UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
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)
| Nevada | 84-0928627 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
14860 Montfort Drive, Suite 210, Dallas, TX 75254
(Address of principal executive offices)
(214) 722-3040
(Registrant’s telephone number, including area code)
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes o No þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: Yes o No þ
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.
Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| | Large Accelerated Filer [ ] | Accelerated Filer [ ] | |
| | Non-Accelerated Filer [ü] | Smaller Reporting Company [ ] | |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant (assuming officers, directors and 10% stockholders are affiliates), based on the closing price of the Registrant’s common stock on June 30, 2009: $600,907
China Crescent Enterprises, Inc.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
PART I
History of the Business
Intercell International Corporation (“Intercell”) was incorporated under the laws of Nevada in May 2000. Until October 2003, Intercell had no operations. In October 2003, Intercell acquired 60% membership interest in Brunetti DEC, LLC, a Colorado limited liability company (“Brunetti”) for a cash contribution. In January 2004, Intercell acquired the remaining 40% of Brunetti for an additional cash contribution. In October 2004, the operations of Brunetti were discontinued and in March 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.
On March 16, 2005, Intercell filed a voluntary petition for relief in the United States Bankruptcy Court, District of Colorado under Chapter 11 of Title 11 of the U.S. Bankruptcy Code. On April 5, 2006, the United States Bankruptcy Court, District of Colorado dismissed the Chapter 11 proceedings.
In October 2006, Intercell executed an Agreement and Plan of Reorganization (the “Agreement”) with NewMarket China, Inc. (“NewMarket China”) a wholly-owned subsidiary of NewMarket Technology, Inc. (“NewMarket Technology”). The Agreement provided for Intercell to acquire from NewMarket Technology its subsidiary, NewMarket China, through the exchange of all of the issued and outstanding stock of NewMarket China, one thousand (1,000) shares held by NewMarket Technology, for two million (2,000,000) common shares of Intercell. As a result of the Agreement, NewMarket China became the wholly-owned subsidiary of Intercell.
In a separate agreement, NewMarket Technology agreed to purchase 250,000 shares of Series A Preferred Stock from Intercell for a $250,000 cash payment. The shares have a par value of $0.001 per share and a purchase price of $1.00 per share and bear no dividend. The shares are convertible into 60% of the issued and outstanding common stock of Intercell, any time after August 31, 2007. The shares have a voting right equal to 60% of the issued and outstanding common stock of Intercell.
As part of the reorganization and acquisition of Intercell, on January 31, 2007, we changed the name of the company to NewMarket China, Inc. (the “Company”) and changed its trading symbol to “NMCH”. Additionally, we changed the Company’s fiscal year end from September 30th to December 31st. In June 2008, we changed the Company’s name to China Crescent Enterprises, Inc. and changed its trading symbol to “CCTR”.
As a result of the acquisition of NewMarket China and the change in control of Intercell, the following changes were made to our management, including the appointment on October 18, 2006 of John Verges as Chief Executive Officer (“CEO”) and Philip J. Rauch as Chief Financial Officer (“CFO”) of the Company. Additionally, the existing directors of the Company resigned and Mr. Rauch was appointed to the Board of Directors along with Philip Verges and Bruce Noller, the CEO and Director of Operations of NewMarket Technology, respectively.
Mr. Noller resigned from the Board on March 3, 2008 and was replaced by Mr. Paul Danner. Mr. John Verges resigned as Chief Executive Officer of the Company on June 2, 2008 and Mr. Danner was appointed as Chief Executive Officer of the Company effective July 1, 2008.
In April 2009, we issued 750 shares of Series B Convertible Preferred Stock, $.001 par value, to The Huali Group in connection with the acquisition by CLPTEC of an additional 25% interest in Clipper-Huali, bringing our total ownership in Clipper-Huali to 76%.
In November 2009, we entered into an Equity Reorganization Agreement with NewMarket Technology under which NewMarket Technology exchanged its 250,000 shares of Series A Preferred Stock for the issuance of 10,000 shares of Series C Convertible Preferred Stock and 5,000 shares of Series D Preferred Stock.
In December 2009, we acquired 100% of Shenzhen Newbao Technology Co., Ltd. (“Newbao”), an Original Design Manufacturer (ODM) of wireless products, from China Radio Technology Co., Ltd. in exchange for a $300,000 note. Additionally, in December 2009 we acquired 100% of Dalian Aoyuan Electronic Technology Services Co., Ltd. (“DAETS”), a systems integration company, from Aoyuan Electronic Company, Ltd., in exchange for a $200,000 note.
Mr. Danner resigned as CEO and a Director of the Company on January 31, 2010, and Dr. James Jiang was appointed CEO of the Company effective February 1, 2010.
Business of China Crescent Enterprises, Inc.
Our headquarters is located in Dallas, Texas but our primary operations are currently in The People’s Republic of China (“China”). To date, the majority of our sales have been information technology products and services sold within mainland China; however, the Company has also explored the possibility of establishing worldwide business relationships with customers that may involve:
| | - | outsourcing of software development in China |
| | - | exploration of 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 OEM sourcing for producti on 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 ow ned 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, we announced that 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 its total ownership in Clipper Huali to 76% and reducing Huali’s ownership interest to 24%.
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, which was established in March 1995. Aoyuan is one of the top 500 computer hardware suppliers in China and is listed as one of the “Top 100 Northeast Regional Computer Suppliers” by First Chinese Computer Vendors. In 2004, Aoyuan was awarded “Best IT Distributor of Northeast China” and received ISO9001 certification by SGS in the United Kingdom. Aoyuan’s staff operate several business segments, including computer software and hardware sales, system integration, IT consulting services, IT product promotion and IT retail sales.
Shenzhen Newbao Technology Co. Ltd. (“Newbao”). Newbao is a wholly-owned subsidiary that was acquired by CLPTEC in December 2009 from China Radio Technology Co., Ltd., an Original Design Manufacturer located in Shenzhen, China, that designs and manufactures a wide range of wireless products specified by customers throughout Asia. The company’s primary product focus involves wireless communication terminals (GSM, GSM/GPRS modules, GPS modules, GPS trackers, and Personal Navigation Devices). The core research and development staff averages more than 5 years of professional experience, and provides customers with ind ustrial 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.
The following chart reflects our current organizational structure as of the date of this report:
Employees
As of December 31, 2009, we had approximately 227 employees, of which 185 employees work for Clipper-Huali, 7 employees work for Newbao, 27 employees work for DAETS and 8 employees work for CLPTEC. Our employees are not represented by a labor union or subject to any collective bargaining agreement that may stem from such unions. Our Chinese subsidiaries are subject to Chinese labor laws that give labor a comparatively minor level of group power. We believe our relations with our employees are satisfactory and do not present any undue organizational risk.
Risks Related to Our Company
While we have been profitable for the year over the last three years, profits have been small and we have incurred monthly and quarterly operating losses from time to time in each of the last three years.
We cannot be certain that we can sustain or increase profitability on a quarterly or annual basis in the future. If we are unable to remain profitable, our liquidity could be materially harmed.
We cannot predict our future results because our business has a limited operating history, particularly in its current form.
Given our operating history, it will be difficult to predict our future results. You should consider the uncertainties that we may encounter as a technology company in a rapidly evolving market. These uncertainties include:
| | - | market acceptance of our products or services |
| | - | consumer demand for, and acceptance of, our products, services and follow-on products |
| | - | our ability to create user-friendly applications |
| | - | our unproven and evolving business model |
We will need to achieve greater revenues to maintain profitability. There can be no assurance that we will be successful in increasing revenues, or generating acceptable margins, or, if we do, that operation of our business will be a profitable business enterprise. We may have to seek additional outside sources of capital for our business. There can be no assurance that we will be able to obtain such capital on favorable terms and conditions or at all. If this occurs the market price of our common stock could suffer.
Our quarterly and annual sales and financial results have varied significantly in the past, and we expect to experience fluctuations in the future, which mean that period-to-period comparisons are not necessarily meaningful or indicative of future performance.
Our sales and operating results have varied, and may continue to vary, significantly from year to year and from quarter to quarter as a result of a variety of factors, including the introduction of new products by competitors, pricing pressures, the timing of the completion or the cancellation of projects, the evolving and unpredictable nature of the markets in which our products and services are sold and economic conditions generally or in certain geographic areas in which our customers do business. Furthermore, we may be unable to control spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, we cannot assure you that sales and net income, if any, in any particular quarter will not be lower than sales and net income, if any, in a preceding or comparable quarter or quarters. In addition, sales and net income, if any, in any particular quarter are not likely to be indicative of the results of operations for any other quarter or for the full year. The trading prices of our securities may fluctuate significantly in response to variations in our quarterly or annual results of operations.
We may not be able to sustain or accelerate growth, or sustain or accelerate recurring revenue from our business.
There can be no assurance that demand for our services and products will increase or be sustained, or that our current or future products will have market acceptance in that product category. Our acquisition costs per customer are high due to the significant costs associated with sales, research and development and marketing. To the extent we do not achieve growth and this cost per customer is not reduced, it will be difficult for us to generate meaningful revenue at acceptable margins or achieve profitability. To the extent that our business model is not successful, because market acceptance does not develop as expected, or other competing technologies evolve in connection with the changing market or for any other reason, we might have future unexpected declines in revenue.
Rapid technological change could render our products and services obsolete.
The IT services industry is characterized by rapid technological innovation, sudden changes in user and customer requirements and preferences, frequent new product and service introductions and the emergence of new industry standards and practices. Each of these characteristics could render our services, products, intellectual property and systems obsolete. The rapid evolution of our market requires that we improve continually the performance, features and reliability of our products and services, particularly in response to competitive offerings. Our success also will depend, in part, on our ability:
| | - | to develop or license new products, services and technology that address the varied needs of our customers and prospective customers |
| | - | to respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis |
If we are unable, for technical, financial, legal or other reasons, to adapt in a timely manner to changing market conditions or user preferences, we could lose customers, which would cause a decrease in our revenue.
We may be unable to obtain additional capital if needed to grow our business, which would adversely impact our business. If we raise additional financing, shareholders may suffer significant dilution.
