UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C.
20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period
ended June 30, 2014
☐ TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition
period from ____________ to ____________
Commission file number: 001-36055
China Commercial
Credit, Inc.
(Exact name of registrant
as specified in its charter)
Delaware |
|
45-4077653 |
(State or other jurisdiction of
incorporation or organization) |
|
(I.R.S. Employer
Identification No.) |
No. 1688, Yunli
Road, Tongli
Wujiang
Jiangsu Province
People’s Republic
of China
(Address of principal
executive offices)
(86-0512) 6396-0022
(Registrant’s
telephone number, including area code)
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 ☐ No ☒
Indicate by check
mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐
No ☒
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 definition 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 |
☐ |
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 ☐ No ☒
As of February 12, 2015, 12,255,062
shares of the Company’s Common Stock, $0.001 par value per share, were issued and outstanding.
CHINA COMMERCIAL
CREDIT, INC.
FORM 10-Q
INDEX
|
Page
Number |
|
|
NOTE REGARDING FORWARD-LOOKING STATEMENTS |
2 |
|
|
PART I. FINANCIAL INFORMATION |
|
|
|
|
Item 1. |
Financial Statements |
3 |
|
|
|
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
34 |
|
|
|
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
50 |
|
|
|
Item 4. |
Controls and Procedures |
50 |
|
|
|
PART II. OTHER INFORMATION |
|
|
|
|
Item 1. |
Legal Proceedings |
51 |
|
|
|
Item 1A. |
Risk Factors |
51 |
|
|
|
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
71 |
|
|
|
Item 3. |
Defaults Upon Senior Securities |
71 |
|
|
|
Item 4. |
Mine Safety Disclosures |
71 |
|
|
|
Item 5. |
Other Information |
71 |
|
|
|
Item 6. |
Exhibits |
71 |
|
|
|
SIGNATURES |
72 |
Note Regarding Forward-Looking
Statements
The
information contained in this Quarterly Report on Form 10-Q includes some statements that are not purely historical and that are
“forward-looking statements.” Such forward-looking statements include, but are not limited to, statements regarding
our company and our management’s expectations, hopes, beliefs, intentions or strategies regarding the future, including our
financial condition and results of operations. In addition, any statements that refer to projections, forecasts or other characterizations
of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipates,”
“believes,” “continue,” “could,” “estimates,” “expects,” “intends,”
“may,” “might,” “plans,” “possible,” “potential,” “predicts,”
“projects,” “seeks,” “should,” “will,” “would” and similar expressions,
or the negatives of such terms, may identify forward-looking statements, but the absence of these words does not mean that a statement
is not forward-looking.
The
forward-looking statements contained herein are based on current expectations and beliefs concerning future developments and the
potential effects on us. Future developments actually affecting us may not be those anticipated. These forward-looking statements
involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results
or performance to be materially different from those expressed or implied by these forward-looking statements. Examples are statements
regarding future developments with respect to the following:
|
● |
Our
ability to satisfy the inquiry from NASDAQ in order to have our common stock resume trading; |
|
|
|
|
● |
Our
ability to improve internal controls and procedures; |
|
● |
Our ability to develop and market our microcredit lending and guarantee business in the future; |
|
|
|
|
● |
Our ability to effectively control the lending risk and collect
from default borrowers;
|
|
● |
Our ability to make timely adjustment to ensure adequate loan loss
provisions;
|
|
● |
Inflation and fluctuations in foreign currency exchange rates; |
|
|
|
|
● |
Our on-going ability to obtain all mandatory and voluntary government and other industry certifications, approvals, and/or licenses to conduct our business; |
|
|
|
|
● |
Development of a liquid trading market for our securities; and |
|
|
|
|
● |
The costs we may incur in the future from complying with current and future governmental regulations and the impact of any changes in the regulations on our operations. |
You
should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the
forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither
we nor any other person assume responsibility for the accuracy and completeness of the forward-looking statements. Except as required
by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report
to conform these statements to actual results or to changes in our expectations.
