UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





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




For the
quarterly period ended     March 31,
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 May
14, 2010, the registrant had 54,831,327 shares of common stock
outstanding.











TABLE
OF CONTENTS





PART
      I. FINANCIAL INFORMATIONItem
      1. Financial Statements:Consolidated
      Balance Sheets as of March 31, 2010 (Unaudited) and December 31,
      2009
                  1Consolidated
      Statements of Income for the Three Months Ended March 31, 2010 and 2009
      (Unaudited)
                  2Consolidated
      Statements of Cash Flows for the Three Months Ended March 31, 2010 and
      2009 (Unaudited)
                  3Notes
      to Consolidated Financial Statements
                  4 -
      18Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                  19Item
      3. Qualitative and Quantitative Disclosure about Market
    Risk
                  28Item
      4. Controls and Procedures
                  29PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings
                  29Item
      1A. Risk Factors
                  30Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                  30Item
      3. Defaults Upon Senior Securities
                  30Item
      4. (Removed and Reserved)
                  30Item
      5. Other Information
                  30Item
      6. Exhibits
                  30Signatures
                  30







CHINA
3C GROUP AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(IN
THOUSANDS)





March 31,
                    
                    
                    December
                      31,2010
                    
                    
                    2009(Unaudited)
                    
                    
                    (Audited)ASSETSCurrent
      assets:Cash
      and equivalents
                    
                    $
                    27,256
                    
                    
                    $
                    29,908Accounts
      receivable, net
                    
                    
                    17,981
                    
                    
                    
                    18,232Inventories
                    
                    
                    7,627
                    
                    
                    
                    6,764Advances
      to suppliers
                    
                    
                    2,274
                    
                    
                    
                    2,370Tax
      receivable
                    
                    
                    1,157
                    
                    
                    
                    1,157Prepaid
      expenses and other current assets
                    
                    
                    246
                    
                    
                    
                    294Total
      current assets
                    
                    
                    56,541
                    
                    
                    
                    58,725Property,
      plant and equipment, net
                    
                    
                    251
                    
                    
                    
                    279Goodwill
                    
                    
                    20,820
                    
                    
                    
                    20,820Intangible
      asset, net
                    
                    
                    14,206
                    
                    
                    
                    14,557Refundable
      deposits
                    
                    
                    13
                    
                    
                    
                    15Total
      assets
                    
                    $
                    91,831
                    
                    
                    $
                    94,396LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
                    
                    $
                    6,032
                    
                    
                    $
                    6,838Income
      tax payable
                    
                    
                    972
                    
                    
                    
                    938Total
      liabilities
                    
                    
                    7,004
                    
                    
                    
                    7,776Stockholders'
      equityCommon
      stock, $0.001 par value, 100,000,000 sharesauthorized,
      54,831,327 issued and outstanding as ofMarch
      31, 2010 and December 31, 2009, respectively
                    
                    
                    55
                    
                    
                    
                    55Additional
      paid-in capital
                    
                    
                    19,877
                    
                    
                    
                    19,751Subscription
      receivable
                    
                    
                    (50
                    )
                    
                    
                    (50
                    )Statutory
      reserve
                    
                    
                    11,535
                    
                    
                    
                    11,535Other
      comprehensive income
                    
                    
                    5,189
                    
                    
                    
                    5,180Retained
      earnings
                    
                    
                    48,221
                    
                    
                    
                    50,149Total
      stockholders' equity
                    
                    
                    84,827
                    
                    
                    
                    86,620Total
      liabilities and stockholders' equity
                    
                    $
                    91,831
                    
                    
                    $
                    94,396




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





1




CHINA
3C GROUP AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)


FOR
THE THREE MONTHS ENDED MARCH 31, 2010 and 2009


(IN
THOUSANDS)




2010
                    
                    
                    2009(Unaudited)
                    
                    
                    (Unaudited)Sales,
      net
                    
                    $
                    40,798
                    
                    
                    $
                    77,412Cost
      of sales
                    
                    
                    37,433
                    
                    
                    
                    67,353Gross
      profit
                    
                    
                    3,365
                    
                    
                    
                    10,059General
      and administrative expenses
                    
                    
                    5,214
                    
                    
                    
                    5,486Income
      from operations (loss)
                    
                    
                    (1,849
                    )
                    
                    
                    4,573Other
      (income) expenseInterest
      income
                    
                    
                    (25
                    )
                    
                    
                    (29
                    )Other
      income
                    
                    
                    (4
                    )
                    
                    
                    (148
                    )Other
      expense
                    
                    
                    -
                    
                    
                    
                    111Total
      other (income) expense
                    
                    
                    (29
                    )
                    
