China Crescent Enterprises, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.2 - EXHIBIT 31.2 - China Crescent Enterprises, Inc.	a6836225ex31_2.htm
EX-32.1 - EXHIBIT 32.1 - China Crescent Enterprises, Inc.	a6836225ex32_1.htm
EX-31.1 - EXHIBIT 31.1 - China Crescent Enterprises, Inc.	a6836225ex31_1.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 June 30, 2011

[ ]	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)

Nevada	84-0928627
(State or other jurisdiction of	(I.R.S. employer
incorporation or organization)	identification number)

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.

	Large Accelerated Filer o	Accelerated Filer o
	Non-Accelerated Filer o	Smaller Reporting Company þ

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 August 22, 2011.

PART I – FINANCIAL INFORMATION			Page No.

Item 1.	Consolidated Financial Statements

	Consolidated Balance Sheets –
		June 30, 2011 and December 31, 2010	1

	Consolidated Statements of Operations –
		Three and Six Months Ended June 30, 2011 and 2010	2

	Consolidated Statement of Changes in Equity –
		December 31, 2010 through June 30, 2011	3

	Consolidated Statements of Cash Flows –
		Six Months Ended June 30, 2011 and 2010	4

	Notes to Condensed Consolidated Financial Statements		5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		15

Item 4T.	Controls and Procedures		15


PART II – OTHER INFORMATION

Item 1.	Legal Proceedings – Not Applicable		15

Item 1a.	Risk Factors		16

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		16

Item 3.	Defaults Upon Senior Securities – Not Applicable		16

Item 4.	Submission of Matters to a Vote of Security Holders		16

Item 5.	Other Information – Not Applicable		16

Item 6.	Exhibits		16


SIGNATURES			17

Item 1. Financial Statements

China Crescent Enterprises, Inc.
Consolidated Balance Sheet

ASSETS	June 30, 2011		December 31, 2010
	(Unaudited)
CURRENT ASSETS
Cash and cash equivalents	$	2,395,556	$	2,149,733
Accounts receivable		15,174,438		13,441,035
Inventory		2,151,614		1,973,101
Supplier advances and prepaid expenses		4,232,323		2,951,443
Advances to affiliate		5,301,000		5,300,000
Assets of discontinued operations		9,377		9,377
Other current assets		162,721		162,721
Total current assets		29,427,029		25,987,410

PROPERTY AND EQUIPMENT, NET		162,828		168,869
GOODWILL		1,820,267		1,820,267
INTANGIBLE ASSETS		2,738		2,201

Total assets	$	31,412,862	$	27,978,747

LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable	$	2,214,181	$	1,222,225
Short-term borrowing		1,001,615		3,648,199
Accrued expenses and other liabilities		4,590,662		762,592
Liabilities of discontinued operations		215,243		215,243
Total current liabilities		8,021,701		5,848,259

Long-term debt		105,000		386,414

Total liabilities		8,126,701		6,234,673

EQUITY
China Crescent Enterprises, Inc. shareholders' equity:
Common stock; $.001 par value; 3,000,000,000 shares authorized;
2,977,352,624 and 1,493,641,196 shares issued and outstanding
at June 30, 2011 and December 31, 2010, respectively		2,977,352		1,493,641
Preferred stock; $.001 par value; 20,000,000 shares authorized;
Series C 10,000 and 10,000; Series D 5,000 and 5,000 shares
issued and outstanding at June 30, 2011 and
December 31, 2010, respectively		15		15
Additional paid-in capital		7,980,860		8,680,611
Accumulated comprehensive income		1,296,043		973,004
Retained earnings		8,424,062		7,956,899
Total China Crescent Enterprises, Inc. stockholders' equity		20,678,332		19,104,170
Noncontrolling interest		2,607,829		2,639,904
Total equity		23,286,161		21,744,074

Total liabilities and equity	$	31,412,862	$	27,978,747

See accompanying notes to consolidated financial statements.