Although we anticipate that our current cash and cash from operations will be sufficient to satisfy our working capital and ordinary course capital expenditure needs over the next 12 months, if our revenues do not continue to grow to cover our expenses, we will need to seek additional investment from our parent company or a third party to finance our growth plans as we have done in the past. We cannot be certain that financing from our parent company or third parties will be available on acceptable terms to us or at all. Our future capital requirements will depend upon several factors, including the rate of market acceptance of our products and services, our ability to expand our customer base and our level of expenditures for sales and marketing. If our capital requirements vary materially from those currently planned, we ma y require additional financing sooner than anticipated. If we cannot raise funds on acceptable terms, we may not be able to develop our products and services, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, any of which could have a material adverse effect on our ability to grow our business. Further, if we issue equity securities, shareholders will experience dilution of their ownership percentage, and the new equity securities may have rights, preferences or privileges senior to those of our common stock.
Certain of our competitors have significantly greater financial, technical, marketing and other resources than we do and may be able to respond more quickly to new or emerging technologies and changes in customer requirements. Additional competition could result in price reductions, reduced margins and loss of market. We cannot guarantee that we will be able to compete successfully against future competitors or that future competitive pressures will not materially and adversely affect our business, financial condition and results of operations.
Our success depends in large part on the continued service of our management and other key personnel and our ability to continue to attract, motivate and retain highly qualified employees. If one or more of our key employees leaves the Company, we will have to find a replacement with the combination of skills and attributes necessary to execute our strategy. Because competition from other technology companies for skilled employees is intense, and the process of finding qualified individuals can be lengthy and expensive, we believe that the loss of services of key personnel could negatively affect our business, financial condition and results of operations.
The recent credit crisis and turmoil in the global financial system may have an adverse impact on our business and our financial condition, and we may face challenges if conditions in the financial markets do not improve. Our ability to access the capital markets may be restricted at a time when we would like, or need, to raise capital, which could have an impact on our flexibility to react to changing economic and business conditions. In addition, these economic conditions also impact levels of government and consumer spending, which have recently deteriorated significantly and may remain depressed for the foreseeable future. It is uncertain how long the global crisis in the financial services and credit markets will continue and how much of an impact it will have on the global economy in general or the Chinese economy in particular. If demand for our products and services fluctuates as a result of economic conditions or otherwise, our revenue and gross margin could be harmed.
In August 2006, six Chinese regulatory agencies promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which became effective in September, 2006 (the “M&A Rule”). According to the M&A Rule, a “Round-trip Investment” is defined as having taken place when a Chinese business that is owned by Chinese individual(s) is sold to a non-Chinese entity that is established or controlled, directly or indirectly, by those same Chinese individual(s). Under the M&A Rules, any Round-trip Investment must be approved by China’s Ministry of Commerce (“MOFCOM”), and any indirect arrangement or series of arrangements which achieves the same end result without the approval of MOFCOM is a violation of Chinese law. The M&A Rule establishes additional procedures and requirements that could make some acquisitions of Chinese companies by foreign investors more time-consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction and in some situations, require approval of the MOFCOM when a foreign investor takes control of a Chinese domestic enterprise. In the future, we may grow our business in part by acquiring complementary businesses. The M&A Rule also requires MOFCOM anti-trust review of any change-of-control transactions involving certain types of foreign acquirers. Complying with the requirements of the M&A Rule to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
Risks Related to Doing Business in China
Changes in Chinese laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of operations and financial condition. Under our current leadership, the Chinese government has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the Chinese government will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.
Substantially all of our sales are generated from China. We anticipate that sales of our products in China will continue to represent a substantial majority of our total sales in the near future. Any significant decline in the condition of the Chinese economy could adversely affect demand for our products, among other things, which in turn would have a material adverse effect on our business and financial condition.
The Chinese government has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. If our new business ventures are unsuccessful, or other adverse circumstances arise from these transactions, we face the risk that the parties to these ventures may seek ways to terminate the transactions, or, may hinder or prevent us from accessing important information regarding the financial and business operations of these acquired companies. The resolution of these matters may be subject to the exercise of considerable discretion by agencies of the Chine se government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance, or to seek an injunction under Chinese law, in either of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations.
Substantially all of our revenues have been generated from our Chinese subsidiary, CLPTEC. However, Chinese regulations restrict the ability of CLPTEC to make dividends and other payments to its parent company. Chinese legal restrictions permit payments of dividends by CLPTEC only out of its accumulated after-tax profits, if any, determined in accordance with Chinese accounting standards and regulations. Any limitations on the ability of CLPTEC to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.
We are required to comply with the United States Foreign Corrupt Practices Act, which prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some of our competitors, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in mainland China. If our competitors engage in these practices, they may receive preferential treatment from personnel of some companies, giving our competitors an advantage in securing business or from government officials who might give them priority in obtaining new licenses, which would put us at a disadvantage. Although we inform our personnel that such practices are illegal, we cannot assure you that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties.
China only recently has permitted provincial and local economic autonomy and private economic activities, and, as a result, we are dependent on our relationship with the local government in the province in which we operate our business. Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, environmental regulations, land use rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties.
In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. During the past ten years, the rate of inflation in China has been as high as 20.7% and as low as (2.2)%. These factors have led to the adoption by Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. While inflation has been more moderate since 1995, high inflation may in the future cause Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products.
China historically has been deficient in Western style management and financial reporting concepts and practices, as well as in modern banking, computer and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in China. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards. We may have difficulty establishing adequate management, legal and financial controls in China.
Risks Related to Currency Exchange Between the Chinese Renminbi and United States Dollars
Our reporting currency is the U.S. dollar and our operations in China use their local currency as their functional currencies. Substantially all of our revenue and expenses are in Chinese Renminbi (“RMB”). We are subject to the effects of exchange rate fluctuations with respect to any of these currencies. For example, the value of the RMB depends to a large extent on Chinese government policies and China’s domestic and international economic and political developments, as well as supply and demand in the local market. Since 1994, the official exchange rate for the conversion of RMB to the U.S. dollar had generally been stable and the RMB had appreciated slightly against the U.S. dollar. However, on July 21, 2005, the Chinese government changed its policy of pegging the value of Chinese RMB to the U. S. dollar. Under the new policy, Chinese RMB may fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in substantial appreciation of the RMB against the U.S. dollar between July 21, 2005 and December 31, 2009.
It is possible that the Chinese government could adopt a more flexible currency policy, which could result in more significant fluctuation of RMB against the U.S. dollar. We can offer no assurance that RMB will be stable against the U.S. dollar or any other foreign currency.
The income statements appearing elsewhere herein are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currencies denominated transactions will result in reduced revenue, operating expenses and net income for our international operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions will result in increased revenue, operating expenses and net income for our international operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of CLPTEC and our subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other comprehensive income. In addition, we may have certain assets and liabilities that are denominated in currencies other than the relevant entity’s functional currency. Changes in the functional currency value of these assets and liabilities create fluctuations that will lead to a transaction gain or loss. We have not entered into agreements or purchased instruments to hedge our exchange rate risks, although we may do so in the future. The availability and effectiveness of any hedging transaction may be limited and we may not be able to successfully hedge our exchange rate risks.
Although Chinese governmental policies were introduced in 1996 to allow the convertibility of RMB into foreign currency for current account items, conversion of RMB into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration of Foreign Exchange, or SAFE, which is under the authority of the People’s Bank of China. These approvals, however, do not guarantee the availability of foreign currency conversion. We cannot be sure that we will be able to obtain all required conversion approvals for our operations or that Chinese regulatory authorities will not impose greater restrictions on the convertibility of RMB in the future. Because a significant amount of our future revenue may be in the form of RMB, our inability to obtain the requisite approvals or any future restrictions on currency exchanges could limit our ability to utilize revenue generated in RMB to fund potential business activities outside of China, or to repay foreign currency obligations, including our debt obligations, which would have a material adverse effect on our financial condition and results of operations.
Risks Related to Our Industry
Deterioration of the IT services industry could lead to further reductions in capital spending budgets by our customers, which could further adversely affect our revenues, gross margins and income.
Our revenues and gross margins will depend significantly on the overall demand for IT products and services. Reduced capital spending budgets by our customers caused by the ongoing industry downturn have led to continued soft demand for our products and services, which has resulted in, and may continue to result in, decreased revenues, earnings levels or growth rates. The global economy in general, and the technology market in particular, has weakened and market conditions continue to be challenging. As a result, individuals and companies are delaying or reducing expenditures. We have observed effects of the global economic downturn in many areas of our business. In addition, the technology industry has experienced significant consolidation, and this trend is expected to continue. It is possible that we and one or more of our competitor s each supply products to the companies that have merged or will merge. This consolidation could result in further delays in purchasing decisions by merged companies or in us playing a decreased role in the supply of products to the merged companies. Further delays or reductions in spending could have a material adverse effect on demand for our products and services and, consequently, our results of operations, prospects and stock price.
Risks Related to Our Capital Stock
The public market for our common stock may be volatile.
There is currently only a limited public market for our common stock, which is listed on the OTC Bulletin Board under the symbol “CCTR”.
The market price of our common stock has been and is likely to continue to be significantly affected by various factors, including:
| | - | general market conditions and market conditions affecting technology stocks in particular |
| | - | actual or anticipated fluctuations in our quarterly or annual operating results |
| | - | announcements relating to contracts, investments, acquisitions, divestitures |
| | - | discontinued operations, layoffs or corporate actions |
| | - | industry conditions or trends |
| | - | limited market making activity and research coverage |
The stock markets, especially the over-the-counter markets, have experienced significant price and volume fluctuations that have affected the market prices of many technology companies' stocks. These fluctuations have often been unrelated or disproportionate to operating performance. These broad market or technology sector fluctuations may adversely affect the market price of our common stock. General economic, political and market conditions such as recessions and interest rate fluctuations may also have an adverse effect on the market price of our common stock. In addition, the market price of our common stock has also been and is likely to continue to be affected by expectations of analysts and investors.
The U.S. Securities and Exchange Commission (the ‘SEC”) has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our Common Stock is less than $5.00 per share and therefore is a “penny stock.” Brokers and dealers effecting transactions in “penny stock” must disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our Common Stock and may affect your ability to sell shares.
Our stock is controlled by a single majority shareholder for the foreseeable future and as a result, will be able to control our overall direction. This majority shareholder could conceivably control the outcome of matters requiring stockholder approval and could be able to elect all of our directors. Such control, which may have the effect of delaying, deferring or preventing a change of control, is likely to continue for the foreseeable future and significantly diminishes control and influence which future stockholders may have in the Company.
We may be the subject of securities class action litigation due to future stock price volatility.
Shareholder interest in the Company may be substantially diluted as a result of the sale of additional securities to fund our plan of operation.
