Attached files
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| EX-32.1 - EXHIBIT 32.1 - China Crescent Enterprises, Inc. | a6731942_ex321.htm |
| EX-31.2 - EXHIBIT 31.2 - China Crescent Enterprises, Inc. | a6731942_ex312.htm |
| EX-31.1 - EXHIBIT 31.1 - China Crescent Enterprises, Inc. | a6731942_ex311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-14306
CHINA CRESCENT ENTERPRISES, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Nevada
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84-0928627
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(State or other jurisdiction of
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(I.R.S. employer
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incorporation or organization)
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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 o
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Accelerated Filer o
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Non-Accelerated Filer o
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Smaller Reporting Company þ
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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 2,977,352,624 shares of Common Stock outstanding as of May 20, 2011.
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PART I – FINANCIAL INFORMATION
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Page No.
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3
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China Crescent Enterprises, Inc.
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ASSETS
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March 31, 2011
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December 31, 2010
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(Unaudited)
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CURRENT ASSETS
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Cash and cash equivalents
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$ | 1,765,633 | $ | 2,149,733 | ||||
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Accounts receivable
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14,978,232 | 13,441,035 | ||||||
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Inventory
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1,810,422 | 1,973,101 | ||||||
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Supplier advances and prepaid expenses
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4,278,020 | 2,951,443 | ||||||
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Advances to affiliate
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5,301,000 | 5,300,000 | ||||||
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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 | 162,721 | ||||||
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Total current assets
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28,305,405 | 25,987,410 | ||||||
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PROPERTY AND EQUIPMENT, NET
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159,994 | 168,869 | ||||||
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GOODWILL
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1,820,267 | 1,820,267 | ||||||
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INTANGIBLE ASSETS
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2,283 | 2,201 | ||||||
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Total assets
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$ | 30,287,949 | $ | 27,978,747 | ||||
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LIABILITIES AND EQUITY
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CURRENT LIABILITIES
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Accounts payable
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$ | 1,675,866 | $ | 1,222,225 | ||||
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Short-term borrowing
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1,685,240 | 3,648,199 | ||||||
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Accrued expenses and other liabilities
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3,262,514 | 762,592 | ||||||
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Liabilities of discontinued operations
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215,243 | 215,243 | ||||||
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Total current liabilities
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6,838,863 | 5,848,259 | ||||||
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Long-term debt
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503,401 | 386,414 | ||||||
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Total liabilities
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7,342,264 | 6,234,673 | ||||||
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EQUITY
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China Crescent Enterprises, Inc. shareholders' equity:
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Common stock; $.001 par value; 3,000,000,000 shares authorized;
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2,977,352,624 and 1,493,641,196 shares issued and outstanding
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at March 31, 2011 and December 31, 2010, respectively
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2,977,352 | 1,493,641 | ||||||
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Preferred stock; $.001 par value; 20,000,000 shares authorized;
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Series C 10,000 and 10,000; Series D 5,000 and 5,000 shares
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issued and outstanding at March 31, 2011 and
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December 31, 2010, respectively
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15 | 15 | ||||||
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Additional paid-in capital
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7,980,860 | 8,680,611 | ||||||
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Accumulated comprehensive income
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1,188,859 | 973,004 | ||||||
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Retained earnings
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8,193,376 | 7,956,899 | ||||||
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Total China Crescent Enterprises, Inc. stockholders' equity
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20,340,462 | 19,104,170 | ||||||
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Noncontrolling interest
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2,605,223 | 2,639,904 | ||||||
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Total equity
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22,945,685 | 21,744,074 | ||||||
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Total liabilities and equity
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$ | 30,287,949 | $ | 27,978,747 | ||||
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See accompanying notes to consolidated financial statements.
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1
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China Crescent Enterprises, Inc.
