Attached files
| file | filename |
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| EX-31.1 - EXHIBIT 31.1 - China Crescent Enterprises, Inc. | a6400672ex31_1.htm |
| EX-31.2 - EXHIBIT 31.2 - China Crescent Enterprises, Inc. | a6400672ex31_2.htm |
| EX-31.1 - EXHIBIT 32.1 - China Crescent Enterprises, Inc. | a6400672ex32_1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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[ X]
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 2010
OR
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
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Commission file number 0-14306
CHINA CRESCENT ENTERPRISES, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Nevada | 84-0928627 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. employer
identification number)
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14860 Montfort Drive, Suite 210, Dallas, TX 75254
(Address of principal executive offices)
(214) 722-3040
Issuer’s telephone number, including area code
Indicate by check mark 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 (the “Exchange Act”) 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 þ 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 (not required)
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.
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Large Accelerated Filer [ ]
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Accelerated Filer [ ]
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Non-Accelerated Filer [ü]
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Smaller Reporting Company [ ]
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
The Registrant had 722,940,470 shares of Common Stock outstanding as of August 18, 2010.
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PART I – FINANCIAL INFORMATION
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Page No.
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4 | ||||
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China Crescent Enterprises, Inc.
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ASSETS
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June 30, 2010
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December 31, 2009
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(Unaudited)
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CURRENT ASSETS
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Cash and cash equivalents
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$ | 4,136,165 | $ | 3,977,382 | ||||
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Accounts receivable
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9,338,344 | 6,950,902 | ||||||
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Inventory
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2,655,204 | 2,751,131 | ||||||
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Supplier advances and prepaid expenses
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2,862,652 | 1,804,015 | ||||||
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Advances to affiliate
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3,000,000 | 2,000,000 | ||||||
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Assets of discontinued operations
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9,377 | 9,377 | ||||||
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Other current assets
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162,721 | 147,613 | ||||||
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Total current assets
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22,164,463 | 17,640,420 | ||||||
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PROPERTY AND EQUIPMENT, NET
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220,513 | 160,907 | ||||||
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INTANGIBLE ASSETS
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2,597 | 2,597 | ||||||
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Total assets
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$ | 22,387,573 | $ | 17,803,924 | ||||
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LIABILITIES AND EQUITY
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CURRENT LIABILITIES
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Accounts payable
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$ | 1,728,061 | $ | 1,204,616 | ||||
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Short-term borrowing
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1,151,883 | 1,897,069 | ||||||
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Accrued expenses and other liabilities
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1,043,578 | 563,661 | ||||||
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Income taxes payable
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- | - | ||||||
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Liabilities of discontinued operations
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308,683 | 308,683 | ||||||
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Total current liabilities
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4,232,205 | 3,974,029 | ||||||
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Long-term debt
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500,000 | 500,000 | ||||||
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Total liabilities
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4,732,205 | 4,474,029 | ||||||
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EQUITY
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China Crescent Enterprises, Inc. shareholders' equity:
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Common stock; $.001 par value; 1,000,000,000 shares authorized;
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618,875,051 and 234,370,600 shares issued and outstanding
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at June 30, 2010 and December 31, 2009, respectively
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618,875 | 234,371 | ||||||
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Preferred stock; $.001 par value; 20,000,000 shares authorized;
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Series C 10,000 and 10,000; Series D 5,000 and 5,000 shares
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issued and outstanding at June 30, 2010 and
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December 31, 2009, respectively
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15 | 15 | ||||||
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Additional paid-in capital
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7,409,593 | 5,950,581 | ||||||
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Accumulated comprehensive income
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1,311,289 | 739,511 | ||||||
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Retained earnings
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5,531,360 | 3,755,468 | ||||||
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Total China Crescent Enterprises, Inc. stockholders' equity
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14,871,132 | 10,679,946 | ||||||
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Noncontrolling interest
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2,784,236 | 2,649,949 | ||||||
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Total equity
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17,655,368 | 13,329,895 | ||||||
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Total liabilities and equity
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$ | 22,387,573 | $ | 17,803,924 | ||||
See accompanying notes to consolidated financial statements.
1
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China Crescent Enterprises, Inc.
