UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q






QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934




For the
quarterly period ended     June 30,
2010





or






TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934





For the
transition period from ____ to _____




Commission
File Number:  000-28767




China
3C Group


(Exact
name of registrant as specified in its charter)




Nevada
            88-0403070(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification No.)





368
HuShu Nan Road


HangZhou City, Zhejiang
Province, China 310014




(Address
of Principal Executive Offices) (Zip Code)





086-0571-88381700


(Registrant’s
telephone number, including area code)




______________________________________________________________________


(Former
name, former address and former fiscal year, if changed since last
report)





Indicate
by check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days:  Yes x No 




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes  No





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.





Large
      accelerated filer 
            
            Accelerated
      filer 
            
            Non-accelerated
      filer   x
              (Do
      not check if a smaller reporting company)
            
            Smaller
      reporting company 




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  No x





As of
August 12, 2010, the registrant had 54,831,327 shares of common stock
outstanding.










TABLE OF CONTENTS





PAGEPART
      I. FINANCIAL INFORMATIONItem
      1. Financial Statements:Consolidated
      Balance Sheets as of June 30, 2010 (Unaudited) and December 31,
      2009
            1Consolidated
      Statements of Operations and Comprehensive Income (Loss) for the Six
      Months Ended June 30, 2010 and 2009 (Unaudited)
            2Consolidated
      Statements of Operations and Comprehensive Income (Loss) for the Three
      Months Ended June 30, 2010 and 2009 (Unaudited)
            3Consolidated
      Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009
      (Unaudited)
            4Notes
      to Consolidated Financial Statements
            5Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
            22Item
      3. Quantitative and Qualitative Disclosure About Market
    Risk
            34Item
      4T. Controls and Procedures
            36PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings
            36Item
      1A. Risk Factors
            36Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
            37Item
      3. Defaults Upon Senior Securities
            37Item
      4. (Removed and Reserved)
            37Item
      5. Other Information
            37Item
      6. Exhibits
            37Signatures
            37









PART
I. FINANCIAL INFORMATION





Item
1.  Financial Statements





CHINA
3C GROUP AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(in
thousands)





June 30,
            
            
            December 31,2010
            
            
            2009(Unaudited)
            
            
            (Audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            29,123
            
            
            $
            29,908Accounts
      receivable, net
            
            
            15,547
            
            
            
            18,232Inventories
            
            
            6,785
            
            
            
            6,764Advances
      to suppliers
            
            
            2,484
            
            
            
            2,370Tax
      receivable
            
            
            1,162
            
            
            
            1,157Prepaid
      expenses and other current assets
            
            
            246
            
            
            
            294Total
      current assets
            
            
            55,347
            
            
            
            58,725Property,
      plant and equipment, net
            
            
            250
            
            
            
            279Intangible
      asset, net
            
            
            13,861
            
            
            
            14,557Goodwill
            
            
            20,820
            
            
            
            20,820Refundable
      deposits
            
            
            11
            
            
            
            15Total
      assets
            
            $
            90,289
            
            
            $
            94,396LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
            
            $
            6,058
            
            
            $
            6,838Income
      tax payable
            
            
            987
            
            
            
            938Total
      liabilities
            
            
            7,045
            
            
            
            7,776Stockholders'
      equityCommon
      stock, $0.001 par value, 100,000,000 million shares authorized, 54,831,327
      issued and outstanding as of June 30, 2010 and December 31, 2009,
      respectively
            
            
            55
            
            
            
            55Additional
      paid-in capital
            
            
            20,002
            
            
            
            19,751Subscription
      receivable
            
            
            (50
            )
            
            
            (50
            )Statutory
      reserve
            
            
            11,535
            
            
            
            11,535Other
      comprehensive income
            
            
            5,149
            
            
            
            5,180Retained
      earnings
            
            
            46,553
            
            
            
            50,149Total
      stockholders' equity
            
            
            83,244
            
            
            
            86,620Total
      liabilities and stockholders' equity
            
            $
            90,289
            
            
            $
            94,396





The
accompanying notes are an integral part of these consolidated financial
statements.





1




CHINA
3C GROUP AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)


SIX
MONTHS ENDED JUNE 30, 2010 and 2009 (UNAUDITED)


(in
thousands)





2010
            
            
            2009Net
      sales
            
            $
            78,226
            
            
            $
            128,537Cost
      of sales
            
            
            70,939
            
            
            
            112,458Gross
      profit
            
            
            7,287
            
            
            
            16,079Selling,
      general and administrative expenses
            
            
            10,702
            
            
            
            10,235Income
      (loss) from operations
            
            
            (3,415)
            
            
            
            5,844Other
      (income) expenseInterest
      income
            
            
            (47
            )
            
            
            (54
            )Other
      income
            
            
            (7
            )
            
            
            (163
            )Other
      expense
            
            
            44
            
            
            
            116Total
      other (income) expense
            
            
            (10
            )
            
            
            (101
            )Income
      (loss) before income taxes
            
            
            (3,405)
            
            
            
            5,945Provision
      for income taxes
            
            
            190
            
            
            
            1,591Net
      income (loss)
            
            
            (3,595)
            
            
            
            4,354Foreign
      currency translation adjustments
            
            
            48
            
            
            
            (129)Comprehensive
      income (loss)
            
            $
            (3,547)
            
            
            $
            4,225Net
      income (loss) available to common shareholders per share:Basic
            
            $
            (0.07)
            
            
            $
            0.08Diluted
            
            $
            (0.07)
            
            
            $
            0.08Weighted
      average shares outstanding:Basic
            
            
            54,831,327
            
            
            
            53,682,309Diluted
            
            
            54,831,327
            
            
            
            53,682,309





The
accompanying notes are an integral part of these consolidated financial
statements.




2




CHINA
3C GROUP AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)


THREE
MONTHS ENDED JUNE 30, 2010 and 2009 (UNAUDITED)


(in
thousands)





2010
            
            
            2009Net
      sales
            
            $
            37,428
            
            
            $
            51,126Cost
      of sales
            
            
            33,506
            
            
            
            45,105Gross
      profit
            
            
            3,922
            
            
            
            6,021Selling,
      general and administrative expenses
            
            
            5,488
            
            
            
            4,750Income
      (loss) from operations
            
            
            (1,566)
            
            
            
            1,271Other
      (income) expenseInterest
      income
            
            
            (22
            )
            
            
            (25
            )Other
      income
            
            
            (3
            )
            
            
            (15
            )Other
      expense
            
            
            44
            
            
            
            5Total
      other (income) expense
            
            
            19
            
            
            
            (35
            )Income
      (loss) before income taxes
            
            
            (1,585)
            
            
            
            1,306Provision
      for income taxes
            
            
            83
            
            
            
            392Net
      income (loss)
            
            
            (1,668)
            
            
            
            914Foreign
      currency translation adjustments
            
            
            40
            
            
            
            8Comprehensive
      income (loss)
            
            $
            (1,628)
            
            
            $
            922Net
      income (loss) available to common shareholders per share:Basic
            
            $
            (0.03)
            
            
            $
            0.02Diluted
            
            $
            (0.03)
            
            
            $
            0.02Weighted
      average shares outstanding:Basic
            
            
            54,831,327
            
            
            
            53,931,327Diluted
            
            
            54,831,327
            
            
            
            53,931,327





The
accompanying notes are an integral part of these consolidated financial
statements.




3




CHINA
3C GROUP AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR
THE SIX MONTHS ENDED JUNE, 2010 and 2009 (UNAUDITED)


(in
thousands)





2010
            
            
            2009CASH
      FLOW FROM OPERATING ACTIVITIESNet
      income (loss)
            
            $
            (3,595
            )
            
            $
            4,354Adjustments
      to reconcile net income (loss) to net cash provided by (used in)
      operating activities:Depreciation
            
            
            11
            
            
            
            13Amortization
      of intangible assets
            
            
            702
            
            
            
            -Provision
      for bad debts
            
            
            
            
            
            
            3,Stock
      based compensation
            
            
            251
            
            
            
            -(Increase)
      / decrease in assets:Accounts
      receivable
            
            
            2,751
            
            
            
            (801
            )Other
      receivable
            
            
            13
            
            
            
            26Inventories
            
            
            7
            
            
            
            (424
            )Prepaid
      expenses and other current assets
            
            
            36
            
            
            
            35Refundable
      deposits
            
            
            5
            
            
            
            5Advance
      to suppliers
            
            
            (103
            )
            
            
            149(Increase)
      / decrease in current liabilities:Advance
      from customers
            
            
            23
            
            
            
            -Accounts
      payable and accrued expenses
            
            
            (771
            )
            
            
            (893
            )Income
      tax payable
            
            
            45
            
            
            
            (1,746
            )Net
      cash (used in) provided by operating activities
            
            
            (625
            )
            
            
            721CASH
      FLOW FROM INVESTING ACTIVITIESPurchase
      of property and equipment
            
            
            (18
            )
            
            
            (4
            )Deposit
      for acquisition of subsidiary
            
            
            -
            
            
            
            (7,291
            )Net
      cash used in investing activities
            
            
            (18
            )
            
            
            (7,295
            )Effect
      of exchange rate changes on cash and cash equivalents
            
            
            (142
            )
            
            
            (136
            )Net
      decrease in cash
            
            
            (785
            )
            
            
            (6,710
            )Cash,
      beginning of period
            
            
            29,908
            
            
            
            32,158Cash,
      end of period
            
            $
            29,123
            
            
            $
            25,448Supplemental
      disclosure of cash flow information:Interest
      paid
            
            $
            -
            
            
            $
            -Income
      taxes paid
            
            $
            74
            
            
            $
            3,340





The
accompanying notes are an integral part of these consolidated financial
statements.




4




CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS


JUNE
30, 2010


(UNAUDITED)


Note
1 - ORGANIZATION





China 3C Group (the “Company” or “China 3C”) was incorporated on
August 20, 1998 under the laws of the State of Nevada. Capital Future
Developments Limited - BVI (“Capital”) was incorporated on July 22, 2004 under
the laws of the British Virgin Islands. Zhejiang Yong Xin Digital Technology
Company Limited (“Zhejiang”), Yiwu Yong Xin Communication Limited (“Yiwu”),
Hangzhou Wang Da Electronics Company Limited (“Wang Da”), Hangzhou Sanhe
Electronic Technology Limited (“Sanhe”), and Shanghai Joy & Harmony
Electronics Company Limited (“Joy & Harmony”), Jinhua Baofa Logistic Ltd
(“Jinhua”) were incorporated under the laws of Peoples Republic of China (“PRC”)
on July 11, 2005, July 18, 1997, March, 30, 1998, April 12, 2004, August 20,
2003 and December 27, 2001, respectively. All dollar amounts are in thousands,
unless otherwise indicated.





On
December 21, 2005, Capital became a wholly owned subsidiary of China 3C Group
through a reverse merger (“Merger Transaction”). China 3C Group acquired all of
the issued and outstanding capital stock of Capital pursuant to a Merger
Agreement dated December 21, 2005 by and among China 3C Group, XY Acquisition
Corporation, Capital and the shareholders of Capital (the “Merger Agreement”).
Pursuant to the Merger Agreement, Capital became a wholly owned subsidiary of
China 3C Group and, in exchange for the Capital shares, China 3C Group issued
35,000,000 shares of its common stock to the shareholders of Capital,
representing 93% of the issued and outstanding capital stock of China 3C Group
at that time and cash of $500.