Our preferred stock has certain preferences over our common stock with regard to liquidation, dividends and election of directors.
Our issued and outstanding preferred stock holds a preference in liquidation over our common stock. Certain classes of our outstanding preferred stock is subject to conversion into common stock upon the occurrence of certain enumerated events and contain provisions that may limit our ability to raise additional capital if needed. In addition, any such conversion will dilute our existing common stockholders.
Our ability to issue additional preferred stock or other convertible securities may adversely affect the rights of our common stockholders and may make takeovers more difficult, possibly preventing you from obtaining optimal share price.
Our Articles of Incorporation authorize the issuance of shares of "blank check" preferred stock, which would have the designations, rights and preferences as may be determined from time to time by the board of directors. Accordingly, the board of directors is empowered, without shareholder approval (but subject to applicable government regulatory restrictions), to issue additional preferred stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of the common stock. In the event of an issuance, the preferred stock could be used, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. We have also historically used securities that are convertible into common stock as a currency to finance a cquisitions and may continue to do so in the future.
| UNRESOLVED STAFF COMMENTS |
Principal Executive Offices
Our principal executive offices are located at 14860 Montfort Drive, Suite 210, Dallas, Texas 75254. We moved to these offices during the fall of 2006. NewMarket Technology, our majority stockholder, leases the space.
CLPTEC’s offices are located at No. 123 Qinjiang Road, Shanghai, 200233, People’s Republic of China. The offices are leased from Gaozhi, a strategic partner, on a month-to-month basis. The annual rent expense for the year ended December 31, 2009 was approximately $6,336.
None.
| SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
There were no meetings of the security holders during the period covered by this report.
PART II
| MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is presently traded on the over-the-counter market on the OTC Bulletin Board (the "OTCBB") under the symbol “CCTR.” The following table sets forth the range of high and low bid quotations for our common stock of each full quarterly period during the fiscal year or equivalent period for the fiscal periods indicated below.
| 2009 Fiscal Year | | | | | | |
| | | | | | | |
| First Quarter | | | 0.375 | | | | 0.115 | |
| Second Quarter | | | 0.225 | | | | 0.029 | |
| Third Quarter | | | 0.075 | | | | 0.02 | |
| Fourth Quarter | | | 0.06 | | | | 0.02 | |
| 2008 Fiscal Year | | | | | | |
| | | | | | | |
| First Quarter | | | 3.75 | | | | 1.50 | |
| Second Quarter | | | 2.825 | | | | 0.75 | |
| Third Quarter | | | 0.975 | | | | 0.35 | |
| Fourth Quarter | | | 0.425 | | | | 0.10 | |
Number of Shareholders
At December 31, 2009, there were 620 stockholders of record of our common stock. Based upon information provided to us by persons holding securities for the benefit of others, it is estimated that we have in excess of 3,500 beneficial owners of our common stock as of that date.
Purchase of Equity Securities
We have made no repurchases of our equity securities in the fiscal year ended December 31, 2009.
Dividend Policy
We have not declared or paid any dividends to our stockholders. Any future determination to pay dividends, if any, will be at the discretion of our board of directors.
The following selected financial data is derived from the consolidated financial statements of the Company. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information included herein. The information presented below is in thousands, except per share amounts.
| | | Year ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | |
| SELECTED STATEMENT OF OPERATIONS DATA | | | | | | | | | |
| Revenues | | $ | 45,628 | | | $ | 41,878 | | | $ | 40,007 | |
| Income from operations | | | 2,890 | | | | 1,258 | | | | 671 | |
| Net income | | | 2,183 | | | | 638 | | | | 438 | |
| Net income per weighted avg. common share-basic | | $ | 0.03 | | | $ | 0.02 | | | $ | 0.02 | |
| | | | | | | | | | | | | |
| SELECTED BALANCE SHEET DATA | | | | | | | | | | | | |
| Cash | | $ | 3,977 | | | $ | 2,600 | | | $ | 1,489 | |
| Working capital | | | 13,666 | | | | 6,124 | | | | 3,461 | |
| Total assets | | | 17,804 | | | | 10,346 | | | | 7,209 | |
| Total liabilities | | | 3,974 | | | | 4,277 | | | | 3,650 | |
| | | | | | | | | | | | | |
| Stockholders' equity | | | 10,680 | | | | 4,456 | | | | 2,560 | |
| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-Looking Statements:
Some statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include the words “may,” “estimate,” “intend,” “continue,” “believe,” “expect,” or “anticipate” and other similar words. These forward-looking statements generally relate to plans and objectives for future operations and are based upon management’s reasonable estimates of future results or trends. Although we believe that the plans and objectives reflected in or suggested by such forward-looking statements are reasonable, such plans or objectives may not be a chieved. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of risks and uncertainties, including: (a) lack of demand for our products and services; (b) competitive products and pricing; (c) limited amount of resources devoted to advertising; (d) lack of demand for our products and services being purchased via the Internet; and (e) other factors that may negatively affect our operating results. Statements made herein are as of the date of the filing of this Form 10-K with the Securities and Exchange Commission and should not be relied upon as of any subsequent date. We expressly disclaim any obligation to update any information or forward-looking statements contained in this Form 10-K, except as may otherwise be required by applicable law.
Overview
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 and Hangzhou in China. In the fourth quarter of 2009, we acquired new subsidiary companies in Dalian and Shenzhen, China.
In June 2008, we changed the Company name from NewMarket China, Inc. to China Crescent Enterprises, Inc. In July 2008, Paul K. Danner was appointed President and Chief Executive Officer of the Company. In February 2010, Dr. James Jiang was appointed President and Chief Executive Officer of the Company.
In April 2009, we issued 750 shares of Series B Convertible Preferred Stock, $.001 par value, to The Huali Group in connection with the acquisition by CLPTEC of an additional 25% interest in Clipper-Huali, bringing our total ownership in Clipper-Huali to 76%. In the fourth quarter of 2009, all 750 shares of Series B Convertible Preferred Stock were converted into a total of 81,027,024 shares of the common stock of the Company.
In December 2009, we acquired 100% of Shenzhen Newbao Technology Co., Ltd. (“Newbao”), an Original Design Manufacturer of wireless products, from China Radio Technology Co., Ltd. in exchange for a $300,000 note. Additionally, in December 2009 we acquired 100% of Dalian Aoyuan Electronic Technology Services Co., Ltd. (“DAETS”), a systems integration company, from Aoyuan Electronic Company, Ltd., in exchange for a $200,000 note.
2009 Compared to 2008
Revenue increased 9% from $41,877,584 for the year ended December 31, 2008 to $45,628,397 for the year ended December 31, 2009. This was due to fourth quarter sales in the Dalian and Shenzhen regions. Year over year systems integration sales in the Ningbo and Shanghai regions were essentially even. Cost of sales increased 5% from $39,538,508 for the year ended December 31, 2008 to $41,578,414 for the year ended December 31, 2009. This increase was primarily due to the corresponding increase in sales volume. Cost of sales as a percentage of sales was approximately 91% and 94% for the years ended December 31, 2009 and 2008, respectively. We plan to continue to pursue strategies to reduce the overall cost of sales as a percentage of sales as the Company grows, such as enteri ng into higher margin outsourcing agreements.
General and administrative expenses for the year ended December 31, 2009 were $1,138,739 compared to $1,064,491 for the year ended December 31, 2008, an increase of 7%. The increase is primarily attributable to start-up costs associated with our new Dalian and Shenzhen subsidiaries in the fourth quarter of 2009.
For the year ended December 31, 2009, we recognized net income of $2,182,620 after accounting for the non-controlling interest in a consolidated subsidiary, compared to net income of $638,319 for the year ended December 31, 2008, a 242% increase. The increase in net income is attributable to (i) an increase in overall sales; and (ii) an increase in gross margin. Comprehensive income for the year ended December 31, 2009 was $2,101,432 compared to comprehensive income of $1,131,931 for the year ended December 31, 2007, a 86% increase. Comprehensive income includes foreign currency translation adjustments and gains or losses on investment securities held.
2008 Compared to 2007
Revenue increased 5% from $40,007,006 for the year ended December 31, 2007 to $41,877,584 for the year ended December 31, 2008. This was due to increased sales of computer hardware in the Hangzhou region. Year over year sales in the Ningbo and Shanghai regions were essentially even. Cost of sales increased 3% from $38,211,067 for the year ended December 31, 2007 to $39,538,508 for the year ended December 31, 2008. This increase was primarily due to the corresponding increase in sales volume. Cost of sales as a percentage of sales was approximately 94% and 96% for the years ended December 31, 2008 and 2007, respectively. We plan to continue to pursue strategies to reduce the overall cost of sales as a percentage of sales as the Company grows. Management intends to leverage the increased purchasing volume to improve purchasing contracts and reduce overall cost of sales.
General and administrative expenses for the year ended December 31, 2008 were $1,064,491 compared to $1,085,982 for the year ended December 31, 2007, a decrease of 2%. The decrease is primarily attributable to decreased administrative headcount in the Shanghai region.
For the year ended December 31, 2008, we recognized net income of $638,319 after accounting for the non-controlling in a consolidated subsidiary, compared to net income of $437,824 for the year ended December 31, 2007, a 46% increase. The increase in net income is attributable to (i) an increase in overall sales; (ii) a decrease in general and administrative expenses for the year; and (iii) a decrease in cost of sales as a percentage of sales. Comprehensive income for the year ended December 31, 2008 was $1,131,931 compared to comprehensive income of $909,771 for the year ended December 31, 2007, a 24% increase. Comprehensive income includes foreign currency translation adjustments and gains or losses on investment securities held.
Liquidity and Capital Resources
Cash Flow Activities
Our cash balance at December 31, 2009 increased $1,376,884, from $2,600,498 as of December 31, 2008, to $3,977,382. The increase was the result of cash provided by investing activities of $233,036, cash provided by financing activities of $1,000,000 and the effect of exchange rates on cash of $1,570,970, offset by cash used in operating activities of $1,427,122. Operating activities for the year ended December 31, 2009, exclusive of changes in operating assets and liabilities provided $2,741,254, as well as an increase in accrued expenses of $119,330, offset by an increase in inventory of $792,898, an increase in accounts receivable of $2,054,206 and a decrease in accounts payable of $375,770.
Financing Activities
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.& #160; 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.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. We consider our critical accounting policies to be those that require the more significant judgments and estimates in the preparation of financial statements, including the following:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, our wholly-owned subsidiaries CLPTEC, Newbao and DAETS and our majority-owned subsidiary Clipper Huali. All material intercompany accounts, transactions and profits have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, trade receivables, prepaid expenses, payables and accrued expenses, Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. We consider the carrying values of our financial instruments in the consolidated financial statements to approximate fair value, due to their short-term nature.