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(Unaudited)
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Three Months Ended June 30,
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Six Months Ended June 30,
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2010
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2009
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2010
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2009
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REVENUE
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$ | 16,719,095 | $ | 9,556,566 | $ | 31,706,314 | $ | 16,985,874 | ||||||||
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COST OF SALES
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14,909,148 | 7,942,007 | 28,794,214 | 14,932,862 | ||||||||||||
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Gross Margin
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1,809,947 | 1,614,559 | 2,912,100 | 2,053,012 | ||||||||||||
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OPERATING EXPENSES
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Selling, general and administrative expenses
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522,759 | 315,314 | 860,668 | 529,324 | ||||||||||||
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Depreciation and amortization
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15,365 | 5,242 | 27,930 | 6,392 | ||||||||||||
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Total expenses
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538,124 | 320,556 | 888,598 | 535,716 | ||||||||||||
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Income (loss) from operations
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1,271,823 | 1,294,003 | 2,023,502 | 1,517,296 | ||||||||||||
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OTHER INCOME (EXPENSE)
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Interest income
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- | (79 | ) | - | 902 | |||||||||||
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Interest expense
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(34,998 | ) | (54,711 | ) | (65,321 | ) | (101,940 | ) | ||||||||
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Other income
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81,314 | 45,624 | 166,508 | 89,582 | ||||||||||||
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Other expense
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(1,650 | ) | (1,627 | ) | (2,830 | ) | (3,351 | ) | ||||||||
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Total other income (expense)
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44,666 | (10,793 | ) | 98,357 | (14,807 | ) | ||||||||||
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Net income before income tax and non-controlling interest
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1,316,489 | 1,283,210 | 2,121,859 | 1,502,489 | ||||||||||||
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Foreign income tax
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(126,789 | ) | - | (214,680 | ) | - | ||||||||||
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Non-controlling interest in consolidated subsidiary
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(70,791 | ) | (259,970 | ) | (134,287 | ) | (367,417 | ) | ||||||||
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Net income
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1,118,909 | 1,023,240 | 1,772,892 | 1,135,072 | ||||||||||||
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Other comprehensive income (loss):
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Unrealized gain (loss) on available-for-sale securities
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- | (210 | ) | - | (1,023 | ) | ||||||||||
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Gain (loss) on foreign currency translation
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339,737 | (674,198 | ) | 571,778 | (462,597 | ) | ||||||||||
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Total other comprehensive income
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339,737 | (674,408 | ) | 571,778 | (463,620 | ) | ||||||||||
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Comprehensive income
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$ | 1,458,646 | $ | 348,832 | $ | 2,344,670 | $ | 671,452 | ||||||||
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Earnings per share-basic and diluted:
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Net income per weighted-average share-basic
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$ | 0.00 | $ | 0.11 | $ | 0.00 | $ | 0.17 | ||||||||
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Net income per weighted-average share-diluted
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$ | 0.00 | $ | 0.07 | $ | 0.00 | $ | 0.11 | ||||||||
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Number of weighted average common shares o/s-basic
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488,754,379 | 9,378,599 | 386,588,624 | 6,610,607 | ||||||||||||
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Number of weighted average common shares o/s-diluted
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513,754,379 | 14,067,899 | 411,588,624 | 9,915,911 | ||||||||||||
See accompanying notes to consolidated financial statements.
2
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China Crescent Enterprises, Inc.
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December 31, 2009 Through June 30, 2010
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(Unaudited)
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Accumulated
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Number of Shares
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Par Value of Shares
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Additional
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Comprehensive
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Retained
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Stockholders'
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Preferred
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Common
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Preferred
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Common
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Paid-In Capital
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Income
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Earnings
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Equity
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STARTING BALANCE, 12/31/09
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250,000 | 234,370,600 | $ | 15 | $ | 234,371 | $ | 5,950,581 | $ | 739,511 | $ | 3,755,468 | $ | 10,679,946 | ||||||||||||||||||
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Common stock issued to settle debt
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155,706,532 | 155,707 | 493,044 | 648,751 | ||||||||||||||||||||||||||||
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Common stock issued for conversion
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of note payable
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151,662,451 | 151,662 | 716,281 | 867,943 | ||||||||||||||||||||||||||||
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Common stock issued for trade payables
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77,135,468 | 77,135 | 249,687 | 326,822 | ||||||||||||||||||||||||||||
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Other comprehensive income
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571,778 | 571,778 | ||||||||||||||||||||||||||||||
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Net income
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1,775,892 | 1,775,892 | ||||||||||||||||||||||||||||||
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ENDING BALANCE, 6/30/10
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250,000 | 618,875,051 | 15 | $ | 618,875 | $ | 7,409,593 | $ | 1,311,289 | $ | 5,531,360 | $ | 14,871,132 | |||||||||||||||||||
See accompanying notes to consolidated financial statements.