                    
                    (66
                    )Income
      (loss) before income taxes
                    
                    
                    (1,820
                    )
                    
                    
                    4,639Provision
      for income taxes
                    
                    
                    107
                    
                    
                    
                    1,199Net
      income (loss)
                    
                    
                    (1,927
                    )
                    
                    
                    3,440Foreign
      currency translation adjustments
                    
                    
                    8
                    
                    
                    
                    (137
                    )Comprehensive
      income (loss)
                    
                    $
                    (1,919
                    )
                    
                    $
                    3,303Basic
                    
                    $
                    (0.04
                    )
                    
                    $
                    0.07Diluted
                    
                    $
                    (0.04
                    )
                    
                    $
                    0.07Weighted
      average shares outstanding:Basic
                    
                    
                    54,831,327
                    
                    
                    
                    52,834,055Diluted
                    
                    
                    54,831,327
                    
                    
                    
                    52,834,055





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




2


CHINA
3C GROUP AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010 and 2009


(IN
THOUSANDS)




2010
                
                
                2009(Unaudited)
                
                
                (Unaudited)CASH
      FLOW FROM OPERATING ACTIVITIESNet
      income (loss)
                
                $
                (1,927
                )
                
                $
                3,440Adjustments
      to reconcile net income (loss) to net cash provided (used) by operating
      activities:Depreciation
                
                
                29
                
                
                
                7Amortization
      of intangible assets
                
                
                345
                
                
                
                -Stock
      based compensation
                
                
                125
                
                
                
                -(Increase)
      / decrease in assets:Accounts
      receivable
                
                
                254
                
                
                
                208Other
      receivable
                
                
                13
                
                
                
                26Inventories
                
                
                (862
                )
                
                
                (2,388
                )Prepaid
      expenses and other current assets
                
                
                35
                
                
                
                17Refundable
      deposits
                
                
                3
                
                
                
                2Advance
      to suppliers
                
                
                96
                
                
                
                149Increase
      / (decrease) in current liabilities:Advance
      from customers
                
                
                23
                
                
                
                -Accounts
      payable and accrued expenses
                
                
                (773
                )
                
                
                3,363Income
      tax payable
                
                
                34
                
                
                
                (940
                )Net
      cash provided by (used in) operating activities
                
                
                (2,605
                )
                
                
                3,884CASH
      FLOW FROM INVESTING ACTIVITIESPurchase
      of property and equipment
                
                
                -
                
                
                
                (3
                )Deposit
      for acquisition of subsidiary
                
                
                -
                
                
                
                (7,289
                )Net
      cash used in investing activities
                
                
                -
                
                
                
                (7,292
                )Effect
      of exchange rate changes on cash and cash equivalents
                
                
                (47
                )
                
                
                (83
                )Net
      increase (decrease) in cash
                
                
                (2,652
                )
                
                
                (3,491
                )Cash,
      beginning of period
                
                
                29,908
                
                
                
                32,158Cash,
      end of period
                
                $
                27,256
                
                
                $
                28,667Supplemental
      disclosure of cash flow information:Interest
      paid
                
                $
                -
                
                
                $
                -Income
      taxes paid
                
                $
                69
                
                
                $
                2,142




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





3




CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010 AND 2009 (UNAUDITED)


(DOLLARS
IN THOUSANDS)





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”) were incorporated under the
laws of Peoples Republic of China on July 11, 2005, July 18, 1997, March, 30,
1998, April 12, 2004, and August 20, 2003, respectively.





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 Accounting Standards
Codification (“ASC”) 810, Consolidation of Variable Interest Entities (VIEs),
qualify the business operations of Zhejiang to be consolidated with Capital and
ultimately with China 3C.





4


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 ASC 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.




5










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.





6


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 (“CNY”). Such financial statements were translated into U.S. Dollars
(“USD”) in accordance with Accounting Standards Codification (“ASC”) 830-10,
“Foreign Currency Translation,” with the CNY as the functional currency.
According to ASC 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 ASC 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.





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
$394 and $404 (audited) as of March 31, 2010 and December 31, 2009,
respectively.