Accounts Receivable
Receivables were carried at their estimated collectible amounts. Accounts were periodically evaluated for collectability based on past credit history with customers and their current financial condition and were written off when deemed to be uncollectible. An allowance for doubtful accounts was recorded when management determined the collection was unlikely.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation. Depreciation is provided for using straight-line methods over the estimated useful lives of the respective assets, usually three to seven years.
Stock-Based Compensation
We recognize the cost of stock-based compensation plans and awards in operations on a straight-line basis over the vesting period (if any) of the awards. We measure and recognize compensation expense for all stock-based payment awards made to employees and directors. The compensation expense for our stock-based payments is based on an estimated fair value at the time of the grant. We estimate the fair value of stock based payment awards on the date of the grant using an option pricing model. These option pricing models involve a number of assumptions, including the expected lives of stock options, the volatility of the market price of our common stock and interest rates. We are using the Black-Scholes option pricing model. Stock based compensation expense recognized durin g the period is based on the value of the portion of stock-based payment awards that are ultimately expected to vest. Changes in our assumptions can materially affect the estimate of the fair value of stock-based payments and the related amount recognized in our consolidated financial statements.
Valuation of Long-Lived Assets
We periodically evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset were less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value. We do not believe that there has been any impairment to long-lived assets as of December 31, 2009.
Statement of Cash Flows
In accordance with Accounting Standards Codification (“ASC”) 230-10, Statement of Cash Flows, cash flows from our operations are based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.
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.
In accordance with ASC 830-10, Foreign Currency Matters, 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.
Comprehensive Income
Comprehensive income includes accumulated foreign currency translation gains and losses and any accumulated gains or losses attributable to securities held for investment purposes. We have reported the components of comprehensive income on our statements of stockholders’ equity.
Effects of Inflation
Inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. However, our management will closely monitor the price change and continually maintain effective cost control in operations
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in Regulation S-K Item 303(a)(4).
Recent Accounting Pronouncements
(See “Recently Issued Accounting Pronouncements” in Note 2 of Notes to the Consolidated Financial Statements.)
| QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Exchange Rate Risk
While our reporting currency is the U.S. dollar, the majority of our consolidated revenues and consolidated costs and expenses are denominated in foreign currency, specifically the Chinese RMB. The majority of our assets are denominated in RMB. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. dollars and the Chinese currencies. If the Chinese currency depreciates against the U.S. dollar, the value of a portion of our revenues, earnings and assets as expressed in our U.S. dollar financial statements will decline. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.
| FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The full text of our audited consolidated financial statements as of December 31, 2009 and 2008 begins on page F-1 of this annual report.
| CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISLCOSURE |
During the fiscal years ended December 31, 2008 and 2007 and through August 3, 2009 (i) there were no disagreements between the Company and PKASI on any matter of accounting principles or practices, financial statement disclosure or auditing scope and procedure which, if not resolved to the satisfaction of PKASI would have caused PKASI to make reference to the matter in reports on the Company’s financial statements, and (ii) PKASI’s reports on the Company’s financial statements did not contain an adverse opinion or disclaimer of opinion, or was modified as to uncertainty, audit scope or accounting principles.
Management’s Report on Internal Control Over Financial Reporting
(a) Evaluation of Disclosure Controls and Procedures
Management of the Company with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934) pursuant to Rile 13a-15 under the Exchange Act. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported on a timely basis and that such information is communicated to management, including the Chief Executive Officer, Chief Financial Officer and the Company’s Board of Directors, to allow timely decisions regarding required disc losure.
Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2009.
(b) Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
It should be noted that the Company’s management, including the Chief Executive Officer and Chief Financial Officer, do not expect that the Company’s internal controls will necessarily prevent all errors or fraud. A control system, no matter how well conceived or operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met, Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
We conducted an evaluation of the effectiveness of our internal controls over financial reporting based on the framework in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2009.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. The Company’s internal controls over financial reporting was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules if the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
(c) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART III
| DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The following table sets forth information with respect to the sole executive officers and directors of the Company as of March 31, 2010:
| Name and Age | Position | Date of Appointment |
| James Jiang, Ph.D. (56) | President & Chief Executive Officer | February 1, 2010 |
| Paul K. Danner (52) | President & Chief Executive Officer, Director | July 1, 2008 to February 1, 2010 |
| Philip J. Rauch (49) | Chief Financial Officer, Director | October 18, 2006 |
| Philip Verges (44) | Chairman | October 18, 2006 |
Committees of the Board of Directors
We presently do not have an audit committee, compensation committee, nominating committee, an executive committee of its board of directors, stock plan committee or any other committees.
Biographical Information on Officers and Directors
James Jiang, PhD. Dr. James Jiang was appointed Chief Executive Officer of the Company on February 1, 2010. Dr, Jiang was previously the Managing Director of Clipper Technology, Ltd., a wholly-owned subsidiary of the Company. Dr. Jiang has over 18 years of senior executive management experience in the information technology and wireless industries. His management resume includes posts with various multinational firms including British Telecom Laboratory, Telular Corp, Singapore Technologies and GaozhiSoft, Inc. Dr. Jiang has extensive knowledge of GSM/GPRS systems and architecture, 3G wireless communications and Internet technologies. In 1996, he developed and launched AirTrak, China's first e-com merce service to deliver commerce information from the Internet via a wireless network, and was the Chief Architect of a dynamic web content cache engine and mobile application platform. Dr. Jiang holds two patents in Viterbi Decoding and Dynamic Contents Extraction, and is a World Bank Scholar.
Paul K. Danner. On March 3, 2008, Mr. Danner was appointed to the Board of Directors of the Company. He was appointed President and Chief Executive Officer of the Company by the Board of Directors effective July 1, 2008. Mr. Danner previously served as the Chairman and Chief Executive Officer of Paragon Financial Corp., a financial services firm, from November 2004 to February 2006 and as a Director since June 2002. He held various other positions with that company since June 2002. From August 2001 to May 2002, Mr. Danner was a director and Chief Executive Officer of Paragon Homefunding, Inc. Mr. Danner was a founder of that company. From January 1999 to October 2000 Mr. Danner was employed in various roles at MyTurn.com, Inc., including as Chief Executive Officer. From 1997 to 1998, Mr. Danner served as Vice President of Zekko Corp., a technology company and from 1996 to 1997 Mr. Danner was the managing partner of Technology Ventures, a consulting firm. From 1985 to 1998 he held executive-level and sales & marketing positions with a number of technology companies including NEC Technologies and Control Data Corporation. Mr. Danner previously served on active duty with the United States Navy where he flew the F-14 Tomcat. He recently retired with the rank of Captain.
Philip J. Rauch. On October 18, 2006, Mr. Rauch was appointed the Chief Financial Officer and a Director of the Company. Mr. Rauch is the Chief Financial Officer and a Director of NewMarket Technology, Inc., the majority stockholder of the Company. Mr. Rauch holds a Bachelor of Science in Economics degree with honors from the University of Pennsylvania Wharton School of Business, with a concentration in finance and accounting. From February 2004 to February 2007, Mr. Rauch served as the Chief Operating and Financial Officer of Defense Technology Systems, Inc. Beginning in 1997, Mr. Rauch served in a senior capacity at AboveNet, Inc. (formerly Metr omedia Fiber Network, Inc.) as Vice President, Business Operations, and later as Controller. From 1993 to 1997, Mr. Rauch was Vice President and Chief Financial Officer of Columbus Construction. From 1989 to 1993, he was Vice President and Chief Financial Officer of Garofalo Electric Co., an engineering and construction company.
Philip Verges. On October 18, 2006, Mr. Verges was appointed to the Board of Directors of the Company. Mr. Verges is the Chief Executive Officer and Chairman of NewMarket Technology, Inc., the majority shareholder of the Company. Mr. Verges is a 1988 graduate of the United States Military Academy. His studies at West Point centered on national security. Mr. Verges served with distinction as a U.S. Army Captain in a wide variety of important engagements to include research and development of counterterrorism communication technologies and practices. Mr. Verges' early career after the Army includes time in the Computer Sciences Research an d Development Department of General Motors as well as experience teaching systems engineering methodology and programming to Electronic Data Systems ("EDS") employees from 1991 to 1995. Mr. Verges' first business start-up experience was at EDS in a new division concentrating on call center technology in financial institutions. Later in 1995, he added to his start-up experience at a $30 million technology services business with the responsibility to open a new geographic region with a Greenfield operation. Mr. Verges founded NewMarket Technology in 1997.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires that our executive officers, directors and 10% stockholders file reports of securities ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and 10% owners also are required to furnish us with copies of all Section 16(a) forms they file.
Based solely on our review of the copies of the Section 16(a) forms received by us, or written representations from certain reporting persons, we believe that, during the last fiscal year, all Section 16(a) filing requirements applicable our officers, directors and greater than 10%, beneficial owners were complied with.
Code of Ethics
We have adopted a corporate code of ethics that applies to our Chief Executive Officer and our Chief Financial Officer. A copy of the code of ethics is filed as an exhibit to this Form 10-K. We believe our code of ethics is reasonably designed to deter wrongdoing and promote honest and ethical conduct; provide full, fair, accurate, timely and understandable disclosure in public reports; comply with applicable laws; ensure prompt internal reporting of code violations; and provide accountability for adherence to the code.
Corporate Governance
We have no change in any state law or other procedures by which security holders may recommend nominees to our board of directors. In addition to having no nominating committee for this purpose, we currently have no specific audit committee and no audit committee financial expert. The board of directors has determined that such committees are excessive and beyond the scope of our business and needs.
This table summarizes the before-tax compensation for the Chief Executive Officer and Chief Financial Officer who were our only executive officers during fiscal 2009.
Summary Compensation
| | | Annual Compensation Awards | Long Term Compensation Payouts | | |
Name & Principal Position | Year | Salary ($) | Bonus ($) | Other Annual Compensation ($) | Restricted Stock Awards ($) | Securities Underlying Options (#) | LTIP Payouts ($) | All Other Compensation ($) |
| | | | | | | | | |
Paul K. Danner President & CEO(1) | 2008 2009 | $ 87,500 $ 150,000 | $-0- $-0- | $-0- $-0- | -0- -0- | -0- -0- | -0- -0- | -0- -0- |
| | | | | | | | | |
Philip J. Rauch CFO | 2008 2009 | $ 50,000 $ 75,000 | $-0- $-0- | $-0- $-0- | -0- -0- | -0- -0- | -0- -0- | -0- -0- |
(1) Mr. Danner was appointed President and Chief Executive Officer effective July 1, 2008.
