UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





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




For the
quarterly period ended     September 30,
2009





or





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





For the
transition period from ____ to _____




Commission
File Number:  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 registrant (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 o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§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 o No o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
      Accelerated Filer  ̈
            Accelerated
      Filer x
            Non-Accelerated
      Filer  ̈
              (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 o No x





As of
November 13, 2009 the registrant had 54,831,327 shares of common stock
outstanding.










TABLE
OF CONTENTS





PAGEPART
      I. FINANCIAL INFORMATIONItem
      1. Financial Statements:Consolidated
      Balance Sheets as of September 30, 2009 (Unaudited) and December 31,
      2008
            
            1Consolidated
      Statements of Income for the Nine Months Ended September 30, 2009 and 2008
      (Unaudited)
            
            2Consolidated
      Statements of Income (Loss) for the Three Months Ended September 30, 2009
      and 2008 (Unaudited)
            
            3Consolidated
      Statements of Cash Flows for the Nine Months Ended September 30, 2009 and
      2008 (Unaudited)
            
            4Notes
      to Consolidated Financial Statements
            
            5Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
            
            21Item
      3. Quantitative and Qualitative Disclosure About Market
    Risk
            
            29Item
      4. Controls and Procedures
            
            30PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings
            
            31Item
      1A. Risk Factors
            
            31Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
            
            31Item
      3. Defaults Upon Senior Securities
            
            31Item
      4. Submission of Matters to a Vote of Security Holders
            
            31Item
      5. Other Information
            
            31Item
      6. Exhibits
            
            31Signatures
            
            32









PART
I. FINANCIAL INFORMATION





Item
1.  Financial Statements


CHINA
3C GROUP AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
  September
      30,
                2009
              
              
              December
      31,
                2008(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              28,303,125
              
              
              $
              32,157,831Accounts
      receivable, net
              
              
              22,530,164
              
              
              
              23,724,587Inventories
              
              
              8,229,254
              
              
              
              8,971,352Advances
      to suppliers
              
              
              2,340,003
              
              
              
              2,491,518Prepaid
      expenses and other current assets
              
              
              229,043
              
              
              
              87,773Total
      current assets
              
              
              61,631,589
              
              
              
              67,433,061Property,
      plant and equipment, net
              
              
              302,760
              
              
              
              64,100Goodwill
              
              
              20,820,287
              
              
              
              20,348,278Deposit
      for acquisition of subsidiary
              
              
              -
              
              
              
              7,318,501Refundable
      deposits
              
              
              17,351
              
              
              
              32,076Intangible
      asset
              
              
              14,908,204
              
              
              
              -Total
      assets
              
              $
              97,680,191
              
              
              $
              95,196,016LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
              
              $
              6,492,727
              
              
              $
              5,417,327Income
      tax payable
              
              
              878,396
              
              
              
              2,140,624Due
      to shareholders
              
              
              59
              
              
              
              -Total
      liabilities
              
              $
              7,371,182
              
              
              $
              7,557,951Stockholders'
      equityCommon
      stock, $0.001 par value, 100,000,000 million sharesauthorized,
      53,931,327 and 52,673,938 issued and outstandingas
      of September 30, 2009 and December 31, 2008, respectively
              
              
              53,931
              
              
              
              52,674Additional
      paid-in capital
              
              
              19,626,687
              
              
              
              19,465,776Subscription
      receivable
              
              
              (50,000
              )
              
              
              (50,000
              )Statutory
      reserve
              
              
              11,109,379
              
              
              
              11,109,379Other
      comprehensive income
              
              
              5,178,360
              
              
              
              5,272,104Retained
      earnings
              
              
              54,390,652
              
              
              
              51,788,132Total
      stockholders' equity
              
              
              90,309,009
              
              
              
              87,638,065Total
      liabilities and stockholders' equity
              
              $
              97,680,191
              
              
              $
              95,196,016
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  1
 
 CHINA
3C GROUP AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 and 2008 (UNAUDITED)
 
 2009
              
              
              2008Net
      sales
              
              $
              172,492,520
              
              
              $
              225,725,603Cost
      of sales
              
              
              152,400,772
              
              
              
              190,457,324Gross
      profit
              
              
              20,091,748
              
              
              
              35,268,279Selling,
      general and administrative expenses
              
              
              15,856,294
              
              
              
              10,043,055Income
      from operations
              
              
              4,235,454
              
              
              
              25,225,224Other
      (income) expenseInterest
      income
              
              
              (82,955
              )
              
              
              (103,581
              )Gain
      on disposal
              
              
              -
              
              
              
              (2,161
              )Other
      income
              
              
              (163,225
              )
              
              
              (690,905
              )Other
      expense
              
              
              143,642
              
              
              
              -Total
      other (income) expense
              
              
              (102,538
              )
              
              
              (796,647
              )Income
      before income taxes
              
              
              4,337,992
              
              
              
              26,021,871Provision
      for income taxes
              
              
              1,734,472
              
              
              
              6,333,265Net
      income
              
              
              2,603,520
              
              
              
              19,688,606Foreign
      currency translation adjustments
              
              
              (92,744
              )
              
              
              3,052,891Comprehensive
      income
              
              $
              2,510,776
              
              
              $
              22,741,497Net
      income available to common shareholders per share:Basic
              
              $
              0.05
              
              
              $
              0.37Diluted
              
              $
              0.05
              
              
              $
              0.37Weighted
      average shares outstanding:Basic
      and Diluted
              
              
              53,374,016
              
              
              
              52,673,938Basic
      and Diluted
              
              
              53,374,016
              
              
              
              53,073,938
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  2
 
 CHINA
3C GROUP AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
 FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 and 2008 (UNAUDITED)
  2009
              
              
              2008Net
      sales
              
              $
              43,955,024
              
              
              $
              79,056,756Cost
      of sales
              
              
              39,942,479
              
              
              
              67,210,574Gross
      profit
              
              
              4,012,545
              
              
              
              11,846,182Selling,
      general and administrative expenses
              
              
              5,620,799
              
              
              
              3,730,967Income
      (loss) from operations
              
              
              (1,608,254
              )
              
              
              8,115,215Other
      (income) expenseInterest
      income
              
              
              (28,884
              )
              
              
              (38,014
              )Other
      income
              
              
              (438
              )
              
              
              (378,976
              )Other
      expense
              
              
              27,790
              
              
              
              -Total
      other (income) expense
              
              
              (1,532
              )
              
              
              (416,990
              )Income
      (loss) before income taxes
              
              
              (1,606,722
              )
              
              
              8,532,205Provision
      for income taxes
              
              
              143,414
              
              
              
              2,168,638Net
      income (loss)
              
              
              (1,750,136
              )
              
              
              6,363,567Foreign
      currency translation adjustments
              
              
              35,907
              
              
              
              230,251Comprehensive
      income (loss)
              
              $
              (1,714,229
              )
              
              $
              6,593,818Net
      income (loss) available to common shareholders per share:Basic
              
              $
              (0.03
              )
              
              $
              0.12Diluted
              
              $
              (0.03
              )
              
              $
              0.12Weighted
      average shares outstanding:Basic
      and Diluted
              
              
              53,931,327
              
              
              
              52,673,938Basic
      and Diluted
              
              
              53,931,327
              
              
              
              53,073,938
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  3
 
 CHINA
3C GROUP AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 and 2008 (UNAUDITED)
 
 2009
              
              
              2008CASH
      FLOW FROM OPERATING ACTIVITIESNet
      income
              
              $
              2,603,520
              
              
              $
              19,688,606Adjustments
      to reconcile net income to net cashprovided
      by (used in) operating activities:Depreciation
              
              
              583,848
              
              
              
              28,837Amortization
      of intangible assets
              
              
              345,050
              
              
              
              -Gain
      on asset disposition
              
              
              -
              
              
              
              (2,161
              )Provision
      for bad debts
              
              
              -
              
              
              
              24,666Stock
      based compensation
              
              
              162,168
              
              
              
              336,668(Increase)
      / decrease in assets:Accounts
      receivable
              
              
              1,174,392
              
              
              
              (11,490,859
              )Other
      receivable
              
              
              (41,839
              )
              