7


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 March 31, 2010 and December 31, 2009, inventory consisted entirely
of finished goods valued at $7,627 (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
March 31, 2010 and December 31, 2009, property and equipment consisted of the
following:





(amounts
in thousands of dollars)





2010
                        
                        
                        2009(Unaudited)Automotive
                        
                        $
                        877
                        
                        
                        $
                        877Office
      equipment
                        
                        
                        132
                        
                        
                        
                        132Leasehold
      improvement
                        
                        
                        67
                        
                        
                        
                        67Plant
      and machinery
                        
                        
                        3
                        
                        
                        
                        3Sub
      Total
                        
                        
                        1,079
                        
                        
                        
                        1,079Less:
      accumulated depreciation
                        
                        
                        (828
                        )
                        
                        
                        (800
                        )Total
                        
                        $
                        251
                        
                        
                        $
                        279




Long-Lived
Assets




The
Company periodically evaluates the carrying value of long-lived assets to be
held and used in accordance with ASC 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 March 31, 2010
and December 31, 2009, there were no significant impairments of its long-lived
assets.





8


Fair Value of Financial
Instruments




ASC 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. 69% and 68% 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 months ended March 31, 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 the first quarter 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% and 32%
      of the Company’s revenue comes from wholesale during the three and nine
      months ended March 31, 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 the first quarter 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.





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.




9




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.





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.





10


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 ASC 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 months ended March 31, 2010 and 2009, the Company incurred shipping
and handling fees and costs of $51 and $54, respectively.





Vendor
Discounts





The
Company has 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.





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 as general and
administrative expenses were $136 and $486 during the three months ended March
31, 2010 and 2009, respectively. Management fees accounted for deductions of
sales were $1,260 and $2,365 in sales for the three months ended March 31, 2010
and 2009, respectively.




Share Based
Payment




The
Company adopted ASC 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. ASC 718-10 is a revision
to SFAS No. 123, “Accounting for Stock-Based Compensation,” ASC 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.





11


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 $86 and$57 for the three months ended
March 31, 2010 and 2009, respectively.




Other
Income





Other
income consists of the following:





Three months ended
                        March 31,2010
                      
                      
                      2009Advertising
      service income
                      
                      $
                      -
                      
                      
                      $
                      103Repair
      service income
                      
                      
                      -
                      
                      
                      
                      15Commission
      income from China Unicom
                      
                      
                      -
                      
                      
                      
                      30Others
                      
                      
                      4
                      
                      
                      
                      -Total
      other income
                      
                      $
                      4
                      
                      
                      $
                      148





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 ASC 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 ASC 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 months ended March 31, 2010 was 100,000 options, as they were not
dilutive.




12


Statement of Cash
Flows




In
accordance with ASC 230 “Statement of Cash Flows”, cash flows from the Company’s
operations are calculated based upon the functional currency, in our case the
CNY. 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.




Segment
Reporting





ASC 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 (see Note 13).





Recent Accounting
Pronouncements





ASC 805 “Business Combinations”,
previously SFAS No. 141(R) “Business Combinations”. SFAS No. 141(R)
changes how a reporting enterprise accounts for the acquisition of a business.
SFAS 141(R) 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. SFAS 141(R) is effective for fiscal years beginning on or after
December 15, 2008 and early adoption and retrospective application is
prohibited. Effective January 1, 2009. ASC 805 revised SFAS No. 141, “Business
Combinations” and addresses the accounting and disclosure for identifiable
assets acquired, liabilities assumed, and noncontrolling interests in a business
combination. The Company adopted ASC 805. The Company accounted for the
acquisition of Jinhua in accordance with these standards.





ASC 810 “Consolidation”, previously
SFAS No. 160 “Noncontrolling Interests in Consolidated Financial
Statement”.  This Statement amends ARB 51 to establish 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 SFAS 160 on January 1, 2009. The
adoption of this statement had no effect on the Company’s consolidated financial
statements.




13


ASC 815 “Derivatives and Hedging”,
previously SFAS No. 161 “Disclosures about Derivative Instruments and Hedging
Activities”. SFAS No. 161 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 SFAS 161 on January 1, 2009.
The adoption of this statement had no effect on the Company’s consolidated
financial statements.





ASC 825 “Financial Instruments”,
previously FSP SFAS No. 107-1“Interim Disclosures about Fair Value of
Financial Instruments”.The guidance requires
that the fair value disclosures required for all financial instruments within
the scope of SFAS 107, “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. FSP 107-1 was effective for interim periods ending
after June 15, 2009. The adoption of FSP 107-1 did not have a material
effect on the Company’s consolidated financial statements.





ASC 860 “Transfers and servicing”,
previously SFAS No. 166 “Accounting for Transfers of Financial Assets”.
SFAS No. 166 requires more information about transfers of financial assets and
where companies have continuing exposure to the risks related to transferred
financial assets. SFAS 166 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.





ASC 810 “Consolidation”, previously
SFAS NO. 167 “Amendments to FASB Interpretation No. 46(R)”.SFAS No. 167
will change how a company determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should be
consolidated. Under SFAS 167, 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. SFAS 167 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 SFAS No. 167 did not have any impact on our financial
statements.