The foregoing compensation table does not include certain fringe benefits made available on a nondiscriminatory basis to all our employees such as group health insurance, dental insurance, long-term disability insurance, vacation and sick leave. In addition, we make available certain non-monetary benefits to our executive officers with a view to acquiring and retaining qualified personnel and facilitating job performance. We consider such benefits to be ordinary and incidental business costs and expenses. The aggregate value of such benefits in the case of each executive officer listed in the above table, which cannot be precisely ascertained but which is less than 10% of the cash compensation paid to each such executive officer, is not included in such table.
Option/SAR Grants
No options were granted during the fiscal years ended December 31, 2009 and 2008.
Aggregated Option/SAR Exercises in Last Fiscal Year
No options were exercised during the fiscal years ended December 31, 2009 and 2008.
Employment Agreements
We do not have any employment agreements in place with our officers at this time.
Director Compensation
We do not provide for any compensation to members of our Board of Directors.
| SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
| Name and Address of Beneficial Owner | Number of Shares | % of Outstanding (3) |
| | | |
NewMarket Technology, Inc. 14860 Montfort Drive, Suite 210 Dallas, TX 75254 | 25,000,000(1) | | 9.6% |
| | | | |
All officers and directors as a group (3 persons) | 0(2) | | 0.0% |
(1) Based on the conversion of 10,000 shares of our Series C Preferred Stock. The shares have a par value of $0.001 per share and bear no dividend. The shares are convertible into 25 million shares of the common stock of the Company.
(2) Messrs. Jiang, Rauch and Verges, our officers and directors, do not own any common stock, options or warrants exercisable into the common stock of the Company on December 31, 2009. This does not include shares of the Company held by NewMarket Technology, Inc., which Messrs. Verges and Rauch are officers of.
(3) Based on 234,370,600 shares of common stock issued and outstanding on December 31, 2009 and assuming the conversion of the 10,000 shares of Series C Convertible Preferred Stock into 25,000,000 shares of common stock, there would be 259,370,600 shares outstanding.
| CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Certain Relationships and Related Transactions
In October 2006, the Company, at the time a wholly-owned subsidiary of NewMarket Technology, Inc. executed an Agreement and Plan of Reorganization (the “Agreement”) with Intercell International Corporation (“Intercell”). The Agreement provided for all of the issued and outstanding stock of the Company, one thousand (1,000) shares held by NewMarket Technology, to be exchanged for two million (2,000,000) restricted common shares of Intercell. As a result of the Agreement, we became the wholly-owned subsidiary of Intercell.
In a separate agreement, NewMarket Technology agreed to purchase 250,000 shares of a Series A Preferred Stock from Intercell for $250,000. The shares have a par value of $0.001 per share and a purchase price of $1.00 per share and bear no dividend. The shares are convertible into 60% of the issued and outstanding common stock of the Company, any time after August 31, 2007. The shares have a voting right equal to 60% of our issued and outstanding common stock. In November 2009, we entered into an Equity Reorganization Agreement with NewMarket Technology under which NewMarket Technology exchanged its 250,000 shares of Series A Preferred Stock for the issuance of 10,000 shares of Series C Convertible Preferred Stock and 5,000 shares of Series D Preferred Stock of the Company.
Director Independence
The Board of Directors currently consists of two directors. The Company’s board of directors has determined that there were no “independent” directors during 2009 as such term is defined by a national securities exchange or an inter-dealer quotation system.
| PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Summarized below is the aggregate amount of various professional fees billed by our principal accountants, Hamilton, PC in 2009 and our former accountants, Pollard-Kelley Auditing Services, Inc. (“PKASI”) in 2008:
| | | 2009 | | | 2008 | |
| | | | | | | | | |
| Audit fees | | $ | 20,000 | | | $ | 31,796 | |
| Tax fees | | | 0 | | | | 0 | |
| | | | | | | | | |
| Total: | | $ | 20,000 | | | $ | 31,796 | |
| EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) Financial Statements
The following financial statements of the Company and the related report of Independent Registered Public Accounting Firm thereon are set forth immediately following the Index of Financial Statements which appears on page F-1 of this report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2009 and 2008
Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2009, 2008 and 2007
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007
Notes to Consolidated Financial Statements
(b) Financial Statement Schedules
All schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.
(c) Exhibits
| | Exhibit No. | Description |
| | | |
| | 22 | Agreement for Purchase of Ownership Interest, dated October 20, 2003, by and between Brunetti DEC, LLC and the Company. |
| | 4.15 | Certificate of Designation of Series A Convertible Preferred Stock |
| | 4.27 | Certificate of Designation of Series B Convertible Preferred Stock |
| | 4.3* | Certificate of Designation of Series C Convertible Preferred Stock |
| | 4.4* | Certificate of Designation of Series D Preferred Stock |
| | 10.11 | 1995 Compensatory Stock Option Plan. |
| | 10.43 | Code of Ethics |
| | 10.54 | Agreement and Plan or Reorganization between Intercell International Corp., NewMarket China, Inc. and NewMarket Technology, Inc., dated August 7, 2007. |
| | 10.65 | Stock Purchase Agreement between Intercell International Corp. and NewMarket Technology, Inc. dated August 21, 2007. |
| | 10.7* | Equity Reorganization Agreement By and Between China Crescent Enterprises, Inc. and NewMarket Technology, Inc., dated November 16, 2009. |
| | 216 | List of Subsidiaries of Intercell International Corporation |
| | 31* | Certifications pursuant to Section 302 of the Sarbanes-Oxley Act |
| | 32* | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act |
*Filed herewith.
| 1. | Incorporated by reference to the Company's Registration Statement on Form S-8, Registration No. 333-67742, and effective August 16, 2001. |
| 2. | Current Report on Form 8-K, dated October 20, 2003. |
| 3. | Form 10-KSB for the fiscal year ended September 30, 2003. |
| 4. | Current Report on Form 8-K, dated August 11, 2007. |
| 5. | Current Report on Form 8-K, dated August 24, 2007. |
| 6. | Form 10-KSB for the fiscal year ended December 31, 2006. |
| 7. | Current Report on Form 8-K, dated March 31, 2009 |
Pursuant to the requirements of Section 13 or Section 15(d) 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: April 15, 2010
| | By: /s/ James Jiang | |
| | James Jiang, Ph.D. | |
| | President and Chief Executive Officer | |
Date: April 15, 2010
| | By: /s/ Philip J. Rauch | |
| | Philip J. Rauch | |
| | Chief Financial Officer | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| /s/ James Jiang | President and Chief Executive Officer | April 15, 2010 |
| James Jiang, Ph.D. | | |
| | | |
| /s/ Philip J. Rauch | Chief Financial Officer and Director | April 15, 2010 |
| Philip J. Rauch | | |
| | | |
| /s/ Philip M. Verges | Chairman of the Board | April 15, 2010 |
| Philip M. Verges | | |
The Board of Directors and Stockholders
China Crescent Enterprises, Inc.
Dallas, Texas
We have audited the accompanying balance sheets of China Crescent Enterprises, Inc., and subsidiaries as of December 31, 2009, and the related statements of operations, stockholders’ equity (deficit) and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The financials statements of China Crescent Enterprises, Inc. and subsidiaries as of December 31, 2008, were audited by other auditors whose report dated March 30, 2009, expressed an unqualified opinion.
We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of China Crescent Enterprises, Inc. and subsidiaries as of December 31, 2009, and the result of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
Hamilton, PC
/s/ Hamilton, PC
Denver, Colorado
April 15, 2010
| |
| Consolidated Balance Sheet | |
| | | | | | | |
| ASSETS | | December 31, 2009 | | | December 31, 2008 | |
| CURRENT ASSETS | | | | | | |
| Cash and cash equivalents | | $ | 3,977,382 | | | $ | 2,600,498 | |
| Accounts receivable | | | 6,950,902 | | | | 4,238,294 | |
| Inventory | | | 2,751,131 | | | | 1,858,233 | |
| Supplier advances and prepaid expenses | | | 1,804,015 | | | | 787,149 | |
| Advances to affiliate | | | 2,000,000 | | | | 687,567 | |
| Assets of discontinued operations | | | 9,377 | | | | 9,377 | |
| Other current assets | | | 147,613 | | | | 68,840 | |
| Total current assets | | | 17,640,420 | | | | 10,249,958 | |
| | | | | | | | | |
| PROPERTY AND EQUIPMENT, NET | | | 160,907 | | | | 93,185 | |
| INTANGIBLE ASSETS | | | 2,597 | | | | 2,993 | |
| | | | | | | | | |
| Total assets | | $ | 17,803,924 | | | $ | 10,346,136 | |
| | | | | | | | | |
| | | | | | | | | |
| LIABILITIES AND EQUITY | | | | | | | | |
| CURRENT LIABILITIES | | | | | | | | |
| Accounts payable | | $ | 1,204,616 | | | $ | 1,573,643 | |
| Short-term borrowing | | | 1,897,069 | | | | 1,798,542 | |
| Accrued expenses and other liabilities | | | 563,661 | | | | 445,258 | |
| Liabilities of discontinued operations | | | 308,683 | | | | 308,683 | |
| Total current liabilities | | | 3,974,029 | | | | 4,126,126 | |
| | | | | | | | | |
| Long-term debt | | | 500,000 | | | | 151,041 | |
| | | | | | | | | |
| Total liabilities | | | 4,474,029 | | | | 4,277,167 | |
| | | | | | | | | |
| | | | | | | | | |
| EQUITY | | | | | | | | |
| Common stock; $.001 par value; 1,000,000,000 shares authorized; | | | | | | | | |
| 234,370,600 and 2,786,186 shares issued and outstanding | | | | | | | | |
| at December 31, 2009 and 2008, respectively | | | 234,371 | | | | 2,786 | |
| Preferred stock; $.001 par value; 20,000,000 shares authorized; | | | | | | | | |
| Series A 0 and 250,000; Series C 10,000 and 0; | | | | | | | | |
| Series D 5,000 and 0 shares issued and outstanding | | | | | | | | |
| at December 31, 2009 and 2008, respectively | | | 15 | | | | 250 | |
| Additional paid-in capital | | | 5,950,581 | | | | 2,239,978 | |
| Accumulated comprehensive income | | | 739,511 | | | | 820,699 | |
| Retained earnings | | | 3,755,468 | | | | 1,392,493 | |
| Total China Crescent Enterprises, Inc. stockholders' equity | | | 10,679,946 | | | | 4,456,206 | |
| Noncontrolling interest | | | 2,649,949 | | | | 1,612,763 | |
| Total equity | | | 13,329,895 | | | | 6,068,969 | |
| | | | | | | | | |
| | | | | | | | | |
| Total liabilities and equity | | $ | 17,803,924 | | | $ | 10,346,136 | |
See accompanying notes to consolidated financial statements.