On August
3, 2006, Capital completed the acquisition of a 100% interest in Sanhe for a
cash and stock transaction valued at approximately $8,750. The consideration
consisted of 915,751 newly issued shares of the Company’s common stock and
$5,000 in cash.





On
November 28, 2006, Capital completed the acquisition of a 100% interest in Joy
& Harmony for a cash and stock transaction valued at approximately $18,500.
The consideration consisted of 2,723,110 shares of the Company’s common stock
and $7,500 in cash.





On August
15, 2007, the Company changed its ownership structure. As a result, instead of
Capital owning 100% of Zhejiang, Capital entered into contractual agreements
with Zhejiang whereby Capital owns a 100% interest in the revenues of Zhejiang.
Capital does not have an equity interest in Zhejiang, but enjoys all the
economic benefits. Under this structure, Zhejiang is now a wholly foreign owned
enterprise of Capital. The contractual agreements give Capital and its equity
owners an obligation, and having ability to absorb, any losses, and rights to
receive returns. Capital will be unable to make significant decisions about the
activities of Zhejiang and cannot carry out its principal activities without
financial support. These characteristics as defined in the Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810,
Consolidation of Variable Interest Entities (VIEs), qualify the business
operations of Zhejiang to be consolidated with Capital and ultimately with China
3C.




5





On July
6, 2009, China 3C and its subsidiary Zhejiang and Yiwu purchased 100% interest
of Jinhua for RMB 120 million (approximately $17,500) in cash.  Zhejiang
acquired 90% and Yiwu acquired 10% of the entire equity interests in
Jinhua.





The
purchase price and related allocation to the estimated fair values of the assets
acquired and liabilities assumed, after proportionately allocating the goodwill
resulting from the transaction in accordance with FASB ASC Topic 805 “Business
Combinations” is as follows:





Cash
      paid for acquisition of Jinhua
            
            $
            17,508Assets
      acquired:Cash
            
            $
            2,406Accounts
      receivable, net
            
            
            715Other
      receivables, net
            
            
            60Prepaid
      expenses
            
            
            133Property,
      plant and equipment
            
            
            216Intangible
      asset - transportation network
            
            
            15,182Goodwill
            
            
            472Assets
      acquired
            
            
            19,184Liabilities
      assumed:Accounts
      payable
            
            
            315Accrued
      expenses and other payables
            
            
            547Income
      taxes payable
            
            
            -Due
      to shareholders
            
            
            814Liabilities
      assumed
            
            
            1,676Net
      assets acquired
            
            $
            17,508





Following
the acquisition of Jinhua, the Company began providing logistic service to
businesses in addition to its traditional business of resale and distribution of
third party products such as mobile phones, facsimile machines, DVD players,
stereos, speakers, MP3 and MP4 players, iPods, electronic dictionaries, CD
players, radio Walkmans and audio systems.




6









Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES





Basis of
Presentation





The
accompanying consolidated financial statements were prepared in conformity with
accounting principles generally accepted in the United States of America (“US
GAAP”).  The Company’s functional currency is the Chinese Renminbi,
however, the accompanying consolidated financial statements have been translated
and presented in United States Dollars.





Principles of
Consolidation





The
consolidated financial statements include the accounts of China 3C Group and its
wholly owned subsidiaries Capital, Wang Da, Yiwu, Joy & Harmony, Sanhe and
Jinhua and variable interest entity Zhejiang, collectively referred to as the
Company. All material intercompany accounts, transactions and profits were
eliminated in consolidation.





Currency
Translation





The
accounts of Zhejiang, Wang Da, Yiwu, Sanhe, Joy & Harmony and Jinhua were
maintained, and its financial statements were expressed, in Chinese Yuan
Renminbi (“RMB”). Such financial statements were translated into U.S. Dollars
(“USD”) in accordance with FASB ASC Topic 830-10, “Foreign Currency
Translation,” with the RMB as the functional currency. According to FASB ASC
Topic 830-10, assets and liabilities were translated at the ending exchange
rate, stockholders’ equity is translated at the historical rates and income
statement items are translated at the average exchange rate for the period. The
resulting translation adjustments are reported as other comprehensive income in
accordance with FASB ASC Topic 220, “Reporting Comprehensive Income,” as a
component of shareholders’ equity. Transaction gains and losses are reflected in
the consolidated income (loss) and comprehensive income (loss)
statement.




7





Use of
Estimates





The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.





Risks and
Uncertainties





The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history, foreign currency exchange rates and the volatility of
public markets.





Contingencies





Certain
conditions may exist as of the date the financial statements are issued, which
could result in a loss to the Company but which will only be resolved when one
or more future events occur or fail to occur. The Company’s management assesses
such contingent liabilities, and such assessment inherently involves an exercise
of judgment. In assessing loss contingencies related to legal proceedings that
are pending against the Company or unasserted claims that may result in such
proceedings, the Company’s management evaluates the perceived merits of any
legal proceedings or unasserted claims as well as the perceived merits of the
amount of relief sought or expected to be sought.





If the
assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, then the
estimated liability is accrued in the Company’s financial statements. If the
assessment indicates that a potential material loss contingency is not probable
but is reasonably possible, or is probable but cannot be estimated, then the
nature of the contingent liability, together with an estimate of the range of
possible loss if determinable and material would be disclosed.





Loss
contingencies considered to be remote by management are generally not disclosed
unless they involve guarantees, in which case the guarantee would be
disclosed.




Accounts
Receivable





The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves. Terms of the sales vary. Reserves are recorded
primarily on a specific identification basis. Allowance for doubtful debts was
$403 (unaudited) and $404 as of June 30, 2010 and December 31, 2009,
respectively.




8





Inventories





Inventories
are valued at the lower of cost (determined on a weighted average basis) or
market.  Management compares the cost of inventories with the market value
and allowance is made for writing down their inventories to market value, if
lower. As of June 30, 2010 and December 31, 2009, inventory consisted entirely
of finished goods valued at $6,786 (unaudited) and $6,764,
respectively.




Property, Plant &
Equipment, net




Property,
plant and equipment are stated at cost. Expenditures for maintenance and repairs
are charged to earnings as incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise disposed of,
the related cost and accumulated depreciation are removed from the respective
accounts, and any gain or loss is included in operations. Depreciation of
property and equipment is provided using the straight-line method for
substantially all assets with estimated lives of:





Automotive
            5
      yearsOffice
      Equipment
            5
      years




As of
June 30, 2010 and December 31, 2009, property and equipment consisted of the
following:





2010
            
            
            2009(Unaudited)Automotive
            
            $
            836
            
            
            $
            877Office
      equipment
            
            
            132
            
            
            
            132Leasehold
      improvement
            
            
            67
            
            
            
            67Plant
      and Equipment
            
            
            3
            
            
            
            3Sub
      Total
            
            
            1,038
            
            
            
            1,079Less:
      accumulated depreciation
            
            
            (788
            )
            
            
            (800
            )Total
            
            $
            250
            
            
            $
            279




Long-Lived
Assets




The
Company periodically evaluates the carrying value of long-lived assets to be
held and used in accordance with FASB ASC Topic 360 “Property, Plant and
Equipment” requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets’
carrying amounts. In that event, a loss is recognized based on the amount by
which the carrying amount exceeds the fair market value of the long-lived
assets. Losses on long-lived assets to be disposed of are determined in a
similar manner, except that fair market values are reduced for the cost of
disposal. Based on its review, the Company believes that, as of June 30, 2010
(unaudited) and December 31, 2009, there were no significant impairments of its
long-lived assets.




9





Fair Value of Financial
Instruments




FASB ASC
Topic 825 “Financial Instruments” requires that the Company disclose estimated
fair values of financial instruments. The carrying amounts reported in the
statements of financial position for current assets and current liabilities
qualifying as financial instruments are a reasonable estimate of fair
value.




Revenue
Recognition





In
accordance with Securities and Exchange Commission (“SEC”) Staff Accounting
Bulletin (“SAB”) 104, the Company recognizes revenues when there is persuasive
evidence of an arrangement, product delivery and acceptance have occurred, the
sales price is fixed and determinable, and collectability of the resulting
receivable is reasonably assured.





The
Company records revenues when title and the risk of loss pass to the
customer.  Generally, these conditions occur on the date the customer takes
delivery of the product.  Revenue is generated from sales of China 3C
products through two main revenue streams:





1.
            Retail.  68.7%,
      69.0%, 68.6% and 69.1% of the Company’s revenue comes from sales to
      individual customers at outlets installed inside department stores etc.
      (i.e. store in store model) during the three and six months ended June 30,
      2010 and 2009, respectively and is mainly achieved through two broad
      categories:





a.
            Purchase contracts. The
      terms for sales by purchase contracts were 45 days from the transfer of
      goods to the customer in 2010 and 30 days in 2009. Under this method, the
      Company delivers goods to places designated by the customers and receives
      confirmation of delivery. At that time, ownership and all risks associated
      to the goods are transferred to the customers and payment is made within
      the terms. The Company relieves its inventory and recognizes revenue upon
      receipt of confirmation from the
customer.





b.
            Point of sale transfer of
      ownership. Under this method, the Company’s products are placed in
      third party stores and sold by the Company’s sales people. Upon purchase
      of the item by the customer, the Company relieves its inventory and
      recognizes revenue related to that
item.





2.
            Wholesale.  31.3%
      , 31.0%, 31.4% and 30.9% of the Company’s revenue comes from wholesale
      during the three and six months ended June 30, 2010 and 2009,
      respectively. Recognition of wholesale income is based on the contract
      terms. The main contract terms on wholesale were 15 days after receipt of
      goods in 2010 and 10 days in 2009 and that ownership and all risks
      associated with the goods are transferred to the customers on the date of
      goods received.




10


Sales
revenue is therefore recognized on the following basis:





1.
            Store
      in store model:





a.
            For
      goods sold under sales and purchase contracts, revenue is recognized when
      goods are received by customers.





b.
            For
      goods at customer outlets which the Company’s sales people operate, and
      inventory of goods is under joint control by the customers and the
      Company, revenue is recognized at the point of sale to the end
      buyer.




During
public holidays or department store celebration periods, we provide certain
sales incentives to retail customers to increase sales, such as gift giving and
price reductions. These are the only temporary incentives during the specified
periods. Sales made to our retail customers as a result of incentives are
immaterial as a percentage of total sales revenue.





2.
            Wholesale:





a.
            Revenue
      is recognized at the date the goods are received by the wholesale
      customers. We operate our wholesale business by selling large volume
      orders to second-tier distributors and large department stores. Revenues
      from wholesale are recognized as net sales after confirmation with
      distributors. Net sales already take into account revenue dilution as they
      exclude inventory credit, discount from early payment, product
      obsolescence and return of products and other allowances. Net sales also
      take into account the return of products in accordance with relevant laws
      and regulations in China.