FASB Accounting Standards
Codification (Accounting Standards Update “ASU” 2009-1). In June 2009,
the  FASB approved its Accounting Standards Codification (“Codification”)
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.





Note
3 – ADVANCES TO
SUPPLIERS




Advances
to suppliers represent advance payments to suppliers for the purchase of
inventory. As of March 31, 2010 and December 31, 2009, the Company had $2,275
and $2,370 (audited), respectively, as advances to suppliers.




14


Note 4– ACCOUNTS
PAYABLE AND ACCRUED EXPENSES





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





(amounts
in thousands of dollars)


2010
                    
                    
                    2009Accounts payable
                    
                    $
                    3,884
                    
                    
                    $
                    3,729Accrued
      expenses and other payable
                    
                    
                    1,916
                    
                    
                    
                    2,874VAT
      tax payable
                    
                    
                    209
                    
                    
                    
                    235Advance
      from customers
                    
                    
                    23
                    
                    
                    
                    -Total
                    
                    $
                    6,032
                    
                    
                    $
                    6,838





Note 5 - COMMON
STOCK





On
January 15, 2009, the Company’s Board 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 Board of Directors.





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. $125
was recognized as stock based compensation expense during the three months ended
March 31, 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 March 31,
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
                                                    
                                                    
                                                    
                                                    0.75
                                                    
                                                    
                                                    $
                                                    3.80
                                                    
                                                    
                                                    
                                                    50,000
                                                    
                                                    
                                                    $
                                                    3.804.16
                                                    
                                                    
                                                    
                                                    50,000
                                                    
                                                    
                                                    
                                                    7.75
                                                    
                                                    
                                                    
                                                    4.16
                                                    
                                                    
                                                    
                                                    50,000
                                                    
                                                    
                                                    
                                                    4.16




15





Note
8 - COMPENSATED
ABSENCES




Regulation
45 of the labor laws in the People’s Republic of China (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
9 - 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, Inc is subject to the United States federal income tax
at a tax rate of 34%. The US entity has incurred net accumulated operating
losses of approximately $2,930 as of March 31, 20010 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 $996.




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 months ended
March 31, 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 is a reconciliation of income tax expense for the three months ended
March 31, 2010 and 2009:





2010
                      
                      U.S.
                      
                      
                      State
                      
                      
                      International
                      
                      
                      TotalCurrent
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      107
                      
                      
                      $
                      107Deferred
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      107
                      
                      
                      $
                      107





During
the three months ended March 31, 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 three
months ended March 31, 2010 and incurred income tax expense of
$107.





2009
                      
                      U.S.
                      
                      
                      State
                      
                      
                      International
                      
                      
                      TotalCurrent
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      1,199
                      
                      
                      $
                      1,199Deferred
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      1,199
                      
                      
                      $
                      1,199





Reconciliation
of the differences between the statutory U.S. Federal income tax rate and the
effective rate for the three months ended March 31, 2010 and 2009, is as
follows:




16




2010
                    
                    
                    2009US
      statutory tax rate
                    
                    
                    34.0
                    %
                    
                    
                    34.0
                    %Tax
      rate difference
                    
                    
                    (9.0
                    )%
                    
                    
                    (9.0
                    )%other
                    
                    
                    3.5
                    %
                    
                    
                    0.8
                    %Effective
      rate
                    
                    
                    28.5
                    %
                    
                    
                    25.8
                    %




Note
10 - COMMITMENTS




The
Company leases office facilities under operating leases that terminate through
2011. Rent expense for the three months ended March 31, 2010 and 2009 was $136
and $51, respectively. The future minimum obligations under these agreements are
as follows by years as of March 31, 2010:





2010
                      
                      $
                      2452011
                      
                      
                      592012
                      
                      
                      17Total
                      
                      $
                      321





Note
11 - STATUTORY
RESERVE





In
accordance with the laws and regulations of the PRC, a wholly-owned Foreign
Invested Enterprise’s income, after the payment of the PRC income taxes, shall
be allocated to the statutory surplus reserves and statutory public welfare
fund. Prior to January 1, 2006, the proportion of allocation for reserve 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 March 31,
2010 and December 31, 2009, the Company had allocated $11,535 to these
non-distributable reserve funds.