3
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China Crescent Enterprises, Inc.
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(Unaudited)
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Six Months Ended June 30,
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2010
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2009
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net income
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$ | 1,772,892 | $ | 1,135,072 | ||||
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Adjustments to reconcile net earnings to net cash
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provided (used) by operating activities:
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Noncontrolling interest in consolidated subsidiary
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134,287 | 367,417 | ||||||
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Depreciation
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27,930 | 6,392 | ||||||
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Changes in operating assets and liabilities:
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(Increase) decrease in accounts receivable
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(2,946,158 | ) | (783,075 | ) | ||||
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(Increase) decrease in advances and other assets
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(358,612 | ) | (226,767 | ) | ||||
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(Increase) decrease in inventory
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119,829 | (276,732 | ) | |||||
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Increase (decrease) in accounts payable
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323,423 | (174,558 | ) | |||||
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Increase (decrease) in accrued expenses and other payables
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1,173,558 | 119,977 | ||||||
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Net cash provided by operating activities
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247,149 | 167,726 | ||||||
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CASH FLOWS FROM INVESTING ACTIVITIES:
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Purchase of property and equipment
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(87,548 | ) | - | |||||
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Net cash used in investing activities
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(87,548 | ) | - | |||||
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CASH FLOWS FROM FINANCING ACTIVITIES:
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Advances to affiliates
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(1,000,000 | ) | (255,193 | ) | ||||
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Proceeds from short-term borrowings
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445,156 | - | ||||||
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Net cash used in financing activities
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(554,844 | ) | (255,193 | ) | ||||
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Effect of exchange rates on cash
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554,026 | (253,836 | ) | |||||
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Net increase (decrease) in cash and equivalents
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158,783 | (341,303 | ) | |||||
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CASH, beginning of period
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3,977,382 | 2,600,498 | ||||||
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CASH, end of period
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$ | 4,136,165 | $ | 2,259,195 | ||||
See accompanying notes to consolidated financial statements.
4
CHINA CRESCENT ENTERPRISES, INC. AND SUBSIDIARIES
June 30, 2010
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES:
Unaudited Interim Financial Statements
The accompanying unaudited interim consolidated financial statements include the accounts of China Crescent Enterprises, Inc. (formerly known as NewMarket China, Inc. or “NewMarket China”) a Nevada corporation (“we”, “our” or the “Company”), and our consolidated subsidiaries. To date, the majority of our sales have been information technology products and services sold within mainland China through our wholly-owned and majority owned foreign subsidiaries. The Company’s headquarters is located in Dallas, Texas.
The Company is a majority-owned subsidiary of NewMarket Technology, Inc. (“NewMarket”), a Dallas, Texas based systems integration company.
In October 2004, we discontinued the operations of Brunetti and implemented steps to liquidate the assets of Brunetti. On March 1, 2005, Brunetti filed a voluntary petition for relief in the United States Bankruptcy Court, District of Colorado under Chapter 7 of Title 7 of the U.S. Bankruptcy Code (Note 3).
In April 2009, we filed a certificate of amendment of our Certificate of Incorporation to (1) increase the number of authorized common shares from two hundred million (200,000,000) to one billion (1,000,000,000); and (2) effect a reverse split of the common stock issued and outstanding on a one new share for twenty-five old shares basis. These actions were effective on May 12, 2009 and the Consolidated Balance Sheet, the Statement of Shareholder’s Equity and information presented in the Notes to the Consolidated Financial Statements have been adjusted to reflect the effect of the reverse stock split.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all information and footnotes required by general accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position at June 30, 2010 and the results of operations and comprehensive income (loss), stockholders’ equity and cash flows for all periods presented. The consolidated results of operations for the three and six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto of the Company included in our annual report on Form 10-K for the year ended December 31, 2009.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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. Certain amounts included in the financial statements are estimated based on currently available information and management's judgment as to the outcome of future conditions and circumstances. Changes in the status of certain facts or circumstances could result in material changes to the estimates used in the preparation of financial statements and actual results could differ from the estimates and assumptions. Management makes estimates and assumptions for, but not limited to, allowance for doubtful accounts, revenue recognition, purchase price allocation, inventory reserves, tax assets and liabilities, depreciation and amortization lives, stock-based compensation, fair value of derivative liabilities, impairment of tangible and intangible assets and other contingencies.