Return
policies





Our
return policy complies with China’s laws and regulations on consumer’s rights
and product quality. In accordance with Chinese law, consumers can return or
exchange used products within seven days only if the goods do not meet safety
and health requirements, endanger a person’s property, or do not meet the
advertised performance. If the conditions and requirements as set out in the
relevant laws and regulations are met, the retail stores are entitled to accept
a return of the goods from the consumer. In such cases, the Company shall accept
the returns unconditionally. Goods returned will be redirected to the production
factory or supplier who shall bear all losses on the returns in accordance the
laws and regulations. Consumer returns or exchanges of products that have not
been used, where the packaging has not been damaged, are honored if such return
or exchange is within seven days. If a consumer returns a product, the Company
must refund the invoice price to the consumer. The Company will then be
responsible for returning the goods to the production factory or supplier. At
that time the Company can recover the price based on the purchase and sale
contract with the producer or supplier. However, when goods are returned, the
Company loses the gross margin that it records when revenue is recognized,
regardless of whether the production factory or supplier takes the product back
or not.




11





The
return rights granted to wholesale customers are similar to the rights granted
to retail customers. Once wholesale customers purchase the products, they follow
the same return policy as retail customers. We do not honor any return from
wholesale customers other than if the products don’t meet laws and regulations
or quality requirements. If the wholesale customers have a high inventory level
or product obsolescence caused by lower market demands or other operational
issues, the wholesale customers bear their own losses. When a wholesale customer
returns products, the Company will return the products to the suppliers or
manufacturers. A sales return and allowance is recorded at the sales price.
Meanwhile, a purchase return and allowance entry is recorded at the invoice
price because the suppliers or manufacturers bear the losses. The net effect is
that the Company derecognizes the gross profit when a return takes place, but
does not record any loss on the cost of the returned item back to the supplier
or manufacturer.





In light
of the aforesaid PRC laws and regulations and the Company’s arrangements with
suppliers, we do not provide an accrual for any estimated losses on subsequent
sale of the return of products.  As a result we do not engage in assessing
levels of inventory in the distribution channel, product obsolescence and/or
introductions of new products, as none of those factors have any impact on us
with respect to estimating losses on subsequent sale of returned goods. 
Third party market research report and consumer demand study is not used to make
estimates of goods returned.





Cost of
Sales





Cost of
sales consists of actual product cost, which is the purchase price of the
product less any discounts.  Cost of sales excludes freight charges,
purchase and delivery costs, internal transfer, freight charges and the other
costs of the Company’s distribution network, which are identified in general and
administrative expenses.





General and Administrative
Expenses





General
and administrative expenses are comprised principally of payroll and benefits
costs for retail and corporate employees, occupancy costs of corporate
facilities, lease expenses, management fees, traveling expenses and other
operating and administrative expenses, including freight charges, purchase and
delivery costs, internal transfer freight charges and other distribution
costs.





Shipping and handling
fees





The
Company follows FASB ASC Topic 605-45, “Handling Costs, Shipping Costs”. 
The Company does not charge its customers for shipping and handling. The Company
classifies shipping and handling fees as part of general and administrative
expenses. During the three and six months ended June 30, 2010 and 2009, the
Company incurred shipping and handling fees and costs of $56, $60, $107 and
$103, respectively.





Vendor
Discounts





The
Company negotiated preferred pricing arrangements with certain vendors on
certain products. These arrangements are not contingent on any levels of volume
and are considered vendor discounts as opposed to rebates. The Company records
these discounts along with the purchase of the discounted items, resulting in
lower inventory cost and a corresponding lower cost of sales as the products are
sold.




12





Management fees paid to the
department stores under “store in store” model





Under the
“store in store” business operation model, the Company may pay management fees
to the department stores, which are in the form of service charges or “selling
at an allowance (discount)”. The management fees are accounted for (1) in the
form of service charges which are reflected in general and administrative
expenses, or (2) in the form of “selling at an allowance (discount)”, as a
deduction of sales, which means, the expenses are directly deducted at a certain
percentage on sales. Such management fees accounted for general and
administrative expenses were $290, $244, $426 and $730 during the three and six
months ended June 30, 2010 and 2009 respectively. Management fees accounted for
deductions of sales were $1,299, $1,880, $2,559 and $4,245 in sales for the
three and six months ended June 30, 2010 and 2009, respectively.




Share Based
Payment




The
Company adopted FASB ASC Topic 718-10, “Stock Compensation”, which addresses the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services, with a primary focus on transactions in which an entity
obtains employee services in share-based payment transactions. FASB ASC Topic
718-10 requires measurement of the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of the award (with limited exceptions). Incremental compensation costs arising
from subsequent modifications of awards after the grant date must be
recognized.




Advertising





Advertising
expenses consist primarily of costs of promotion for corporate image and product
marketing and costs of direct advertising. The Company expenses all advertising
costs as incurred. Advertising expense was $114, $71, $200 and $128 for the
three and six months ended June 30, 2010 and 2009.




Other
Income




Other
income was $3 and $15, $7 and $163 for the three and six months ended June 30,
2010 and 2009. Other income consists of the following:




Six
      months ended June 30,2010
            
            
            2009Advertising
      service income
            
            $
            -
            
            
            $
            101Repair
      service income
            
            
            -
            
            
            
            29Commission
      income from China Unicom
            
            
            -
            
            
            
            30Other
            
            
            7
            
            
            
            -Total
      other income
            
            $
            7
            
            
            $
            163





Three
      months ended June 30,2010
            
            
            2009Repair
      service income
            
            $
            -
            
            
            $
            15Other
            
            
            3
            
            
            
            -Total
      other income
            
            $
            3
            
            
            $
            15




13




Advertising
service income is the fee we receive from electronic product manufacturers when
we advertise their products in our retail locations. Commission income from
China Unicom is derived from the sales of China Unicom’s wireless service and
products, i.e. rechargeable mobile phone cards.





Income
Taxes





The
Company utilizes FASB ASC Topic 740 “Income Taxes”. Deferred income taxes are
recognized for the tax consequences in future years of differences between the
tax bases of assets and liabilities and their financial reporting amounts at
each period end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.





Basic and Diluted Earnings
(Loss) per Share




Earnings
(loss) per share are calculated in accordance with FASB ASC Topic 260, “Earnings
per Share”. Basic earnings (loss) per share is based upon the weighted average
number of common shares outstanding. Diluted earnings (losses) per share is
based on the assumption that all dilutive convertible shares and stock options
were converted or exercised. Dilution is computed by applying the treasury stock
method. Under this method, options and warrants are assumed to be exercised at
the beginning of the period (or at the time of issuance, if later), and as if
funds obtained thereby were used to purchase common stock at the average market
price during the period. If convertible shares and stock options are
anti-dilutive, the impact of conversion is not included in the diluted net
income per share. Excluded from the calculation of diluted earnings per share
for the three and six months ended June 30, 2010 was 100,000 options, as they
were not dilutive. Excluded from the calculation of diluted earnings per share
for the three and six months ended June 30, 2009 was 50,000 options, as they
were not dilutive.




Statement of Cash
Flows




In
accordance with FASB ASC Topic 230 “Statement of Cash Flows”, cash flows from
the Company’s operations are calculated based upon the functional currency, in
our case the RMB. As a result, amounts related to changes in assets and
liabilities reported on the statement of cash flows will not necessarily agree
with the changes in the corresponding balances on the balance
sheet.




Concentration of Credit
Risk




Financial
instruments that potentially subject the Company to concentrations of credit
risk are cash, accounts receivable, advances to suppliers and other receivables
arising from its normal business activities. The Company places its cash in what
it believes to be credit-worthy financial institutions. The Company has a
diversified customer base, most of which is in China. The Company controls
credit risk related to accounts receivable through credit approvals, credit
limits and monitoring procedures. The Company routinely assesses the financial
strength of its customers and, based upon factors surrounding the credit risk,
establishes an allowance, if required, for uncollectible accounts and, as a
consequence, believes that its accounts receivable credit risk exposure beyond
such allowance is limited.




14




Segment
Reporting





FASB ASC
Topic 280, “Segment Reporting” requires use of the “management approach” model
for segment reporting. The management approach model is based on the way a
company’s management organizes segments within the company for making operating
decisions and assessing performance. Reportable segments are based on products
and services, geography, legal structure, management structure, or any other
manner in which management disaggregates a company. The Company operates in five
segments during 2010 (see Note 14).





Recent Accounting
Pronouncements





FASB ASC
Topic 805“Business
Combinations” addresses the accounting and disclosure for identifiable
assets acquired, liabilities assumed, and noncontrolling interests in a business
combination. FASB ASC Topic 805 requires an acquiring entity to recognize all
the assets acquired and liabilities assumed in a transaction at the
acquisition-date fair value, with limited exceptions, and applies to a wider
range of transactions or events. FASB ASC Topic 805 is effective for fiscal
years beginning on or after December 15, 2008 and early adoption and
retrospective application is prohibited. The Company adopted FASB ASC Topic 805
on January 1, 2009. The Company accounted for the acquisition of Jinhua in
accordance with these standards.





FASB ASC
Topic 810“Consolidation” establishes accounting and reporting standards for the
non-controlling (minority) interest in a subsidiary and for the deconsolidation
of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is
an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. The Company adopted FASB ASC
Topic 810 on January 1, 2009. The adoption of this statement had no effect on
the Company’s consolidated financial statements.




FASB ASC
Topic 815“Derivatives and
Hedging” is intended to improve financial reporting about derivative
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entity’s financial position,
financial performance, and cash flows. It is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. The Standard also improves transparency about
the location and amounts of derivative instruments in an entity’s financial
statements; how derivative instruments and related hedged items are accounted
for under Statement 133; and how derivative instruments and related hedged items
affect its financial position, financial performance, and cash flows. The
Company adopted FASB ASC Topic 815 on January 1, 2009. The adoption of this
statement had no effect on the Company’s consolidated financial
statements.





FASB ASC
Topic 825“Financial
Instruments” requires that the fair value disclosures required for all
financial instruments within the scope of FASB ASCTopic825-10,
“Disclosures about Fair Value of Financial Instruments”, be included in interim
financial statements. This FSP also requires entities to disclose the method and
significant assumptions used to estimate the fair value of financial instruments
on an interim and annual basis and to highlight any changes from prior periods.
FASB ASC Topic 825 was effective for interim periods ending after June 15, 2009.
The adoption of FASB ASC Topic 825 did not have a material effect on the
Company’s consolidated financial statements.




15




FASB ASC
Topic 860“Transfers and
servicing” requires more information about transfers of financial assets
and where companies have continuing exposure to the risks related to transferred
financial assets. FASB ASC Topic 860 is effective at the start of a company’s
first fiscal year beginning after November 15, 2009, or January 1, 2010 for
companies reporting earnings on a calendar-year basis. The adoption of this
statement did not have a material effect on the Company’s financial
statements.