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(Unaudited)
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Three Months Ended March 31,
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2011
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2010
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REVENUE
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14,889,592 | 14,987,219 | ||||||
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COST OF SALES
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14,020,502 | 13,885,066 | ||||||
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Gross Margin
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869,090 | 1,102,153 | ||||||
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OPERATING EXPENSES
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Selling, general and administrative expenses
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511,301 | 337,909 | ||||||
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Depreciation and amortization
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15,167 | 12,565 | ||||||
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Total expenses
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526,468 | 350,474 | ||||||
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Income (loss) from operations
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342,622 | 751,679 | ||||||
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OTHER INCOME (EXPENSE)
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Interest income
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- | - | ||||||
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Interest expense
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(21,676 | ) | (30,323 | ) | ||||
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Other income
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10,404 | 85,194 | ||||||
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Other expense
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- | (1,180 | ) | |||||
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Total other income (expense)
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(11,272 | ) | 53,691 | |||||
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Net income before income tax and non-controlling interest
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331,350 | 805,370 | ||||||
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Foreign income tax
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129,555 | 84,891 | ||||||
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Non-controlling interest in consolidated subsidiary
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(34,681 | ) | 63,496 | |||||
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Net income
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236,476 | 656,983 | ||||||
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Other comprehensive income:
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Gain on foreign currency translation
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215,855 | 232,041 | ||||||
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Total other comprehensive income
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215,855 | 232,041 | ||||||
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Comprehensive income
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$ | 452,331 | $ | 889,024 | ||||
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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 | $ | 0.00 | ||||
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Net income per weighted-average share-diluted
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$ | 0.00 | $ | 0.00 | ||||
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Number of weighted average common shares o/s-basic
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2,459,868,916 | 283,287,693 | ||||||
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Number of weighted average common shares o/s-diluted
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3,000,000,000 | 308,287,693 | ||||||
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See accompanying notes to consolidated financial statements.
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China Crescent Enterprises, Inc.
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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, 12/31/10
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15,000 | 1,493,641,196 | $ | 15 | $ | 1,493,641 | $ | 8,680,611 | $ | 973,004 | $ | 7,956,899 | $ | 19,104,170 | ||||||||||||||||||
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Common stock issued for conversion
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of notes payable
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1,218,131,428 | 1,218,131 | (568,882 | ) | 649,249 | |||||||||||||||||||||||||||
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Common stock issued for trade payables
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265,580,000 | 265,580 | (130,869 | ) | 134,711 | |||||||||||||||||||||||||||
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Other comprehensive income
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215,855 | 215,855 | ||||||||||||||||||||||||||||||
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Net income
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236,476 | 236,476 | ||||||||||||||||||||||||||||||
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ENDING BALANCE, 3/31/11
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15,000 | 2,977,352,624 | 15 | $ | 2,977,352 | $ | 7,980,860 | $ | 1,188,859 | $ | 8,193,375 | $ | 20,340,461 | |||||||||||||||||||
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See accompanying notes to consolidated financial statements.
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China Crescent Enterprises, Inc.
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(Unaudited)
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Three Months Ended March 31,
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2011
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2010
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net income
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$ | 236,477 | $ | 656,983 | ||||
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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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(34,681 | ) | 63,496 | |||||
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Depreciation
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15,167 | 12,565 | ||||||
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Changes in operating assets and liabilities:
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(Increase) decrease in accounts receivable
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(1,537,197 | ) | (1,335,513 | ) | ||||
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(Increase) decrease in advances and other assets
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(1,326,577 | ) | (782,828 | ) | ||||
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(Increase) decrease in inventory
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162,679 | (216,558 | ) | |||||
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Increase (decrease) in accounts payable
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453,641 | 476,249 | ||||||
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Increase (decrease) in accrued expenses and other payables
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2,499,922 | 651,293 | ||||||
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Net cash provided by/(used in) operating activities
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469,431 | (474,313 | ) | |||||
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CASH FLOWS FROM INVESTING ACTIVITIES:
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Advances to affiliates
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(1,000 | ) | (500,000 | ) | ||||
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Purchase of property and equipment
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- | (4,528 | ) | |||||
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Net cash used in investing activities
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(1,000 | ) | (504,528 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES:
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Proceeds from short-term borrowings
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- | 205,256 | ||||||
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Payments on short-term borrowing
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(1,313,710 | ) | - | |||||
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Proceeds from long-term debt
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116,987 | - | ||||||
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Net cash provided by/(used in) financing activities
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(1,196,723 | ) | 205,256 | |||||
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Effect of exchange rates on cash
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344,192 | 215,812 | ||||||
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Net decrease in cash and equivalents
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(384,100 | ) | (557,773 | ) | ||||
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CASH, beginning of period
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2,149,733 | 3,977,382 | ||||||
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CASH, end of period
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$ | 1,765,633 | $ | 3,419,609 | ||||
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
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Interest paid in cash
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$ | 21,676 | $ | 30,323 | ||||
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Non-Cash Financing Activities:
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Common stock issued to settle debt
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$ | 649,249 | $ | 745,836 | ||||
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Common stock issued to settle trade payables
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$ | 134,711 | $ | 94,833 | ||||
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See accompanying notes to consolidated financial statements.