5
Principles of Consolidation
Our consolidated financial statements include the accounts of China Crescent Enterprises, Inc., and all our wholly-owned and majority-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation.
Fair Value of Financial Instruments
On January 1, 2008, we adopted the standard that defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosure about fair value measurements. This standard defines fair value as the amount that would be received upon sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. It also establishes a fair value hierarchy which prioritizes the types of inputs to valuation techniques that companies may use to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1). The next highest priority is given to inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly (Level 2). The lowest priority is given to unobservable inputs in which there is little or no market data available and which require the reporting entity to develop its own assumptions (Level 3).
Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less and money market instruments to be cash equivalents.
Inventory
Inventory, which consists primarily of finished goods, is stated at the lower of cost or market. Cost is determined using the weighted average method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided by use of the accelerated method over the estimated useful lives of the related assets, which range from five to seven years.
Revenue Recognition
We are engaged in the business of resale of computer hardware and software and IT consulting services in the People’s Republic of China (“China”). Revenue from product sales, which accounts for the substantial majority of revenue, is recognized upon delivery. IT Consulting services are invoiced under a time and materials contract. Revenue is recognized as time is spent on hourly rates, which are negotiated with the customer, plus the cost of any allowable material costs and out-of-pocket expenses.
Translation Adjustment
The Chinese Renminbi ("RMB"), the national currency of the China, is the primary currency of the economic environment in which our operations are conducted. We use the United States dollar ("U.S. dollars") for financial reporting purposes. Our results of operations and cash flows are translated at the average exchange rates during the period, assets and liabilities are translated at the exchange rates at the balance sheet dates, and equity is translated at the historical exchange rates. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.
Derivative Instruments
ASC 815-10, Derivatives and Hedging, establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at fair value, and that changes in fair value be recognized currently in earnings (loss) unless specific hedge accounting criteria are met.
6
Stock-Based Compensation
We have two stock option plans which permit the granting of shares to attract, retain and motivate employees, directors and consultants. We record compensation expense for share-based awards issued to employees and directors in exchange for services provided. The amount of the compensation expense is based on the estimated fair value of the awards on their grant dates and is recognized over the requisite service periods. Our share-based awards include stock options, warrants and restricted stock awards. We use the Black-Scholes-Merton option-pricing model (“Black-Scholes”) to measure fair value of these share-based awards. The Black-Scholes model requires us to make significant judgments regarding the assumptions used within the model, the most significant of which are the expected stock price volatility, the expected life of the option award, the risk-free rate of return and dividends during the expected term.
There were no options granted during the six months ended June 30, 2010.
Earnings Per Share
Earnings per share is calculated in accordance with ASC 260-10, Earnings Per Share. Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted-average number of common shares outstanding during the period presented. Diluted net income (loss) per share for the period is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period, increased by potentially dilutive common shares (“dilutive securities”) that were outstanding during the period. Dilutive securities include options granted pursuant to our stock option plan, stock warrants and convertible debt and convertible preferred stock.
Income Taxes
Income taxes are accounted for by the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income (loss) in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized.
Comprehensive Income
Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For the Company, comprehensive income (loss) consists of its net income (loss), the change in the currency translation adjustment.
Recently Issued Accounting Standards
In October 2009, the FASB issued ASU 2009-13, Multiple Deliverable Revenue Arrangements (“ASU 2009-13”) which established guidance for accounting for multiple-deliverable revenue arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable; eliminates the residual method of allocation and requires arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method; and requires a vendor to determine its best estimate selling price in a manner consistent with that used to determine the selling price of the deliverable on a stand-alone basis. This guidance also expands the required disclosures related to a vendor’s multiple-deliverable revenue arrangements. The guidance is effective beginning July 15, 2010 with early adoption permitted. The Company does not believe the adoption of this standard will have a material impact on its results of operations, financial condition, cash flows or disclosures.
