, we rely entirely on dividend payments from our direct wholly wned subsidiary, China Electronic Holdings, Inc.,  and in turn, the various direct and indirect subsidiaries of China Electronic Holdings, Inc.,  who may, from time to time, be subject to certain additional restrictions on its ability to make distributions to us. PRC accounting standards and regulations currently permit payment of dividends only out of accumulated profits, a portion of which must be set aside to fund certain reserve funds. Our inability to receive all of the revenues from our subsidiaries’ operations may in turn provide an additional obstacle to our ability to pay dividends on our Common Stock in the future. Additionally, because the PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of the PRC, shortages in the availability of foreign currency may occur, which could restrict our ability to remit sufficient foreign currency to pay dividends.

We currently intend to retain any future earnings to finance the development and growth of our business and do not anticipate paying cash dividends on our Common Stock in the foreseeable future, but will review this policy as circumstances dictate. If in the future we are able to pay dividends and determine it is in our best interest to do so, such dividends will be paid at the discretion of the Board of Directors after taking into account various factors, including our financial condition, operating results, capital requirements, restrictions contained in any future financing instruments and other factors the Board deems relevant.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.   These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions.  We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions.  Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  Factors which could have a material adverse affect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.  We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.  Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.

Overview
 
China Electronics Holdings, Inc. was incorporated in Nevada on July 9, 2007 under the name Buyonate, Inc. The Company was formed to develop and offer software products for the creation of interactive digital software for children.  However, upon a change of control of the Company on March 29, 2010 the Company immediately discontinued such business and began to search for target companies as candidates for business combinations.
 
 
18

 

We entered into a Share Exchange Agreement, dated as of July 9, 2010 (the “Share Exchange Agreement”) with China Electronic and certain stockholders and warrantholders of China Electronic (the “CEH Stockholders”).  Pursuant to the Share Exchange Agreement, on July 15, 2010, 10 CEH Stockholders transferred 100% of the outstanding shares of common stock and preferred stock and 100% of the warrants to purchase common stock of China Electronic held by them, in exchange for an aggregate of 13,785,902   newly issued shares of our Common Stock and warrants to purchase an aggregate of 1,628,572 shares of our Common Stock. The shares of our common stock acquired by the CEH Stockholders in such transactions constitute approximately 86% of our issued and outstanding Common Stock giving effect to the share and warrant exchange and the sale of our Common Stock pursuant to the Subscription Agreement discussed below, but not including any outstanding purchase warrants to purchase shares of our common stock, including the warrants issued pursuant to the Subscription Agreement. In connection with the closing of the Share Exchange Agreement, China Electronic purchased from the former principal stockholder of us an aggregate of 4 million shares of our common stock and then agreed to the cancellation of such shares.

The Share Exchange resulted in (i) a change in our control with a shareholder of China Electronic owning approximately 72.5% of issued and outstanding shares of our common stock, (ii) China Electronic becoming our wholly-owned subsidiary, and (iii) appointment of certain nominees of the shareholder of China Electronic as our directors and officers and resignation of Mr. Ryan Cravey as our sole director, Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer.

China Electronic was incorporated in Delaware on November 15, 2007 for the purpose of acquiring an existing company with continuing operations. On December 31, 2008 China Electronic entered into a Share Transfer Agreement with four shareholders of Lu’an Guoying Electronic Sales Co., Ltd., a limited liability company organized under the laws of the PRC, which resulted in Guoying becoming a wholly-owned subsidiary of China Electronic. The transfer of ownership of Guoying took effect on February 10, 2010 upon approval of the transaction by the PRC authorities. Guoying is a manufacturer and retailer of home appliances and consumer electronics in the PRC.

Because until its acquisition of Guoying in 2010, China Electronic was a development stage company and did not have significant operations, the discussion and analysis of our financial condition and results of operations presented below was prepared without taking into account operations of China Electronic during fiscal years ended December 31, 2009 and 2008.

Revenues

Our net revenue for the six months ended June 30, 2010 was $55,785,305, an increase of 382.3%, or $44,219,617, from $11,565,688 for the six months ended June 30, 2009.

   
SIX MONTHS ENDED JUNE 30,
 
   
2010
   
2009
 
             
Net revenue from exclusive franchise stores
  $ 31,352,521     $ 5,901,495  
Net revenue from non-exclusive franchise stores
    20,154,553       3,807,904  
Net revenue from company owned stores
    4,278,231       1,856,288  
Net Revenue
    55,785,305       11,565,688  

For the six months ended June 30, 2010, net revenue from exclusive franchise stores was $31,352,521, an increase of 431.3%, or $25,451,026, from $5,901,495 for the six months ended June 30, 2009. For the six months ended June 30, 2010, net revenue from non-exclusive franchise stores was $20,154,553, an increase of 429.3%, or $16,346,649, from $3,807,904 for the six months ended June 30, 2009. This increase was mainly due to 71 new stores being in operation during the six months ended June 30, 2010 as compared to the same period in 2009 and sales of  new products from SONY, LG and THTF that we began to carry in 2010 and also due to the improved economic climate in PRC which had a positive impact on the demand for our products and our sales.

 
19

 
 
For six months ended June 30, 2010, net revenue from our own stores was $4,278,231, an increase 130.5%, or $2,421,943, from $1,856,288 for the six months ended June 30, 2009. This increase for our own stores was mainly due to sales of new products from SONY, LG and THTF and also due to the improved economic climate in PRC which had a positive impact on the demand for our products and our sales.
 
Cost of Goods Sold

Our cost of goods sold for the six months ended June 30, 2010 was $45,598,608, an increase of $35,814,023, or 366.0%, compared to $9,784,586 for the six months ended June 30, 2009. The increase was mainly due to the increase in sales.

   
SIX MONTHS ENDED JUNE 30,
 
   
2010
   
2009
 
             
Cost of goods sold from exclusive franchise stores
    25,082,017       4,786,246  
Cost of goods sold from non-exclusive franchise stores
    16,406,448       3,084,402  
Cost of goods sold from company owned stores
    4,110,143       1,913,937  
Cost of goods sold
    45,598,608       9,784,586  

For the six months ended June 30, 2010, cost of goods sold from exclusive franchise stores was $25,082,017, an increase of 424.0%, or $20,295,771, from $4,786,264 for the six months ended June 30, 2009. For the six months ended June 30, 2010, cost of goods sold from non-exclusive franchise storeswas $16,406,448, an increase of 431.9%, or $13,322,046, from $3,804,402 for the six months ended June 30, 2009. For the six months ended June 30, 2010, cost of goods sold from our own stores was $4,110,143, an increase of 114.8 %, or $2,196,206, from $1,913,937 for the six months ended June 30, 2009. This increase for our own stores was mainly due to the increase in sales.

Gross Profit

Gross profit for the six months ended June 30, 2010 was $10,186,698, an increase of $8,405,594, or approximately 471.9%, compared to $1,781,102 for the six months ended June 31, 2009. The increase was due to the increased sales and the increase in gross profit margin for exclusive franchise stores from 23% to 25% and for our own stores from 3% to 4%.