China Crescent Enterprises, Inc.
Consolidated Statement of Operations
(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
REVENUE		14,939,762			16,719,095			29,829,354			31,706,314

COST OF SALES		14,170,808			14,909,148			28,191,310			28,794,214

Gross Margin		768,954			1,809,947			1,638,044			2,912,100

OPERATING EXPENSES
Selling, general and administrative expenses		510,690			522,759			1,021,991			860,668
Depreciation and amortization		14,161			15,365			29,328			27,930
Total expenses		524,851			538,124			1,051,319			888,598

Income (loss) from operations		244,103			1,271,823			586,725			2,023,502

OTHER INCOME (EXPENSE)
Interest income		-			-			-			-
Interest expense		(13,489	)		(34,998	)		(35,165	)		(65,321	)
Other income		80,332			81,314			90,736			166,508
Other expense		(436	)		(1,650	)		(436	)		(2,830	)
Total other income (expense)		66,407			44,666			55,135			98,357


Net income before income tax and non-controlling interest		310,510			1,316,489			641,860			2,121,859
Foreign income tax		(77,218	)		(126,789	)		(206,773	)		(214,680	)
Non-controlling interest in consolidated subsidiary		(2,605	)		(70,791	)		32,076			(134,287	)

Net income		230,687			1,118,909			467,163			1,772,892

Other comprehensive income:
Gain on foreign currency translation		107,184			339,737			323,039			232,041
Total other comprehensive income		107,184			339,737			323,039			232,041

Comprehensive income	$	337,871		$	1,458,646		$	790,202		$	2,004,933

Earnings per share-basic and diluted:

Net income per weighted-average share-basic	$	0.00		$	0.00		$	0.00		$	0.00

Net income per weighted-average share-diluted	$	0.00		$	0.00		$	0.00		$	0.00

Number of weighted average common shares o/s-basic		2,977,352,624			488,754,379			2,977,352,624			386,588,624
Number of weighted average common shares o/s-diluted		3,000,000,000			513,754,379			3,000,000,000			411,588,624

See accompanying notes to consolidated financial statements.

China Crescent Enterprises, Inc.
Consolidated Statement of Changes in Equity
December 31, 2010 Through June 30, 2011
(Unaudited)

												Accumulated
	Number of Shares				Par Value of Shares				Additional			Comprehensive		Retained		Stockholders'
	Preferred		Common		Preferred		Common		Paid-In Capital			Income		Earnings		Equity

STARTING BALANCE, 12/31/10		15,000		1,493,641,196	$	15	$	1,493,641	$	8,680,611		$	973,004	$	7,956,899	$	19,104,170

Common stock issued for conversion
of notes payable				1,218,131,428				1,218,131		(568,882	)						649,249

Common stock issued for trade payables				265,580,000				265,580		(130,869	)						134,711

Other comprehensive income													323,039				323,039

Net income															467,163		467,163


ENDING BALANCE, 6/30/11		15,000		2,977,352,624		15	$	2,977,352	$	7,980,860		$	1,296,043	$	8,424,062	$	20,678,332

See accompanying notes to consolidated financial statements.

China Crescent Enterprises, Inc.
Consolidated Statement of Cash Flows
(Unaudited)

	Six Months Ended June 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	467,163		$	1,772,892
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Noncontrolling interest in consolidated subsidiary		32,076			134,287
Depreciation		29,328			27,930
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable		(1,733,403	)		(2,946,158	)
(Increase) decrease in advances and other assets		(1,280,880	)		(358,612	)
(Increase) decrease in inventory		(178,513	)		119,829
Increase (decrease) in accounts payable		991,956			323,423
Increase (decrease) in accrued expenses and other payables		3,828,070			1,173,558
Net cash provided by operating activities		2,155,797			247,149

CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to affiliates		-			-
Purchase of property and equipment		(29,841	)		(87,548	)
Net cash used in investing activities		(29,841	)		(87,548	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings		-			445,156
Payments on short-term borrowings		(2,646,584	)
Advances to affiliates		-			(1,000,000	)
Payments on long-term debt		(261,414	)		-
Net cash used in financing activities		(2,907,998	)		(554,844	)

Effect of exchange rates on cash		1,027,865			554,026

Net increase in cash and equivalents		245,823			158,783

CASH, beginning of period		2,149,733			3,977,382

CASH, end of period	$	2,395,556		$	4,136,165


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Interest paid in cash	$	35,165		$	65,321

Non-Cash Financing Activities:
Common stock issued to settle debt	$	649,249		$	1,516,694

Common stock issued to settle trade payables	$	134,711		$	326,822

See accompanying notes to consolidated financial statements.