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 amends FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (“ASC 820-10”), to require additional disclosures regarding fair value measurements. The amended guidance requires entities to disclose additional information regarding assets and liabilities that are transferred between levels of the fair value hierarchy. This guidance is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. The Company does not expect the adoption of this guidance to have a material impact on its financial statements.
7
2. DESCRIPTION OF BUSINESS:
NewMarket China was formed in 2006 as a wholly-owned subsidiary of NewMarket Technology, Inc. (“NewMarket”), a technology and systems integration company based in Dallas, Texas. Our headquarters is located in Dallas but the primary operations are currently in the People’s Republic of China (“China”). To date, the majority of our sales have been information technology products and services sold within China. These services are provided through our subsidiaries as detailed below:
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·
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Clipper Technology, Ltd. (“CLPTEC”): A Wholly Owned Foreign Entity (“WOFE”) registered in Shanghai, China, which provides consulting, development, implementation, and maintenance of technology systems which include both software and hardware peripherals for computing, communication, and data exchanges related to general business applications as well as the specialty fields of medical, security, military and homeland defense applications. CLPTEC may also engage in the prototype development of security systems as well as OEM sourcing for production of hardware related to the above business activities.
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·
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Clipper Huali Co., Ltd. (“Clipper-Huali”). Clipper-Huali was originally formed as a collaborative business enterprise between ClpTec and a consortium of Chinese technology firms called The Huali Group, Ltd. (“Huali”). Clipper-Huali is registered in the City of Ningbo, China. Effective April 1, 2009, Clipper-Huali is owned 76% by ClpTec and 24% by Huali. Clipper-Huali is engaged in the sales, distribution and integration of IT products including notebook and desktop computers, printers, servers, network equipment, and peripheral devices from a number of global brand partners and is also an authorized reseller of operating systems, database, middleware and other software applications.
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·
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Dalian Aoyuan Electronic Technology Services Co., Ltd. (“DAETS”). DAETS is a wholly-owned subsidiary that was acquired by CLPTEC in December 2009 from Aoyuan Electronic Company, Ltd., located in Dalian, China, which was established in March 1995. Aoyuan is one of the top 500 computer hardware suppliers in China and is listed as one of the “Top 100 Northeast Regional Computer Suppliers” by First Chinese Computer Vendors. In 2004, Aoyuan was awarded “Best IT Distributor of Northeast China” and received ISO9001 certification by SGS in the United Kingdom. Aoyuan’s staff operate several business segments, including computer software and hardware sales, system integration, IT consulting services, IT product promotion and IT retail sales.
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Shenzhen Newbao Technology Co., Ltd. (“Newbao”). Newbao is a wholly-owned subsidiary that was acquired by CLPTEC in December 2009 from China Radio Technology Co., Ltd., an Original Design Manufacturer located in Shenzhen, China, that designs and manufactures a wide range of wireless products specified by customers throughout Asia. The company’s primary product focus involves wireless communication terminals (GSM, GSM/GPRS modules, GPS modules, GPS trackers, and Personal Navigation Devices). The core research and development staff averages more than 5 years of professional experience, and provides customers with industrial design (ID), mechanical design (MD), hardware design (HW), software design (SW), manufacturing, test and evaluation (T&E) , and quality assurance (QA) services covering the full range of wireless communication solutions for intelligent terminals.
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In June 2008, the Company changed its name to China Crescent Enterprises, Inc.
3. DISCONTINUED OPERATIONS:
Brunetti Acquisition
On October 20, 2003, the Company acquired a controlling 60% equity interest in Brunetti in exchange for a $700,000 cash contribution to Brunetti. On January 30, 2004, the Company acquired the remaining 40% equity interest in Brunetti in exchange for a $300,000 cash contribution to Brunetti.
8
On October 11, 2004, the Company discontinued the operations of Brunetti and implemented steps to liquidate the assets of Brunetti. On March 1, 2005, Brunetti filed a voluntary petition for relief in the United States Bankruptcy Court, District of Colorado under Chapter 7 of Title 7 of the U.S. Bankruptcy Code.