Operating Expenses

Operating expenses for the six months ended June 30, 2010 were $838,278, an increase of $781,789, or 1,383.9% from $56,489 for the six months ended June 30, 2009. Selling expenses for the six months ended June 30, 2010 were $793,606, an increase of $768,530, or 3,064.9% from $25,075 for the six months ended June 30, 2009. General and administrative expenses for the six months ended June 30, 2010 were $44,672, an increase of $13,259, or 42.2%, from $31,413 for the six month ended June 30, 2009. The increase was due to the increase in sales and business expansion.

 
20

 
 
Net Operating Income

Our net operating income for the six months ended June 30, 2010 was $9,348,419, an increase of $7,622,425 or 442.2%, from $1,724,613 for the same period in 2009. The increases were due to increased sales which were not proportionately offset by increases in costs of good sold and operating expenses.

Income Taxes Expense

Income Taxes

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the six months ended June 30, 2010 and 2009:

   
2010
   
2009
 
             
U.S. Statutory rates
   
34.0
%
   
34.0
%
                 
Foreign income not recognized in USA
   
(34.0
)
   
(34.0
)
                 
China income taxes
   
0
     
0
 
                 
China income tax exemption
   
0
     
0
 
                 
Total provision for income taxes
   
0
%
   
0
%

Pursuant to authorizations from the Company’s local and provincial taxing authorities, the Company pays di minimis annual income taxes. There can be no assurance that such tax treatment will continue or that PRC tax authorities will not assess taxes in the future, which relate to prior periods.

Off-Balance Sheet Arrangements

There were no off-balance sheet arrangements during the year ended December 31, 2009  or during the six months ended June 30, 2010 that have, or are reasonably likely to have, a current or future material affect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Liquidity and Capital Resources

As of June 30, 2010, we had cash and cash equivalents of $155,529. We have historically funded our working capital needs from operations, advance payments from customers, bank borrowings, and capital from shareholders. Our working capital requirements are influenced by the level of our operations, and the timing of accounts receivable collections.
 
We had no material commitments for capital expenditures as of June 30, 2010.
 
 The following table sets forth a summary of our cash flows for the periods indicated:

   
June 30, 2010
   
June 30, 2009
 
   
(Unaudited)
   
(Unaudited)
 
Net cash used in operating activities
  $ (27,974 )   $ (86,062 )
Net cash provided by investing activities  
    132,176       -  
Net cash provided by financing activities
    -       74,575  
Effect of rate changes on cash  
    (13,410 )     (40 )
Increase (decrease) in cash and cash equivalents  
    90,793       (11,527 )
Cash and cash equivalents, beginning of period  
    64,736       33,600  
Cash and cash equivalents, end of period  
  $ 155,529     $ 22,073  
 
 
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Operating Activities

Net cash used in operating activities was $27,974 for the six months ended June 30, 2010, compared to net cash used in operating activities of $86,062 for the six months ended June 30, 2009, a decrease of $58,088 or 67.5%. The decrease of net cash used in operating activities was primarily due to increase of $7,622,425 in net income and a decrease of $1,787,733 in accrued expenses and an increase of $1,514,066 in other receivables offset by an increase of $3,651,533 in account receivables and an increase of $2,959,899 in prepayments and increase of $1,818,688 in other receivables and an increase of $2,483,845 in inventories during the first half of 2010, which is mainly due to the result of greater sales.

Investing Activities

Net cash provided by investing activities was $132,176 for the six months ended June 30, 2010, compared to $0 for the three months ended June 30, 2009 because $136,643 in cash was received in financing in the first quarter of 2010 and $4,467 in cash was used to purchase equipment in the first half year of 2010.

Critical Accounting Policies

Revenue Recognition - Direct sales and Wholesale Activities

The Company receives revenue from sales of electronic products. The Company's revenue recognition policies are in compliance with ASC 605 (previously Staff Accounting Bulletin 104). Sales revenue is recognized 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. Our sales are usually covered by the manufacturers’ return and warranty policies. Therefore, we do not estimate deductions or allowance for sales returns. Sales are presented net of any discounts, reward, or incentive given to customers. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as customer deposits. Customer deposits amounted to $1,338,545 and $1,333,091 as of June 30, 2010 and December 31, 2009, respectively.

Our products delivered to customers are checked on site by customers and, once the products are accepted by customers, the customers sign acceptance notices as evidence of delivery and completion of sales.

Rewards or incentives given to our customers are an adjustment of the selling prices of our products; therefore, the consideration is characterized as a reduction of revenue when recognized in our income statement.

The Company recognizes its revenues net of value-added taxes (“VAT”).  The Company is subject to VAT which is levied at a fixed annual amount. Currently, the Company is charged at a fixed annual amount of approximately $1,200 to cover all types of taxes, including income taxes and value added taxes. This amount has been approved by the PRC national and tax departments from March 2007 to 2010.

Revenue Recognition – Franchise Activities

Revenues from franchised activities include area development and initial franchise fees (collectively referred to as “Franchise fees”) received from franchisees to establish new stores and royalties charged to franchisees based on a percentage of a franchised store’s sales. Franchise fees are accrued as unearned franchise revenue when received and are recognized as revenue when the non-exclusive franchise stores covered by the fees open, which is generally when we have fulfilled all significant obligations, which are we only have on store at one village, free delivery and free after sales service to the franchisee. Continuing fees and royalties are recognized in the period earned.

 
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Estimates

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

Inventories

Inventories are stated at the lower of cost, determined on a weighted average basis, and net realizable value. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose.

ORGANIZATIONAL HISTORY OF THE COMPANY AND ITS SUBSIDIARIES

China Electronics Holdings, Inc. was incorporated in Nevada on July 9, 2007 under the name Buyonate, Inc. The Company was formed to develop and offer software products for the creation of interactive digital software for children.  However, upon a change of control of the Company on March 29, 2010 the Company immediately discontinued such business and began to search for target companies as candidates for business combinations.

On July 15, 2010, pursuant to a Share Exchange Agreement, dated as of July 9, 2010, 10 shareholders and warrantholders of China Electronic Holdings, Inc., a Delaware corporation “ (“CEH Delaware”), transferred 100% of the outstanding shares of common stock and 100% of the warrants to purchase common stock of CEH Delaware held by them, in exchange for an aggregate of 13,785,902 newly issued shares of our Common Stock and warrants to purchase an aggregate of 1,628,572 shares of our Common Stock. In connection with the closing of the Share Exchange Agreement, CEH Delaware purchased from our former principal stockholder an aggregate of 4 million shares of our Common Stock and then agreed to the cancellation of such shares.