CHINA CRESCENT ENTERPRISES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 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 June 30, 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 and six months ended June 30, 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.

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.

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 six months ended June 30, 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.

Noncontrolling Interest

We account for noncontrolling interests in accordance with ASC 810-10-45, Noncontrolling Interest in a Subsidiary, which requires us to present noncontrolling interests (previously referred to as minority interests) as a separate component of total shareholder’s equity on the consolidated balance sheet and the consolidated net income attributable to the parent and the noncontrolling interest to be clearly identified and presented on the consolidated income statement.

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.

Related Parties

Parties are considered related to the Company if they have the ability, directly or indirectly, to control the Company or exercise significant influence over the Company in making financial and operational decisions, or visa versa, where we have such an ability. Related parties may be individuals or other entities which are under the significant influence of related parties of the Company where those parties are individuals.

Concentration of Risk

Our operations are carried out in China. Accordingly, our business, financial condition and results of operations may be influenced by the political, economic and legal environment in China, and by the general state of China’s economy. Our operations in China are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. Our results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti- inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

Cash includes cash on hand and demand deposits in accounts maintained with state owned banks within China. We have not experienced any losses in such accounts and believe we are not exposed to any risks on our cash in bank accounts.

Recently Issued Accounting Standards

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which is not expected to have a material impact on our consolidated financial position and results of operations upon adoption.

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:

-	Outsourcing of software development in China

-	Expansion within the Chinese marketplace

-	Localization of products and/or services

-	Identification of complimentary products in China

-	Export of products manufactured in China

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%.

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 June 30, 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 six months ended June 30, 2011.

4. NON-CONTROLLING INTEREST:

Non-controlling interest represents the minority stockholder’s proportionate share of equity in our Clipper-Huali subsidiary. As of June 30, 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 June 30, 2011, The Huali Group, Ltd., our non-controlling interest partner, held a $2,607,829 interest in the net asset value of our Clipper-Huali subsidiary.

5. NOTES PAYABLE AND CREDIT FACILITIES:

SHORT-TERM DEBT

As of June 30, 2011, the Company had an unsecured promissory note outstanding with an investor:

	Annual		Principal
	Interest	Maturity	Outstanding
Note	Rate	Date	at 6/30/11

1	8%	12/15/11	$	285,000

CONVERTIBLE LONG-TERM DEBT

As of June 30, 2011, the Company had an unsecured convertible promissory note outstanding with an investor:

	Annual		Principal
	Interest	Maturity	Outstanding
Note	Rate	Date	at 6/30/11

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 June 30, 2011, such a conversion would have represented 297,437,527 shares of common stock. The note has a face value of $125,000 with an unamortized discount of $20,000 at June 30, 2011.

LINES OF CREDIT

As of June 30, 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.

	Annual		Amount
	Interest	Maturity	Outstanding
Institution	Rate	Date	at 6/30/11

Hangzhou United Commerical Bank	7.92%	3/22/12	$	216,580
Shanghai Pudong Development Bank	5.31%	11/27/11	$	190,635
Bank of Ningbo	5.31%	6/24/12	$	309,400


Total:			$	716,615

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 June 30, 2011.

During the second quarter of 2011, we did not issue any shares of common stock.

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 June 30, 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

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, 2011.

Warrants

At June 30, 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 June 30, 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 six months ended June 30, 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.

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, 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 June 30, 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.