              
              -Inventories
              
              
              734,375
              
              
              
              (8,497,789
              )Prepaid
      expenses and other current assets
              
              
              (99,417
              )
              
              
              (61,436
              )Refundable
      deposits
              
              
              14,684
              
              
              
              6,831Advance
      to suppliers
              
              
              149,398
              
              
              
              1,116,510(Increase)
      / decrease in current liabilities:Accounts
      payable and accrued expenses
              
              
              1,136,874
              
              
              
              2,865,102Income
      tax payable
              
              
              (1,259,830
              )
              
              
              (332,870
              )Net
      cash provided by (used in) operating activities
              
              
              5,503,223
              
              
              
              3,682,105CASH
      FLOW FROM INVESTING ACTIVITIESPurchase
      of property and equipment
              
              
              (798,973
              )
              
              
              (11,088
              )Proceeds
      from asset sales
              
              
              -
              
              
              
              2,447Payment
      for acquisition of subsidiary - net of cash acquired
              
              
              (7,784,494
              )
              
              
              -Net
      cash used in investing activities
              
              
              (8,583,467
              )
              
              
              (8,641
              )CASH
      FLOW FROM FINANCING ACTIVITIESDue
      to shareholders
              
              
              59
              
              
              
              -Net
      cash provided by financing activities
              
              
              59
              
              
              
              -Effect
      of exchange rate changes on cash and cash equivalents
              
              
              (774,521
              )
              
              
              3,052,891Net
      increase (decrease) in cash
              
              
              (3,854,706
              )
              
              
              6,726,355Cash,
      beginning of period
              
              
              32,157,831
              
              
              
              24,952,614Cash,
      end of period
              
              $
              28,303,125
              
              
              $
              31,678,969Supplemental
      disclosure of cash flow information:Interest
      paid
              
              $
              -
              
              
              $
              -Income
      taxes paid
              
              $
              1,284,548
              
              
              $
              6,666,135Non
      cash transactions relating to acquisitionPurchased
      Goodwill
              
              $
              472,009Fair
      value of assets purchased less cash acquired
              
              $
              16,779,317Purchased
      intangible assets
              
              $
              15,182,197Net
      cash acquired in acquisition
              
              $
              2,404,519
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  4




CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2009





Note
1 - ORGANIZATION





China 3C
Group (the “Company”) 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 (“PRC”) on July
11, 2005, July 18, 1997, March, 30, 1998, April 12, 2004, and August 20, 2003,
respectively. 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.





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 at 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 a cash consideration of $500,000.




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




On
November 28, 2006, Capital purchased 100% interest in Joy & Harmony for a
cash and stock transaction valued at approximately $18,500,000. The
consideration consisted of 2,723,110 shares of the Company’s common stock and
$7,500,000 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 Standard
Codification (“ASC”) Topic 810-10 , previously Financial Accounting Standards
Board (“FASB”) Interpretation 46, Consolidation of Variable Interest Entities
(VIEs), qualifies the business operations of Zhejiang to be consolidated with
Capital and ultimately with China 3C Group. Zhejiang owns 90% of the issued and
outstanding capital stock of each of Wang Da and Yiwu.





Acquisitions





On July
6, 2009, China 3C Group (“China 3C”) and its subsidiary Zhejiang and Yiwu
purchased 100% interest of Jinhua for RMB 120 million (approximately $17.5
million) in cash.  Zhejiang acquired 90% and Yiwu acquired 10% of the
entire equity interests in Jinhua.





Jinhua
provides transportation logistics services to businesses. Jinhua operates
primarily in Eastern China and covers many of the most developed cities in the
Eastern China such as Shanghai, Hangzhou and Nanjing.




5





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”, previously Statement of Financial Accounts Standards
(“SFAS”)  No. 141(R) is as follows:




Cash
      paid for acquisition of  Jinhua Bao Fa
              
              $
              17,507,514Assets
      acquired :Cash
              
              $
              2,404,519Accounts
      receivable, net
              
              
              715,045Other
      receivables, net
              
              
              60,250Prepaid
      expenses
              
              
              133,534Property,
      plant and equipment
              
              
              216,282Intangible
      asset - transportation network
              
              
              15,182,197Goodwill
              
              
              472,009Assets
      acquired
              
              
              19,183,836Liabilities
      assumed:Accounts
      payable
              
              
              315,165Accrued
      expenses and other payables
              
              
              546,748Income
      taxes payable
              
              
              58Due
      to shareholders
              
              
              814,351Liabilities
      assumed
              
              
              1,676,322Net
      assets acquired
              
              $
              17,507,514


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





6










Note 2 -SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





Basis of
Presentation





The
accompanying consolidated financial statements have been 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,
Jinhua and variable interest entity Zhejiang, collectively referred to as the
Company. All material intercompany accounts, transactions and profits have been
eliminated in consolidation.




7





Currency
Translation





The
accounts of Zhejiang, Wang Da, Yiwu, Joy & Harmony, Sanhe 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 ASC 830-30 “Translation of Financial Statements”,
previously SFAS No. 52, “Foreign Currency Translation,” with the CNY as the
functional currency. According to SFAS No. 52, all monetary assets and
liabilities were translated at the ending exchange rate, non-monetary assets and
stockholders’ equity are 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 “Comprehensive Income”, previously SFAS  No. 130,
“Reporting Comprehensive Income,” as a component of shareholders’ equity.
Transaction gains and losses are reflected in the condensed consolidated income
and comprehensive income 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
$397,407 (unaudited) and $365,318 as of September 30, 2009 and December 31,
2008, respectively.





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 September 30, 2009 and December 31, 2008, inventory consisted
entirely of finished goods valued at $8,229,254 (unaudited) and $8,971,352,
respectively.




8




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
September 30, 2009 and December 31, 2008, property and equipment consisted of
the following:





2009
            
            
            2008(Unaudited)Automotive
            
            $
            876,653
            
            
            $
            132,627Office
      equipment
            
            
            131,561
            
            
            
            116,700Leasehold
      improvement
            
            
            60,297
            
            
            
            -Plant
      and machinery
            
            
            3,324
            
            
            
            -Sub
      Total
            
            
            1,071,835
            
            
            
            249,327Less:
      accumulated depreciation
            
            
            (769,075
            )
            
            
            (185,227
            )Total
            
            $
            302,760
            
            
            $
            64,100




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”,
previously SFAS No. 144,”Accounting for the Impairment or Disposal of Long-Lived
Assets”.  SFAS No. 144 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
September 30, 2009 and December 31, 2008, there were no significant impairments
of its long-lived assets.





Fair Value of Financial
Instruments




ASC 825
“Financial Instruments”, previously SFAS No. 107, “Disclosures about Fair Value
of Financial Instruments”, requires the Company to 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.




9





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
consumer and business products through two main revenue streams:





1.
            Retail. 67.5%, 68%,
      68.5% and 66.7% of the Company’s revenue comes from sales to individual
      customers at outlets installed inside department stores etc. (i.e. store
      in store model) during the three and nine months ended September 30, 2009
      and 2008, respectively and is mainly achieved through two broad
      categories:





a.
            Purchase contracts. The
      terms for sales by purchase contracts changed from 30 days to 45 days from
      the transfer of goods to the customer in the second quarter 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. 32.5% and
      32%, 31.5% and 33.3% of the Company’s revenue comes from wholesale during
      the three and nine months ended September 30, 2009 and 2008, respectively.
      Recognition of wholesale income is based on the contract terms. The main
      contract terms on wholesale changed from 10 days to 15 days after receipt
      of goods in the second quarter 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.





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.




10





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





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





Cost of
Sales





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





General and Administrative
Expenses





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





Shipping and handling
fees





The
Company follows ASC 605-45, “Handling Costs, Shipping Costs”, previously
Emerging Issues Task Force (“EITF”) No. 00-10, Accounting for Shipping and
Handling Fees and Costs.  The Company does not charge its customers
for shipping and handling. The Company classifies shipping and handling fees as
part of general and administrative expenses. During the three and nine months
ended September 30, 2009 and 2008, the Company incurred shipping and handling
fees and costs of $64,292, $60,939, $167,592 and $180,346,
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.