Effective August 3, 2010, CEH Merger Corp., a Nevada corporation newly formed by the Company for the purposes of merging into the Company, merged into the Company. In connection with merger and pursuant to Articles of Merger filed with the Nevada Secretary of State, Buyonate, Inc. changed its name to China Electronics Holdings, Inc. No securities of the Company were issued in connection with the merger. The merger and name change were approved by the Financial Industry Regulatory Authority ("FINRA") and the Common Stock began trading under the symbol “CEHD.OB” on August 23, 2010.

CEH Delaware owns 100% of the capital stock of Guoying. Guoying is a wholly foreign-owned enterprise, or “WFOE,” under the laws of the PRC by virtue of its status as a wholly-owned subsidiary of a non-PRC company, CEH Delaware.

Purchase Agreement

During the period from July 15, 2010 to August 17, 2010 we consummated a series of Private Placements of our Common Stock and warrants to purchase our Common Stock pursuant to a Subscription Agreement dated as of July 9, 2010 (the “Purchase Agreement”). Pursuant to the Purchase Agreement we sold to 105 investors for an aggregate gross purchase price of $5,251,548 an aggregate of (a) 1,989,211 shares of our Common Stock, (b) three year Series C Warrants to purchase an aggregate of 497,303 shares of our Common Stock for $3.70 per share and (c) three year Series D Warrants to purchase an aggregate of 497,303 shares of our Common Stock for $4.75 per share.

 
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Representations and Warranties; Indemnification : The Purchase Agreement contains representations and warranties by us and the investors which are customary for transactions of this type such as, with respect to the Company: organization, good standing and qualification to do business; capitalization; authorization and enforceability of the transaction and transaction documents; no conflicts or violations resulting from executing, delivering and performing the transaction documents; financial statements; valid issuance of stock, governmental being obtained or not required to consummate the transaction; litigation; no market manipulation; no defaults; no undisclosed liabilities or events, no general solicitation; full disclosure; environmental compliance; quotation of our shares on the OTC Bulletin Board; no foreign corrupt practices related party transactions; representations concerning employees and no brokers used, and with respect to the investors:  authorization, investment intent and no conflicts arising as a result of execution, delivery and performance of the transaction documents. The Company has agreed to indemnify the investors and their affiliates against claims, costs, losses, damages, expenses and obligations arising out of or based on material misrepresentations by the Company made in the Purchase Agreement and breaches by the Company of material covenants in the Purchase Agreement.

Covenants: The Purchase Agreement contains certain covenants on our part, including the following:

Registration: we must file a registration statement covering the resale by the investors of 100% of our shares of Common Stock issuable to the investors upon the exercise of all of the Series C Warrants and the Series D Warrants (the “Resale Registration Statement”). The Resale Registration Statement must be filed with the SEC within 60 days after the final closing date of sales of our securities pursuant to the Purchase Agreement (which occurred on August 17, 2010) and cause the registration statement to be declared effective within 180 days after the final closing date). The Purchase Agreement provides for liquidated damages of .5% per month of the purchase price of the securities purchased by the investors (with a cap of 5% of the purchase price in the aggregate) if the filing or effectiveness of the registration statement is delayed beyond the required deadlines or if after effectiveness is declared by the SEC, effectiveness of the Resale Registration Statement is not maintained or if the Company shall fail for any reason to satisfy the current public information requirement under Rule 144. 

Listing: we have agreed to maintain the quotation or listing of our Common Stock on the American Stock Exchange, Nasdaq Capital Market, Nasdaq Global Market, Nasdaq Global Select Market, OTC Bulletin Board, or New York Stock Exchange use our best efforts to list our Common Stock on the American Stock Exchange, Nasdaq Capital Market, Nasdaq Global Market, Nasdaq Global Select Market or New York Stock Exchange and comply in all respects with the Company’s reporting, filing and other obligations under the bylaws or rules of the applicable principal market on which the Common Stock is traded or quoted as long as any Purchased Securities are outstanding. We have also agreed to complete an uplisting of our common stock to the Nasdaq Capital Market, Nasdaq Global Market, Nasdaq Global Select Market or NYSE Amex Equities.

Filings: For the later of August 17, 2012 (two years after the final closing date of the sale of securities pursuant to the Purchase Agreement) or until all of the securities purchased under the Purchase Agreement (the “Purchased Securities”) can be resold by the investors under Rule 144 the Company will comply with all of its reporting and filing obligations under the Securities Exchange Act of 1934 and all of the requirements relating to maintaining the effectiveness of the Resale Registration Statement within 12 months after the closing date.

Lockup Agreement: The Chairman of the Company has agreed that until February 17, 2012 (18 months after the final closing date) he will not sell any offer, pledge, sell, contract to sell, sell any option or contract to purchase, lend, transfer or otherwise dispose of any shares of Common Stock or any options, warrants or other rights to purchase shares of common stock or any other security of the Company which he owns or has a right to acquire as of July 9, 2010.

Right of Participation: The investors shall have the right to purchase up to 25% of any subsequent underwritten offering of the Company’s securities before the time the Company completes an uplisting of its common stock to the Nasdaq Capital Market, Nasdaq Global Market, Nasdaq Global Select Market or NYSE Amex Equities.

 
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Most Favored Nations provision: subject to certain exceptions, if at any time prior to July 9, 2012, the Company shall issue any common stock or securities convertible into or exercisable for shares of common stock (or modify the conversion or exercise price of any of the foregoing which may be outstanding) to any person or entity at a price per share which shall be less than $3.43, subject to adjustment for stock dividends, subdivisions and combinations (the “Lower Price Issuance”), without the consent of the investor, then the Company shall issue, for each such occasion, additional shares of common stock to the investors respecting those purchased securities that are then still owned by the investor at the time of the Lower Price Issuance so that the average per share purchase price of the purchased securities owned by the investors on the date of the Lower Price Issuance plus such additional shares issued to investor pursuant to this provision is equal to such other lower price per share.

Delivery of up to 1,241,817  shares of Common Stock from Based on 2010 Net Income: If our net income for the year ending December 31, 2010 (“Actual 2010 Net Income”)  is less than $12.0 million (2010 Guaranteed NI”), then the Company shall issue, for each such occasion, to each investor on a pro-rata basis (determined by dividing each investor’s consideration paid for the securities purchased by such investor by the aggregate consideration paid for the securities purchased by all investors), an  additional amount of shares of common stock (the “Make Good Shares”) equal to, as applicable, a number of shares equal to the difference between A and the product of A x B, where A is the number of common shares originally purchased and B equals (2010 Guaranteed NI  minus Actual 2010 Net Income)/2010 Guaranteed NI.

Our Corporate Structure

As set forth in the following diagram, following our acquisition of CEH Delaware, CEH Delaware became and currently is our direct, wholly-owned subsidiary.


 
25

 
 
BUSINESS
Overview

Through our subsidiary, CEH Delaware., we are engaged in the retail sale of consumer electronics and appliances in China, such as solar eaters, refrigerators, air conditioners, televisions, etc. We are targeting the rural market in Anhui Province.