| |
| Consolidated Statement of Operations | |
| Year ended December 31, | |
| | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
| REVENUE | | $ | 45,628,397 | | | $ | 41,877,584 | | | $ | 40,007,006 | |
| | | | | | | | | | | | | |
| COST OF SALES | | | 41,578,424 | | | | 39,538,508 | | | | 38,211,067 | |
| | | | | | | | | | | | | |
| Gross Margin | | | 4,049,973 | | | | 2,339,076 | | | | 1,795,939 | |
| | | | | | | | | | | | | |
| OPERATING EXPENSES | | | | | | | | | | | | |
| Selling, general and administrative expenses | | | 1,138,739 | | | | 1,064,491 | | | | 1,085,982 | |
| Depreciation and amortization | | | 21,448 | | | | 16,332 | | | | 38,900 | |
| Total expenses | | | 1,160,187 | | | | 1,080,823 | | | | 1,124,882 | |
| | | | | | | | | | | | | |
| Income from operations | | | 2,889,786 | | | | 1,258,253 | | | | 671,057 | |
| | | | | | | | | | | | | |
| OTHER INCOME (EXPENSE) | | | | | | | | | | | | |
| Gain on sale of fixed assets | | | - | | | | - | | | | 303,631 | |
| Interest income | | | - | | | | 463 | | | | 8 | |
| Interest expense | | | (191,717 | ) | | | (193,095 | ) | | | (57,996 | ) |
| Other income | | | 102,687 | | | | 233,280 | | | | 82,799 | |
| Other expense | | | (7,453 | ) | | | (6,694 | ) | | | (8,827 | ) |
| Total other income (expense) | | | (96,483 | ) | | | 33,954 | | | | 319,615 | |
| | | | | | | | | | | | | |
| Net income before income tax (credit) and | | | | | | | | | | | | |
| minority interest | | | 2,793,303 | | | | 1,292,207 | | | | 990,672 | |
| Foreign income tax | | | (73,497 | ) | | | (40,602 | ) | | | (132,202 | ) |
| Minority interest in consolidated subsidiary | | | (537,186 | ) | | | (613,286 | ) | | | (420,646 | ) |
| | | | | | | | | | | | | |
| Net income | | | 2,182,620 | | | | 638,319 | | | | 437,824 | |
| Other comprehensive income | | | | | | | | | | | | |
| Gain (loss) on investment security | | | 8,368 | | | | (4,184 | ) | | | (1,109 | ) |
| Foreign currency translation gain (loss) | | | (89,556 | ) | | | 497,796 | | | | 473,056 | |
| | | | | | | | | | | | | |
| Comprehensive income | | $ | 2,101,432 | | | $ | 1,131,931 | | | $ | 909,771 | |
| | | | | | | | | | | | | |
| Income per weighted-average common share-basic | | $ | 0.03 | | | $ | 0.41 | | | $ | 0.48 | |
| Income per weighted-average common share-diluted | | $ | 0.03 | | | $ | 0.16 | | | $ | 0.19 | |
| | | | | | | | | | | | | |
| Number of weighted average common shares o/s-basic | | | 79,488,437 | | | | 1,567,489 | | | | 904,795 | |
| Number of weighted average common shares o/s-diluted | | | 79,488,437 | | | | 3,918,724 | | | | 2,261,988 | |
See accompanying notes to consolidated financial statements.
| |
| Consolidated Statement of Stockholders' Equity | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Additional | | | Accumulated | | | | | | Total | |
| | | Number of Shares | | | Par Value of Stock | | | Paid-In | | | Comprehensive | | | Retained | | | Stockholders' | |
| | | Preferred | | | Common | | | Preferred | | | Common | | | Capital | | | Income/(Loss) | | | Earnings | | | Equity | |
BEGINNING BALANCE, December 31, 2006 | | | 250,000 | | | | 1,037,737 | | | $ | 250 | | | $ | 1,038 | | | $ | 1,477,226 | | | $ | (144,860 | ) | | $ | 316,350 | | | $ | 1,650,004 | |
| Issuance of shares due to warrant exercise | | | | | | | 32,449 | | | | | | | | 32 | | | | (32 | ) | | | | | | | | | | | 0 | |
| Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | 471,947 | | | | | | | | 471,947 | |
| Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | 437,824 | | | | 437,824 | |
BALANCE, December 31, 2007 | | | 250,000 | | | | 1,070,186 | | | | 250 | | | | 1,070 | | | | 1,477,194 | | | | 327,087 | | | | 754,174 | | | | 2,559,774 | |
| Issuance of shares for exchange of debt | | | | | | | 1,716,000 | | | | | | | | 1,716 | | | | 762,784 | | | | | | | | | | | | 764,500 | |
| Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | 493,612 | | | | | | | | 493,612 | |
| Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | 638,319 | | | | 638,319 | |
BALANCE, December 31, 2008 | | | 250,000 | | | | 2,786,186 | | | | 250 | | | | 2,786 | | | | 2,239,978 | | | | 820,699 | | | | 1,392,493 | | | | 4,456,205 | |
| Issuance of preferred shares for purchase of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| additional interest in subsidiary | | | 750 | | | | | | | | 1 | | | | | | | | 749,999 | | | | | | | | 180,355 | | | | 930,355 | |
| Conversion of Series B preferred stock | | | (750 | ) | | | 81,027,024 | | | | (1 | ) | | | 81,027 | | | | (81,026 | ) | | | | | | | | | | | - | |
| Exchange of Series A preferred stock for | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| issuance of Series C & D preferred stock | | | | | | | | | | | (235 | ) | | | | | | | 235 | | | | | | | | | | | | - | |
| Conversion of note payable | | | | | | | 21,649,669 | | | | | | | | 21,650 | | | | 228,222 | | | | | | | | | | | | 249,872 | |
| Issuance of shares in exchange for debt | | | | | | | 128,907,721 | | | | | | | | 128,908 | | | | 2,813,173 | | | | | | | | | | | | 2,942,081 | |
| Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | (81,188 | ) | | | | | | | (81,188 | ) |
| Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,182,620 | | | | 2,182,620 | |
ENDING BALANCE, December 31, 2009 | | | 250,000 | | | | 234,370,600 | | | | 15 | | | | 234,371 | | | | 5,950,581 | | | | 739,511 | | | | 3,755,468 | | | | 10,679,945 | |
See accompanying notes to consolidated financial statements.
| |
| Consolidated Statement of Cash Flows | |
| Year ended December 31, | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | |
| Net Income | | $ | 2,182,620 | | | $ | 638,319 | | | $ | 437,824 | |
| Adjustments to reconcile net earnings to net cash | | | | | | | | | | | | |
| provided (used) by operating activities: | | | | | | | | | | | | |
| Non-controlling interest in consolidated subsidiary | | | 537,186 | | | | 613,286 | | | | 420,646 | |
| Depreciation | | | 21,448 | | | | 16,332 | | | | 38,900 | |
| Gain on sale of fixed assets | | | - | | | | - | | | | (303,631 | ) |
| Changes in operating assets and liabilities: | | | | | | | | | | | | |
| (Increase) decrease in accounts receivable | | | (2,054,206 | ) | | | (957,274 | ) | | | (1,010,760 | ) |
| (Increase) decrease in deposits and other assets | | | (1,064,832 | ) | | | (468,609 | ) | | | 163,716 | |
| (Increase) decrease in inventory | | | (792,898 | ) | | | (161,810 | ) | | | (650,812 | ) |
| Increase (decrease) in accounts payable | | | (375,770 | ) | | | (491,351 | ) | | | 1,299,415 | |
| Increase (decrease) in accrued expenses and other payables | | | 119,330 | | | | 81,226 | | | | 445,127 | |
| Net cash provided/(used) by operating activities | | | (1,427,122 | ) | | | (729,881 | ) | | | 840,425 | |
| | | | | | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | |
| Purchase of property and equipment | | | | | | | - | | | | (16,616 | ) |
| Advances to affiliates | | | | | | | | | | | | |
| Purchased retained earnings | | | 180,355 | | | | | | | | | |
| Sale of property and equipment | | | 52,681 | | | | - | | | | 17,467 | |
| Net cash provided by investing activities | | | 233,036 | | | | - | | | | 851 | |
| | | | | | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | |
| Proceeds from short-term borrowings | | | 500,000 | | | | 1,153,200 | | | | - | |
| Proceeds from long-term debt | | | 500,000 | | | | 148,415 | | | | - | |
| Payments on short-term borrowings | | | | | | | - | | | | (740,317 | ) |
| Payments on long-term debt | | | | | | | - | | | | - | |
| Proceeds from sale of convertible preferred stock | | | - | | | | - | | | | - | |
| Net cash provided/(used) by financing activities | | | 1,000,000 | | | | 1,301,615 | | | | (740,317 | ) |
| | | | | | | | | | | | | |
| Effect of exchange rates on cash | | | 1,570,970 | | | | 539,990 | | | | 219,471 | |
| | | | | | | | | | | | | |
| Net increase in cash and equivalents | | | 1,376,884 | | | | 1,111,724 | | | | 320,430 | |
| | | | | | | | | | | | | |
CASH, beginning of period | | | 2,600,498 | | | | 1,488,774 | | | | 1,168,344 | |
| | | | | | | | | | | | | |
CASH, end of period | | $ | 3,977,382 | | | $ | 2,600,498 | | | $ | 1,488,774 | |
| | | | | | | | | | | | | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | | | | | | | |
| | | | | | | | | | | | | |
| Non-Cash Financing Activities: | | | | | | | | | | | | |
| Common stock issued to settle debt | | $ | 2,942,081 | | | $ | 764,500 | | | $ | - | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
NOTE 1 - NATURE OF OPERATION:
China Crescent Enterprises, Inc. and Subsidiaries (“China Crescent” or the “Company”) is systems integration company. To date, the majority of the Company’s sales have been information technology products and services sold within mainland China through its wholly-owned foreign subsidiary, Clipper Technology, Ltd. (“CLPTEC”) located in Shanghai, China, and its majority-owned subsidiary Clipper Huali, Ltd. (“Clipper Huali”) located in Ningbo, China. In the fourth quarter of 2009, the Company acquired Dalian Aoyuan Electronic Technology Services Co., Ltd. (“DAETS”), a systems integration company located in Dalian, China and Shenzhen Newbao Technology Co., Ltd. (“Newbao”), a wireless equipment manufacturer located in Shenzhen, China. The Comp any’s headquarters is located in Dallas, Texas.