Revisions
underFASB ASC
Topic 810“Consolidation”, revises how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. Under FASB ASC Topic 810, determining whether a
company is required to consolidate an entity will be based on, among other
things, an entity’s purpose and design and a company’s ability to direct the
activities of the entity that most significantly impact the entity’s economic
performance. FASB ASC Topic 810 is effective at the start of a company’s first
fiscal year beginning after November 15, 2009, or January 1, 2010 for companies
reporting earnings on a calendar-year basis. The adoption of FASB ASC Topic
810did not have
any impact on our financial statements.





In June 2009, the FASB issuedAccounting Standards Update “ASU” 2009-1. The FASB approved its
Codification ASC as the single source of authoritative United States accounting
and reporting standards applicable for all non-governmental entities, with the
exception of the SEC and its staff. The Codification is effective for interim or
annual financial periods ending after September 15, 2009 and impacts our
financial statements as all future references to authoritative accounting
literature will be referenced in accordance with the Codification. There have
been no changes to the content of our financial statements or disclosures as a
result of implementing the Codification.





In
April 2010, FASB issued ASU 2010-13, Compensation – Stock Compensation
(Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment
Award in the Currency of the Market in Which the Underlying Equity Security
Trades. ASU 2010-13 provides guidance on the classification of a
share-based payment award as either equity or a liability. A share-based payment
that contains a condition that is not a market, performance, or service
condition is required to be classified as a liability. ASU 2010-13 is effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2010 and is not expected to have a significant impact on
the Company’s financial statements.





In April
2010, the FASB issued ASU 20-10-17, “Revenue Recognition—Milestone Method (Topic
605): Milestone Method of Revenue Recognition” orASU 2010-17.This Update
provides guidance on the recognition of revenue under the milestone method,
which allows a vendor to adopt an accounting policy to recognize all of the
arrangement consideration that is contingent on the achievement of a substantive
milestone (milestone consideration) in the period the milestone is achieved. The
pronouncement is effective on a prospective basis for milestones achieved in
fiscal years and interim periods within those years, beginning on or after
June 15, 2010. The adoption of this ASU does not have a material impact on
the Company’s consolidated financial statements.





Note
3 – ADVANCES TO
SUPPLIERS




Advances
to suppliers represent advance payments to suppliers for the purchase of
inventory. As of June 30, 2010 and December 31, 2009, the Company had $2,484
(unaudited) and $2,370, respectively, as advances to suppliers.




16





Note 4– ACCOUNTS
PAYABLE AND ACCRUED EXPENSES





Accounts
payable and accrued expenses as of June 30, 2010 (unaudited) and December 31,
2009 consist of the following:





2010
            
            
            2009Accounts payable
            
            $
            3,785
            
            
            $
            3,729Accrued
      expenses and other payable
            
            
            2,111
            
            
            
            2,874VAT
      tax payable
            
            
            139
            
            
            
            235Advance
      from customers
            
            
            23
            
            
            
            -Total
            
            $
            6,058
            
            
            $
            6,838





Note 5 - COMMON
STOCK




On
January 15, 2009, the Company’s of Directors (“BOD”) adopted the China 3C Group,
Inc. 2008 Omnibus Securities and Incentive Plan (the “2008 Plan”).  The
2008 Plan provides for the granting of distribution equivalent rights, incentive
stock options, non-qualified stock options, performance share awards,
performance unit awards, restricted stock awards, stock appreciation rights,
tandem stock appreciation rights, unrestricted stock awards or any combination
of the foregoing, as may be best suited to the circumstances of the particular
employee, director or consultant.  Under the 2008 Plan 2,000,000 shares of
the Company’s common stock are available for issuance for awards.  Each
award shall remain exercisable for a term of ten (10) years from the date of its
grant. The price at which a share of common stock may be purchased upon exercise
of an option shall not be less than the closing sales price of the common stock
on the date such option is granted.  The 2008 Plan shall continue in
effect, unless sooner terminated, until the tenth anniversary of the date on
which it is adopted by the BOD.





In April
and October 2009, the Company issued 1,997,272 shares of common stock under the
2008 Plan. The cost is expected to be recognized over a three year period. $250
and $125 was recognized as stock based compensation expense during the six and
three months ended June 30, 2010.





Note
6 - STOCK WARRANTS,
OPTIONS, AND COMPENSATION





Stock
options— Options issued have a ten-year life and were fully vested upon
issuance. The option holder has no voting or dividend rights. The grant price
was equal the market price at the date of grant. The Company records the expense
of the stock options over the related vesting period. The options were valued
using the Black-Scholes option-pricing model at the date of grant stock option
pricing.





Outstanding
options by exercise price consisted of the following as of June 30,
2010.




Options Outstanding
            
            
            Options ExercisableExercise Price
            
            
            Number of
              Shares
            
            
            Weighted
              Average
              Remaining
              Life (Years)
            
            
            Weighted
              Average
              Exercise Price
            
            
            Number
              of Shares
            
            
            Weighted
              Average
              Exercise
              Price$
            3.80
            
            
            
            50,000
            
            
            
            0.50
            
            
            $
            3.80
            
            
            
            50,000
            
            
            $
            3.804.16
            
            
            
            50,000
            
            
            
            7.50
            
            
            
            4.16
            
            
            
            50,000
            
            
            
            4.16




17




Note
7 - COMPENSATED
ABSENCES




Regulation
45 of the labor laws in the PRC entitles employees to annual vacation leave
after 1 year of service. In general all leave must be utilized annually, with
proper notification, any unutilized leave is cancelled.





Note
8 - INCOME
TAXES





The
Company, through its subsidiaries, Zhejiang, Wang Da, Sanhe, Joy & Harmony,
Yiwu and Jinhua is governed by the Income Tax Laws of the PRC.





The US
entity, China 3C Group is subject to the US federal income tax at 34%. The US
entity has incurred net accumulated operating losses of approximately $3,168 as
of June 30, 2010 for income tax purposes. The US entity does not conduct any
operations and only incurs public expenses every year.  Therefore, it is
more likely than not that all of the
Company’s deferred tax assets will not be realized. A
100% allowance was recorded on the deferred tax asset of approximately $1,077 as
of June 30, 2010.




The
Company’s policy is to recognize interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense. The Company did
not have any accrued interest or penalties associated with any unrecognized tax
benefits, nor was any interest expense recognized during the three and six
months ended June 30, 2010 and 2009.





Pursuant
to the PRC Income Tax Laws, from January 1, 2008, the Enterprise Income Tax
(“EIT) is calculated against the net income in a fiscal year at a statutory rate
of 25%.




The
following details a reconciliation of income tax expense for the six months
ended June 30, 2010 and 2009:





2010
            
            U.S.
            
            
            State
            
            
            International
            
            
            TotalCurrent
            
            $
            -
            
            
            $
            -
            
            
            $
            190
            
            
            $
            190Deferred
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            $
            -
            
            
            $
            -
            
            
            $
            190
            
            
            $
            190








2009
            
            U.S.
            
            
            State
            
            
            International
            
            
            TotalCurrent
            
            $
            -
            
            
            $
            -
            
            
            $
            1,591
            
            
            $
            1,591Deferred
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            $
            -
            
            
            $
            -
            
            
            $
            1,591
            
            
            $
            1,591





During
the six months ended June 30, 2010, Wan Da, Sanhe, Joy & Harmony and Yiwu
had operating losses and therefore no income tax expenses. Zhejiang and Jinhua
were the only subsidiaries that reported an operating income during the six
months ended June 30, 2010 and incurred income tax expense of $190.





The
following details a reconciliation of income tax expense for the three months
ended June 30, 2010 and 2009:





2010
            
            U.S.
            
            
            State
            
            
            International
            
            
            TotalCurrent
            
            $
            -
            
            
            $
            -
            
            
            $
            83
            
            
            
            83Deferred
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            $
            -
            
            
            $
            -
            
            
            $
            83
            
            
            
            83





2009
            
            U.S.
            
            
            State
            
            
            International
            
            
            TotalCurrent
            
            $
            -
            
            
            $
            -
            
            
            $
            392
            
            
            $
            392Deferred
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            $
            -
            
            
            $
            -
            
            
            $
            392
            
            
            $
            392




18




During
the three months ended June 30, 2010, Wang Da, Sanhe, Joy & Harmony and Yiwu
had operating losses and therefore no income tax expenses. Zhejiang and Jinhua
were the only subsidiaries that reported an operating income during the three
months ended June 30, 2010 and incurred income tax expense of $83.





Reconciliation
of the differences between the statutory U.S. Federal income tax rate and the
effective rate is as follows:




Six
      months ended June 30,2010
            
            
            2009US
      statutory tax rate
            
            
            (34.0
            %)
            
            
            34.0
            %Tax
      rate difference
            
            
            9.0
            %
            
            
            (9.0
            %)Increase
      in valuation allowance
            
            
            19.4
            %
            
            
            1.8
            %Effective
      rate
            
            
            (5.6
            %)
            
            
            26.8
            %





Three
      months ended June 30,2010
            
            
            2009US
      statutory tax rate
            
            
            (34.0
            %)
            
            
            34.0
            %Tax
      rate difference
            
            
            9.0
            %
            
            
            (9.0
            %)Increase
      in valuation allowance
            
            
            19.8
            %
            
            
            5.0
            %Effective
      rate
            
            
            (5.2
            %)
            
            
            30.0
            %





Foreign
pretax earnings approximated $(960) and $(2,345) for the three and six months
ended June 30, 2010, respectively. Pretax earnings of a foreign subsidiary are
subject to U.S. taxation when effectively repatriated. The Company provides
income taxes on the undistributed earnings of non-U.S. subsidiaries except to
the extent that such earnings are indefinitely invested outside the United
States. At June 30, 2010, $60,608 of accumulated undistributed earnings of
non-U.S. subsidiaries was indefinitely invested. At the existing U.S. federal
income tax rate, additional taxes of approximately $5,455 would have to be
provided if such earnings were remitted currently.




19





Note
9 - COMMITMENTS




The
Company leases office facilities under operating leases that terminate through
2014. Rent expense for the three and six months ended June 30, 2010 and 2009 was
$119, $68, $255 and $119, respectively. The future minimum obligations under
these agreements are as follows by years as of June 30, 2010:




2011
            
            $
            4422012
            
            
            382013
            
            
            16$
            496





Note
10 - STATUTORY
RESERVE





In
accordance with the laws and regulations of the PRC, a wholly-owned Foreign
Invested Enterprise’s income, after the payment of PRC income taxes, shall be
allocated to the statutory surplus reserves and statutory public welfare fund.
Prior to January 1, 2006, the allocation was 10 percent of the profit after tax
to the surplus reserve fund and additional 5-10 percent to the public affair
fund. The public welfare fund reserve was limited to 50 percent of the
registered capital. Effective January 1, 2006, there is now only one fund
requirement. The reserve is 10 percent of income after tax, not to exceed 50
percent of registered capital.





Statutory
reserve funds are restricted for set off against losses, expansion of production
and operation or increase in register capital of the respective company.
Statutory public welfare fund is restricted to the capital expenditures for the
collective welfare of employees. These reserves are not transferable to the
Company in the form of cash dividends, loans or advances. These reserves are
therefore not available for distribution except in liquidation. As of June 30,
2010 , the Company had allocated $11,535 to these non-distributable reserve
funds.