Note
12 - OTHER
COMPREHENSIVE INCOME





The
detail of other comprehensive income as included in stockholders’ equity at
March 31, 2010 (unaudited) and December 31, 2009 are as follows:





ForeignCurrencyTranslationAdjustmentBalance
      at December 31, 2008
                      
                      $
                      5,272Change
      for 2009
                      
                      
                      (92
                      )Balance
      at December 31, 2009
                      
                      
                      5,180Change
      for three months ended March 31, 2010
                      
                      
                      9Balance
      at March 31, 2010
                      
                      $
                      5,189




17




Note 13 -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
14 - MAJOR CUSTOMERS
AND CREDIT RISK





During
the three months ended March 31, 2010 and 2009, no customer accounted for more
than 10% of the Company’s sales or accounts receivable. At March 31, 2010 and
2009, novendor
accounted for more than 10% of the Company’s accounts payable.





Note
15 -   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 of the operating companies 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 SFAS 131: (1) mobile phones, (2)
home electronics, (3) office communication products, (4) consumer electronics
and (5) logistics.





The
following tables present summarized information by segment:




Three Months Ended March 31, 2010Mobile
                    
                    
                    Home
                    
                    
                    Communication
                    
                    
                    ConsumerPhones
                    
                    
                    Electronics
                    
                    
                    Products
                    
                    
                    Electronics
                    
                    
                    Logistics
                    
                    
                    Other
                    
                    
                    TotalSales,
      net
                    
                    $
                    10,499
                    
                    
                    $
                    11,312
                    
                    
                    $
                    6,178
                    
                    
                    $
                    9,934
                    
                    
                    $
                    2,641
                    
                    
                    $
                    234
                    
                    
                    $
                    40,798Cost
      of sales
                    
                    
                    9,731
                    
                    
                    
                    10,077
                    
                    
                    
                    5,671
                    
                    
                    
                    9,696
                    
                    
                    
                    2,045
                    
                    
                    
                    213
                    
                    
                    
                    37,433Gross
      profit
                    
                    
                    768
                    
                    
                    
                    1,235
                    
                    
                    
                    507
                    
                    
                    
                    238
                    
                    
                    
                    596
                    
                    
                    
                    21
                    
                    
                    
                    3,365Income
      from operations
                    
                    
                    (446
                    )
                    
                    
                    (516
                    )
                    
                    
                    (210
                    )
                    
                    
                    (508
                    )
                    
                    
                    250
                    
                    
                    
                    (390
                    )
                    
                    
                    (1,820
                    )Total
      assets at March 31, 2010
                    
                    $
                    13,444
                    
                    
                    $
                    10,752
                    
                    
                    $
                    11,908
                    
                    
                    $
                    15,206
                    
                    
                    $
                    4,809
                    
                    
                    $
                    35,712
                    
                    
                    $
                    91,831




18





Three Months Ended March 31, 2009Mobile
                      Phones
                    
                    
                    Home
                      Electronics
                    
                    
                    Communication
                      Products
                    
                    
                    Consumer
                      Electronics
                    
                    
                    Other
                    
                    
                    TotalSales,
      net
                    
                    $
                    25,744
                    
                    
                    
                    16,593
                    
                    
                    $
                    15,802
                    
                    
                    $
                    19,273
                    
                    
                    $
                    -
                    
                    
                    $
                    77,412Cost
      of sales
                    
                    
                    22,784
                    
                    
                    
                    13,344
                    
                    
                    
                    14,105
                    
                    
                    
                    17,120
                    
                    
                    
                    -
                    
                    
                    
                    67,353Gross
      profit
                    
                    
                    2,960
                    
                    
                    
                    3,249
                    
                    
                    
                    1,697
                    
                    
                    
                    2,153
                    
                    
                    
                    -
                    
                    
                    
                    10,059Income
      from operations
                    
                    
                    1,116
                    
                    
                    
                    1,138
                    
                    
                    
                    502
                    
                    
                    
                    1,279
                    
                    
                    
                    537
                    
                    
                    
                    4,572Total
      assets at March 31, 2009
                    
                    $
                    16,679
                    
                    
                    $
                    17,746
                    
                    
                    $
                    16,598
                    
                    
                    $
                    16,069
                    
                    
                    $
                    33,813
                    
                    
                    $
                    100,905





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





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 a
cash consideration 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 ASC 810, Consolidation of Variable Interest
Entities (VIEs), qualifies the business operations of Zhejiang to be
consolidated with CFDL and ultimately with China 3C.





19


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. The shares were
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. The shares were 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 substantially all 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. After acquisition
of Jinhua in July 2009, the Company started provideing transportation service to
business in Eastern China.




Result
of Operations





Results
of Operations for the Three Months Ended March 31, 2010 and 2009





Reportable
Operating Segments





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




20


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.