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4
CHINA CRESCENT ENTERPRISES, INC. AND SUBSIDIARIES
March 31, 2011
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.
We are a majority-owned subsidiary of NewMarket Technology, Inc. (“NewMarket”), a Dallas, Texas based systems integration company.
In April 2009, we filed a certificate of amendment of our Articles 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.
In October 2010, we filed a Definitive Information Statement on Schedule 14C indicating that the Board of Directors had authorized an amendment to our Articles of Incorporation to increase the number of authorized common shares from one billion (1,000,000,000) to three billion (3,000,000,000). This action was passed by written consent of our majority shareholder and was effective on November 15, 2010.
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 March 31, 2011 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 months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. 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, 2010.
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.
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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.
Intangibles
Accounting Standards Codification (“ASC”) 350-10, Intangibles-Goodwill and Other, requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provision of ASC 350. This standard also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment.
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.
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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.
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 three months ended March 31, 2011.
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 December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-28 which amends “Intangibles- Goodwill and Other” (Topic 350). The ASU modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting entities, they are required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. An entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance in Topic 350, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances changes that would more likely than not reduce the fair value of a reporting unit below its carrying amount. ASU 2010-28 is effective for fiscal years, and interim periods within those years beginning after December 15, 2010. Early adoption is not permitted. We are currently evaluating the impact of this ASU; however, we do not expect the adoption of this ASU will have a material impact on our consolidated financial statements.
7
In December 2010, the FASB issued ASU 2010-29 which addresses diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations (Topic 805). This ASU specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. This ASU also expands the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. We are currently evaluating the impact of this ASU and what effect expected the adoption of this ASU will have an impact on our future business combinations, if any.
2. DESCRIPTION OF BUSINESS:
Our headquarters is located in Dallas, Texas but our primary operations are currently in The People’s Republic of China (“China” or “PRC”). To date, the majority of our revenue has been derived from the resale of information technology products, as well as providing certain technology-related services within mainland China. Through a recent acquisition the Company has expanded into the original design manufacturing (ODM) market. An ODM designs and manufactures products which are specified and eventually branded by another firm for sale. Such ODM companies allow the brand firm to produce (either as a supplement or solely) without having to engage in the organization or running of a factory. ODM's typically handle production for multiple clients, often providing a large portion of overall production. A primary attribute of this business model is that the ODM owns and/or designs in-house the products that are branded by the buying firm which is in contrast to a contract manufacturer (CM). This business model is often employed in international trade, where a local ODM is used to produce goods for a foreign company which benefits from some advantage in the transaction, such as low labor inputs, transport links or proximity to markets. ODM manufacturing may also be utilized when local ownership laws prohibit direct ownership of assets by foreigners, allowing a local firm to produce for a brand company for either the domestic market or export.
Beyond the recent inclusion of our ODM business, we also continue to explore the possibility of establishing worldwide business relationships with customers that may involve:
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Outsourcing of software development in China
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Expansion within the Chinese marketplace
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Localization of products and/or services
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Identification of complimentary products in China
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Export of products manufactured in China
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We provide these products and services through our subsidiaries and partnerships, as discussed below.
Clipper Technology, Ltd. (“CLPTEC”). CLPTEC, a Wholly Owned Foreign Entity (W.O.F.E.) registered in Shanghai, China, is our main operating subsidiary. Chinese companies must be registered in the specific market they intend to operate in. CLPTEC’s corporate charter in China allows the Company to provide 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 original equipment manufacturing (“OEM”) sourcing for production of hardware related to the above business activities.