Note
11 - OTHER
COMPREHENSIVE INCOME





The
detail of other comprehensive income, all of which arose from foreign currency
translation, as included in stockholders’ equity at June 30, 2010 (unaudited)
and December 31, 2009 are as follows:





Balance
      at December 31, 2008
            
            $
            5,272Change
      for 2009
            
            
            (92
            )Balance
      at December 31, 2009
            
            
            5,180Change
      for six months ended June 30, 2010
            
            
            (31
            )Balance
      at June 30, 2010
            
            $
            5,149




20




Note 12 -CURRENT
VULNERABILITY DUE TO CERTAIN RISK FACTORS





The
Company’s operations are carried out in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, by the general state of
the PRC’s economy. The Company’s business may be influenced by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.





Note
13 - MAJOR CUSTOMERS
AND CREDIT RISK





During
the three and six months ended June 30, 2010 and 2009, no customer accounted for
more than 10% of the Company’s sales or accounts receivable and no vendor
accounted for more than 10% of the Company’s purchase. At June 30, 2009 one
(1)vendor
comprised approximately 21.67% of the Company’s accounts payable.





Note
14 -   SEGMENT
INFORMATION





We
separately operate and prepare accounting and other financial reports to
management for five major business organizations (Wang Da, Sanhe, Yiwu, Joy
& Harmony and Jinhua). Each operating company has different products and
service.  Wang Da sells mainly mobile phones, Sanhe sells mainly home
appliances, Yiwu sells mainly office communication products, Joy & Harmony
sells mainly consumer electronics and Jinhua provides transportation logistics
to businesses. All segments are accounted for using the same principles as
described in Note 2.





We
identified five reportable segments required by FASB ASC Topic 280: (1) mobile
phones, (2) home electronics, (3) office communication products, (4) consumer
electronics and (5) logistics.





The
following tables present summarized information by segment:





Six Months Ended June
      30, 2010Mobile
            
            
            Home
            
            
            Communication
            
            
            ConsumerPhones
            
            
            Electronics
            
            
            Products
            
            
            Electronics
            
            
            Logistics
            
            
            Other
            
            
            TotalSales,
      net
            
            $
            21,244
            
            
            $
            21,998
            
            
            $
            10,563
            
            
            $
            18,532
            
            
            $
            5,516
            
            
            $
            382
            
            
            $
            78,226Cost
      of sales
            
            
            19,534
            
            
            
            19,403
            
            
            
            9,666
            
            
            
            17,674
            
            
            
            4,322
            
            
            
            340
            
            
            
            70,939Gross
      profit
            
            
            1,710
            
            
            
            2,595
            
            
            
            897
            
            
            
            849
            
            
            
            1,194
            
            
            
            42
            
            
            
            7,287Income
      (loss)  from operations
            
            
            (825)
            
            
            
            (873)
            
            
            
            (486)
            
            
            
            (628)
            
            
            
            448
            
            
            
            (1,051)
            
            
            
            (3,415)




Six Months Ended June 30, 2009Mobile
            
            
            Home
            
            
            Communication
            
            
            ConsumerPhones
            
            
            Electronics
            
            
            Products
            
            
            Electronics
            
            
            Other
            
            
            TotalSales,
      net
            
            $
            39,912
            
            
            $
            30,996
            
            
            $
            26,388
            
            
            $
            31,241
            
            
            $
            -
            
            
            $
            128,537Cost
      of sales
            
            
            35,449
            
            
            
            25,159
            
            
            
            23,928
            
            
            
            27,922
            
            
            
            -
            
            
            
            112,458Gross
      profit
            
            
            4,463
            
            
            
            5,837
            
            
            
            2,460
            
            
            
            3,319
            
            
            
            -
            
            
            
            16,079Income
      from operations
            
            
            1,204
            
            
            
            1,903
            
            
            
            422
            
            
            
            1,748
            
            
            
            567
            
            
            
            5,844




21




Three Months Ended June
      30, 2010Mobile
            
            
            Home
            
            
            Communication
            
            
            ConsumerPhones
            
            
            Electronics
            
            
            Products
            
            
            Electronics
            
            
            Logistics
            
            
            Other
            
            
            TotalSales,
      net
            
            $
            10,745
            
            
            $
            10,686
            
            
            $
            4,385
            
            
            $
            8,589
            
            
            $
            2,875
            
            
            $
            148
            
            
            $
            37,428Cost
      of sales
            
            
            9,803
            
            
            
            9,326
            
            
            
            3,995
            
            
            
            7,978
            
            
            
            2,277
            
            
            
            127
            
            
            
            33,506Gross
      profit
            
            
            942
            
            
            
            1,360
            
            
            
            390
            
            
            
            611
            
            
            
            598
            
            
            
            21
            
            
            
            3,922Income
      (loss) from operations
            
            
            (379)
            
            
            
            (357)
            
            
            
            (276)
            
            
            
            (120)
            
            
            
            198
            
            
            
            (632)
            
            
            
            (1,566)








Three
      Months Ended June 30, 2009Mobile
            
            
            Home
            
            
            Communication
            
            
            ConsumerPhones
            
            
            Electronics
            
            
            Products
            
            
            Electronics
            
            
            Other
            
            
            TotalSales,
      net
            
            $
            14,168
            
            
            $
            14,403
            
            
            $
            10,587
            
            
            $
            11,968
            
            
            $
            -
            
            
            $
            51,126Cost
      of sales
            
            
            12,665
            
            
            
            11,815
            
            
            
            9,824
            
            
            
            10,801
            
            
            
            -
            
            
            
            45,105Gross
      profit
            
            
            1,503
            
            
            
            2,588
            
            
            
            763
            
            
            
            1,167
            
            
            
            -
            
            
            
            6,021Income
      (loss) from operations
            
            
            88
            
            
            
            764
            
            
            
            (80
            )
            
            
            469
            
            
            
            30
            
            
            
            1,271





Total
assets by segment as of June 30, 2010 and December 31, 2009 are as
follows:





Mobile
            
            
            Home
            
            
            Communication
            
            
            ConsumerPhones
            
            
            Electronics
            
            
            Products
            
            
            Electronics
            
            
            Logistics
            
            
            Other
            
            
            TotalJune
      30, 2010
            
            $
            12,889
            
            
            $
            10,373
            
            
            $
            11,537
            
            
            $
            15,346
            
            
            $
            4,912
            
            
            $
            35,232
            
            
            $
            90,289December
      31, 2009
            
            $
            13,761
            
            
            $
            11,525
            
            
            $
            12,353
            
            
            $
            15,777
            
            
            $
            4,776
            
            
            $
            36,204
            
            
            $
            94,396





Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.





Forward
Looking Statements





We have
included, and from time–to-time may make in our public filings, press releases
or other public statements, certain statements, including, without limitation,
those under “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in Item 2.  In some cases, these statements are
identifiable through the use of words such as “anticipate”, “believe”,
“estimate”, “expect”, “intend”, “plan”, “project”, “target”, “can”, “could”,
“may”, “should”, “will”, “would”, and similar expressions. You are cautioned not
to place undue reliance on these forward-looking statements.  In
addition, our management may make forward-looking statements to analysts,
investors, representatives of the media and others.  These
forward-looking statements are not historical facts and represent only our
beliefs regarding future events, many of which, by their nature, are inherently
uncertain and beyond our control.




22





The
following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Form
10-Q.  The following discussion contains forward-looking
statements.  Our actual results may differ significantly from those
projected in the forward-looking statements.  Factors that may cause
future results to differ materially from those projected in the forward-looking
statements include, but are not limited to, those discussed in  “Risk
Factors” and elsewhere in this Form 10-Q.





Overview
(All dollar amounts in thousands)





China 3C
Group (“China 3C”) was incorporated on August, 20, 1998 under the laws of the
State of Nevada. Capital Future Developments Limited (“CFDL”) was incorporated
on July 22, 2004 under the laws of the British Virgin Islands. Zhejiang Yong Xin
Digital Technology Company Limited (“Zhejiang”), Yiwu Yong Xin Communication
Limited (“Yiwu”), Hangzhou Wandda Electronics Company Limited (“Wang Da”),
Hangzhou Sanhe Electronic Technology, Limited (“Sanhe”), and Shanghai Joy &
Harmony Electronic Development Company Limited (“Joy & Harmony”) were
incorporated under the laws of the Peoples Republic of China (“PRC” or “China”)
on July 11, 2005, July 18, 1997, March 30, 1998, April 12, 2004, and August 25,
2003, respectively. China 3C Group owns 100% of CFDL and CFDL own 100% of the
capital stock of Joy & Harmony and Sanhe. Until August 14, 2007, when it
made the change to its ownership structure described in the next paragraph in
order to comply with certain requirements of PRC law, CFDL owned 100% of the
capital stock of Zhenjiang. Zhejiang owns 90% and Yiwu owns 10% of Wang Da.
Zhejiang owns 90% and Wang Da owns 10% of Yiwu. On March 10, 2009 Zhejiang set
up a new operating entity, Hangzhou Letong Digital Technology Co., Ltd.
(“Letong”) to establish an electronic retail franchise operation for China 3C
Group. On July 6, 2009, Zhejiang and Yiwu completed acquisition of Jinhua Baofa
Logistic Ltd (“Jinhua”).  Jinhua was incorporated under the laws of PRC on
December 27, 2001.





References
to “we,” “us,” “our,” or the “Company” refer collectively to the nine
corporations described above.





On
December 21, 2005, CFDL became a wholly owned subsidiary of China 3C through a
merger with a wholly owned subsidiary of the Company (the “Merger Transaction”).
China 3C acquired all of the issued and outstanding capital stock of CFDL
pursuant to a Merger Agreement dated at December 21, 2005 by and among China 3C,
XY Acquisition Corporation, CFDL and the shareholders of CFDL (the “Merger
Agreement”). Pursuant to the Merger Agreement, CFDL became a wholly owned
subsidiary of China 3C and, in exchange for the CFDL shares, China 3C issued
35,000,000 shares of its common stock to the shareholders of CFDL, representing
93% of the issued and outstanding capital stock of China 3C at that time and
cash of $500. On August 15, 2007, in order to comply with the requirements of
PRC law, the Company recapitalized its ownership structure. As a result, instead
of CFDL owning 100% of Zhejiang as previously was the case, CFDL entered into
contractual agreements with Zhejiang whereby CFDL owns a 100% interest in the
revenues of Zhejiang. CFDL does not have an equity interest in Zhejiang, but is
deemed to have all the economic benefits and liabilities by contract. Under this
structure, Zhejiang is now a wholly foreign owned enterprise (WOFE) of CFDL. The
contractual agreements give CFDL and its equity owners an obligation to absorb
any losses, and rights to receive revenue. CFDL will be unable to make
significant decisions about the activities of Zhejiang and can not carry out its
principal activities without financial support. These characteristics as defined
in FASB ASC Topic 810, Consolidation of Variable Interest Entities (VIEs),
qualifies the business operations of Zhejiang to be consolidated with CFDL and
ultimately with China 3C.