At June 30, 2010, the carrying values of Brunetti’s assets and liabilities (presented as assets and liabilities of discontinued operations) are as follows:
|
Cash
|
$ | 9,377 | ||
|
Total assets
(all current)
|
$ | 9,377 | ||
|
Accounts payable
|
$ | 179,473 | ||
|
Related party payable
|
25,035 | |||
|
Line of credit
|
10,735 | |||
|
Accrued payroll
|
93,440 | |||
|
Total liabilities
(all current)
|
$ | 308,683 |
Brunetti reported no revenues or income during the six months ended June 30, 2010. Operations related to Brunetti resulted in a net loss during the year ended December 31, 2009 and 2008 of $0 and $0, respectively. Brunetti did not incur any income taxes during these periods.
4. STOCKHOLDER’S EQUITY:
Common Stock
The Company has authorized 1,000,000,000 shares of $0.001 par value of common stock. The Company had 618,875,051 shares of common stock issued and outstanding at June 30, 2010.
During the second quarter of 2010, we issued 243,119,907 shares of common stock as follows:
|
|
·
|
The Company issued 129,439,625 shares of common stock pursuant to several agreements to exchange $478,975 in short-term debt for equity.
|
|
|
·
|
The Company issued 59,627,751 shares of common stock pursuant to two agreements to exchange $231,990 in trade payables for equity.
|
|
|
·
|
The Company issued 54,052,531 shares of common stock pursuant to an agreement to convert $576,060 of a note payable into equity.
|
Preferred Stock
The Company has authorized 20,000,000 shares of $0.001 par value preferred stock. The rights and privileges of the preferred stock are determined by our Board of Directors prior to issuance.
In November 2009, pursuant to the terms of the Equity Reorganization Agreement between the Company and NewMarket, NewMarket agreed to tender 250,000 shares of Series A Preferred Stock to the Company in exchange for the issuance of 10,000 shares of Series C Convertible Preferred Stock and 5,000 shares of Series D Preferred Stock. The Series C Convertible Preferred Stock bears no dividend and is convertible into 25 million shares of common stock of the Company upon the effectiveness of a registration statement with the Securities and Exchange Commission. The Series D Preferred Stock bears no dividend and the holders have voting rights at all times equal to 51% of the total outstanding shares of our common stock.
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5. STOCK OPTIONS AND WARRANTS:
Stock Options
The Company established a Compensatory Stock Option Plan (the “1995 Plan” or the “Option Plan”) and had reserved 400,000 shares of common stock for issuance under the Option Plan. Incentive stock options were granted under the Option Plan at prices not less than 110% of the fair market value of the stock at the date of grant, and nonqualified options were granted at not less than 50% of the stock’s fair market value at the date of grant or the date the exercise price of any such option is modified. Vesting provisions were determined by the Board of Directors. All stock options expire 10 years from the date of grant.
The following table summarizes information about stock options outstanding as of June 30, 2010:
|
Options Outstanding
|
Options Exercisable
|
|||||||||||||
|
Range of
Exercise Prices
|
Number of
Options
|
Remaining
Contractual Life
|
Weighted Average Exercise Price
|
Number of
Options
|
Exercise Price
|
|||||||||
| $3.50-12.75 | 190,000 |
3-4 years
|
$10.86 | 190,000 | $3.50-12.75 | |||||||||
In August 2008, we established a Stock Option and Award Plan (the “2008 Plan”) and reserved 400,000 shares of common stock for issuance under the 2008 Plan. Under the 2008 Plan, incentive stock options are granted at prices not less than 100% of the fair market value of the stock at the date of grant, and nonqualified options are granted at prices determined by the Board of Directors. Vesting provisions are determined by our Board of Directors. There have been no grants made under the 2008 Plan as of June 30, 2010.
Warrants
At June 30, 2010, there were no warrants to purchase common stock outstanding.
6 - SEGMENT INFORMATION:
Operating segments are defined as components of an enterprise about which separate financial information is available, where the chief operating decision-maker evaluates regularly in determining allocation of resources and assessing performance. We have determined that we do not have any separately reportable operating segments and therefore operate and evaluate our business as one reporting unit.
7. SUBSEQUENT EVENTS:
We have evaluated subsequent events from the balance sheet date through the date the financial statements were issued. We are not aware of any subsequent events which would require recognition or disclosure in the financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Safe Harbor for Forward-Looking Statements
The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this report.