We started sales of home appliances and electronics in 2001. During the fiscal year ended December 31, 2009 (“fiscal 2009”), approximately 66% of our revenues were from the sale of solar water heaters, , approximately 10.5% of our revenues were from the sale of refrigerators  and approximately 6.5% of our revenues were generated from the sale of televisions. Approximately 69% of our net income for fiscal 2009 was from the sale of solar water heaters, approximately 12.7% of our 2009 net income was from the sale of refrigerators and approximately 8.0% of our 2009 net income was profit from sales of televisions.
 
We operate 3 company owned stores, all of which are located in Lu’an City, Anhui Province. As of October 12, 2010 we also operate 458 exclusive franchise stores and 600 non-exclusive franchise stores, which are located in the rural areas around Lu’an. Approximately 3.3% of our revenues for fiscal 2009 were from the company owned stores, approximately 88.9% of our 2009 revenues were from the exclusive franchise stores and approximately 7.8% of our 2009 revenues were generated from the non-exclusive franchise stores.

For additional information concerning the location and area of each of our company owned stores and the terms under which the real estate for each store is leased, see “Description of Property” herein.

We purchase the consumer electronics and appliances we sell directly from the manufacturers thereof or large distributors. Currently, 30% of the products are supplied to us by large distributors, mainly under the brand names Samsung and LG.  Guoying is the exclusive wholesaler in the Lu’an area for products under the brand names, Sony, LG, Samsung, Shanghai Shangling, Chigo, Huayang and Huangming.  Guoying is the general sales agency of Sino-Japan Sanyo electronic products, such as Sanyo TVs, air conditioners, washing machines and micro-wave ovens.  Guoying has teamed up with Huangming and Huayang, the 2 largest manufacturers of solar thermal products in China, to be their exclusive retail outlet in Lu’an, Anhui. Some of their energy efficient, “green” products include:  solar thermal water heaters, solar panels (photovoltaic) and energy saving glass.

In addition to purchasing from the manufacturers or distributors, we have refrigerators manufactured by an OEM manufacturer under the Company’s own trademark “Guoying”. Guoying refrigerators have “3C” quality national authentication certificates. During fiscal year 2009, approximately 2 % of our revenues and 2.5% of our net income were from the sale of Guoying brand refrigerators. In August 2007, Guoying entered into a 5 year OEM agreement with Shanghai Pengpai Electronic Co., Ltd. (“Pengpai”), under which Pengpai will manufacture refrigerators for Guoying to sell under its own trademark. Guoying sold a total of 30,000 refrigerators in 2007, 46,000 in 2008, and 62,000 in 2009, and expects to sell 77,000 in 2010 and 100,000 in 2011, in Anhui, Henan and Hubei Provinces. On October 2, 2006, Guoying entered into a loan agreement with Pengpai where Guoying loaned to Pengpai a total of RMB 80 million (approximately $ 11.76 million) from year 2006 to 2010. In exchange, Pengpai sells refrigerators to Guoying at a discounted price. Pengpai is required to repay the loan within 4 years, starting from October 2013. The loan is secured by all the assets of Pengpai.

Retail Operations

The various stores are described below:

Company Owned Stores

We operate 3 company owned stores. Two of them are focused on the sale of solar thermal products, with one store having an area of 100 square meters and another one having an area of 60 square meters. The third one is a general store with an area of 180 square meters, which carries solar thermal products, refrigerators, air conditioners, TV, and other products. Our offices are located on the second floor of the third store. We currently lease all the company owned stores.

 
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Exclusive Franchise Stores

As of October 12, 2010 we operate 458 exclusive franchise stores. The stores are located in rural areas around Lu’an City. The customers of these stores are residents of the local towns and villages. Guoying is the only wholesaler providing products to these type of stores. Guoying is in charge of the delivery to each store and the stores pay the purchase price of the products provided in cash at delivery.  Generally, after receiving orders from the stores, Guoying can make the delivery within 3 days.  For products within the national “Rural consumer electronics and appliances” plan, meaning, the maximum sales price is fixed, Guoying will give the stores certain discounts based on the quantity of their purchases.
 
With each store, Guoying has signed an exclusive franchise agreement with a term ranging from 1 year to 3 years. Based on the agreements, Guoying provides a loan to the store owner when establishing the stores. The loan is in the form of cash and products, while the loan amount to each store depends on the specific needs of each store. The store owners provide the operating space. In consideration of the loan, the stores will exclusively purchase products from Guoying.

Non-Exclusive Franchise Stores

As of October 12, 2010 we also operate 600 non-exclusive franchise stores, which are located at the rural areas around Lu’an City. Guoying is in charge of the delivery of products and gets cash payment for the products it sells to the stores at delivery.  Each non-exclusive franchise store pays Guoying an annual franchise fee of 5,000 RMB (approximately $ 735). Guoying is not the only wholesaler of the stores and the stores are free to purchase products from anyone, including Guoying’s competitors.

Our Warehouses

We currently distribute products to our stores from two warehouses located within Lu’an city, which are leased by Guoying.   For additional information concerning the location and area of each of the Company’s warehouse and the terms under which the real estate for each warehouse is leased, see “Description of Property” herein.

Industry Background

Approximately 56% of China’s population still resides in rural areas of China, making rural residents the largest consumer group in China. After many years of economic reforms, the average income of people living in China's rural areas has gradually increased. The rural market is largely untapped and has enormous potential for growth. The rural consumer group has tremendous purchasing power and is increasing as the Chinese government encourages rural communities to modernize.

There are several reasons for the potential development of rural consumer electronics and appliances market.

First, the central government has decided to expand internal demand by increasing the income of the rural population by reducing tax for farmers. The continuous improvements in the rural power network, rural transportation, and rural communication make the rural market extremely favorable for home appliances and electronics.

Second, the Chinese government has initiated a rural home appliance and electronics rebate program, called “Rural Consumer Electronics” plan. The plan provides that the maximum sales price of electronics is fixed, at a price which is usually equal to or less than the market price in urban areas of the same product. Meanwhile, rural consumers can get a 13% government rebate on their purchases of electronics.

 
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Third, the current consumer electronics and appliances markets in big PRC cities like Beijing, Shanghai, and Shenzhen are already saturated by an over abundance of competitors – leading to very lean margins. Although some competitors have announced interest in the rural market, none of the current competitors have established any significant presence in the rural markets. Successful brand names typically established in cities are not an indicator of automatic success in the rural. A majority of the population from the rural market has not seen or heard of the retail chains that exist in the cities.

Additionally, the rural consumers have different tastes and values in making their purchases. For example, when it comes to appliances, functionality to cost is the most important factor in deciding which product to purchase. However, product colors have a significant impact in decision making. Most rural consumers prefer certain colors, such as red, over colors like black, silver, and white that are successful in the city. As a result, much research has to be carried out to fully understand the outlook of the rural consumer.

        Guoying is the first rural home appliance and electronics retailer in Anhui province.