11





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 $248,167, $454,618, $978,076 and $1,061,554 during
the three and nine months ended September 30, 2009 and 2008, respectively.
Management fees accounted for deductions of sales were $1,330,775, $2,513,078,
$5,576,230 and $7,126,516 in sales for the three and nine months ended September
30, 2009 and 2008, 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.





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 $125,010, $94,114, $253,308 and
$290,659 for the three and nine months ended September 30, 2009 and 2008,
respectively.




Other
Income




Other
income consists of the following:




Nine
      months ended
              September
      30,2009
            
            
            2008Advertising
      service income
            
            $
            103,220
            
            
            $
            523,009Repair
      service income
            
            
            29,415
            
            
            
            14,352Commission
      income from China Unicom
            
            
            30,151
            
            
            
            153,544Others
            
            
            439
            
            
            
            -Total
      other income
            
            $
            163,225
            
            
            $
            690,905





Three
      months ended
              September
      30,2009
            
            
            2008Advertising
      service income
            
            $
            -
            
            
            $
            287,748Repair
      service income
            
            
            -
            
            
            
            14,352Commission
      income from China Unicom
            
            
            -
            
            
            
            76,876Others
            
            
            438
            
            
            
            -Total
      other income
            
            $
            438
            
            
            $
            378,976





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.




12





Income
Taxes




The
Company utilizes ASC 740 “Income Taxes”, previously SFAS No. 109, “Accounting
for Income Taxes”, which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, 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”, previously SFAS No. 128, “Earnings per Share.” Basic earnings (loss) per
share is based upon the weighted average number of common shares outstanding.
Diluted earnings (losses) per share is based on the assumption that all dilutive
convertible shares and stock options were converted or exercised. Dilution is
computed by applying the treasury stock method. Under this method, options and
warrants are assumed to be exercised at the beginning of the period (or at the
time of issuance, if later), and as if funds obtained thereby were used to
purchase common stock at the average market price during the period. If
convertible shares and stock options are anti-dilutive, the impact of conversion
is not included in the diluted net income per share. Excluded from the
calculation of diluted earnings per share for the three and nine months ended
September 30, 2009 was 50,000 options, as they were not dilutive.




Statement of Cash
Flows




In
accordance with ASC 230 “Statement of Cash Flows”, previously SFAS No. 95,
“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 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”, previously SFAS No. 131, “Disclosure about Segments of an
Enterprise and Related Information”, 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 15).





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.




13





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.




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 affect on the
Company’s consolidated financial statements.





ASC 855 “Subsequent
Events”, previously SFAS No. 165 “Subsequent Events”.SFAS No. 165 is intended to establish
general standards of accounting for and disclosures of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. It requires the disclosure of the date through which an
entity has evaluated subsequent events and the basis for selecting that date,
that is, whether that date represents the date the financial statements were
issued or were available to be issued. SFAS 165 is effective for interim or
annual financial periods ending after June 15, 2009. The Company adopted SFAS
165 and it will have an effect on our 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 is
not expected to 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. We are in the process of evaluating the effect, if any, the adoption of
SFAS No. 167 will have 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 during the quarter ended September 30,
2009.




14





Note
3 – ADVANCES TO
SUPPLIERS




Advances
to suppliers represent advance payments to suppliers for the purchase of
inventory. As of September 30, 2009 and December 31, 2008, the Company paid
$2,340,003 (unaudited) and $2,491,518, respectively, as advances to
suppliers.




Note 4– ACCOUNTS
PAYABLE AND ACCRUED EXPENSES





Accounts
payable and accrued expenses as of September 30, 2009 (unaudited) and December
31, 2008 consist of the following:





2009
            
            
            2008Accounts
      payable
            
            $
            4,303,571
            
            
            $
            2,753,728Accrued
      expenses and other payable
            
            
            2,107,526
            
            
            
            1,839,806VAT
      tax payable
            
            
            81,630
            
            
            
            823,793Total
            
            $
            6,492,727
            
            
            $
            5,417,327





Note
5 - DUE TO SHAREHOLDERS





On
September 30, 2009 and December 31, 2008, the Company had advances from
shareholders of $59 and $0, respectively. The advances do not bear
interest.





Note 6 - COMMON
STOCK




The
Company appointed Joseph Levinson to serve as a member of the Company’s Board of
Directors (“Board”) on May 7, 2007. Joseph Levinson resigned as a member of the
Company’s Board on January 27, 2009.  There were no disagreements
between Mr. Levinson and the Company on any matter related to the Company’s
operations, policies or practices which resulted in his
resignation.  Pursuant to an agreement dated May 3, 2007 the Company
agreed to issue to Mr. Levinson, as compensation for his services, a monthly
grant of 1,000 shares of the Company’s common stock.  The Company has
issued 20,000 shares in total to M. Levinson representing the 1,000 share per
month payments.  In addition, the Company agreed to grant Mr. Levinson
the following awards under the China 3C 2005 Equity Incentive Plan: (i) an
initial annual grant of a stock option to purchase 300,000 shares of the
Company’s common stock, with an exercise price of $6.15 per share (the “2007
Stock Option”); and (ii) a subsequent annual grant of a stock option to purchase
an additional 300,000 shares of the Company’s common stock, with an exercise
price of $1.82 (the “2008 Stock Option”).  It was later determined
that due to the expiration of the China 3C 2005 Equity Incentive Plan on
December 31, 2006, the 2007 Stock Option and the 2008 Stock Option could not be
validly granted.  Pursuant to the terms of the Compensation Agreement
dated as of November 27, 2008 between Mr. Levinson and the Company, Mr. Levinson
acknowledged that the 2007 Stock Option and the 2008 Stock Option were not and
could  not be granted and  in consideration for his services
as a Director accepted the issuance of 125,000 shares of the Company’s 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 of Directors. In May 2009,
the Company issued 1,097,272 shares of common stocks under the 2008 Plan. For
the three months and nine months ended September 30, 2009, the Company
recognized $162,168 compensation expenses and there was $810,844 of unrecognized
compensation expense related to the nonvested stocks as of September 30, 2009.
The cost is expected to be recognized over a three year period.




15





Note
7 - STOCK WARRANTS,
OPTIONS, AND COMPENSATION





The
Company appointed Kenneth T. Berents to serve as a member of the Company’s Board
on December 8, 2006.  Under the Board Agreement between the Company
and Mr. Berents, dated December 8, 2006, the Company agreed to issue to Mr.
Berents as a compensation for his services under the 2005 Plan, an initial grant
of a stock option to purchase 50,000 shares of the Company’s common stock upon
execution of the Board Agreement and an option to purchase 30,000 shares of the
Company’s common stock on each anniversary of the Board
Agreement  provided Mr. Berents is a member of the Board at such
time.  It was later determined that due to the expiration of the 2005
Plan on December 31, 2006 the grants of stock options to Mr. Berents could not
be validly granted.  In order to meet its obligations under the Board
Agreement, the Company entered into the following agreements with Mr. Berents
(i) Stock Option Agreement - Director Non-Qualified Stock Option dated as of
December 1, 2008 and effective as of January 15, 2009 for the issuance of 50,000
shares of the Company’s common stock, with an exercise price of $4.29 per share
under the Company’s 2008 Plan to Mr. Berents, (ii) Stock Option Agreement -
Director Non-Qualified Stock Option dated as of December 1, 2008 and effective
as of January 15, 2009 for the issuance of 30,000 shares of the Company’s common
stock, with an exercise price of $4.27 per share under the Company’s 2008 Plan
to Mr. Berents, and (iii) Stock Option Agreement - Director Non-Qualified Stock
Option dated as of December 1, 2008 and effective as of January 15, 2009 for the
issuance of 30,000 shares of the Company’s common stock, with an exercise price
of $0.90 per share under the Company’s 2008 Plan to Mr. Berents.