23





As a
result of the Merger Agreement, the reorganization was treated as an acquisition
by the accounting acquiree that is being accounted for as a recapitalization and
as a reverse merger by the legal acquirer for accounting purposes. Pursuant to
the recapitalization, all capital stock shares and amounts and per share data
have been retroactively restated. Accordingly, the financial statements include
the following:




(1) The
balance sheet consists of the net assets of the accounting acquirer at
historical cost and the net assets of the legal acquirer at historical
cost.




(2) The
statements of operations include the operations of the accounting acquirer for
the period presented and the operations of the legal acquirer from the date of
the merger.





Pursuant
to a share exchange agreement, dated August 3, 2006, we issued 915,751 shares of
restricted common stock to the former shareholders of Sanhe, valued at $3,750,
which was the fair value of the shares at the date of the share exchange
agreement. This amount is included in the cost of net assets and goodwill
purchased.





Pursuant
to a share exchange agreement, dated November 28, 2006, we issued 2,723,110
shares of newly issued shares of common stock to the former shareholders of Joy
& Harmony, valued at $11,000, which was the fair value of the shares at the
date of exchange agreement. This amount is included in the cost of net assets
and goodwill purchased.





On July
6, 2009, China 3C’s subsidiaries, Zhejiang and Yiwu completed acquisition of
Jinhua, a company organized under the laws of the PRC. Zhejiang acquired 90% and
Yiwu acquired 10% of the entire equity interests in Jinhua from the shareholders
of Jinhua for a total purchase price of RMB 120,000,000 (approximately $17,500)
in cash.





The
Company is engaged in the business of resale and distribution of third party
products and generates approximately 100% of its revenue from resale of items
such as mobile phones, facsimile machines, DVD players, stereos, speakers, MP3
and MP4 players, iPod, electronic dictionaries, CD players, radios, Walkmans,
and audio systems. We sell and distribute products through retail stores and
secondary distributors. We operate most of our retail operations through our
“store in store” model. Under this model, the Company leases space in major
department stores and retailers. Leasing costs can vary based on a percentage of
sales, or can be fixed. For the year ended December 31, 2009, all of our stores
in stores leases were variable based on sales.





In 2009,
Zhejiang started establishing direct electronic retail stores and franchise
operation. As of June 30, 2010, the Company has three franchise stores and three
direct retail stores in operation, all of which are located in Zhejiang
province. For the three and six months ended June 30, 2010, the direct stores
and franchise stores had sales revenue of $148 and $382. The direct store and
franchise operation is still in the early stage and does not represent a
significant part of our business as of June 30, 2010.




24





In
July 2009, the Company acquired Jinhua and started providing transportation
service to business in Eastern China.




Result
of Operations





Results
of Operations for the Three and Six Months Ended June 30, 2010 and
2009





Reportable
Operating Segments





The
Company reports financial and operating information in the following five
segments:




a)
            Yiwu
      Yong Xin Telecommunication Company, Limited or
  “Yiwu”





b)
            Hangzhou
      Wang Da Electronics Company, Limited or “Wang
  Da”





c)
            Hangzhou
      Sanhe Electronic Technology Limited or
  “Sanhe”





d)
            Shanghai
      Joy & Harmony Electronics Company Limited or “Joy &
      Harmony”





e)
            Jinhua
      Baofa Logistic Limited or “Jinhua”





a)         Yiwu
Yong Xin Telecommunication Company Limited or “Yiwu”





Yiwu
focuses on the selling, circulation and modern logistics of fax machines and
cord phone products.





Six
      months ended
              June
      30,
            
            
            PercentageYiwu
            
            2010
            
            
            2009
            
            
            ChangeRevenue
            
            $
            10,563
            
            
            $
            26,389
            
            
            
            (59.97)
            %Gross
      Profit
            
            $
            897
            
            
            $
            2,459
            
            
            
            (63.52)
            %Gross
      Margin
            
            
            8.49
            %
            
            
            9.32
            %
            
            
            (0.83)
            %Operating
      (Loss)/Income
            
            $
            (486)
            
            
            $
            422
            
            
            
            (215.17)
            %





Three
      months ended
              June
      30,
            
            
            PercentageYiwu
            
            2010
            
            
            2009
            
            
            ChangeRevenue
            
            $
            4,385
            
            
            $
            10,587
            
            
            
            (58.58)
            %Gross
      Profit
            
            $
            390
            
            
            $
            762
            
            
            
            (48.82)
            %Gross
      Margin
            
            
            8.89
            %
            
            
            7.19
            %
            
            
            1.70
            %Operating
      Loss
            
            $
            (276)
            
            
            $
            (80
            )
            
            
            245
            %





For the
six months ended June 30, 2010, Yiwu generated revenue of $10,563, a decrease of
$15,826 or 59.97% compared to $26,389 for the six months ended June 30, 2009.
Gross profit decreased $1,562 or 63.52% from $2,459 for the six months ended
June 30, 2009 to $897 for the six months ended June 30, 2010. Operating loss was
$(486) for the six months ended June 30, 2010, a decrease of $908 or 215.17%
compared to operating income of $422 for the six months ended June 30,
2009.




25





For the
three months ended June 30, 2010, Yiwu generated revenue of $4,385, a decrease
of $6,202 or 58.58% compared to $10,587 for the three months ended June 30,
2009. Gross profit decreased $372 or 48.82% from $762 for the three months ended
June 30, 2009 to $390 for the three months ended June 30, 2010. Operating loss
was $(276) for the three months ended June 30, 2010, a decrease of $196 or 245%
compared to operating loss of $(80) for the three months ended June 30,
2009.





Such
decrease in revenue was primarily due to weaker demand for office equipment.
Many small and medium-sized companies in China were less likely to purchase or
upgrade new office equipment in the current economic environment. Growing
competition in the fax machine and telephone markets also led to lower unit
sales prices which resulted in lower sales revenue.





Gross
margin decreased 0.83% during the six months ended June 30, 2010 compared
to June 30, 2009. The decrease was a result of lower unit sales price of
fax machines and telephones due to a more competitive sales market. Gross margin
increased 1.70% during the three months ended June 30, 2010 compared to the same
period in 2009. The increase was a result of change in revenue mix. We had more
sales in telephones than fax machines in 2010, which led to higher gross
margin.





b)           Hangzhou
Wang Da Electronics Company Limited or “Wang Da”





Wang Da
focuses on the selling, circulation and modern logistics of cell phones, cell
phones products, and digital products, including digital cameras, digital
camcorders, PDAs, flash disks, and removable hard disks.








Six
      months ended June 30,
            
            
            PercentageWang
      Da
            
            2010
            
            
            2009
            
            
            ChangeRevenue
            
            $
            21,244
            
            
            $
            39,912
            
            
            
            (46.77)
            %Gross
      Profit
            
            $
            1,710
            
            
            $
            4,463
            
            
            
            (61.68)
            %Gross
      Margin
            
            
            8.05
            %
            
            
            11.18
            %
            
            
            (3.13)
            %Operating
      (Loss)/Income
            
            $
            (825)
            
            
            $
            1,204
            
            
            
            (168.52)
            %







Three
      months ended June 30,
            
            
            PercentageWang
      Da
            
            2010
            
            
            2009
            
            
            ChangeRevenue
            
            $
            10,745
            
            
            $
            14,168
            
            
            
            (24.16)
            %Gross
      Profit
            
            $
            942
            
            
            $
            1,503
            
            
            
            (37.33)
            %Gross
      Margin
            
            
            8.77
            %
            
            
            10.61
            %
            
            
            (1.84)
            %Operating
      (Loss)/Income
            
            $
            (379)
            
            
            $
            88
            
            
            
            (530.68)
            %





For the
six months ended June 30, 2010, Wang Da generated revenue of $21,244, a decrease
of $18,668 or 46.77% compared to $39,912 for the six months ended June 30, 2009.
Gross profit decreased $2,753 or 61.68% from $4,463 for the six months ended
June 30, 2009 to $1,710 for the six months ended June 30, 2010. Operating loss
was $(825) for the six months ended June 30, 2010, a decrease of $2,029 or
168.52% compared to operating income of $1,204 for the six months ended June 30,
2009.




26





For the
three months ended June 30, 2010, Wang Da generated revenue of $10,745, a
decrease of $3,423 or 24.16% compared to $14,168 for the three months ended June
30, 2009. Gross profit decreased $561 or 37.33% from $1,503 for the three months
ended June 30, 2009 to $942 for the three months ended June 30, 2010. Operating
loss was $(379) for the three months ended June 30, 2010, a decrease of $467 or
530.68% compared to operating income of $88 for the three months ended June 30,
2009.





The
decrease in revenue was primarily due to the high competition from
government-owned large telecommunication service providers. Telecommunication
service providers started to open their direct operating stores to sell
communication products and also launched promotions such as “free phone with
service contract”.





Gross
margin decreased 3.13% and 1.84%, respectively during the six and three months
ended June 30, 2010. The decrease in gross profit and gross margin was due to
the decrease in demand of domestic cell phones, which had a higher gross margin
than brand name cell phones.





c)           Hangzhou
Sanhe Electronic Technology Limited or “Sanhe”





Sanhe
focuses on the selling, circulation and modern logistics of home electronics,
including DVD players, audio systems, speakers, televisions and air
conditioners.





Six
      months ended June 30,
            
            
            PercentageSanhe
            
            2010
            
            
            2009
            
            
            ChangeRevenue
            
            $
            21,998
            
            
            $
            30,996
            
            
            
            (29.03)
            %Gross
      Profit
            
            $
            2,595
            
            
            $
            5,838
            
            
            
            (55.55)
            %Gross
      Margin
            
            
            11.80
            %
            
            
            18.83
            %
            
            
            (7.03)
            %Operating
      (Loss)/Income
            
            $
            (873)
            
            
            $
            1,902
            
            
            
            (145.90)
            %





Three
      months ended June 30,
            
            
            PercentageSanhe
            
            2010
            
            
            2009
            
            
            ChangeRevenue
            
            $
            10,686
            
            
            $
            14,403
            
            
            
            (25.81)
            %Gross
      Profit
            
            $
            1,361
            
            
            $
            2,589
            
            
            
            (47.47)
            %Gross
      Margin
            
            
            12.74
            %
            
            
            17.98
            %
            
            
            (5.25)
            %Operating
      (Loss)/Income
            
            $
            (357)
            
            
            $
            764
            
            
            
            (146.73)
            %





For the
six months ended June 30, 2010, Sanhe generated revenue of $21,998, a decrease
of $8.998 or 29.03% compared to $30,996 for the six months ended June 30, 2009.
Gross profit decreased $3,243 or 55.55% from $5,838 for the six months ended
June 30, 2009 to $2,595 for the six months ended June 30, 2010. Operating loss
was $873 for the six months ended June 30, 2010, a decrease of $2,775 or 145.90%
compared to operating income of $1,902 for the six months ended June 30,
2009.




27





For the
three months ended June 30, 2010, Sanhe generated revenue of $10,686, a decrease
of $3,717 or 25.81% compared to $14,403 for the three months ended June 30,
2009. Gross profit decreased $1,228 or 47.47% from $2,589 for the three months
ended June 30, 2009 to $1,361 for the three months ended June 30, 2010.
Operating loss was $(357) for the three months ended June 30, 2010, a decrease
of $1,121 or 146.73% compared to operating income of $764 for the three months
ended June 30, 2009.