Raw Materials and Suppliers

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

Our biggest suppliers of merchandise in 2009, in terms of cost to us, were:

Name of Supplier
 
Percentage
 
Shangdong Huangming Solar Power Sales Co.
   
52.15
%
Jiangshu Huayang Solar Power Sales Co.
   
14.89
%
Hier Hefei Ririshun Sales Co.
   
26.22
%
Shanghai Tengpai Electronic Co.
   
1.50
%
Sanyo Hefei Office
   
3.21
%
Jiangshu Taizhou Chunlan Sales Co.
   
0.78
%
Anhui Germei Tech. Co.
   
1.02
%

Our biggest suppliers of merchandise in 2008, in terms of cost to us, were:

Name of Supplier
 
Percentage
 
Hier Hefei Ririshun Sales Co.
   
45.51
%
Shangdong Huangming Solar Power Sales Co.
   
24.33
%
Jiangshu Taizhou Chunlan Sales Co.
   
25.34
%
Sanyo Hefei Office
   
4.82
%

Our biggest suppliers of merchandise in 2007, in terms of value, were:

Name of Suppliers
 
Percentage
 
Sanyo Hefei Office
   
78.85
%
Shanghai Pengpai Electronic Sales Co.
   
21.15
%

We receive all of our merchandise from our suppliers, which are often the manufacturers, by the suppliers’ delivery trucks sent to our two warehouses located within Lu’an city.

Marketing, Sales, and Distribution

We have a staff of 27 employees who take orders and provide customer service to each franchise store in assigned geographical areas. We advertise in many ways, including using TV advertisements, on buses and walls and on pagers on the streets distributed by our promotion personnel and general promotions, including discounts. We base our advertising on our observations of the market and our competitors. Under contracts we have with our suppliers, our suppliers are responsible for the costs of all discounts and promotions.

 
28

 
 
Customers and Pricing

Our customer strategy is to offer products to the rural market where there is less competition.

Our customers pay different prices for our products depending on where they live.
 
In general, most of the products sold in our franchise stores are under the regulation of the national “Rural Consumer Electronics” plan, meaning that the maximum sales price is fixed, which price is usually equal to or less than the market price in urban areas of the same product. Meanwhile, rural consumers can get a 13% government rebate on electronics.

Some products sold by our company owned stores to the residents in Lu’an city are at the market price in urban areas.

Payment methods for customers are mainly cash.

In recent years, the pricing of our merchandise has changed as the price charged by our vendors has changed. For example, due to inflation in the recent years, the market price of consumer electronics and appliances has risen. However, the selling prices on some old models have decreased since such models are being discontinued.

Employees

As of October 12, 2010, Guoying had 47 full-time employees, including 15 management and supervisory personnel, 27 sales and marketing personnel and 5 after sale support.

Seasonality

Approximately 30% of our sales of products are made in the first quarter. The Chinese Spring Festival (which is a traditional shopping time) is in the first quarter. The fourth quarter is the next busiest. For sales of electronic appliances, the first quarter is the busiest quarter and the third quarter is the slowest quarter, because in the third quarter the demand for solar heaters, refrigerators and air conditioners decrease and the demand associated with the Chinese Spring Festival have not begun.

Competition

We believe our main competitor is Guosheng Electronic (“Guosheng”), which is a state-owned enterprise in Anhui Province.  Guosheng is the third biggest retail of consumer electronics and appliances in Anhui Province and runs several franchise stores in small cities and towns.  Guosheng also has stores in Lu’an city.

Compared to Guosheng, our competitive disadvantages are:

Fund. As a state-owned enterprise, it is easier for Guosheng to get bank loans.

Exclusive Representative Rights. With its current larger size, it is easier for Guosheng to get the exclusive representative rights with respect to certain  major brands

Compared to Guosheng, our competitive advantages are:

Rural market.  We have hundreds of franchise stores in rural markets, which are markets with high potential margin, but which markets are ignored by the big retail chain stores.
 
 
29

 
 
Flexibility. We are running 24/7 in making deliveries. After receiving an order, we can make delivery as soon as within 2 hours. Huge state-owned retail stores, such as Guosheng, usually take 2-3 days to deliver after receipt of orders.

Sales Networking. We have 27 sales persons visiting the franchise stores each week, which serves to keep a good relationship between Guoying and the stores.
 
Research and Development

We are not presently involved or engaged in any research and development activities.

Intellectual Property

The Company does not own any patents.

Mr. Hailong Liu, our CEO, owns the following trademarks:

(i)
Trademark Registration No:
5307764
 
Owned Trademark:
GUOYING(国鹰)
 
Clarification No:
11
 
Term:
May 7, 2009 to May 6, 2019
 
Issued by:
Trademark Office, State Administration for Industry and Commerce
     
(ii)
Trademark Registration No:
5307765
 
Owned Trademark:
GUOYING(国鹰)
 
Clarification No:
7
 
Term:
April 28, 2009 to April 27 2019
 
Issued by:
Trademark Office, State Administration for Industry and Commerce

Mr. Liu has orally authorized Guoying  to use the trademarks for an unspecified term at no cost to us.

Regulation

We are subject to a wide range of regulation covering every aspect of our business. The most significant of these regulations are set forth below.

Chain Stores Management

In March 1997, the Domestic Trade Ministry issued and enforced the Standard Opinions on the Operation and Management of Chain Stores, or the Opinions, to regulate and administrate the forms, management models, composition, business area and other requirements of Chain Stores. Such Opinions specifically stipulate the three forms of Chain Stores, including regular chain, franchise chain and voluntary chain. The Opinions also stipulate that the franchise chain and voluntary chain store shall execute relevant cooperation contracts with specified clauses provided in the Opinions including but without limited to license use of trademarks, product quality management, centralized purchase and sales promotion policies.

In May 1997, the State Administration of Industry and Commerce issued the Circular of the Relevant Issues for the Administration of Registration of Chain Stores, mainly providing the conditions of the establishment for chain stores and branches, the procedures and documents for application for the registration with the administration of industry and commerce and name of chain stores to regulate the registration issues of chain stores.
 
 
30

 
 

 
Regulations on consumer protection
 
On October 31, 1993, the Standing Committee of the National People's Congress issued and enforced the Law on the Protection of the Rights and Interests of Consumers, or the Consumer Protection Law, revised in 2009. The State Administration of Industry and Commerce also issued the notice regarding Handling of Acts of Infringement of Rights of Consumers or the Notice in March 2004. Under the Consumer Protection Law and the Notice, a business operator providing a commodity or service to a consumer shall first undertake the responsibilities of products for the manufacturers. These liabilities include restoring the consumer’s reputation, eliminating the adverse effects suffered by the consumer, and offering an apology and compensation for any losses incurred. The following penalties may also be imposed upon business operators for the infraction of these obligations: issuance of a warning, confiscation of any illegal income, imposition of a fine, an order to cease business operation, revocation of its business license or imposition of criminal liabilities under circumstances that are specified in laws and statutory regulations.
 