The
Company appointed Todd L. Mavis to serve as a member of the Company’s Board on
January 2, 2007. Mr. Mavis resigned as a member of the Board effective as of
December 17, 2007.  There were no disagreements between Mr. Mavis and
the Company on any matter related to the Company’s operations, policies or
practices which resulted in his resignation.   As a compensation
for his services, the Company agreed to issue to Mr. Mavis under the 2005
Plan, an initial annual grant of a stock option to purchase 50,000 shares of the
Company’s common stock, with an exercise price of $3.80 per share (the “Mavis
Stock Option”).  Under the Board Agreement between the Company and Mr.
Mavis, dated January 2, 2007, in the event that Mr. Mavis is no longer a member
of the Board, his exercise period for all vested options is twenty-four months
from the anniversary date of his departure from the Board.  It was
later determined that due to the expiration of the 2005 Plan on December 31,
2006 the Mavis Stock Option could not be validly granted.  Pursuant to
the terms of the Stock Option Agreement with Todd L. Mavis dated as of April 21,
2009 between Mr. Mavis and the Company, Mr. Mavis was granted an option to
purchase 50,000 shares of the Company’s common stock (the “New Mavis Stock
Option”), for an exercise price per share of common stock equal to
$3.46.  All or any part of the New Mavis Stock Option may be exercised
by Mr. Mavis, no later than December 17, 2009.





Stock
options— All issued 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.





The
expected term represents the estimated average period of time that the options
remain outstanding. The expected volatility is based on the historical
volatility of the Company’s stock price. No dividend payouts were assumed, as
the Company has no plans to declare dividends during the expected term of the
stock options. The risk-free rate of return reflects the weighted average
interest rate offered for zero coupon treasury bonds over the expected term of
the options. Based upon this calculation and pursuant to ASC 505-50 “ Equity
Based Payment to Non-employees”, previously EITF 96-18, the Company recorded
expenses of $336,668 and a $899,952 for the three  and nine months ended
September 30, 2008, respectively and none for 2009.





The
Company did not grant any options during the nine months ended September 30,
2009 and 2008.





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.




16





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 $2,741,500 as of September 30, 2009 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 $932,000.




The
Company’s policy is to recognize interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense. The Company did
not have any accrued interest or penalties associated with any unrecognized tax
benefits, nor was any interest expense recognized during the three and nine
months ended September 30, 2009 and 2008.





Pursuant
to the PRC Income Tax Laws, from January 1, 2008, the Enterprise Income Tax is
at a statutory rate of 25%.




The
following is a reconciliation of income tax expense for the nine months ended
September 30, 2009 and 2008:





2009
            
            U.S.
            
            
            State
            
            
            International
            
            
            TotalCurrent
            
            $
            -
            
            
            $
            -
            
            
            $
            1,734,472
            
            
            $
            1,734,472Deferred
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            $
            -
            
            
            $
            -
            
            
            $
            1,734,472
            
            
            $
            1,734,472




2008
            
            U.S.
            
            
            State
            
            
            International
            
            
            TotalCurrent
            
            $
            -
            
            
            $
            -
            
            
            $
            6,333,265
            
            
            $
            6,333,265Deferred
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            $
            -
            
            
            $
            -
            
            
            $
            6,333,265
            
            
            $
            6,333,265





The
following is a reconciliation of income tax expense for the three months ended
September 30, 2009 and 2008:





2009
            
            U.S.
            
            
            State
            
            
            International
            
            
            TotalCurrent
            
            $
            -
            
            
            $
            -
            
            
            $
            143,414
            
            
            $
            143,414Deferred
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            $
            -
            
            
            $
            -
            
            
            $
            143,414
            
            
            $
            143,414





2008
            
            U.S.
            
            
            State
            
            
            International
            
            
            TotalCurrent
            
            $
            -
            
            
            $
            -
            
            
            $
            2,168,638
            
            
            $
            2,168,638Deferred
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            $
            -
            
            
            $
            -
            
            
            $
            2,168,638
            
            
            $
            2,168,638





During
the three months ended September 30, 2009, Wan Da, Sanhe, Joy & Harmony,
Yiwu and Zhejiang had operating losses and therefore no income tax expenses.
Jinhua was the only subsidiary that reported an operating income during the
three months ended September 30, 2009 and incurred income tax expense of
$143,414.





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




For
      the nine months ended
              September
      30,2009
            
            
            2008US
      statutory tax rate
            
            
            34.0
            %
            
            
            34.0
            %Tax
      rate difference
            
            
            (9.0
            %)
            
            
            (9.0
            %)other
            
            
            1.5
            %
            
            
            (0.7
            )Effective
      rate
            
            
            26.5
            %
            
            
            24.3
            %




17




For
      the three months ended
              September
      30,2009
            
            
            2008US
      statutory tax rate
            
            
            34.0
            %
            
            
            34.0
            %Tax
      rate difference
            
            
            (9.0
            %)
            
            
            (9.0
            %)other
            
            
            (1.3
            %)
            
            
            0.4
            %Effective
      rate
            
            
            23.7
            %
            
            
            25.4
            %




Note
10 - COMMITMENTS




The
Company leases office facilities under operating leases that terminate through
2011. Rent expense for the three and nine months ended September 30, 2009 and
2008 was $68,018, $62,203, $119,192 and $125,002, respectively. The future
minimum obligations under these agreements are as follows by years as of
September 30, 2009:




2010
            
            $
            1,237,0002011
            
            
            178,0002012
            
            
            57,000Total
            
            $
            1,472,000





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 September
30, 2009 and December 31, 2008, the Company had allocated $11,109,379 to these
non-distributable reserve funds.





Note 12 -OTHER
COMPREHENSIVE INCOME





The
detail of other comprehensive income as included in stockholders’ equity at
September 30, 2009 (unaudited) and December 31, 2008 are as
follows:





ForeignCurrencyTranslationAdjustmentBalance
      at December 31, 2007
            
            $
            1,872,334Change
      for 2008
            
            
            3,399,770Balance
      at December 31, 2008
            
            
            5,272,104Change
      for nine months ended September 30, 2009
            
            
            (93,744
            )Balance
      at September 30, 2009
            
            $
            5,178,360




18




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 nine and three months ended September 30, 2009 and 2008, no customer
accounted for more than 10% of the Company’s sales or accounts receivable. At
September 30, 2009 and 2008, 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 (in
thousands):




Three
      Months Ended September 30, 2009Mobile
            
            
            Home
            
            
            Communication
            
            
            ConsumerPhones
            
            
            Electronics
            
            
            Products
            
            
            Electronics
            
            
            Logistics
            
            
            Other
            
            
            TotalSales,
      net
            
            $
            9,776
            
            
            $
            11,948
            
            
            $
            8,865
            
            
            $
            10,267
            
            
            $
            2,974
            
            
            $
            125
            
            
            $
            43,955Cost
      of sales
            
            
            8,971
            
            
            
            10,485
            
            
            
            8,201
            
            
            
            10,107
            
            
            
            2,065
            
            
            
            113
            
            
            
            39,942Gross
      profit
            
            
            805
            
            
            
            1,463
            
            
            
            664
            
            
            
            160
            
            
            
            909
            
            
            
            12
            
            
            
            4,013Income
      from operations
            
            
            (356
            )
            
            
            (338
            )
            
            
            (36
            )
            
            
            (643
            )
            
            
            604
            
            
            
            (839
            )
            
            
            (1,608
            )Total
      assets at September 30, 2009
            
            $
            14,932
            
            
            $
            13,366
            
            
            $
            13,648
            
            
            $
            15,615
            
            
            $
            4,212
            
            
            $
            35,907
            
            
            $
            97,680








Nine
      Months Ended September 30, 2009Mobile
            
            
            Home
            
            
            Communication
            
            
            ConsumerPhones
            
            
            electronics
            
            
            Products
            
            
            Electronics
            
            
            Logistics
            
            
            Other
            
            
            TotalSales,
      net
            
            $
            49,688
            
            
            $
            42,944
            
            
            $
            35,254
            
            
            $
            41,508
            
            
            $
            2,974
            
            
            $
            125
            
            
            $
            172,493Cost
      of sales
            
            
            44,420
            
            
            
            35,644
            
            
            
            32,129
            
            
            
            38,029
            
            
            
            2,065
            
            
            
            113
            
            
            
            152,400Gross
      profit
            
            
            5,268
            
            
            
            7,300
            
            
            