Information contained herein contains forward-looking statements, You should not place undue reliance on those statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Forward-looking statements include information concerning our possible and assumed future results of operations, including descriptions of our business strategy. The statements often include words such as “may,” “will,” “should,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or other similar expressions. These statements are based on assumptions that we have made in light of our experience and well as perceptions of historical trends, current conditions, expected future developments, and other factors we believe are appropriate under the circumstances. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financials results or results of operations and could cause actual results to differ materially from those on the forward-looking statements. These factors include, but are not limited to, competition from existing and future competitors, failure to maintain and develop business, failure to increase or maintain the number of customers we have, downturns in the economies and/or industries that we serve, and the failure to attract or keep qualified professionals we employ. These factors and others discussed in detail in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” You should keep in mind that any forward-looking statements made by us herein, or elsewhere, speaks only as of the date on which we made it. New risks and uncertainties come up from time to time, and it is impossible for us to predict these events or how they may affect us. We have no obligation to update any forward-looking statements after the date hereof, except as required by federal securities laws.
Links to all of our filings, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, information statements and other material information concerning us are available on the Investor Relations page of our website at www.ChinaCrescent.com .
Critical accounting policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Our management evaluates these estimates on an on-going basis including those related to the collection of accounts receivable, inventory, sales returns, and non-monetary transactions such as stock-based compensation, impairment of intangible assets and derivative liabilities. Actual results may differ from these estimates. A discussion of critical accounting policies and the related judgments and estimates affecting the preparation of the consolidated financial statements is included in our Annual Report on our Form 10-K for the year ended December 31, 2009, as filed with the Securities and Exchange Commission. There have been no material changes to these critical accounting policies as of June 30, 2010.
Plan of Operations
In February 2010, Paul K. Danner resigned as our Chief Executive Officer and a Director and Dr. James Jiang was appointed President and Chief Executive Officer of the Company.
In March 2010, we executed a non-binding letter of intent (the “Fonix LOI”) under which CLPTEC, our wholly-owned subsidiary based in Shanghai, China, would acquire 100% of Shanghai Gaozhi Software Systems, Ltd. (“Gaozhi”), a telecommunications software developer, from Fonix Corporation (“Fonix”) in exchange for the issuance of a newly authorized series of preferred stock, the terms and conditions of which are subject to negotiation. The transaction is subject to the parties successfully entering into a definitive agreement. It is anticipated that this transaction will close in the third quarter of 2010.
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Simultaneous with the execution of the Fonix LOI, we entered into a one-year management agreement with Fonix under which CLPTEC will assist in the management of Gaozhi until the execution of a definitive agreement between the parties for the acquisition of Gaozhi by CLPTEC.
Results of Operations
Three months ended June 30, 2010 compared to three months ended June 30, 2009:
Net sales increased 75% from $9,556,566 for the quarter ended June 30, 2009 to $16,719,095 for the quarter ended June 30, 2010. The increase is attributable to sales associated with our new DAETS and Newbao subsidiaries. Cost of sales increased 88% from $7,942,007 for the quarter ended June 30, 2009 to $14,909,148 for the quarter ended June 30, 2010. This increase was due to of the corresponding increase in sales volume. Cost of sales, as a percentage of revenue was approximately 89% and 83% for the three months ended June 30, 2010 and 2009, respectively. We are pursuing strategies to reduce the overall cost of sales as a percentage of sales as the Company grows, such as entering into higher margin outsourcing agreements.
General and administrative expenses during the three months ended June 30, 2010 were $522,759 compared to $315,314 for the three months ended June 30, 2009, an increase of 66%. The increase is primarily attributable to expenses associated with our new DAETS and Newbao subsidiaries which were acquired in the fourth quarter of 2009. General and administrative expenses as a percentage of revenue were 3% and 3% for the three months ended June 30, 2010 and 2009, respectively.
During the three months ended June 30, 2010, we recognized net income of $1,118,909 after accounting for the non-controlling interest in our Clipper-Huali consolidated subsidiary, compared to net income of $1,023,240 during the three months ended June 30, 2009, a 9% increase. The increase in net income is attributable to an increase in net sales for the quarter. Comprehensive income for the three months ended June 30, 2010 was $1,458,646 compared to $348,832 for three months ended June 30, 2009. Comprehensive income or loss includes gains or losses in foreign currency translation adjustments and unrealized gains or losses (if any) on available-for-sale securities held.