Regulations on commercial franchising

On May 1, 2007, the State Council issued and enforced the Regulations for Administration of Commercial Franchising, to supervise and administrate the Franchise activities. The Regulations for Administration of Commercial Franchising were later supplemented by the Administrative Measures for Archival Filing of Commercial Franchise and the Administrative Measures for Information Disclosure of Commercial Franchise, both of which were issued by the Ministry of Commerce. Under these regulations, Franchisors are required to file franchise contracts with the Ministry of Commerce or its local counterparts; and franchise contracts shall include certain required provisions, such as terms, termination rights and payments. Franchisors are also required to satisfy certain requirements including, but without limitation, to have mature business models, the capacity to provide operation guidance, technical support and training to franchisees. Franchisors engaged in franchising activities without satisfying the above requirements may be subject to administrative penalties.

Regulations on trademarks

The State Council issued the PRC Trademark Law in 1982, revised in 2001, and the Implementation Regulation of the PRC Trademark Law in 2002, to protect the owners of registered trademarks and trade names. The Trademark Office handles trademark registrations and grants a term of ten years to registered trademarks. Trademark license agreement must be filed with the Trademark Office or its regional counterpart.

Home appliances sales on the rural market

On April 16, 2009, the Ministry of Commerce, the Ministry Of Finance, the Industry and Information Technology, National Development and Reform Committee, the Ministry of Environmental Protection, State Administration of Industry and Commerce and State Administration of Quality Supervision promulgated the Implementation Rules of Home Appliance Sales on the Rural Market, or the Implementation Rules to stimulate domestic demand and promote economic development. According to the Implementation Rules, the local government authority would make its decision concerning the qualification of home appliance selling enterprises based on the process of public bidding and tendering. Such enterprise shall satisfy certain requirements, including having measures on dispatching, price management, after-sale service and sales channel. Such enterprises are also required to file with local commerce bureau for sale of home appliances and shall provide good service. The sales enterprises can be cancelled its qualification to sell home appliances in the rural areas in case of any serious violation of commitments or duties as set forth in the Implementation Rules.

DESCRIPTION OF PROPERTY

Set forth below is a table containing certain information concerning the location and area of each of our company owned stores and warehouses and the terms under which such properties are leased.

 
31

 

 
Name 
 
Area
(Square Meters)
 
Location
 
Landlord
 
Lease
Commencement
Date
 
Term
(years)
 
Rent per Year ($)
 
Foziling Road Warehouse
   
800
 
Foziling Road
 
Zongjun Gao
 
January 1,2008
 
6 years and 11 months
   
9,882.35
 
Development Zone Warehouse
   
1437.50
 
Development Zone, East of Jing Er Road, North of Foziling Road
 
Benjun Zhang
 
April 1,2010
 
1 year
   
20,294.12
 
Guangcai Big Market Lease Agreement
   
100
 
First Floor of Guangcai Big Market
 
Haibo Liu
 
October 30,2008
 
3 years
   
20,882.35
 
Haomen Garden Lease Agreeement
       
Haomen Store operation site
 
Haibo Liu
 
June 1, 2007
 
3 years
   
10,000
 
Wangpai Warehouse
   
808
 
Wangpai Warehouse, Liufo Road
 
Haibo Liu
 
January, 2008
 
4 years and 11 months
   
950.59
 
Office Lease Building
   
375
 
No.166, No.266 and No.176 stores, Building 3, Longgang Road, Liu’an City
 
Taidong Han
 
September 1, 2007
 
10 years
   
11647.06
 

We believe that the foregoing properties are adequate for our present needs.

 
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

 
Directors and Executive Officers

The following table sets forth the name and position of each of our current executive officers and directors.

Name
 
Age
 
Position
             
Hailong Liu 
   
39
   
Chairman, President, CEO and CFO
             
Haibo Liu
   
36
   
 Director and Vice President

             Hailong Liu became our Chairman, President and CEO on July 15, 2010. Mr. Liu is the CEO of Lu’an Guoying Electronic Sales Co., Ltd. since May 2007. From 2004 to 2007, Mr. Liu was the general manager of Guoying (Formerly named as Lu’an Dongshen Electronic Sales Co., Ltd.). From 2001 to 2003, Mr. Liu was the general manager of Lu’an Xianglong Electronic Sales Co., Ltd. From 1997 to 2001, Mr. Liu was the associate manager of Operation Department of Lu’an Xianglong Electronic Sales. From 1994 to 1996, Mr.Liu was the manager of Nanjing Branch of Shanghai Kaili Company. From 1990 to 1994, Mr. Liu was the manager of Shenzhen Branch of Shanghai Kaili Company. Mr. Liu got his Executive MBA Degree on Marketing and Sales of Beijing University on 2005.

               Haibo Liu became our Director and Vice President on July 15, 2010. Mr.Liu is the general manager of sales of Lu’an Guoying Electronic Sales Co., Ltd. since September 2007. From January 2004 to September 2007, Mr.Liu was the shareholder and general manager of Guoying. From 2000 to 2003, Mr. Liu was the general manager of Lu’an Shengtang Sales Co., Ltd. From 1992 to 1999, Mr. Liu established Lu’an Haifeng Sales Operation Department. Mr Liu has been enrolled as a part-time student in Shenzhen Jucheng Business School since October 2007, majoring in marketing and sales.

 
32

 
 
Employment Agreements

We have not entered into employment agreements with any of our officers or other key employees.

Compensation of Officers and Directors

Our executive officers do not receive any compensation for serving as executive officers for China Electronics. However, our executive officers are compensated by and through Guoying.  The following table sets forth information concerning cash and non-cash compensation paid by Guoying to our named executive officers for 2009 and 2008, respectively.  No executive officer of ours received compensation in excess of $100,000 for either of those two years.  

Name and 
Principal 
Position 
 
Year
Ended
 
Salary
($)
   
Bonus
($)
   
Stock
Awards
($)
   
Option
Awards
($)
   
Non-
Equity
Incentive
Plan
Compensation
($)
   
Non-
Qualified
Deferred
Compensation
Earnings 
($)
   
All
Other
Compensation
($)
   
Total ($)
 
Hailong Liu,
 
12/31/2009
  $ 44,118                                         $ 44,118  
Chairman, President, CEO and CFO
 
12/31/2008
  $ 41,176                                         $ 41,176  
Haibo Liu, Vice
 
12/31/2009
  $ 29,850                                                     $ 29,850  
President  
12/31/2008
  $ 29,850                                                     $ 29,850  

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

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

Transactions with related persons

None.

Director Independence

We currently do not have any independent directors, as the term “independent” is defined by the rules of the Nasdaq Stock Market.

Board Composition and Committees

Our board of directors is currently composed of two members, Hailong Liu and Haibo Liu.