            3,125
            
            
            
            3,479
            
            
            
            909
            
            
            
            12
            
            
            
            20,093Income
      from operations
            
            $
            848
            
            
            $
            1,564
            
            
            $
            386
            
            
            $
            1,105
            
            
            $
            604
            
            
            $
            (272
            )
            
            $
            4,235





19




Three
      Months Ended September 30, 2008Mobile
            
            
            Home
            
            
            Communication
            
            
            ConsumerPhones
            
            
            Electronics
            
            
            Products
            
            
            Electronics
            
            
            Other
            
            
            TotalSales,
      net
            
            $
            26,990
            
            
            $
            17,266
            
            
            $
            16,553
            
            
            $
            18,248
            
            
            $
            -
            
            
            $
            79,057Cost
      of sales
            
            
            22,006
            
            
            
            14,478
            
            
            
            14,252
            
            
            
            16,475
            
            
            
            -
            
            
            
            67,211Gross
      profit
            
            
            4,984
            
            
            
            2,788
            
            
            
            2,301
            
            
            
            1,773
            
            
            
            -
            
            
            
            11,846Income
      from operations
            
            
            3,612
            
            
            
            1,578
            
            
            
            1,818
            
            
            
            1,201
            
            
            
            (93
            )
            
            
            8,116Total
      assets at September 30, 2008
            
            $
            25,941
            
            
            $
            21,919
            
            
            $
            19,694
            
            
            $
            19,500
            
            
            $
            1,416
            
            
            $
            88,470





Nine
      Months Ended September 30, 2008Mobile
            
            
            Home
            
            
            Communication
            
            
            ConsumerPhones
            
            
            Electronics
            
            
            Products
            
            
            Electronics
            
            
            Other
            
            
            TotalSales,
      net
            
            $
            74,300
            
            
            $
            52,804
            
            
            $
            46,701
            
            
            $
            51,921
            
            
            $
            -
            
            
            $
            225,726Cost
      of sales
            
            
            62,004
            
            
            
            43,527
            
            
            
            39,649
            
            
            
            45,278
            
            
            
            -
            
            
            
            190,458Gross
      profit
            
            
            12,296
            
            
            
            9,277
            
            
            
            7,052
            
            
            
            6,643
            
            
            
            -
            
            
            
            35,268Income
      from operations
            
            $
            8,530
            
            
            $
            5,841
            
            
            $
            5,230
            
            
            $
            4,958
            
            
            $
            667
            
            
            $
            25,226




20


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





Overview





China 3C
Group was incorporated on August, 20, 1998 under the laws of the State of
Nevada. Capital Future Developments Limited (“Capital”) was incorporated on July
22, 2004 under the laws of the British Virgin Islands. Zhejiang Yong Xin Digital
Technology Co., Ltd. (“Zhejiang”), Yiwu Yong Xin Communication Ltd. (“Yiwu”),
Hangzhou Wandga Electronics Co., Ltd. (“Wang Da”), Hangzhou Sanhe Electronic
Technology, Limited (“Sanhe”), and Shanghai Joy & Harmony Electronic
Development Co., Ltd. (“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 25, 2003, respectively. China 3C Group owns 100% of Capital
and Capital 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,
Capital 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, the Company completed the
acquisition of Jinhua Boafa Logistic, Ltd (“Jinhua”).  Collectively
the eight corporations are referred to herein as the Company.





On
December 21, 2005 Capital became a wholly owned subsidiary of China 3C Group
through a merger with a wholly owned subsidiary of the Company (“Merger
Transaction”). China 3C Group acquired all of the issued and outstanding capital
stock of Capital pursuant to a Merger Agreement dated at 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 a cash
consideration of $500,000. 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 Capital owning 100% of Zhejiang as previously was the case,
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 is deemed to have all the economic benefits and
liabilities by contract. Under this structure, Zhejiang is now a wholly foreign
owned enterprise  of Capital. The contractual agreements give Capital
and its’ equity owners an obligation to absorb, any losses, and rights to
receive revenue. Capital 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 Accounting Standard
Codification (“ASC”) Topic 810-10 , previously Financial Accounting Standards
Board (“FASB”) Interpretation 46, Consolidation of Variable Interest Entities
(VIEs), qualifies the business operations of (Zhejiang) to be consolidated with
(Capital) and ultimately with China 3C Group.




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.




21




(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 $3,750,000, 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.





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 $11,000,000, 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 Group’s subsidiaries, Zhejiang and Yiwu completed acquisition
of Jinhua, a company organized under the laws of the People’s Republic of China.
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. The purchase price was paid off  as of September
2009.





The
Company is engaged in the resale and distribution of mobile phones, facsimile
machines, DVD players, stereos, speakers, MP3 and MP4 players, iPods, electronic
dictionaries, CD players, radios, Walkmans, and audio systems. The Company sell
and distribute these products through retail stores and secondary distributors.
Following the acquisition of Jinhua, the Company also provide logistics for
businesses in China.





Result
of Operations





For
the Nine and Three Months Ended September 30, 2009 and 2008





Reportable
Operating Segments





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




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




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




c)           Hangzhou
Sanhe Electronic Technology Limited or “Sanhe”




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




e)           Jinhua
Baofa Logistic Limited or “Jinhua”





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





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





All
amounts, except percentages of revenues, are in thousands of U.S.
dollars.





Nine
      months ended
              September
      30,
            
            
            PercentageYiwu
            
            2009
            
            
            2008
            
            
            ChangeRevenue
            
            $
            35,254
            
            
            $
            46,701
            
            
            
            (24.51)
            %Gross
      Profit
            
            $
            3,125
            
            
            $
            7,052
            
            
            
            (55.69)
            %Gross
      Margin
            
            
            8.86
            %
            
            
            15.10
            %
            
            
            (6.24)
            %Operating
      Income
            
            $
            386
            
            
            $
            5,230
            
            
            
            (92.62)
            %




22




Three
      months ended
              September
      30,
            
            
            PercentageYiwu
            
            2009
            
            
            2008
            
            
            ChangeRevenue
            
            $
            8,865
            
            
            $
            16,553
            
            
            
            (46.44)
            %Gross
      Profit
            
            $
            664
            
            
            $
            2,301
            
            
            
            (71.14)
            %Gross
      Margin
            
            
            7.49
            %
            
            
            13.90
            %
            
            
            (6.41)
            %Operating
      Income
            
            $
            (36)
            
            
            $
            1,818
            
            
            
            (101.98)
            %





For the
nine months ended September 30, 2009, Yiwu generated revenue of $35,254, a
decrease of $11,447 or 24.51% compared to $46,701 for the nine months ended
September 30, 2008. Gross profit decreased $3,927 or 55.69% from $7,052 for the
nine months ended September 30, 2008 to $3,125 for the nine months ended
September 30, 2009. Operating income was $386 for the nine months ended
September 30,2009, a decrease of $4,844 or 92.62% compared to $5,230 for the
nine months ended September 30, 2008.





For the
three months ended September 30, 2009, Yiwu generated revenue of $8,865, a
decrease of $7,688 or 46.44% compared to $16,553 for the three months ended
September 30, 2008. Gross profit decreased $1,637 or 71.14% from $2,301 for the
three months ended September 30, 2008 to $664 for the three months ended
September 30, 2009. Operating loss was $(36) for the three months ended
September 30, 2009, a decrease of $1,854 or 101.98% compared to operating income
of $1,818 for the three months ended September 30, 2008.





Due to
the global financial crisis, the demand for electronic products in China
decreased. Many small and medium-sized companies in China were less likely to
purchase or upgrade new office equipment in the current economic environment. In
addition, 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”. These factors negatively affected
our sales of phones.





Gross
margin decreased 6.24% and 6.41%, respectively during the nine and three months
ended September 30, 2009. The decrease was a result of lower unit sales price of
fax machines and telephones due to a more competitive sales market.





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.





All
amounts, except percentages of revenues, are in thousands of U.S.
dollars.