The
decrease in revenue was a result of decline in market demand of DVD players and
speakers. Higher competitions also led to lower sales volume and lower unit
sales price, which resulted in lower revenue.





Gross
margin decreased 7.03% during the six months ended June 30, 2010 and decreased
5.25% during the three months ended June 30, 2010. The decrease was a result of
higher sales volume of televisions compared to higher sales in DVD players and
speakers in 2009, which have higher gross margin compared to other home
electronics products.




d)           Shanghai
Joy & Harmony Electronics Company Limited or “Joy &
Harmony”





Joy &
Harmony focuses on the selling, circulation and modern logistics of consumer
electronics, including MP3 players, MP4 players, iPod, electronic dictionary,
radios, and Walkman.




Six
      months ended June 30,
            
            
            PercentageJoy
      & Harmony
            
            2010
            
            
            2009
            
            
            ChangeRevenue
            
            $
            18,532
            
            
            $
            31,241
            
            
            
            (40.68)
            %Gross
      Profit
            
            $
            849
            
            
            $
            3,319
            
            
            
            (74.42)
            %Gross
      Margin
            
            
            4.58
            %
            
            
            10.62
            %
            
            
            (6.04)
            %Operating
      (Loss)/Income
            
            $
            (628)
            
            
            $
            1,748
            
            
            
            (135.93)
            %





Three
      months ended June 30,
            
            
            PercentageJoy
      & Harmony
            
            2010
            
            
            2009
            
            
            ChangeRevenue
            
            $
            8,589
            
            
            $
            11,968
            
            
            
            (28.23)
            %Gross
      Profit
            
            $
            611
            
            
            $
            1,166
            
            
            
            (47.60)
            %Gross
      Margin
            
            
            7.11
            %
            
            
            9.74
            %
            
            
            (2.63)
            %Operating
      (Loss)/Income
            
            $
            (120)
            
            
            $
            469
            
            
            
            (125.59)
            %





For the
six months ended June 30, 2010, Joy & Harmony generated revenue of $18,532,
a decrease of $12,709 or 40.68% compared to $31,241 for the six months ended
June 30, 2009. Gross profit decreased $2,470 or 74.42% from $3,319 for the six
months ended June 30, 2009 to $849 for the six months ended June 30, 2010.
Operating loss was $628 for the six months ended June 30, 2010, a decrease of
$2,376 or 135.93% compared to operating income of $1,748 for the six months
ended June 30, 2009.





For the
three months ended June 30, 2010, Joy & Harmony generated revenue of $8,589,
a decrease of $3,379 or 28.23% compared to $11,968 for the three months ended
June 30, 2009. Gross profit decreased $555 or 47.60% from $1,166 for the three
months ended June 30, 2009 to $611 for the three months ended June 30, 2010.
Operating loss was $(120) for the three months ended June 30, 2010, a decrease
of $589 or 125.59% compared to operating income of $469 for the three months
ended June 30, 2009.




28





Gross
margin decreased 6.04% and 2.63% during the six and three months ended June 30,
2010, respectively.





Many
small domestic electronics manufacturers closed down in the first two quarters
of 2010 and large manufacturers raised the price of consumer electronics.
Therefore, the cost for Joy & Harmony increased, which led to a significant
decline in gross margin. The closedown of many small electronics manufacturers
also caused some of our products to discontinue which led to lower sales
revenue. Operating income decreased primarily due to decreased gross margin and
increased operating expenses, which includes an increase in base salary for all
staff, an increase in marketing expenses and management fees paid to the
department stores.





e)           Jinhua
Baofa Logistic Limited or “Jinhua”





Jinhua
provides transportation service to business and transports freight, including
electronics, machinery and equipment, metal products, chemical materials,
garments and handicraft goods, in more than 20 cities in Eastern China. Its
transportation services cover many of the most developed cities in Eastern China
such as Shanghai, Hangzhou and Nanjing.





China 3C
acquired Jinhua on July 6, 2009. Therefore, the consolidated statement of income
(loss) and comprehensive income (loss) of China 3C for the period ended June 30,
2009 did not include Jinhua’s operating results.





Jinhua
            
            Six months ended
              June
      30, 2010Revenue
            
            $
            5,516Gross
      Profit
            
            $
            1,194Gross
      Margin
            
            
            21.65
            %Operating
      Income
            
            $
            448





Jinhua
            
            Three months ended
              June
      30, 2010Revenue
            
            $
            2,875Gross
      Profit
            
            $
            598Gross
      Margin
            
            
            20.80
            %Operating
      Income
            
            $
            198





Net
Sales





Net sales
for the six months ended June 30, 2010 decreased by 39.14%, to $78,226 compared
to $128,537 for the six months ended June 30, 2009. Net sales for the three
months ended June 30, 2010 decreased by 26.79%, to $37,428 as compared to
$51,126 for the three months ended June 30, 2009. Management believes that the
lower sales were a result of various factors including a slowdown in the retail
markets in general, weaker demand for consumer and business electronics as well
as the pressure of increased competition within the markets in which we
operate.




29





Cost
of Sales





Cost of
sales for the six months ended June 30, 2010 was $70,939 compared to $112,458
for the six months ended June 30, 2009, a decrease of 36.92%. Cost of sales for
the three months ended June 30, 2010 was $33,506 as compared to $45,105 for the
three months ended June 30, 2009, a decrease of 25.72%. The decreased cost of
sales for the six months was a direct result of the decrease in sales during the
same period.




Gross
Profit Margin





Gross
profit margin for the six months ended June 30, 2010 was 9.32% compared to12.51%
for the six months ended June 30, 2009. Gross profit margin for the three months
ended June 30, 2010 was 10.48% as compared to 11.78% for the three months ended
June 30, 2009. The lower gross profit margin was primarily due to the decreased
unit sales prices of consumer and business electronics in the competitive market
in China. While the unit sales prices decreased, the purchase price
increased.




General
and Administrative Expenses





General
and administrative expenses for the six months ended June 30, 2010 were $10,702
or 13.68% of net sales, compared to $10,235 or 7.96% of net sales for the six
months ended June 30, 2009, an increase of 4.56%. General and administrative
expenses for the three months ended June 30, 2010 were $5,488 or 14.66% of net
sales, compared to $4,750 or 9.29% of net sales for the three months ended June
30, 2009, an increase of 15.54%. The increase in general and administrative
expenses was primarily due to an increase in base salary for all staff, increase
in public expenses as well as increased marketing expenses and management fees
paid to department stores.





Income
(loss) from Operations





Operating
loss for the six months ended June 30, 2010 was $(3,415) or (4.37)% of net sales
compared to income from operations of $5,844 or 4.55% of net sales for the six
months ended June 30, 2009, a decrease of 158.44%. Operating loss for the three
months ended June 30, 2010 was $(1,566) or 4.18% of net sales compared to income
from operations of $1,271 or 2.49% of net sales for the three months ended June
30, 2009, a decrease of 223.21%. Lower sales, lower gross margin as well as
increased operating expenses were the key factors for the decrease in income
from operations during the three and six months ended June 30,
2010.





Provision
for Income Taxes





The
provision for income taxes for the six months ended June 30, 2010 was $190
compared to $1,591 for the six months ended June 30, 2009. The provision for
income taxes for the three months ended June 30, 2010 was $83 compared to $392
for the three months ended June 30, 2009. The decrease in income tax expenses
was due to Yiwu, Wang Da, Joy & Harmony and Sanhe having net losses in the
first two quarters of 2010 and therefore not having income tax expenses. Jinhua
and Zhejiang were the only two subsidiaries having operating income and the
amount was not significant.




30





Net
(Loss) / Income





Net loss
was $(3,595) or (4.60)% of net sales for the six months ended June 30, 2010
compared to net income of $4,354 or 3.39% of net sales for the six months ended
June 30, 2009, a decrease of 182.57%. Net loss was $(1,668) or (4.46)% of net
sales for the three months ended June 30, 2010 compared to net income of $914 or
1.78% of net sales for the three months ended June 30, 2009, a decrease of
282.49%. Decreased sales revenue, lower gross margin and higher operating
expenses were the critical factors which contributed to the decrease in net
income.




Liquidity
and Capital Resources





Operations
and liquidity needs are funded primarily through cash flows from operations.
Cash and cash equivalents were $29,123 at June 30, 2010, compared to $25,448 at
June 30, 2009, and compared to $29,908 at December 31, 2009.




We
believe the funds available to us are adequate to meet our operating needs for
the remainder of 2010.





Six months
      ended June 30,2010
            
            
            2009Net
      cash (used in) provided by operating activities
            
            $
            (625)
            
            
            $
            721Net
      cash used in investing activities
            
            $
            (18
            )
            
            $
            (7,295
            )Effect
      of exchange rate change on cash and cash equivalents
            
            $
            (142
            )
            
            $
            (136
            )Net
      decrease in cash and cash equivalents
            
            $
            (785
            )
            
            $
            (6,710
            )Cash
      and cash equivalents at beginning of period
            
            $
            29,908
            
            
            $
            32,158Cash
      and cash equivalents at end period
            
            $
            29,123
            
            
            $
            25,448




Operating
Activities





Net cash
used in operating activities was $625 for the six months ended June 30,
2010 compared to net cash generated from operating activities of $721 for
the six months ended June 30, 2009, approximately a 186.69%
decrease.  The decrease was mainly attributable to several factors,
including (i) net loss of $(3,595); (ii) decrease in advance to suppliers of
$103; (iii) decrease in accounts payable and accrued expenses of $771, offset by
the decrease in accounts receivable of $2,751 in the six months ended June 30,
2010.





Six
      months ended June 30,2010
            
            
            2009
            
            
            Percentage
              ChangeSales
      Net
            
            $
            78,226
            
            
            $
            128,537
            
            
            
            (39.14
            )%Accounts
      receivable
            
            $
            15,547
            
            
            $
            18,232
            
            
            
            (14.73
            )%




31




Accounts
receivable did not decrease in line with the decrease in sales due to the terms
of payment changed from 30 days to 45 days on retail and from 10 days to 15 days
on wholesale. Management monitors and periodically assesses the collectability
of accounts receivable to ensure the receivables are reasonably assured.
Collection of debt is based on the terms of legal binding documents. Our account
receivable department has periodically reviewed the allowance for doubtful
accounts. The estimate of bad debt allowance is based on the aging of the
receivables, the credit history and credit quality of the customers, the term of
the contracts as well as the balance outstanding. If an account receivable item
is considered highly probable that it is uncollectible, then it will be charged
to bad debt immediately in that period.





Investing
Activities





Six
      months ended June 30,2010
            
            
            2009Net
      cash used investment activities
            
            $
            (18
            )
            
            $
            (7,295
            )





Net cash
used in investing activities was $7,295 during the six months ended June 30,
2009 due to the deposit payment for the acquisition of Jinhua.