Clipper Huali Co., Ltd. (“Clipper Huali”). Clipper Huali was originally formed as a collaborative business venture between CLPTEC and a consortium of Chinese technology firms called The Huali Group, Ltd. (“Huali”). Such ventures in China are required to be registered companies. In 2006, CLPTEC and Huali formalized our business relationship with the formation of Clipper Huali. Clipper Huali is registered in the City of Ningbo, China, located just south of Shanghai on the opposite side of the Hangzhou Bay. By virtue of its registration as an independent firm, Clipper Huali is a now a majority-owned subsidiary of CLPTEC and was initially owned 51% by CLPTEC and 49% by Huali. Clipper Huali is a value-added reseller of IT products including notebook and desktop computers, printers, servers and networking equipment from a number of global brand partners including Dell, HP, IBM, Cisco, Sony, Epson, Canon and Sanyo. The company is also an authorized reseller of operating systems, database, middleware and application software from Microsoft, Red Hat, Oracle, Sybase, IBM, BEA, Veritas and others. In March 2009, CLPTEC acquired an additional 25% interest in Clipper Huali from Huali in exchange for the issuance of 750 shares of Series B Convertible Preferred Stock of the Company, bringing CLPTEC’s total ownership in Clipper Huali to 76% and reducing Huali’s ownership interest to 24%.
8
Gaozhi Science and Technology Development, Ltd. (“Gaozhi”). In 2006, CLPTEC formed a strategic partnership with Gaozhi to develop and distribute high technology products and services. Our primary office in mainland China is located in the same building as Gaozhi. Gaozhi is a well established technology company in Shanghai, China. Gaozhi operates in many high technology markets including the manufacture of mobile communication vehicles, low-energy intelligent lighting products, satellite data communications, telecommunications software, and IP television. We have partnered with Gaozhi to develop foreign sales for several of Gaozhi’s products and services.
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. 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.
Shenzhen Nubao Technology Co. Ltd. (“Nubao”). Nubao is a wholly-owned subsidiary acquired by CLPTEC in December 2009 from China Radio Technology Co., Ltd., an original design manufacturer located in Shenzhen, China. Nubao designs and manufactures a wide range of custom wireless products specified by customers worldwide, with the company’s primary product focus on wireless communication terminals (GSM, GSM/GPRS modules, GPS modules, GPS trackers, and personal navigation devices). The core research and development staff of Nubao averages more than five 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.
3. DISCONTINUED OPERATIONS:
Brunetti Acquisition
On October 20, 2003, we acquired a controlling 60% equity interest in Brunetti in exchange for a $700,000 cash contribution to Brunetti. On January 30, 2004, we acquired the remaining 40% equity interest in Brunetti in exchange for a $300,000 cash contribution to Brunetti.
On October 11, 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.
At March 31, 2011, 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 | |||
|
Total liabilities
(all current)
|
$ | 215,243 |
Brunetti reported no revenues or income during the three months ended March 31, 2011.
9
4. NON-CONTROLLING INTEREST:
Non-controlling interest represents the minority stockholder’s proportionate share of equity in our Clipper-Huali subsidiary. As of March 31, 2011, we owned 76% of the capital stock of Clipper-Huali, representing voting control and a majority interest. Our controlling ownership interest requires that Clipper-Huali’s operations be included in the Condensed Consolidated Financial Statements contained herein. The 24% equity interest that is not owned by us is shown as “Non-controlling interest in consolidated subsidiary” in the Consolidated Statement of Operations and the Consolidated Balance Sheet. As of March 31, 2011, The Huali Group, Ltd., our minority interest partner, held a $2,605,223 interest in the net asset value of our Clipper-Huali subsidiary.