Nine
      months ended
              September
      30,
            
            
            PercentageWang
      Da
            
            2009
            
            
            2008
            
            
            ChangeRevenue
            
            $
            49,688
            
            
            $
            74,300
            
            
            
            (33.13)
            %Gross
      Profit
            
            $
            5,268
            
            
            $
            12,296
            
            
            
            (57.16)
            %Gross
      Margin
            
            
            10.60
            %
            
            
            16.55
            %
            
            
            (5.95)
            %Operating
      Income
            
            $
            848
            
            
            $
            8,530
            
            
            
            (90.06)
            %





Three
      months ended
              September
      30,
            
            
            PercentageWang
      Da
            
            2009
            
            
            2008
            
            
            ChangeRevenue
            
            $
            9,776
            
            
            $
            26,990
            
            
            
            (63.87)
            %Gross
      Profit
            
            $
            805
            
            
            $
            4,984
            
            
            
            (83.85)
            %Gross
      Margin
            
            
            8.23
            %
            
            
            18.47
            %
            
            
            (10.23)
            %Operating
      Income (Loss)
            
            $
            (356)
            
            
            $
            3,612
            
            
            
            (109.86)
            %





For the
nine months ended September 30, 2009, Wang Da generated revenue of $49,688, a
decrease of $24,612 or 33.13% compared to $74,300 for the nine months ended
September 30, 2008. Gross profit decreased $7,028 or 57.16% from $12,296 for the
nine months ended September 30, 2008 to $5,268 for the nine months ended
September 30, 2009. Operating income was $848 for the nine months ended
September 30, 2009, a decrease of $7,682 or 90.06% compared to $8,530 for the
nine months ended September 30, 2008.





For the
three months ended September 30, 2009, Wang Da generated revenue of $9,776, a
decrease of $17,214 or 63.78% compared to $26,990 for the three months ended
September 30, 2008. Gross profit decreased $4,179 or 83.85% from $4,984 for the
three months ended September 30, 2008 to $805 for the three months ended
September 30, 2009. Operating loss was $(356) for the three months ended
September 30, 2009, a decrease of $3,968 or 109.86% compared to $3,612 for the
three months ended September 30, 2008.




23





During
the third quarter of 2009, China started promoting its 3G network. However, the
3G network is still in the trial period, the network coverage is yet to be
complete and the cost of wireless service is relatively higher than before. In
addition, the costs of 3G phones are also higher than the old models. The
introduction of 3G phones caused lower demand for the old model mobile phones.
Meanwhile, customers are waiting to upgrade to 3G phones until the 3G network is
complete. In addition, 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”. These factors negatively
affected our sales of phones. These factors led to decreased sales revenue
during the nine months and three months ended September 30, 2009.





Gross
margin decreased 5.95% and 10.23%, respectively during the nine and three months
ended September 30, 2009. The decrease was due to the fact that old model mobile
phones are selling at a lower unit price as a result of the introduction of the
3G phones.





c)           Hangzhou
Sanhe Electronic Technology Limited or “Sanhe”





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





All
amounts, except percentages of revenues, are in thousands of U.S.
dollars.





Nine
      months ended
              September
      30,
            
            
            PercentageSanhe
            
            2009
            
            
            2008
            
            
            ChangeRevenue
            
            $
            42,944
            
            
            $
            52,804
            
            
            
            (18.67)
            %Gross
      Profit
            
            $
            7,300
            
            
            $
            9,277
            
            
            
            (21.31)
            %Gross
      Margin
            
            
            17.00
            %
            
            
            17.57
            %
            
            
            (0.57)
            %Operating
      Income
            
            $
            1,564
            
            
            $
            5,841
            
            
            
            (73.22)
            %





Three
      months ended
              September
      30,
            
            
            PercentageSanhe
            
            2009
            
            
            2008
            
            
            ChangeRevenue
            
            $
            11,948
            
            
            $
            17,266
            
            
            
            (30.80)
            %Gross
      Profit
            
            $
            1,463
            
            
            $
            2,788
            
            
            
            (47.53)
            %Gross
      Margin
            
            
            12.24
            %
            
            
            16.15
            %
            
            
            (3.90)
            %Operating
      Income (Loss)
            
            $
            (338)
            
            
            $
            1,578
            
            
            
            (121.42)
            %





For the
nine months ended September 30, 2009, Sanhe generated revenue of $42,944, a
decrease of $9,860 or 18.67% compared to $52,804 for the nine months ended
September 30, 2008. Gross profit decreased $1,977 or 21.31% from $9,277 for the
nine months ended September 30, 2008 to $7,300 for the nine months ended
September 30, 2009. Operating income was $1,564 for the nine months ended
September 30, 2009, a decrease of $4,277 or 73.22% compared to $5,841 for the
nine months ended September 30, 2008.





For the
three months ended September 30, 2009, Sanhe generated revenue of $11,948, a
decrease of $5,318 or 30.80% compared to $17,266 for the three months ended
September 30, 2008. Gross profit decreased $1,325 or 47.53% from $2,788 for the
three months ended September 30, 2008 to $1,463 for the three months ended
September 30, 2009. Operating loss was $(338) for the three months ended
September 30, 2009, a decrease of $1,916 or 121.42% compared to operating income
of $1,578 for the three months ended September 30, 2008.





Due to
the global financial crisis, the demand for electronic products in China
decreased in general. In 2009, China started to advocate the policy of “Home
appliances going to the countryside” to boost domestic demand for electronics.
However, this policy excludes store in stores and only benefits direct operating
stores.  Therefore, the policy led to a more competitive market for
home electronics. Sales commission rate paid to department stores also increased
in 2009, this caused an increase in general administration expenses and
therefore a decrease in operating income.




24





Gross
margin decreased 0.57% during the nine months ended September 30, 2009 and
decreased 3.90% during the three months ended September 30, 2009. The decrease
in gross margin was a result of lower unit sales price of home electronics due
to a more competitive sales market.





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, iPods, electronic dictionary,
radios, and Walkman.





All
amounts, except percentages of revenues, are in thousands of U.S.
dollars.




Nine
      months ended
              September
      30,
            
            
            PercentageJoy
      & Harmony
            
            2009
            
            
            2008
            
            
            ChangeRevenue
            
            $
            41,508
            
            
            $
            51,921
            
            
            
            (20.06)
            %Gross
      Profit
            
            $
            3,479
            
            
            $
            6,643
            
            
            
            (47.63)
            %Gross
      Margin
            
            
            8.38
            %
            
            
            12.79
            %
            
            
            (4.41)
            %Operating
      Income
            
            $
            1,105
            
            
            $
            4,958
            
            
            
            (77.71)
            %





Three
      months ended
              September
      30,
            
            
            PercentageJoy
      & Harmony
            
            2009
            
            
            2008
            
            
            ChangeRevenue
            
            $
            10,267
            
            
            $
            18,248
            
            
            
            (41.74)
            %Gross
      Profit
            
            $
            160
            
            
            $
            1,773
            
            
            
            (90.98)
            %Gross
      Margin
            
            
            1.60
            %
            
            
            9.72
            %
            
            
            (8.16)
            %Operating
      Income (Loss)
            
            $
            (643)
            
            
            $
            1,201
            
            
            
            (153.54)
            %





For the
nine months ended September 30, 2009, Joy & Harmony generated revenue of
$41,508, a decrease of $10,413 or 20.06% compared to $51,921 for the nine months
ended September 30, 2008. Gross profit decreased $3,164 or 47.63% from $6,643
for the nine months ended September 30, 2008 to $3,479 for the nine months ended
September 30, 2009. Operating income was $1,105 for the nine months ended
September 30, 2009, a decrease of $3,853 or 77.71% compared to $4,958 for the
nine months ended September 30, 2008.





For the
three months ended September 30, 2009, Joy & Harmony generated revenue of
$10,276, a decrease of $7,981 or 43.74% compared to $17,309 for the three months
ended September 30, 2008. Gross profit decreased $1,613 or 90.98% from $1,773
for the three months ended September 30, 2008 to $160 for the three months ended
September 30, 2009. Operating loss was $(643) for the three months ended
September 30, 2009, a decrease of $1,844 or 153.54% compared to $1,201 for the
three months ended September 30, 2008.  The operating loss in the
third quarter of 2009 was a result of decreased sales and a significant decrease
in gross margin due to the increased management fees paid to department
stores.