The
Company’s activities focused on the distribution of electronic products and
logistic service.  As a result, investments in fixed assets were
moderate and hence there is little effect to the utilization of cash over the
six months ended June 30, 2010.





Financing
Activities





The
Company did not carry out any financing activities during the six months ended
June 30, 2010 and 2009.






Six
      months ended June 30,2010
            
            
            2009Net
      change in cash and cash equivalents
            
            $
            (785
            )
            
            $
            (6,710
            )





Six
      months ended June 30,2010
            
            
            2009Cash
      and cash equivalent at June 30, 2010 and 2009
            
            $
            29,123
            
            
            $
            25,448





Capital
Expenditures





Total
capital expenditures for the first six months of 2010 were $18 for purchase of
fixed assets compared to $4 for the first six months of 2009. The increase is
due to acquisition of a motor vehicle in second quarter 2010.




32





Working Capital Requirements





Historically
operations and short term financing have been sufficient to meet our cash needs.
We believe we will be able to generate revenues from sales and raise capital
through private placement offerings of our equity securities to provide the
necessary cash flow to meet anticipated working capital requirements. However,
our working capital needs for the long and short term will depend upon numerous
factors, including operating results, competition, and the availability of
credit facilities, none of which can be predicted with certainty. Future
expansion will be limited by the availability of financing products and raising
capital.





Off-Balance
Sheet Arrangements





We have
never entered into any off-balance sheet financing arrangements and have never
established any special purpose entities. We have not guaranteed any debt or
commitments of other entities or entered into any options on non-financial
assets.





Critical
Accounting Policies





Our
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these consolidated financial statements requires us to make
estimates, judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosure of contingent
assets and liabilities. We base our estimates on historical experience and on
various other assumptions that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates.





An
accounting policy is considered to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimates are made, and if different estimates that reasonably
could have been used, or changes in the accounting estimates that are reasonably
likely to occur, could materially impact the consolidated financial statements.
We believe the following critical accounting policies reflect the more
significant estimates and assumptions used in the preparation of the
consolidated financial statements.





Revenue
Recognition





Our
revenues are generated from sales of electronics products. All of our revenue
transactions contain standard business terms and conditions. We determine the
appropriate accounting for these transactions after considering (1) whether a
contract exists; (2) when to recognize revenue on the deliverables; and (3)
whether all elements of the contract have been fulfilled and delivered. In
addition, our revenue recognition policy requires an assessment as to whether
collection is reasonably assured, which inherently requires us to evaluate the
creditworthiness of our customers. Changes in judgments on these assumptions and
estimates could materially impact the timing or amount of revenue
recognition.




33




Please
refer to Note 2 in the footnotes to the financial statements for detailed
description of our revenue recognition policy.





After
Sales Service





The
after-sales services we provide to our customers are primarily repair and
maintenance. If a customer buys a product from us and needs repairs, we can
usually arrange to have the manufacturer repair the product. In certain cases,
clerks in our stores are able to make the repairs directly.





Tabular
Disclosure of Contractual Obligations




The
following table sets forth our contractual obligations as of June 30,
2010.





Payment Due by PeriodLess than 1
            
            
            
            
            
            
            
            
            More thanContractual
      Obligations
            
            Total
            
            
            year
            
            
            1-3 years
            
            
            3-5 years
            
            
            5
      yearsOperating
      lease obligations
            
            $
            307
            
            
            
            244
            
            
            
            53
            
            
            
            10
            
            
            $
            -Advertising
      obligations
            
            
            198
            
            
            
            198
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      contractual obligations
            
            $
            505
            
            
            
            442
            
            
            
            53
            
            
            
            10
            
            
            $
            -





Item
3. Quantitative and Qualitative Disclosures About Market Risk.





Foreign
Currency Exchange Rate Risk




Fluctuations
in the rate of exchange between the U.S. dollar and foreign currencies,
primarily the Chinese Renminbi, could adversely affect our financial results.
During the second quarter ended June 30, 2010, all of our sales were denominated
in foreign currencies. We expect that foreign currencies will continue to
represent a similarly significant percentage of our sales in the future.
Selling, marketing and administrative costs related to these sales are largely
denominated in the same respective currency, thereby mitigating our transaction
risk exposure. We therefore believe that the risk of a significant impact on our
operating income from foreign currency fluctuations is not substantial. However,
for sales not denominated in U.S. dollars, if there is an increase in the rate
at which a foreign currency is exchanged for U.S. dollars, it will require more
of the foreign currency to equal a specified amount of U.S. dollars than before
the rate increase. In such cases and if we price our products in the foreign
currency, we will receive less in US. dollars than we did before the rate
increase went into effect. If we price our products in U.S. dollars and
competitors price their products in local currency, an increase in the relative
strength of the U.S. dollar could result in our price not being competitive in a
market where business is transacted in the local currency.





All of
our sales denominated in foreign currencies are denominated in the Chinese
Renminbi. Our principal exchange rate risk therefore exists between the U.S.
dollar and this currency. Fluctuations from the beginning to the end of any
given reporting period result in the re-measurement of our foreign
currency-denominated receivables and payables, generating currency transaction
gains or losses that impact our non-operating income/expense levels in the
respective period and are reported in other (income) expense, net in our
consolidated financial statements. We do not currently hedge our exposure to
foreign currency exchange rate fluctuations. We may, however, hedge such
exposure to foreign currency exchange rate fluctuations in the
future.




34





Interest
Rate Risk





Changes
in interest rates may affect the interest paid (or earned) and therefore affect
our cash flows and results of operations. However, we do not believe that this
interest rate change risk is significant.





Inflation





Inflation
has not had a material impact on the Company’s business for the Company’s three
most recent fiscal years.





Currency
Exchange Fluctuations





All of
the Company’s revenues are denominated in Chinese Renminbi, while its expenses
are denominated primarily in Chinese Renminbi (“RMB”). The value of the
RMB-to-U.S. dollar and other currencies may fluctuate and is affected by, among
other things, changes in political and economic conditions. Since 1994, the
conversion of Renminbi into foreign currencies, including U.S. dollars, has been
based on rates set by the People’s Bank of China (“PBOC”), which are set daily
based on the previous day’s inter-bank foreign exchange market rates and current
exchange rates on the world financial markets. Since 1994, the official exchange
rate for the conversion of Renminbi to U.S. dollars had generally been stable
and the Renminbi had appreciated slightly against the U.S. dollar. However, on
July 21, 2005, the Chinese government changed its policy of pegging the value of
Chinese Renminbi to the U.S. dollar. Under the new policy, Chinese Renminbi may
fluctuate within a narrow and managed band against a basket of certain foreign
currencies. Recently there has been increased political pressure on the Chinese
government to decouple the Renminbi from the United States dollar. At the recent
quarterly regular meeting of PBOC, its Currency Policy Committee affirmed the
effects of the reform on Chinese Renminbi exchange rate. Since February 2006,
the new currency rate system has been operated; the currency rate of Renminbi
has become more flexible while basically maintaining stable and the expectation
for a larger appreciation range is shrinking. The Company has never engaged in
currency hedging operations and has no present intention to do
so.





Concentration
of Credit Risk





Credit
risk represents the accounting loss that would be recognized at the reporting
date if counterparties failed completely to perform as contracted.
Concentrations of credit risk (whether on or off balance sheet) that arise from
financial instruments exist for groups of customers or counterparties when they
have similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions as described below:






            The
      Company’s business is characterized by rapid technological change, new
      product and service development, and evolving industry standards and
      regulations. Inherent in the Company’s business are various risks and
      uncertainties, including the impact from the volatility of the stock
      market, limited operating history, uncertain profitability and the ability
      to raise additional capital.
            All
      of the Company’s revenue is derived from Asia and Greater China. Changes
      in laws and regulations, or their interpretation, or the imposition of
      confiscatory taxation, restrictions on currency conversion, devaluations
      of currency or the nationalization or other expropriation of private
      enterprises could have a material adverse effect on our business, results
      of operations and financial
condition.






            If
      the Company is unable to derive any revenues from Greater China, it would
      have a significant, financially disruptive effect on the normal operations
      of the Company.




35




Item
4T. Controls and Procedures.





Evaluation
of Disclosure Controls and Procedures





Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures as of June 30, 2010, as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act.
Based on this evaluation, our principal executive officer and principal
financial officer have concluded that during the period covered by this report,
the Company’s disclosure controls and procedures were effective as of such date
to ensure that information required to be disclosed by us in our Exchange Act
reports is recorded, processed, summarized, and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to our management, including our principal executive officer
and principal financial officer, or persons performing similar functions, as
appropriate, to allow timely decisions regarding required
disclosures.





Changes
in Internal Control over Financial Reporting





There was
no change in our internal control over financial reporting that occurred during
the first two fiscal quarters of 2010 covered by this Quarterly Report on Form
10-Q that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting




PART II. OTHER INFORMATION





Item 1. Legal
Proceedings.





Neither
the Company nor its property is a party to any pending legal proceeding. The
Company’s management does not believe that there are any proceedings to which
any director, officer, or affiliate of the Company, any owner of record of
beneficially held or owner of more than five percent (5%) of the Company’s
common stock, or any associate of any such director, officer, affiliate of the
Company, or security holder is a party adverse to the Company, or has a material
interest adverse to the Company.





Item
1A. Risk Factors.





None.




36





Item 2.  Unregistered Sales of Equity
Securities and Use of Proceeds.





None.





Item 3.  Defaults Upon Senior
Securities.




Not
Applicable.





Item 4. (Removed and
Reserved).





Item 5. Other
Information.





None.





Item 6. Exhibits.




Exhibit
      No.
            
            Document
      Description10.1
            
            Separation
      and Release Agreement dated August 6, 2010 by and between China 3C Group
      and Kenneth Berents (1)31.1
            
            Certification
      of the Chief Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the
      Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
            
            Certification
      of the Chief Financial Officer pursuant to Rule 13A-14(A)/15D-14(A) of the
      Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
            
            Certification
      of the Chief Executive Officer and Chief Financial Officer pursuant
      to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of
      2002).




(1)
Incorporated by reference from the Registrant’s Current Report filed with the
SEC on Form 8-K on August 12, 2010.





37




SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




CHINA
      3C GROUPDate:
      August 16, 2010
            By:
            /s/
      Zhenggang WangName:  
      Zhenggang WangTitle:
      Chief Executive Officer and Chairman(Principal
      Executive Officer)




Date:
      August 16, 2010
            By:
            /s/
      Jian ZhangName:  
      Jian ZhangTitle:
      Chief Financial Officer (Principal Accounting and Financial
      Officer)





38




Exhibit
Index


Exhibit
      No.
              
              Document
      Description10.1
              
              Separation
      and Release Agreement dated August 6, 2010 by and between China 3C Group
      and Kenneth Berents (1)31.1
              
              Certification
      of the Chief Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the
      Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
              
              Certification
      of the Chief Financial Officer pursuant to Rule 13A-14(A)/15D-14(A) of the
      Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
              
              Certification
      of the Chief Executive Officer and Chief Financial Officer pursuant
      to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of
      2002).


(1)
Incorporated by reference from the Registrant’s Current Report filed with the
SEC on Form 8-K on August 12, 2010.




39