Three months ended March
                          31,
                        
                        
                        PercentageYiwu
                        
                        2010
                        
                        
                        2009
                        
                        
                        ChangeRevenue
                        
                        $
                        6,178
                        
                        
                        $
                        15,802
                        
                        
                        
                        (60.90
                        )%Gross
      Profit
                        
                        $
                        507
                        
                        
                        $
                        1,697
                        
                        
                        
                        (70.12
                        )%Gross
      Margin
                        
                        
                        8.20
                        %
                        
                        
                        10.74
                        %
                        
                        
                        (2.54
                        )%Operating
      (Loss)/Income
                        
                        $
                        (210
                        )
                        
                        $
                        502
                        
                        
                        
                        (141.83
                        )%





For the
three months ended March 31, 2010, Yiwu generated revenue of $6,178, a decrease
of $9,624 or 60.9% compared to $15,802 for the three months ended
March 31, 2009. The decrease was a result of lower market demand for office
appliances as well as the effect of global economic slowdown. .





Gross
profit decreased $1,190 or 70.12% from $1,697 for the three months
ended March 31, 2009 to $507 for the three months ended March 31, 2010.
Gross profit margin decreased 2.54% from 10.74% in the three months ended March
31, 2009 to 8.20% in the three months ended March 31, 2010. The decrease was a
result of decline in demand of office appliances such as fax machines and
telephones.





Operating
loss was $210 for the three months ended March 31,2010, a decrease of
$712 or 141.9% compared to operating income of $502 for the three
months ended March 31, 2009. Operating income decreased primarily due to
decreased gross profit. Meanwhile, when sales gross profit decreased 70.12%,
operating expenses only decreased approximately 40% primarily due to an increase
in base salary for all staff. As a result, Yiwu had an operating loss in the
first quarter of 2010.





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.





Three months ended March
                            31,
                          
                          
                          PercentageWang Da
                          
                          2010
                          
                          
                          2009
                          
                          
                          ChangeRevenue
                          
                          $
                          10,499
                          
                          
                          $
                          25,744
                          
                          
                          
                          (59.22
                          )%Gross
      Profit
                          
                          $
                          768
                          
                          
                          $
                          2,960
                          
                          
                          
                          (74.06
                          )%Gross
      Margin
                          
                          
                          7.31
                          %
                          
                          
                          11.50
                          %
                          
                          
                          (4.19
                          )%Operating
      (Loss)/Income
                          
                          $
                          (446
                          )
                          
                          $
                          1,116
                          
                          
                          
                          (139.99
                          )%





21


For the
three months ended March 31, 2010, Wang Da generated revenue of $10,499, a
decrease of $15,245 or 59.22% compared to $25,744 for the three months
ended March 31, 2009. The decrease in revenue and gross profit 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
profit decreased $2,192 or 74.06% from $2,960 for the three months
ended March 31, 2009 to $768 for the three months ended March 31, 2010.
Gross profit margin decreased from 11.50% in the three months ended March 31,
2009 to 7.31% in the three months ended March 31, 2010, a decrease of
4.19%.  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. Meanwhile, sales rebate from suppliers also decreased
which led to lower gross margin.





Operating
loss was $446.3 for the three months ended March 31, 2010, a decrease of
$1,562 or 139.99% compared to operating income of $1,116 for the three
months ended March 31, 2009. Operating income decreased primarily due to
decreased gross profit and increased operating expenses. When gross profit
decreased 74.06%, operating expenses only decreased 34.2% primarily due to an
increase in base salary for all staff and an increase in management fees paid to
the department stores.





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.





Three months ended March
                                31,
                              
                              
                              PercentageSanhe
                              
                              2010
                              
                              
                              2009
                              
                              
                              ChangeRevenue
                              
                              $
                              11,312
                              
                              
                              $
                              16,593
                              
                              
                              
                              (31.83
                              )%Gross
      Profit
                              
                              $
                              1,235
                              
                              
                              $
                              3,249
                              
                              
                              
                              (61.99
                              )%Gross
      Margin
                              
                              
                              10.91
                              %
                              
                              
                              19.58
                              %
                              
                              
                              (8.67
                              )%Operating
      (Loss)/Income
                              
                              $
                              (516
                              )
                              
                              $
                              1,138
                              
                              
                              
                              (145.34
                              )%





For the
three months ended March 31, 20010, Sanhe generated revenue of $11,312 , a
decrease of $5,281 or 31.83% compared to $16,593 for the three months
ended March 31, 2009. The decrease was a result of decline in market demand of
DVD players and speakers.





Gross
profit decreased $2,014 or 61.99% from $3,249 for the three months
ended March 31, 2009 to $1,235 for the three months ended March 31, 2010.
Gross profit margin decreased from 19.58% in 2009 to 10.91% in 2009, a decrease
of 8.67%. The decrease was a result of higher sales volume of televisions in the
first quarter of 2010 compared to higher sales in DVD players and speakers in
the first quarter of 2009, which have higher gross margin compared to other home
electronics products.