Due to
the negative effect of the global financial crisis electronic manufacturers have
been introducing new products at a slower rate and the old products currently on
the market become out-dated. This has caused the unit price of consumer
electronics to drop and sales to decline. It also led to a significant decline
in gross margin for Joy & Harmony.





Gross
margin decreased 4.41% and 8.16% during the nine and three months ended
September 30, 2009, respectively. The decrease in gross margin was a result of
lower unit sales price of consumer electronics due to a more competitive sales
market. An increase in management fees paid to department stores as a percentage
of sales also contributed to lower gross margin.





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 three and nine months
ended September 30, 2009 include Jinhua’s operating results from the date of
acquisition to September 30, 2009.




25





The
following tables include historical numbers of Jinhua, which are not included in
the Company’s consolidated statement of income (loss) and comprehensive income
(loss) for the three and nine months ended September 30, 2009.





All
amounts, except percentages of revenues, are in thousands of U.S.
dollars.





Nine
      months ended
              September
      30,
            
            
            PercentageJinhua
            
            2009
            
            
            2008
            
            
            ChangeRevenue
            
            $
            8,732
            
            
            $
            7,673
            
            
            
            13.80
            %Gross
      Profit
            
            $
            2,796
            
            
            $
            2,503
            
            
            
            11.71
            %Gross
      Margin
            
            
            32.02
            %
            
            
            32.63
            %
            
            
            (0.61)
            %Operating
      Income
            
            $
            1,886
            
            
            $
            1,738
            
            
            
            8.52
            %





Three
      months ended
              September
      30,
            
            
            PercentageJinhua
            
            2009
            
            
            2008
            
            
            ChangeRevenue
            
            $
            2,974
            
            
            $
            3,193
            
            
            
            (6.86)
            %Gross
      Profit
            
            $
            909
            
            
            $
            1,220
            
            
            
            (25.49)
            %Gross
      Margin
            
            
            30.56
            %
            
            
            38.20
            %
            
            
            (7.64)
            %Operating
      Income
            
            $
            604
            
            
            $
            947
            
            
            
            (36.22)
            %





For the
nine months ended September 30, 2009, Jinhua generated revenue of $8,732, an
increase of $1,059 or 13.80% compared to $7,673 for the nine months ended
September 30, 2008. Gross profit increased $293 or 11.71% from $2,503 for the
nine months ended September 30, 2008 to $2,796 for the nine months ended
September 30, 2009. Operating income was $1,886 for the nine months ended
September 30, 2009, an increase of $148 or 8.52% compared to $1,738 for the nine
months ended September 30, 2008. The increase in revenue and operating income in
the nine months ended September 30, 2009 was due to the implementation of
regional management and expansion in Jiangsu province.





For the
three months ended September 30, 2009, Jinhua generated revenue of $2,974, a
decrease of $219 or 6.86% compared to $17,309 for the three months ended
September 30, 2008. Gross profit decreased $311 or 56.62% from $1,220 for the
three months ended September 30, 2008 to $909 for the three months ended
September 30, 2009. Operating income was $604 for the three months ended
September 30, 2009, a decrease of $343 or 36.22% compared to $947 for the three
months ended September 30, 2008. The decrease in operating income in the third
quarter 2009 was due to increased fuel cost and increased general administration
expenses.





Gross
margin decreased 0.61% and 7.64% during the nine and three months ended
September 30, 2009, respectively. The decrease in gross margin in the three
months ended September 30, 2009 was due to increased fuel cost which led to the
increase in cost of revenue.





Net
Sales





Net sales
for the nine months ended September 30, 2009 decreased by 23.58%, to $172,493 as
compared to $225,726 for the nine months ended September 30, 2008. Net sales for
the three months ended September 30, 2009 decreased by 44.40%, to $43,955 as
compared to $79,057 for the three months ended September 30, 2008. Lower sales
were a result of various factors including a slowdown in the retail markets in
general, weaker demand for consumer and business electronics due to the global
financial conditions and increased competition from telecomm service providers
who opened their own direct operating stores to sell communication
products.





Cost
of Sales





Cost of
sales for the nine months ended September 30, 2009 totaled $152,401 as compared
to $190,457 for the nine months ended September 30, 2008, a decrease of 19.98%.
Cost of sales for the three months ended September 30, 2009 totaled $39,942 as
compared to $67,211 for the three months ended September 30, 2008, a decrease of
40.57%. The decreased cost of sales for the nine months was a direct result of
the decrease in the number of sales during the same period.




26





Gross
Profit Margin





Gross
profit margin for the nine months ended September 30, 2009 was 11.65% as
compared to 15.62% for the nine months ended September 30, 2008. Gross profit
margin for the three months ended September 30, 2009 was 9.13% as compared to
14.98% for the three months ended September 30, 2008. Joy & Harmony, Wang Da
and Yiwu had significant decrease in gross margin in the third quarter
2009.  The lower gross profit margin was primarily due to the
decreased unit sales prices of consumer and business electronics in the
competitive market in China.




General
and Administrative Expenses





General
and administrative expenses for the nine months ended September 30, 2009 totaled
$15,856 or 9.19% of net sales, as compared to $10,043 or 4.45% of net sales for
the nine months ended September 30, 2008, an increase of 57.88%. General and
administrative expenses for the three months ended September 30, 2009 totaled
$5,621 or 12.79% of net sales, as compared to $3,731 or 4.72% of net sales for
the three months ended September 30, 2008, an increase of 50.65%. The increase
in the third quarter was primarily due to additional general and administration
expenses incurred by Jinhua compared to the same period in 2008, increased
amortization of intangible assets purchased from Jinhua, increased cost in
direct operating stores and franchise stores.  Increased management
fee as a percentage of sales paid to department stores and an increase in base
salary for all staff contributed to the increase in general and administrative
expenses for the 9 months ended September 30, 2009.





Income
from Operations





Income
from operations for the nine months ended September 30, 2009 was $4,235 or 2.46%
of net sales as compared to income from operations of $25,225 or 11.18% of net
sales for the nine months ended September 30, 2008, a decrease of 83.21%. Loss
from operations for the three months ended September 30, 2009 was $(1,608) or
(3.66)% of net sales as compared to income from operations of $8,115 or 10.27%of
net sales for the three months ended September 30, 2008, a decrease of 119.82%.
The decline in sales and gross margin coupled with increase in operating
expenses  caused the income from operations to decrease during the
nine months ended September 30, 2009 and resulted in an operating loss in the
third quarter of 2009.





Provision
for Income Taxes





The
provision for income taxes for the nine months ended September 30, 2009 was
$1,734 compared to $6,333 for the nine months ended September 30, 2008. The
provision for income taxes for the three months ended September 30, 2009 was
$143 compared to $2,169 for the three months ended September 30, 2008. The
decrease in income tax expenses was attributed to the decrease in taxable
income. In the third quarter 2009, five of China 3C’s subsidiaries had income
losses and therefore didn’t have any income tax expenses. Jinhua was the only
subsidiary that had an operating income in the third quarter 2009 and had income
tax expense of $143.





Net
Income





Net
income was $2,604 or 1.51% of net sales for the nine months ended September 30,
2009 compared to $19,689 or 8.72% of net sales for the nine months ended
September 30, 2008, a decrease of 86.78%. Net loss was $(1,750) or (3.98)% of
net sales for the three months ended September 30, 2009 compared to $6,364 or
8.05% of net sales for the three months ended September 30, 2008, a decrease of
127.5%. Decreased sales revenue, lower gross margin and high operating expenses
were the critical factors which contributed to the decrease in net income. In
the third quarter 2009, Wang Da, Yiwu, Joy & Harmony, Sanhe and Zhejiang had
net losses due to significant decrease in sales and gross margin.




Liquidity
and Capital Resources





Operations
and liquidity needs are funded primarily through cash flows from operations.
Cash and cash equivalents were $28,303 at September 30, 2009, compared to
$31,679 at September 30, 2008, and compared to $32,158 at December 31,
2008.




27




We
believe that the funds available to us are adequate to meet our operating needs
for the remainder of 2009.