We currently do not have standing audit, nominating or compensation committees.  Currently, our entire board of directors is responsible for the functions that would otherwise be handled by these committees.  We intend, however, to establish an audit committee, a nominating committee and a compensation committee of the board of directors as soon as practicable.  We envision that the audit committee will be primarily responsible for reviewing the services performed by our independent auditors, evaluating our accounting policies and our system of internal controls.  The nominating committee would be primarily responsible for nominating directors and setting policies and procedures for the nomination of directors.  The nominating committee would also be responsible for overseeing the creation and implementation of our corporate governance policies and procedures.  The compensation committee will be primarily responsible for reviewing and approving our salary and benefit policies (including stock options), including compensation of executive officers.

 
33

 

 
Our board of directors has not made a determination as to whether any member of our board of directors is an audit committee financial expert.  Upon the establishment of an audit committee, the board will determine whether any of the directors qualify as an audit committee financial expert.

Code of Ethics

 
Our board of directors will adopt a new code of ethics that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. The new code will address, among other things, honesty and ethical conduct, conflicts of interest, compliance with laws, regulations and policies, including disclosure requirements under the federal securities laws, confidentiality, trading on inside information, and reporting of violations of the code. 
 
LEGAL PROCEEDINGS

 
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business.  However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.  We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information regarding beneficial ownership of our Common Stock as of October 12, 2010 (i) by each person who is known by us to beneficially own more than 5% of our Common Stock; (ii) by each of the officers and directors of the Company and (iii) by all of officers and directors of the Company as a group.
Address of
Beneficial Owner (1)
 
Positions with the
Company
 
Title of Class
 
Amount and
Nature
of Beneficial
 Ownership (2)
   
Percent of
Class (2)
 
Officers and Directors
 
Hailong Liu (3)(4)(5)
 
 
Chairman, CEO,  President and CFO
 
Common Stock, $0.0001 par value
   
11,556,288
     
68.9
%
Haibo Liu
 
 
Director and Vice President
 
Common Stock, $0.0001 par value
   
0
     
0
 
All officers and directors
as a group (2 persons
named above)
     
Common Stock, $0.0001 par value
   
11,556,288 
     
68.9
%
5% Securities Holders
 
Sherry Li (3)(4)
87 Dennis Street,
Garden City Park
 NY 11040
     
Common Stock, $0.0001 par value
   
11,556,288
     
68.9
%
                         
Professional Capital Partners, Ltd. (6)
1400 Old Country Road
Suite 206,
Westbury NY 11590
     
Common Stock, $0.0001 par value
   
1,463,750 
     
8.7
%
 
 
34

 

 
(1)  Unless otherwise provided, the address of each person is Building 3, Binhe District, Longhe East Road, Lu’an City, Anhui Province, PRC 237000.

(2)   Beneficial Ownership is determined in accordance with the rules of the Securities and Exchange Commission (the “SEC” or the “Commission”) and generally includes voting or investment power with respect to securities. The percent of class has also been determined in accordance with rules of the Commission. For purposes of computing such percentage, as of October 12, 2010, there were 16,775,113 shares of our Common Stock outstanding.

(3)  Hailong Liu is the Voting Trustee under a Voting Trust Agreement dated as of July 9, 2010 between Sherry Li and Hailong Liu pursuant to which Hailong has the right to vote an aggregate of 11,556,288 shares of Common Stock which were issued to Sherry Li.
 
(4) Pursuant to that certain Call Option Agreement between Ms. Sherry Li and Hailong Liu, Hailong Liu has been granted an option, subject to the satisfaction of certain conditions, to purchase from Ms. Li over the course of approximately 2 years for $0.0001 per share, up to 11,556,288 shares of our Common Stock held by Ms. Li. The conditions and the percentage of the total number of shares subject to the option that would vest upon satisfaction of the condition are as follows:
 
 
· 
Filing of a Quarterly Report on Form 10-Q with SEC following the execution of the Share Exchange Agreement – 50%
    
  
·
2 years after the filing of Form 10-Q – 50%;
 
The first condition was satisfied on August 23, 2010. The second condition will be satisfied on August 23, 2012.

(5)  Under a Stock Option Agreement dated as of July 9, 2010, Hailong Liu has granted to American Capital Partners, LLC an option to purchase an aggregate of  757,576 shares of Common Stock at an exercise price of $2.64 per share. The option becomes exercisable in two installments of 378,788 shares each, the first installment of which is exercisable from October 9, 2010 to April 8, 2011 and the second installment of which is exercisable from April 9, 2011 to October 8, 2011.

(6)  Includes 1,000,000 shares issuable upon exercise of currently exercisable warrants.

Changes in Control

Except for the Call Option Agreement described in footnote (3) to the table contained in the section of this prospectus entitled “Security Ownership of Certain Beneficial Owners and Management,” there are currently no arrangements which may result in a change in control of the Company.

SELLING STOCKHOLDERS

This prospectus relates to the offering by the Selling Stockholders of shares of our Common Stock held by and/or issuable to the Selling Stockholders identified in the table below.

 
35

 

 
During the period from July 15, 2010 to August 17, 2010 we entered into and consummated the Purchase Agreement with certain of the Selling Stockholders, pursuant to which we issued to certain of the Selling Stockholders for aggregate gross proceeds of $5,251,548  (a) an aggregate of 1,989,211 shares of our Common Stock, (b) Series C Warrants to purchase an aggregate of 497,303 shares of  Common Stock for $3.70 per share and (c) Series D Warrants to purchase an aggregate of 497,303 shares of Common Stock for $4.75 per share. 

All of the Selling Stockholders are “accredited investors” within the meaning of Rule 501 of Regulation D promulgated under the Securities Act.

The table set forth below lists the names of the Selling Stockholders as well as the number of shares of Common Stock which are being offered by the Selling Stockholders hereby. Except as noted below, none of the Selling Stockholders is a broker-dealer or an affiliate of a broker-dealer. Excepted as noted below, none of the Selling Stockholders has or has had within the past three years any position, office, or other material relationship with the Company or any of its predecessors or affiliates.

Each Selling Stockholder may offer for sale all or part of the shares from time to time. The table below assumes that the Selling Stockholders will sell all of the shares offered for sale. A selling stockholder is under no obligation, however, to sell any shares immediately pursuant to this prospectus, nor is a selling stockholder obligated to sell all or any portion of its shares at any time.
Name of Selling
Stockholder
 
Total Number and Percentage of 
Shares of Common Stock Beneficially 
Owned Prior to the Offering (1) (2)
   
Maximum
Number of 
Shares to 
be Sold  
   
Total Number 
and
Percentage of 
Shares
Beneficially 
Owned After the
Offering (2)(3)
 
Chestnut Ridge Partners, LP (4)
    170,454 (5)     1.0 %     170,454       0       0  
Silver Rock II Limited (6)
    428,571 (7)     2.7 %     428,571       0       0  
The Bosphorous Group, Inc. (8)
    85,731 (9)     *       85,731       0       0  
Jayhawk Private Equity Fund II, L.P. (10)
    342,858 (11)     2.0 %     342,858       0       0  
Professional Capital Partners, Ltd. (12)
    1,463,750 (13)     8.7 %     1,643,750       0       0  
John Baldwin
    28,410 (14)     *       28,410       0       0  
DNST Properties, LLC (15)
    56,820 (16)     *       56,820       0       0  
The Burke Family Trust (17)
    143,533 (18)     *       143,533       0       0  
SEL Private Trust Co. FAO JM Smucker Co. Master Trust (19)
    284,094 (20)     1.7 %     284,094       0      
0
 