5. NOTES PAYABLE AND CREDIT FACILITIES:
SHORT-TERM DEBT
As of March 31, 2011, the Company had an unsecured promissory note outstanding with an investor:
|
Annual
|
Principal
|
||||||||
|
Interest
|
Maturity
|
Outstanding
|
|||||||
|
Note
|
Rate
|
Date
|
at 3/31/11
|
||||||
| 1 | 8% |
6/15/11
|
$ | 285,000 | |||||
LONG-TERM DEBT
As of March 31, 2011, the Company’s Clipper-Huali subsidiary had an unsecured promissory note outstanding with a financial institution in China:
|
Annual
|
Principal
|
||||||||
|
Interest
|
Maturity
|
Outstanding
|
|||||||
|
Institution
|
Rate
|
Date
|
at 3/31/11
|
||||||
|
Shanghai Pudong Development Bank
|
(1) |
6/21/14
|
$ | 400,901 | |||||
|
|
(1)
|
The interest rate for this note is variable based on an official government rate. At March 31, 2011, the annual interest rate was approximately 5%.
|
CONVERTIBLE LONG-TERM DEBT
As of March 31, 2011, the Company had an unsecured convertible promissory note outstanding with an investor:
|
Annual
|
Principal
|
||||||||
|
Interest
|
Maturity
|
Outstanding
|
|||||||
|
Note
|
Rate
|
Date
|
at 3/31/11
|
||||||
| 1 | 6% |
5/3/13
|
$ | 125,000 | |||||
|
|
(1)
|
The note is convertible into shares of common stock of the Company based the average of the three lowest closing prices of the stock during the twenty trading days prior and including the date of conversion. The holder of the notes can only convert a portion of the principal such that at no time does their beneficial ownership exceed 9.99% of the outstanding shares of common stock of the Company. At March 31, 2011, such a conversion would have represented 156,250,000 shares of common stock.
|
LINES OF CREDIT
As of March 31, 2011, the Company’s Clipper-Huali subsidiary had several revolving lines of credit outstanding with two financial institutions in China. These credit lines are secured by the outstanding accounts receivable and inventory of this subsidiary.
10
|
Annual
|
Amount
|
||||||||
|
Interest
|
Maturity
|
Outstanding
|
|||||||
|
Institution
|
Rate
|
Date
|
at 3/31/11
|
||||||
|
Hangzhou United Commerical Bank
|
7.92% |
3/22/12
|
$ | 106,540 | |||||
|
Shanghai Pudong Development Bank
|
5.31% |
11/27/11
|
$ | 989,300 | |||||
|
Bank of Ningbo
|
5.31% |
6/24/11
|
$ | 304,400 | |||||
|
Total:
|
$ | 1,400,240 | |||||||
6. STOCKHOLDER’S EQUITY:
Common Stock
We have authorized 3,000,000,000 shares of $0.001 par value of common stock. We had 2,977,352,624 shares of common stock issued and outstanding at March 31, 2011.
During the first quarter of 2011, we issued 1,483,711,428 shares of common stock as follows:
| ● | We issued 1,127,350,847 shares of common stock pursuant to the conversion of notes payable into shares of common stock |
| ● |
We issued 356,360,581 shares of common stock pursuant to two agreements to exchange $186,357 in trade payables for equity.
|
Preferred Stock
We have 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. 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.
7. 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 March 31, 2011.
|
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 |
2-3 years
|
$10.86 | 190,000 | $3.50-12.75 | |||||||||||
11
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 March 31, 2011.
Warrants
At March 31, 2011, there were no warrants to purchase common stock outstanding.
8. INTANGIBLES:
Our intangible assets consist primarily of goodwill related to acquisitions. None of our intangible assets are subject to amortization. We determined that, as of March 31, 2011, there have been no significant events which may affect the carrying value of our intangible assets, therefore no impairment charge was recorded during the three-months ended March 31, 2011.
9. FAIR VALUE MEASUREMENT
We have adopted the provisions of ASC 820-10, Fair Value Measurements and Disclosures, with respect to our non-financial assets and liabilities effective January 1, 2009. The adoption of ASC 820-10 did not have a material impact on our consolidated financial statements.
10. 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.
11. SUBSEQUENT EVENTS:
In April 2011, we entered into a non-binding Letter-of-Intent to sell our Shenzhen-based Nubao subsidiary to NuMobile, Inc. The prospective transaction is subject to the negotiation of final terms and conditions, the completion of reasonable and customary due diligence, and the issuance of a fairness opinion by a qualified third-party valuation firm.