Nine months
      endedSeptember
      30,
              2009
            
            
            September
      30,
              2008Net
      cash provided by  operating activities
            
            $
            5,503
            
            
            $
            3,682Net
      cash (used in) investing activities
            
            $
            (8,583
            )
            
            $
            (9
            )Effect
      of exchange rate change on cash and cash equivalents
            
            $
            (775
            )
            
            $
            3,053Net
      increase (decrease) in cash and cash equivalents
            
            $
            (3,855
            )
            
            $
            6,726Cash
      and cash equivalents at beginning of period
            
            $
            32,158
            
            
            $
            24,953Cash
      and cash equivalents at end period
            
            $
            28,303
            
            
            $
            31,679





Operating
Activities





Net cash
generated from operating activities was $5,503 for the nine months ended
September 30, 2009 compared to $3,682 for the nine months ended September
30, 2008, a 49.46% increase.  The increase was mainly attributable to
several factors, including (i) net income of $2,603; (ii) decrease in accounts
receivable of $1,174; (iii) decrease in inventory of $734; (iv) decrease in
advance to suppliers of $139 and  (v) increase in accounts payable of
$1,137, offset by the decrease in income taxes payable of $1,260 in the nine
months ended September 30, 2009.








Nine
      months endedSeptember
      30,
              2009
            
            
            September
      30,
              2008a)
      Decrease/(Increase) in inventory
            
            $
            734
            
            
            $
            (8,498
            )b)
      Decrease/(Increase) in Accounts Receivable
            
            $
            1,174
            
            
            $
            (11,491
            )c)
      Decrease /(Increase) in inventory and accountsreceivables
      as a whole a) + b)
            
            $
            1,908
            
            
            $
            (19,989
            )





During
the nine months ended September 30, 2009, sales decreased 23.58% while accounts
receivable decreased 5.03%. The difference is a result of changing its contract
terms for retail department from 30 days to 45 days and wholesale department
from 10 days to 15 days. Extension of payment terms offset the effect of
decrease in sales. Inventory turnover slowed down slightly during the nine
months ended September 30, 2009, which caused inventory to decrease 8.27% which
cost of sales decreased 19.98%.





Investing
Activities





Nine
      months endedSeptember
      30,
              2009
            
            
            September
      30,
              2008Net
      cash used investment activities
            
            $
            (8,583
            )
            
            $
            (9
            )





Net cash
used in investing activities increased from $9 during the nine months ended
September 30, 2008 to $8,583 during the nine months ended September 30, 2009,
due to the payment for the acquisition of Jinhua. Pursuant to the acquisition
agreement, the Company paid for the second installment payment of $7,291 during
the second quarter 2009 and the remaining balance of $2,898 in the third quarter
2009. The Company acquired cash in the amount of $2,405 and property, plant and
equipment of $738 in the acquisition of Jinhua. In addition, the Company spent
$61 purchasing other fixed assets.





The
Company’s activities focused on the distribution of products.  As a
result, investments in fixed assets were moderate and hence there is little
effect to the utilization of cash over the nine months ended September 30,
2008.




28





Financing
Activities





The
Company did not carry out any significant financing activities during the nine
months ended September 30, 2009 and 2008.





Nine
      months endedSeptember
      30,
              2009
            
            
            September
      30,
              2008Net
      change in cash and cash equivalents
            
            $
            (3,855
            )
            
            $
            6,726





September
      30,
              2009
            
            
            September
      30,
              2008Cash
      and cash equivalent at September 30, 2009 and 2008
            
            $
            28,303
            
            
            $
            31,679





Capital
Expenditures





Total
capital expenditures for the nine months ended September 30, 2009 were $61 for
purchase of fixed assets compared to $11 for the nine months of
2008.





Working Capital Requirements





Historically
operations and short term financing have been sufficient to meet our cash needs.
We believe we will be able to generate revenues from sales 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.





Item
3. Quantitative and Qualitative Disclosures About Market Risk.





Foreign
Currency Exchange Rate Risk





Our
financial statements are expressed in U.S. dollars but the functional currency
of our operating subsidiaries is RMB. The value of stockholders’ investment in
our stock will be affected by the foreign exchange rate between U.S. dollars and
RMB. To the extent we hold assets denominated in U.S. dollars any appreciation
of the RMB against the U.S. dollar could result in a change to our statement of
operations and a reduction in the value of our U.S. dollar denominated assets.
On the other hand, a decline in the value of RMB against the U.S. dollar could
reduce the U.S. dollar equivalent amounts of our financial results, the value of
stockholders’ investment in our company and the dividends we may pay in the
future, if any, all of which may have a material adverse effect on the price of
our stock.





Our
exposure to foreign exchange risk primarily relates to currency gains or losses
resulting from timing differences between signing of sales contracts and
settling of these contracts. Furthermore, we translate monetary assets and
liabilities denominated in other currencies into RMB, the functional currency of
our operating business. Our results of operations and cash flow are translated
at average exchange rates during the period, and assets and liabilities are
translated at the foreign exchange rate at the end of the period. Translation
adjustments resulting from this process are included in accumulated other
comprehensive income in our statement of shareholders’ equity. We have not used
any forward contracts, currency options or borrowings to hedge our exposure to
foreign currency exchange risk. We cannot predict the impact of future exchange
rate fluctuations on our results of operations and may incur net foreign
currency losses in the future.




29





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 in recent
years.





Currency
Exchange Fluctuations





All of
the Company’s revenues are denominated in Chinese Renminbi, as are expenses. 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, 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 People’s Bank of
China, its Currency Policy Committee affirmed the effects of the reform on
Chinese Renminbi exchange rate. In February 2006, the new currency rate system
began operating.  The currency rate of Renminbi has become more
flexible while basically maintaining stable and the expectation for a larger
appreciation range is shrinking. The Company has never engaged in currency
hedging operations and has no present intention to do so.





Concentration
of Credit Risk





Credit
risk represents the accounting loss that would be recognized at the reporting
date if counterparties failed 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 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 China, it would have a
      significant, financially disruptive effect on the normal operations of the
      Company.





Seasonality
and Quarterly Fluctuations





Our
businesses experience fluctuations in quarterly performance. Traditionally, the
first quarter from January to March has a higher number of sales reflected by
our electronics business due to the New Year holidays in China occurring during
that period.





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 the effectiveness of our disclosure controls and procedures as of
September 30, 2009, 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.




30





Changes
in Internal Control over Financial Reporting




There was
no change in our internal control over financial reporting that occurred during
the third fiscal quarter of 2009 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 material pending legal
proceedings.





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. Submission of Matters to a Vote of
Security Holders.





None.





Item 5. Other
Information.





None.





Item 6. Exhibits.





Exhibit
      No.
            
            Document
      Description31.1
            
            Certification
      of the Principal 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 Principal Accounting and Financial Officer pursuant to Rule
      13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.32.1
            
            Certification
      of the Principal Executive Officer pursuant to 18 U.S.C. 1350 (Section 906
      of the Sarbanes-Oxley Act of 2002).32.2
            
            Certification
      of the Principal Accounting and Financial Officer pursuant to 18 U.S.C.
      1350 (Section 906 of the Sarbanes-Oxley Act of
  2002).




31


SIGNATURES





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




CHINA
      3C GROUPDate:
      November  16, 2009
              By:
              /s/
      Zhenggang
      WangName:  
      Zhenggang WangTitle:
      Chief Executive Officer and Chairman(Principal
      Executive Officer)






Date:
      November 16, 2009
              By:
              /s/Jian
    ZhangName:  
      Jian ZhangTitle:
      Chief Financial Officer(Principal
      Accounting and Financial Officer)




32




Exhibit
Index





Exhibit
      No.
            
            Document
      Description31.1
            
            Certification
      of the Principal 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 Principal Accounting and Financial Officer pursuant to Rule
      13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.32.1
            
            Certification
      of the Principal Executive Officer pursuant to 18 U.S.C. 1350 (Section 906
      of the Sarbanes-Oxley Act of 2002).32.2
            
            Certification
      of the Principal Accounting and Financial Officer pursuant to 18 U.S.C.
      1350 (Section 906 of the Sarbanes-Oxley Act of
  2002).





33