Six months ended June 30, 2010 compared to six months ended June 30, 2009:
Net sales increased 87% from $16,985,874 for the six months ended June 30, 2009 to $31,706,314 for the six months ended June 30, 2010. The increase is attributable to sales associated with our new DAETS and Newbao subsidiaries. Cost of sales increased 93% from $14,932,862 for the six months ended June 30, 2009 to $28,794,214 for the six months ended June 30, 2009. This increase was due to of the corresponding increase in sales volume. Cost of sales, as a percentage of revenue was approximately 91% and 88% for the six months ended June 30, 2010 and 2009, respectively.
General and administrative expenses during the six months ended June 30, 2010 were $860,668 compared to $529,324 for the six months ended June 30, 2009, an increase of 63%. The increase is primarily attributable to expenses associated with our new DAETS and Newbao subsidiaries which were acquired in the fourth six months of 2009. General and administrative expenses as a percentage of revenue were 3% and 3% for the six months ended June 30, 2010 and 2009, respectively.
During the six months ended June 30, 2010, we recognized net income of $1,772,892 after accounting for the non-controlling interest in our Clipper-Huali consolidated subsidiary, compared to net income of $1,135,072 during the six months ended June 30, 2009, a 56% increase. The increase in net income is attributable to an increase in net sales for the quarter. Comprehensive income for the six months ended June 30, 2010 was $2,344,670 compared to $671,452 for six months ended June 30, 2009. Comprehensive income or loss includes gains or losses in foreign currency translation adjustments and unrealized gains or losses (if any) on available-for-sale securities held.
Liquidity and Capital Resources
Our cash balance at June 30, 2010 increased $158,783, from $3,977,382 as of December 31, 2009, to $4,136,165. The increase was the result of cash provided by operating activities of $247,149 and the effect of exchange rates on cash of $554,026, offset by cash used in investing activities of $87,548 and cash used in financing activities of $554,844. Operating activities for the six months ended June 30, 2010, exclusive of changes in operating assets and liabilities, provided $1,935,109, as well as an increase in accrued expenses and other payables of $1,173,558, an increase in accounts payable of $323,423 and a decrease in inventory of $119,829, offset by an increase in accounts receivable $2,946,158 and a decrease in supplier advances of $358,612.
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In recent years, we have funded our working capital requirements principally through borrowings under bank lines of credit, term loans, and issuances of common stock in exchange for debt. To the extent our operations are not sufficient to fund our capital requirements, we may enter into additional revolving loan agreements with a financial institution, or attempt to raise additional capital through the sale of additional common or preferred stock or through the issuance of additional debt. To the extent that we raise additional capital or settle existing liabilities through the sale or issuance of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring debt, making capital expenditures or declaring dividends. The current financing environment in the United States is exceptionally challenging and we can provide no assurances that we could raise capital either for operations or to finance an acquisition.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.
Impact of Inflation
We believe that inflation has not had a material impact on our results of operations for the three and six months ended June 30, 2010 and 2009
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in foreign currency exchange rates, including fluctuations in the functional currency of foreign operations. The functional currency of operations outside the United States is the respective local currency. Foreign currency translation effects are included in accumulated comprehensive income in shareholder’s equity. We do not utilize derivative financial instruments to manage foreign currency fluctuation risk.
Item 4T. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (1) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure; and (2) recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. There was no change to our internal controls or in other factors that could affect these controls during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Changes in Internal Control Over Financial Reporting
There was no change to our internal controls or in other factors that could affect these controls during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
13
None.
Item 1A. Risk Factors
As of June 30, 2010, there have been no material changes to the risk factors disclosed in Part I, Item 1 to our annual report on Form 10-K for the year ended December 31, 2009.
None.
None.
None.
None.
The following is a complete list of exhibits filed as part of this Form 10-Q:
|
Exhibit 31.1
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Exhibit 31.2
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Exhibit 32.1
|
Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 as enacted by Section 906 of the Sarbanes-Oxley Act of 2002
|
14
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 CRESCENT ENTERPRISES, INC.
|
|||
|
|
(Registrant)
|
||
|
Date: August 18, 2010
|
|
/s/ James Jiang
|
|
|
|
James Jiang, PhD
|
||
|
|
Chief Executive Officer
|
||
|
|
/s/ Philip J. Rauch
|
||
|
|
Philip J. Rauch,
|
||
|
|
Chief Financial Officer
|
15