The Company is a majority-owned subsidiary of NewMarket Technology, Inc. (“NewMarket”), a Dallas, Texas based systems integration company.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying consolidated financial statements have been prepared by management in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”), and include all assets, liabilities, revenues and expenses of the Company, its wholly-owned subsidiary Brunetti, and its Chinese wholly-owned foreign entity, CLPTEC and CLPTEC’s subsidiaries, Clipper Huali, DAETS and Newbao. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 consolidated financial statements and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The fair values of the Company’s cash and cash equivalents, accounts receivable, accounts payable, and lines of credit approximate their carrying amounts due to the short maturities of these instruments.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less and money market instruments to be cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company evaluates the collectability of its accounts receivable based on a combination of factors. Collection risks are mitigated by (i) sales to well-established companies and governmental agencies (ii) ongoing credit evaluation of its customers; and (iii) frequent contact by the Company with its customers which enables the Company to monitor changes in business operations and to respond accordingly. The Company recognizes allowances for doubtful accounts based on the length of time the receivables are outstanding, the current business environment and historical experience.
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 straight-line method over the estimated useful lives of the related assets, which range from five to seven years.
Long-Lived Assets and Other Intangible Assets
Long-lived assets, such as property, plant and equipment and certain identifiable intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of any impairment loss for long-lived assets that management expects to hold and use is based on the fair value of the asset.
Revenue Recognition
The Company is engaged in the business of resale of computer hardware and software and IT consulting services in 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.
Foreign Currency Transaction and Translation Gains (Losses)
The principal operations of the Company are located in China. The local currency is the functional currency. Accordingly, gains and losses from the translation of the financial statements of the foreign subsidiaries are reported as a component of accumulated comprehensive income as a separate component of stockholders’ equity. Assets and liabilities denominated in currencies other that the U.S. dollar are remeasured into U.S. dollars at current exchange rates for monetary assets and liabilities, and historical exchange rates for nonmonetary assets and liabilities. Net revenue, cost of sales and expenses are remeasured at average exchange rates in effect during each reporting period, and net revenue, cost of sales and expenses related to the previously reported periods are remeasured at h istorical exchange rates. The Company includes gains and losses from foreign currency in net earnings.
Stock-Based Compensation
The Company recognizes the cost of stock-based compensation plans and awards in operations on a straight-line basis over the respective vesting period (if applicable) of the awards. The Company measures and recognizes compensation expense for all stock-based awards made to employees and directors. The compensation expense for the Company’s stock-based payments is based on estimated fair values at the time of the grant.
The Company estimates the fair value of stock-based awards on the date of the grant using an options pricing model. These option pricing models involve a number of assumptions, including the expected lives of stock options, the volatility of the market price of our common stock and interest rates. The Company is using the Black-Scholes option pricing model.
Net Income (Loss) 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 the Company’s stock option plan, stock warrants and convertible debt and convertible preferred stock.
Income Taxes
Income taxes are accounted for using the liability method. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment.
Comprehensive Income (Loss)
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 and the change in unrealized gain (loss) on certain available-for-sale securities.
Recently Issued Accounting Pronouncements
In June, 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 105-10, Generally Accepted Accounting Principles (“ASC 105-10”) (the “Codification”). ASC 105-10 established the exclusive authoritative reference for U.S. GAAP for use in financial statements, except for SEC rules and interpretative releases, which are also authoritative for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. The Company has included the references to the Codification, as appropriate, in these consolidated financial statements.
In October 2009, the FASB issued ASU 2009-13, Multiple Deliverable Revenue Arrangements (“ASU 2009-13”) which established guidance for accounting for multiple-deliverable revenue arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable; eliminates the residual method of allocation and requires arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method; and requires a vendor to determine its best estimate selling price in a manner consistent with that used to determine the selling price of the deliverable on a stand-alone basis. This guidance also expands the required disclosures related to a vendor’s multipl e-deliverable revenue arrangements. The guidance is effective beginning July 15, 2010 with early adoption permitted. The Company does not believe the adoption of this standard will have a material impact on its results of operations, financial condition, cash flows or disclosures.
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 amends FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (“ASC 820-10”), to require additional disclosures regarding fair value measurements. The amended guidance requires entities to disclose additional information regarding assets and liabilities that are transferred between levels of the fair value hierarchy. This guidance is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after Dece mber 15, 2010. The Company does not expect the adoption of this guidance to have a material impact on its financial statements.
NOTE 3 - REORGANIZATION:
In October 2006, the Intercell executed an Agreement and Plan of Reorganization (“the Agreement”) with NewMarket China, Inc. (“NewMarket China” or the “Company”), a wholly-owned subsidiary of NewMarket Technology, Inc. (“NewMarket Technology”). The Agreement, provided for Intercell to acquire from NewMarket Technology its subsidiary, NewMarket China through the exchange of all of the issued and outstanding stock of NewMarket China, one thousand (1,000) shares held by NewMarket Technology for two million (2,000,000) common shares of Intercell. As a result of the Agreement, NewMarket China became the wholly-owned subsidiary of Intercell.
In a separate agreement, NewMarket Technology agreed to purchase 250,000 shares of a Series A Preferred Stock from Intercell for $250,000. The shares have a par value of $0.001 per share and a purchase price of $1.00 per share and bear no dividend. The shares are convertible into 60% of the issued and outstanding common stock of the Company, any time after August 31, 2006. The shares have a voting right equal to 60% of the issued and outstanding common stock of the Company.
As a result of this reorganization, the Company’s stockholders’ equity has been adjusted to reflect the effect of this transaction.
NOTE 4 - DISCONTINUED OPERATIONS:
Brunetti Acquisition
On October 20, 2003, the Company acquired a controlling 60% equity interest in Brunetti in exchange for a $700,000 cash contribution to Brunetti. On January 30, 2004, the Company acquired the remaining 40% equity interest in Brunetti in exchange for a $300,000 cash contribution to Brunetti.
On October 11, 2004, the Company discontinued the operations of Brunetti and implemented steps to liquidate the assets of Brunetti. On March 1, 2005, Brunetti filed a voluntary petition for relief in the United States Bankruptcy Court, District of Colorado under Chapter 7 of Title 7 of the U.S. Bankruptcy Code.
At December 31, 2009, the carrying values of Brunetti’s assets and liabilities (presented as assets and liabilities of discontinued operations) are as follows:
| Cash | | $ | 9,377 | |
Total assets (all current) | | $ | 9,377 | |
| | | | | |
| Accounts payable | | $ | 179,473 | |
| Related party payable | | | 25,035 | |
| Line of credit | | | 10,735 | |
| Accrued payroll | | | 93,440 | |
Total liabilities (all current) | | $ | 308,683 | |
Brunetti reported no revenues or income during the year ended December 31, 2009. Revenues attributable to Brunetti operations for the year ended December 31, 2009 and 2008 reported in discontinued operations, were $0 and $0, respectively Operations related to Brunetti resulted in net income during the year ended December 31, 2009 and 2008 of $0 and $0, respectively. Brunetti did not incur any income taxes during these periods.
NOTE 5 - INVESTMENT IN VYTA CORP.:
At December 31, 2008, the Company owned 23,245 shares of Vyta Corporation (“Vyta”) common stock. Beginning October 21, 2003, based on factors which indicated that the Company did not have the ability to exercise significant influence, the Company changed its method of accounting for the Vyta shares to the method of accounting prescribed by ASC 320-10, Investments-Debt and Equity Securities. The Company had previously classified its investment in these Vyta shares as available for sale securities, in which unrealized gains (losses) are computed on the average cost basis, and are recorded in other comprehensive income (loss). On May 15, 2009, the management of Vyta announced that the company has ceased operations. As a result, the remaining value of the investment ($139 as of June 30, 2009) has been written off as of September 30, 2009.
NOTE 6 - NOTES PAYABLE AND CREDIT FACILITIES:
NOTES PAYABLE
As of December 31, 2009, the Company had several unsecured promissory notes outstanding with two different financial institutions in China:
| | | Annual | | | | Amount | |
| | | Interest | | Maturity | | Outstanding | |
| Institution | | Rate | | Date | | at 12/31/09 | |
| | | | | | | | |
| Shanghai Pudong Development Bank | | | 5.78 | % | 12/04/10 | | $ | 395,662 | |
| Shanghai Pudong Development Bank | | | 5.31 | % | 12/14/10 | | $ | 952,520 | |
| Guangdong Development Bank | | | (1 | ) | 1/31/10 | | $ | 548,887 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total: | | | | | | | $ | 1,897,069 | |
| | (1) The interest rate for this note is variable based on an official government rate. At December 31, 2009, the annual interest rate was approximately 6%. |
NOTE 7 - STOCKHOLDERS’ EQUITY:
Preferred Stock
The Company has authorized 20,000,000 shares of $0.001 par value preferred stock. The rights and privileges of the preferred stock are to be determined by the Board of Directors prior to issuance.
During the year ended December 31, 2006, the Company issued 250,000 shares of its Series A Preferred Stock in exchange for $250,000 (see Note 3). The funds were put into escrow, with an unrelated third party escrow agent, with the express purpose to be used to negotiate and purchase the outstanding debt of not only the Company, but also its subsidiary, Brunetti. The shares have a par value of $0.001 per share and a purchase price of $1.00 per share and bear no dividend. The shares are convertible into 60% of the issued and outstanding common stock of the Company, any time after August 31, 2007. The shares have a voting right equal to 60% of the issued and outstanding common stock of the Company.
In April 2009, the Company issued 750 shares of Series B Convertible Preferred Stock, $.001 par value, to The Huali Group in connection with the acquisition by CLPTEC of an additional 25% interest in Clipper-Huali, Ltd. (“Clipper-Huali”), bringing its total ownership in Clipper-Huali to 76%. In the fourth quarter of 2009, all 750 shares of Series B Convertible Preferred Stock were converted into a total of 81,027,024 shares of the common stock of the Company.
