صدر التقرير:
15-Apr-2010
Annual Report
ITEM 7. 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 achieved. 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 entering 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. 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