12
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, 2010 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, 2010, as filed with the Securities and Exchange Commission. There have been no material changes to these critical accounting policies as of March 31, 2011.
Plan of Operations
We sell information technology products and services and provide systems integration services in mainland China through our wholly-owned foreign entity, Clipper Technology, Ltd. The majority of our sales are concentrated in and around the cities of Shanghai, Ningbo, Hangzhou, Dalian, and Shenzhen in China.
As part of a strategy to enhance shareholder value, we recently announced that we are contemplating a plan under which we would sell one or more of our subsidiary operations to a third party which would potentially create a cash or stock dividend distribution to our shareholders and a financial interest in the third party. As part of this plan, in April 2011, we entered into a non-binding Letter-of-Intent to sell our Shenzhen-based Nubao subsidiary to NuMobile, Inc. The prospective transaction is subject to the negotiation of final terms and conditions, the completion of reasonable and customary due diligence, and the issuance of a fairness opinion by a qualified third-party valuation firm.
13
Results of Operations
Three months ended March 31, 2011 compared to three months ended March 31, 2010:
Net sales decreased 1% from $14,987,219 for the quarter ended March 31, 2010 to $14,889,592 for the quarter ended March 31, 2011. Sales for the quarter in all of our operating subsidiaries were essentially flat compared to the prior year. Cost of sales increased 1% from $13,885,066 for the quarter ended March 31, 2010 to $14,020,502 for the quarter ended March 31, 2011. Cost of sales, as a percentage of revenue was approximately 94% and 93% for the three months ended March 31, 2011 and 2010, respectively. This slight increase was a result of competitive pricing pressures in our Clipper-Huali systems integration subsidiary.
General and administrative expenses during the three months ended March 31, 2011 were $511,301 compared to $337,909 for the three months ended March 31, 2010, an increase of 51%. The increase is primarily attributable to expenses associated with our new DAETS and Nubao subsidiaries which were acquired in the fourth quarter of 2009. General and administrative expenses as a percentage of revenue were 3% and 2% for the three months ended March 31, 2011and 2010, respectively.
During the three months ended March 31, 2011, we recognized net income of $236,476 after accounting for the non-controlling interest in our Clipper-Huali consolidated subsidiary, compared to net income of $656,983 during the three months ended March 31, 2010, a 64% decrease. The decrease in net income is attributable to a lower gross margin and higher general and administrative expenses for the three months ended March 31, 2011 compared to the same period last year. Comprehensive income for the three months ended March 31, 2011 was $452,331 compared to $889,024 for three months ended March 31, 2010. 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 March 31, 2011 decreased $384,100, from $2,149,733 as of December 31, 2010, to $1,765,633. The decrease was the result of cash used in financing activities of $1,196,723 and cash used in investing activities of $1,000, offset by cash provided by operating activities of $469,431 and the effect of exchange rates on cash of $344,192. Operating activities for the three months ended March 31, 2011, exclusive of changes in operating assets and liabilities, provided $216,963, as well as an increase in accrued expenses and other payables of $2,499,922, an increase in accounts payable of 453,641 and an decrease in inventory of $162,679, offset by an increase in accounts receivable $1,537,197 and an increase in supplier advances of $1,326,577.
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 months ended March 31, 2011 and 2010.
14
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.
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.
None.
As of March 31, 2011, 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, 2010.
Set forth below is information regarding the issuance and sale of our securities without registration during the three month period ended March 31, 2011:
|
|
●
|
We issued 1,127,350,847 shares of common stock pursuant to the conversion of notes payable into shares of common stock
|
|
|
●
|
We issued 356,360,581 shares of common stock pursuant to two agreements to exchange $186,357 in trade payables for equity.
|
We received no proceeds from the issuance of these securities.
None.
15
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
|
16
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: May 20, 2011
|
/s/ James Jiang
|
|
James Jiang, PhD
|
|
|
Chief Executive Officer
|
|
|
/s/ Philip J. Rauch
|
|
|
Philip J. Rauch,
|
|
|
Chief Financial Officer
|
17