In November 2009, pursuant to the terms of the Equity Reorganization Agreement between the Company and NewMarket, NewMarket agreed to tender 250,000 shares of Series A Preferred Stock to the Company in exchange for the issuance of 10,000 shares of Series C Convertible Preferred Stock and 5,000 shares of Series D Preferred Stock. The Series C Convertible Preferred Stock bears no dividend and is convertible into 25 million shares of common stock of the Company upon the effectiveness of a registration statement with the Securities and Exchange Commission. The Series D Preferred Stock bears no dividend and the holders have voting rights at all times equal to 51% of the total outstanding shares of the common stock of the Company.
Common Stock
The Company has authorized 1,000,000,000 shares of $0.001 par value common stock. The Company had 234,370,600 shares of common stock issued and outstanding at December 31, 2009. In March 2009, the Company filed a Definitive Information Statement on Schedule 14C indicating that the Company had authorized a reverse split of the common stock issued and outstanding on a one new share for twenty-five old shares basis. Additionally, the Company’s Articles of Incorporation were to be amended to increase the number of authorized common shares from two hundred million (200,000,000) to one billion (1,000,000,000). These actions were effective on May 12, 200 9 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.
During the year ended December 31, 2009, the Company issued 209,934,745 shares of common stock (on a post-split basis) for the following:
| · | 81,027,024 shares were issued pursuant to the conversion of 750 shares of Series B Convertible Preferred Stock. |
| · | 21,649,669 shares were issued pursuant to the conversion of a note payable. |
| · | 128,907,721 shares were issued pursuant to various agreements to exchange debt for equity. |
NOTE 8 - STOCK OPTIONS AND WARRANTS:
Stock Options
The Company had established a Compensatory Stock Option Plan (the “1995 Plan”) and had reserved 10,000,000 shares of common stock for issuance under the Option Plan. Incentive stock options can be 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 can be 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 are determined by the board of directors. All stock options expire 10 years from the date of grant.
A summary of the status of the 1995 Plan is as follows:
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | Shares | | | Weighted Average Exercise Price | | | Shares | | | Weighted Average Exercise Price | |
| Outstanding at beginning of Year | | | 4,750,000 | | | $ | 0.43 | | | | 4,762,500 | | | $ | 0.44 | |
| Granted | | | - | | | | - | | | | - | | | | - | |
| Cancelled | | | - | | | | - | | | | - | | | | - | |
| Expired | | | - | | | | - | | | | ( 12,500 | ) | | | - | |
| | | | - | | | | - | | | | - | | | | - | |
| Outstanding at end of year | | | 4,750,000 | | | $ | 0.43 | | | | 4,750,000 | | | $ | 0.43 | |
| | | | | | | | | | | | | | | | | |
| Options exercisable at end of Year | | | 4,750,000 | | | $ | 0.43 | | | | 4,750,000 | | | $ | 0.43 | |
The following table summarizes information about stock options outstanding as of December 31, 2009:
| Options Outstanding | Options Exercisable |
Range of Exercise Prices | Number of Options | Remaining Contractual Life | Weighted Average Exercise Price | Number of Options | Exercise Price |
$0.41-0.51 | 4,750,000 | 4-5 years | $ 0.43 | 4,750,000 | $ 0.41-0.51 |
In August 2008, the Company established a new Stock Option and Award Plan (the “2008 Plan”) and has reserved 10,000,000 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 the Board of Directors. There have been no grants made under the 2008 Plan as of December 31, 2009.
Stock Warrants
At December 31, 2009, there were no warrants to purchase common stock were outstanding:
During the year ended December 31, 2009, warrants to purchase up to 700,000 shares of common stock expired.
NOTE 9 - INCOME TAXES:
The Company did not incur a domestic income tax expense for the years ended December 31, 2009 and 2008.
As of December 31, 2009, the Company has net operating loss carry forwards of approximately $3.4 million which expire between 2008 and 2026. The Company's net operating loss carry forwards may be subject to annual limitations, which could reduce or defer the utilization of the losses as a result of an ownership change as defined in Section 382 of the Internal Revenue Code. The Company is currently examining the effects of the reorganization on the net operating loss carry forwards (see Note 3).
NOTE 10 - EARNINGS PER SHARE:
Basic and diluted net income (loss) per share (“EPS”) is computed by dividing net income (loss) (the numerator) by the weighted average number of common shares outstanding (the denominator), during the period. Diluted EPS gives effect to potentially dilutive common shares outstanding during the period, except in periods where it is anti-dilutive.
The following table provides a reconciliation of the numerators and denominators used in calculating basic and diluted earnings per share for the periods presented below (in thousands, except per share data):
| | | Year ended December 31, | |
| | | | 2009 | | | | 2008 | |
| | | | | | | | | |
| Net income, as reported | | $ | 2,182,620 | | | $ | 638,319 | |
| Basic earnings per share: | | | | | | | | |
| Basic weighted average shares outstanding | | | 79,488,437 | | | | 1,567,489 | |
| Basic earnings per common share | | $ | 0.03 | | | $ | 0.41 | |
| Diluted earnings per share: | | | | | | | | |
| Basic weighted average shares outstanding | | | 79,488,437 | | | | 1,567,489 | |
| Effective of dilutive instruments | | | - | | | | 2,351,235 | |
| Diluted weighted average shares outstanding | | | 79,488,437 | | | | 3,918,724 | |
| Diluted earnings per common share | | $ | 0.03 | | | $ | 0.16 | |
The earning-per-share data have been adjusted to reflect the effect of a reverse stock split of the Company’s common stock which was effective in May 2009. (See Note 6).
NOTE 11 – FAIR VALUE MEASUREMENT
The Company has adopted the provisions of ASC 820-10, Fair Value Measurements and Disclosures, with respect to its non-financial assets and liabilities effective January 1, 2009. The adoption of ASC 820-10 did not have a material impact on the Company’s consolidated financial statements.
NOTE 12 - OTHER COMPREHENSIVE INCOME:
Balances of related after-tax components comprising accumulated other comprehensive income, included in stockholders’ equity, at December 31, 2009 was as follows:
| | | Foreign Currency | | | Gain (Loss) on | |
| | | Translation Adjustment | | | Investment Security | |
| | | | | | | |
| Balance at January 1, 2007 | | $ | (141,785 | ) | | $ | (3,075 | ) |
| Change for the year ended December 31, 2007 | | | 473,056 | | | | (1,109 | ) |
| Balance at January 1, 2008 | | $ | 331,271 | | | $ | (4,184 | ) |
| Change for the year ended December 31, 2008 | | | 497,796 | | | | (4,184 | ) |
| Balance at December 31, 2008 | | | 829,067 | | | | (8,368 | ) |
| Change for the year ended December 31, 2009 | | | (89,556 | ) | | | 8,368 | |
| Balance at December 31, 2009 | | $ | 739,511 | | | $ | - | |
NOTE 13 - 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. The Company has determined that it does not have any separately reportable operating segments and therefore operates and evaluates its business as one reporting unit.
NOTE 14 - COMMITMENTS AND CONTINGENCIES:
Office Leases
The principal executive office of the Company is located at 14860 Montfort Drive, Suite 210, Dallas, Texas 75254. The Company moved to these offices during the fall of 2006. NewMarket Technology, the majority stockholder of the Company, leases the space.
CLPTEC’s offices are located at No. 123 Qinjiang Road, Shanghai, 200233, Peoples Republic of China. The offices are leased from Gaozhi Science and Technology Development, Ltd., a strategic partner, on a month-to-month basis. The rent expense for the year ended December 31, 2009 was approximately $6,336.
Litigation
From time to time, the Company is involved in various claims and legal actions arising in the ordinary course of business. Although the amount of any liability that could arise with respect to currently pending actions cannot be accurately predicted, in the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity.
NOTE 15 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
The following interim financial information presents the 2009 and 2008 results of operations on a quarterly basis (in thousands, except per share amounts):
| | | First | | | Second | | | Third | | | Fourth | |
| | | Quarter | | | Quarter | | | Quarter | | | Quarter | |
| | | | | | | | | | | | | |
| 2009: | | | | | | | | | | | | |
| Revenues | | $ | 7,429 | | | $ | 9,557 | | | $ | 13,344 | | | $ | 15,298 | |
| Operating income | | | 223 | | | | 1,294 | | | | 982 | | | | 391 | |
| Net income | | | 112 | | | | 1,023 | | | | 744 | | | | 304 | |
| Income per share, basic | | $ | 0.00 | | | $ | 0.01 | | | $ | 0.01 | | | $ | 0.01 | |
| Income per share, diluted | | $ | 0.00 | | | $ | 0.01 | | | $ | 0.01 | | | $ | 0.01 | |
| | | | | | | | | | | | | | | | | |
| 2008: | | | | | | | | | | | | | | | | |
| Revenues | | $ | 8,516 | | | $ | 10,675 | | | $ | 11,145 | | | $ | 11,542 | |
| Operating income | | | 162 | | | | 521 | | | | 360 | | | | 215 | |
| Net income | | | 97 | | | | 265 | | | | 155 | | | | 121 | |
| Income per share, basic | | $ | 0.08 | | | $ | 0.18 | | | $ | 0.08 | | | $ | 0.07 | |
| Income per share, diluted | | $ | 0.03 | | | $ | 0.07 | | | $ | 0.03 | | | $ | 0.03 | |
| | | | | | | | | | | | | | | | | |
The earning-per-share data have been adjusted to reflect the effect of a reverse stock split of the Company’s common stock which was effective in May 2009. (See Note 6).
NOTE 16 – SUBSEQUENT EVENTS (UNAUDITED):
In March 2010, the Company executed a non-binding letter of intent (the “Fonix LOI”) under which CLPTEC, the Company’s wholly-owned subsidiary based in Shanghai, China, would acquire 100% of Shanghai Gaozhi Software Systems, Ltd. (“Gaozhi”), a telecommunications software developer, from Fonix Corporation (“Fonix”) in exchange for the issuance of a newly authorized series of preferred stock, the terms and conditions of which are subject to negotiation. The transaction is subject to the parties successfully entering into a definitive agreement. It is anticipated that this transaction will close in the third quarter of 2010.
Simultaneous with the execution of the Fonix LOI, the Company entered into a one-year management agreement with Fonix under which CLPTEC will assist in the management of Gaozhi until the execution of a definitive agreement between the parties for the acquisition of Gaozhi by CLPTEC.
F-16