Coronado Capital Partners LP (21)
    85,230 (22)     *       85,230       0       0  
Lazy Bear, LLC (23)
    22,728 (24)     *       22,728       0       0  
Lazy Bear I, LLC (25)
    71,022 (26)     *       71,022       0       0  
Joseph R. Lee
    198,864 (27)     1.2       198,864       0       0  
Chris Clayton
    34,092 (28)     *       34,092       0       0  
Bear Marsh, LLC (29)
    14,202 (30)     *       14,202       0       0  
Harry Unger Jr.
    12,000 (31)     *       12,000       0       0  
Denise Scarpelli
    12,000 (32)     *       12,000       0       0  
Thomas H. Burke
    60,000 (33)     *       60,000       0       0  
RBC Capital Markets, Custodian for Bruce R. Schafer IRA (34)
    16,800 (35)     *       16,800       0       0  
 
 
36

 
 
Randall M. Toig Family Posterity Trust (36)
    90,000 (37)     *       90,000       0      
0
 
Arthur A. Mitchell, Jr.
    12,000 (38)     *       12,000       0       0  
Scott Sammis
    30,000 (39)     *       30,000       0       0  
Craig Sherlock
    60,000 (40)     *       60,000       0       0  
Frank P. Cutrone
    30,000 (41)     *       30,000       0       0  
John W. Trone
    60,000 (42)     *       60,000       0       0  
Gregory T. Jones
    24,000 (43)     *       24,000       0       0  
Randy Hyland
    15,000 (44)     *       15,000       0       0  
John J. DiLorenzo
    12,000 (45)     *       12,000       0       0  
Norman J. Ferenz
    6,000 (46)     *       6,000       0       0  
Barry A. Morguelan
    30,000 (47)     *       30,000       0       0  
William M. Rogers
    6,000 (48)     *       6,000       0      
0
 
Mark L. Bumler
    30,000 (49)     *       30,000       0       0  
Stanley & Suzanne Dorf
    12,000 (50)     *       12,000       0       0  
Susan Hardesty
    6,000 (51)     *       6,000       0       0  
Lawrence R. Clarke, M.D.
    15,000 (52)     *       15,000       0       0  
Thomas Scott Deal
    24,000 (53)     *       24,000       0       0  
George Eilers Living Trust (54)
    30,000 (55)     *       30,000       0       0  
Joseph Tolliver
    18,000 (56)     *       18,000       0       0  
Jan Dauer
    6,000 (57)     *       6,000       0       0  
Dean N. Browning
    18,000 (58)     *       18,000       0       0  
Larry & Diane Zimmerman
    12,000 (59)     *       12,000       0       0  
Steven Hribar
    60,000 (60)     *       60,000       0      
0
 
Frank Krawiecki Profit Sharing Plan (61)
    60,000 (62)     *       60,000       0       0  
A. Sam Coury
    15,000 (63)     *       15,000       0       0  
Miles Blacksberg
    30,000 (64)     *       30,000       0       0  
Henry & Trisha Ihnfeldt
    12,000 (65)     *       12,000       0       0  
John M. Grenfell
    15,000 (66)     *       15,000       0       0  
David Sutherlan
    6,000 (67)     *       6,000       0       0  
Matt Kinchen
    12,000 (68)     *       12,000       0       0  
Arthur Goldstein
    15,000 (69)     *       15,000       0       0  
Barney Evangelista
    6,000 (70)     *       6,000       0       0  
Ron Dilks
    30,000 (71)     *       30,000       0       0  
Anthony R. Bartolo
    12,000 (72)     *       12,000       0       0  
Phil & Denise Fortuna
    15,000 (73)     *       15,000       0       0  
Atlas Tubular LP (74)
    30,000 (75)     *       30,000       0       0  
Jeffrey Webster
    6,000 (76)     *       6,000       0       0  
Wade M. Harris and Tracy L. Harris JTWROS
    60,000 (77)     *       60,000       0      
0
 
Daniel W. Gottlieb
    60,000 (78)     *       60,000       0       0  
David L. Erickson
    6,000 (79)     *       6,000       0       0  
Bill Campbell and Edda Campbell JTWROS
    18,000 (80)     *       18,000       0       0  
Daniel & Deborah Gibson
    30,000 (81)     *       30,000       0       0  
James J. Roberts
    12,000 (82)     *       12,000       0       0  
 
 
37

 

Walter French
    6,000 (83)     *       6,000       0       0  
LJW Partnership (84)
    18,000 (85)     *       18,000       0       0  
John S. Harris
    18,000 (86)     *       18,000       0      
0
 
William Lurie
    25,200 (87)     *       25,200       0       0  
David J. Beyer
    18,000 (88)     *       18,000       0       0  
James E. Mattutat
    6,000 (89)     *       6,000       0       0  
Neil T. Gutekunst
    21,600 (90)     *       21,600       0       0  
Dale Cripps
    30,000 (91)     *       30,000       0       0  
Troy Stubbs
    144,000 (92)     *       144,000       0       0  
Steven Stubbs
    31,800 (93)     *       31,800       0       0  
Vincent Cafici
    6,000 (94)     *       6,000       0       0  
Paul Sipple
    6,000 (95)     *       6,000       0       0  
Andrew Pace
    6,000 (96)     *       6,000       0       0  
Bhajan Singh
    6,000 (97)     *       6,000       0       0  
Byron D. Winans
    6,000 (98)     *       6,000       0       0  
Charles Landrum
    6,000 (99)     *       6,000       0       0  
Dean Krutty
    6,000 (100)     *       6,000       0       0  
Derek Polk
    18,000 (101)     *       18,000       0      
0
 
Garry Blandford
    18,000 (102)     *       18,000       0       0  
Gary L. Olshansky and Jeanie H. Olshansky JTWROS
    6,000 (103)     *       6,000       0       0  
Giuseppe Surace
    6,000 (104)     *       6,000       0       0  
Greg Kromminga
    30,000 (105)     *       30,000       0       0  
Howard R. Adrian and Debora J. Adrian JTWROS
    6,000 (106)     *       6,000       0       0  
Howard Reinsch
    12,000 (107)     *       12,000       0       0  
ISSC Management (108)
    9,000 (109)     *       9,000       0       0  
James A. Quesenberry
    12,000 (110)     *       12,000       0      
0
 
Jeffrey & Tessa Fitzgerald
    18,000 (111)     *       18,000       0       0  
Jeffrey Jutras
    5,682 (112)     *       5,682       0       0  
Jerry D. Daugherty
    6,000 (113)     *       6,000       0       0