Results of Operations

Three months ended June 30, 2011 compared to three months ended June 30, 2010:

Net sales decreased 11% from $16,719,095 for the quarter ended June 30, 2010 to $14,939,762 for the quarter ended June 30, 2011. Sales for the quarter in our Clipper Huali operating subsidiary were essentially flat compared to the prior year, while sales in our Nubao and DAETS subsidiaries decreased 32% and 26% respectively compared to the prior year. Cost of sales decreased 5% from $14,909,148 for the quarter ended June 30, 2010 to $14,170,808 for the quarter ended June 30, 2011. Cost of sales, as a percentage of revenue was approximately 95% and 89% for the three months ended June 30, 2011 and 2010, respectively. This increase was a result of competitive pricing pressures in our Clipper Huali systems integration subsidiary.

General and administrative expenses during the three months ended June 30, 2011 were $510,690 compared to $522,759 for the three months ended June 30, 2010, a decrease of 2%. General and administrative expenses as a percentage of revenue were 3% and 3% for the three months ended June 30, 2011and 2010, respectively.

During the three months ended June 30, 2011, we recognized net income of $230,687 after accounting for the non-controlling interest in our Clipper-Huali consolidated subsidiary, compared to net income of $1,118,909 during the three months ended June 30, 2010, a 79% decrease. The decrease in net income is attributable to a decrease in sales and a lower gross margin for the three months ended June 30, 2011 compared to the same period last year. Comprehensive income for the three months ended June 30, 2011 was $337,871 compared to $1,458,646 for three months ended June 30, 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.

Six months ended June 30, 2011 compared to six months ended June 30, 2010:

Net sales decreased 7% from $31,706,314 for the six months ended June 30, 2010 to $29,829,354 for the six months ended June 30, 2011. Sales for the six months in our Clipper Huali operating subsidiary were essentially flat compared to the prior year, while sales in our Nubao and DAETS subsidiaries decreased 22% and 11% respectively compared to the prior year. Cost of sales decreased 2% from $28,794,214 for the six months ended June 30, 2010 to $28,191,130 for the six months ended June 30, 2011. Cost of sales, as a percentage of revenue was approximately 95% and 91% for the three months ended June 30, 2011 and 2010, respectively. This increase was a result of competitive pricing pressures in our Clipper Huali systems integration subsidiary.

General and administrative expenses during the six months ended June 30, 2011 were $1,021,991 compared to $860,668 for the six months ended June 30, 2010, an increase of 19%. General and administrative expenses as a percentage of revenue were 3% and 3% for the six months ended June 30, 2011and 2010, respectively.

During the six months ended June 30, 2011, we recognized net income of $467,163 after accounting for the non-controlling interest in our Clipper-Huali consolidated subsidiary, compared to net income of $1,772,892 during the six months ended June 30, 2010, a 74% decrease. The decrease in net income is attributable to a decrease in sales and a lower gross margin for the six months ended June 30, 2011 compared to the same period last year. Comprehensive income for the six months ended June 30, 2011 was $790,202 compared to $2,004,933 for the six months ended June 30, 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 June 30, 2011 increased $245,823, from $2,149,733 as of December 31, 2010, to $2,395,556. The increase was the result of cash provided by operating activities of $2,155,797 and the effect of exchange rates on cash of $1,027,865, offset by cash used in investing activities of $29,841 and cash used in financing activities of $2,907,998. Operating activities for the six months ended June 30, 2011, exclusive of changes in operating assets and liabilities, provided $528,567, as well as an increase in accrued expenses and other payables of $3,828,070 and an increase in accounts payable of $991,956, offset by an increase in accounts receivable $1,733,403, an increase in supplier advances of $1,280,880 and an increase in inventory of $178,513.

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 at all, 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 can raise capital either to fund our operations or to finance an acquisition. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business operations.

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 six months ended June 30, 2011 and 2010.

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.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

As of June 30, 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.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

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

SIGNATURES

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

		CHINA CRESCENT ENTERPRISES, INC.
		(Registrant)


Date:	August 22, 2011	/s/ James Jiang
		James Jiang, Ph D
		Chief Executive Officer



		/s/ Philip J. Rauch
		Philip J. Rauch,
		Chief Financial Officer

Attached files

China Crescent Enterprises, Inc. Reports

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