22





Operating
loss was $516 for the three months ended March 31, 2010, a decrease of
$1,654 or 145.34% compared to operating income of $1,138 for the three
months ended March 31, 2009. Operating income decreased primarily due to
decreased gross profit and increased operating expenses. When gross profit
decreased 61.99%, operating expenses only decreased 17.12% primary due to an
increase in base salary for all staff and an increase in management fees paid to
the department stores.





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.




Three months ended March
                          31,
                        
                        
                        PercentageJoy
      & Harmony
                        
                        2010
                        
                        
                        2009
                        
                        
                        ChangeRevenue
                        
                        $
                        9,934
                        
                        
                        $
                        19,273
                        
                        
                        
                        (48.45
                        )%Gross
      Profit
                        
                        $
                        238
                        
                        
                        $
                        2,153
                        
                        
                        
                        (88.94
                        )%Gross
      Margin
                        
                        
                        2.4
                        %
                        
                        
                        11.17
                        %
                        
                        
                        (8.77
                        )%Operating
      (Loss)/Income
                        
                        $
                        (508
                        )
                        
                        $
                        1,279
                        
                        
                        
                        (139.72
                        )%





For the
three months ended March 31, 2010, Joy & Harmony generated revenue of
$9,934, a decrease of $9,339 or 48.45% compared to $19,273 for the
three months ended March 31, 2009. Gross profit decreased $1,915 or 88.94%
from $2,153 for the three months ended March 31, 2009 to $238 for the
three months ended March 31, 2010. Gross profit margin decreased from 11.17% in
2009 to 2.4% in 2010, a decrease of 8.77%.  The global financial
crisis caused many small electronics manufacturers to exit the market and large
manufacturers to raise 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. Therefore, we had a big sales event for those
products in the first quarter 2010, which led to lower sales
revenue.





Operating
loss was $508 for the three months ended March 31, 2010, a decrease of
$1,787 or 139.72% compared to operating income of $1,279  for the
three months ended March 31, 2009. Operating income decreased primarily due to
decreased gross profit and increased operating expenses. When gross profit
decreased 88.94%, operating expenses only decreased 15% primary due to 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 March
31, 2009 did not includes Jinhua’s operating results.


23





Jinhua
                      
                      Three months ended March
                        31, 2010Revenue
                      
                      $
                      2,641Gross
      Profit
                      
                      $
                      596Gross
      Margin
                      
                      
                      22.57
                      %Operating
      Income
                      
                      $
                      250





Net
Sales





Net sales
for the three months ended on March 31, 2010 decreased by 47.30%, to $40,798
compared to $77,412 for the three months ended March 31, 2009. The decrease was
attributable to the closing of 101 stores in stores in 2009 as well as the
negative effect of global economic slowdown.





Cost
of Sales





Cost of
sales for the three months ended on March 31, 2010 totaled $37,433 compared to
$67,353 for the three months ended on March 31, 2009, a decrease of 44.42%. The
increased cost of sales was a direct result of the decrease in
sales.





Gross
Profit Margin





Gross
profit margin for the three months ended March 31, 2010 was 8.25% compared to
12.99% for the three months ended March 31, 2009. The lower gross profit margin
was because the unit sales prices for many electronic products decreased due to
the highly competitive market environment but the purchase prices
increased.





Selling,
General and Administrative Expenses





Selling,
general and administrative expenses for the three months ended March 31, 2010
totaled $5,214 or 12.78% of net sales, compared to $5,486 or 7.09% of net sales
for the three months ended March 31, 2009, a decrease of 4.96%. Net sales
decreased 47.30% but operating expenses only decreased 4.96% primarily due to an
increase in base salary for all staff, an increase in marketing expenses and
management fees paid to the department stores.





Income
from Operations





Operating
loss for the three months ended March 31, 2010 was $1,820 or (4.46)% of net
sales as compared to income from operations of $4,572 or 5.91% of net sales for
the three months ended March 31, 2009, a decrease of 139.80%. Lower gross margin
and higher operating expenses were the key factors for the decrease in income
from operations.





Provision
for Income Taxes





The
provision for income taxes for the three months ended March 31, 2010 was $107
compared with $1,199 for the three months ended March 31, 2009. The decrease in
income tax expenses was due to Yiwu, Wang Da, Joy & Harmony and Sanhe having
net losses in the first quarter 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.


24





Net
(Loss)/Income





Net loss
was $1,927 or (4.72)% of net sales for the three months ended on March 31, 2010
compared to $3,440 or 4.44% of net sales for the three months ended on March 31,
2009, a decrease of 156.02%. Significant decrease in sales, lower gross margin
and high 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 equivalents were $27,256 at March 31, 2010, as compared to $28,667 at
March 31, 2009, and compared to $29,908 at December 31, 2009.




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





In
summary, our cash flows were:


Three months endedMarch 31,
                      2010
                    
                    
                    March 31,
                      2009Net
      cash (used in) provided by operating activities
                    
                    $
                    (2,605
                    )
                    
                    $
                    3,883Net
      cash (used in) investing activities
                    
                    $
                    -
                    
                    
                    $
                    (7,292
                    )Effect
      of exchange rate change on cash and cash equivalents
                    
                    $
                    (47
                    )
                    
                    $
                    (82
                    )Net
      increase (decrease) in cash and cash equivalents
                    
                    $
                    (2,652
                    )
                    
                    $
                    (3,491
                    )Cash
      and cash equivalents at beginning of period
                    
                    $
                    29,908
                    
                    
                    $
                    32,158Cash
      and cash equivalents at end period
                    
                    $
                    27,256
                    
                    
                    $
                    28,667





Operating
Activities





Net cash
used in operating activities was $2,605 for the three months ended March 31,
2010 compared to net cash proceeds from operating activities of $3,883 for
the three months ended March 31, 2009, approximately a 167.09%
decrease.  The decrease was mainly attributable to several factors,
including (i) net loss of 1,927; (ii) the decrease in accounts payable and
accrued expenses of $830; (iii) the increase in inventory of $862, offset by the
decrease in accounts receivable of $253.




Three
      months ended March 31,2010
                              
                              
                              2009
                              
                              
                              Percentage
                                ChangeSales
      Net
                              
                              $
                              40,798
                              
                              
                              $
                              77,412
                              
                              
                              
                              (47.30
                              )%Accounts
      receivable
                              
                              $
                              17,981
                              
                              
                              $
                              18,232
                              
                              
                              
                              (1.40
                              )%




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 from on retail from 10 days to 15
days on wholesale. Management assessed the collectability of accounts receivable
and determined that all accounts remained collectible. 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.


25





Investing
Activities





Net cash
used in investing activities was $7,292 in the first quarter of 2009, due
to the second installment payment for acquisition of Jinhua Baofa Logistic Ltd.
The Company made the second installment payment in advance of its due date in
order to change the business license registration of Jinhua. There was no
investing activity in the first quarter of 2010.





Three months endedMarch 31,
                      2010
                    
                    
                    March 31,
                      2009Net
      cash (used in) investing activities
                    
                    $
                    -
                    
                    
                    $
                    (7,292
                    )




Capital
Expenditures





Total
capital expenditures for the first three months of 2009 were $3 for purchase of
fixed assetsand
none for 2010.





Working Capital Requirements





Historically
operations and short term financing have been sufficient to meet our cash needs.
We believe that 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 actual 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.


26





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.




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 that 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 March 31,
2010.





Payment Due by PeriodLess than 1
                        
                        
                        
                        
                        
                        
                        
                        
                        More thanContractual
      Obligations
                        
                        Total
                        
                        
                        year
                        
                        
                        1-3 years
                        
                        
                        3-5 years
                        
                        
                        5
      yearsOperating
      lease obligations
                        
                        $
                        333
                        
                        
                        
                        244
                        
                        
                        
                        76
                        
                        
                        
                        13
                        
                        
                        $
                        -Advertising
      obligations
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Total
      contractual obligations
                        
                        $
                        333
                        
                        
                        
                        244
                        
                        
                        
                        76
                        
                        
                        
                        13
                        
                        
                        $
                        -


27





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 first quarter ended March 31, 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.





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.


28





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.





Item
4. 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 March 31, 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 fiscal quarter 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.


29





Item
1A. Risk Factors.





None.





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 Description31.1
                
                Certification
      of 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 Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of
    2002).




SIGNATURES





Pursuant
to the requirements of the Securities and Exchange Act of 1934, the Company has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on this 17th day of May, 2010.




CHINA
      3C GROUPBy:
              /s/
      Zhenggang WangName:  
      Zhenggang WangTitle:
      Chief Executive Officer and Chairman (Principal Executive
      Officer)




By:
              /s/
      Jian ZhangName:  
      Jian ZhangTitle:
      Chief Financial Officer (Principal
                Accounting
      and Financial Officer)


30





Exhibit
Index




Exhibit
                  No.
                
                Document Description31.1
                
                Certification
      of 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 Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of
    2002).


31