You
should review the factors described in the section entitled “Risk Factors” herein and other documents we file from
time to time with the SEC. We qualify all of our forward-looking statements by these cautionary statements.
CHINA COMMERCIAL CREDIT, INC.
CONSOLIDATED BALANCE SHEETS
| |
June 30,
2014 (Unaudited) | | |
December 31,
2013 | |
| |
| | |
| |
ASSETS | |
| | |
| |
Cash | |
$ | 7,399,767 | | |
$ | 9,405,865 | |
Restricted cash | |
| 3,988,679 | | |
| 10,784,960 | |
Notes receivable | |
| 194,916 | | |
| - | |
Loans receivable, net of allowance for loan losses $6,549,771 and $1,375,948 for June 30, 2014 and December 31, 2013, respectively, | |
| 84,713,786 | | |
| 88,827,465 | |
Due from related parties | |
| 1,137,010 | | |
| - | |
Due from a non-controlling shareholder | |
| 8,122 | | |
| - | |
Interest receivable | |
| 1,455,685 | | |
| 1,124,734 | |
Tax receivable, net | |
| 1,741,858 | | |
| 820,526 | |
Property and equipment, net | |
| 197,204 | | |
| 254,795 | |
Guarantee paid on behalf of guarantee service customers | |
| 8,841,659 | | |
| 1,082,486 | |
Other assets | |
| 1,616,498 | | |
| 702,617 | |
Total Assets | |
$ | 111,295,184 | | |
$ | 113,003,448 | |
| |
| | | |
| | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| | | |
| | |
Liabilities | |
| | | |
| | |
Short-term bank loans | |
$ | 16,242,995 | | |
$ | 16,360,721 | |
Deposits payable | |
| 5,183,843 | | |
| 9,659,362 | |
Unearned income from financial guarantee services | |
| 170,657 | | |
| 482,029 | |
Accrual for financial guarantee services | |
| 2,457,260 | | |
| 588,740 | |
Other current liabilities | |
| 142,441 | | |
| 629,073 | |
Deferred tax liability | |
| 342,281 | | |
| 333,617 | |
Total Liabilities | |
| 24,539,477 | | |
| 28,053,542 | |
Shareholders' Equity | |
| | | |
| | |
Series A Preferred Stock (par value $0.001 per share, 1,000,000 shares authorized at June 30, 2014 and December 31, 2013, respectively; nil and nil shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively) | |
$ | - | | |
$ | - | |
Series B Preferred Stock (par value $0.001 per share, 5,000,000 shares authorized at June 30, 2014 and December 31, 2013, respectively; nil and nil shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively) | |
| - | | |
| - | |
Common stock (par value $0.001 per share, 100,000,000 shares authorized; 12,246,812 and 10,430,657 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively) | |
| 12,247 | | |
| 10,431 | |
Subscription receivable | |
| (1,062 | ) | |
| (1,062 | ) |
Additional paid-in capital | |
| 59,394,175 | | |
| 52,704,107 | |
Statutory reserve | |
| 5,442,150 | | |
| 5,442,150 | |
Retained earnings | |
| 16,113,622 | | |
| 20,300,689 | |
Accumulated other comprehensive income | |
| 5,794,575 | | |
| 6,493,591 | |
Total Shareholders’ Equity | |
| 86,755,707 | | |
| 84,949,906 | |
Total Liabilities and Shareholders’ Equity | |
$ | 111,295,184 | | |
$ | 113,003,448 | |
See notes to the consolidated financial statements
CHINA COMMERCIAL CREDIT, INC.
CONSOLIDATED STATEMENTS OF
INCOME AND COMPREHENSIVE INCOME
| |
For the Three Months Ended June 30, | | |
For the Six Months Ended June 30, | |
| |
2014 (Unaudited) | | |
2013 (Unaudited) | | |
2014 (Unaudited) | | |
2013 (Unaudited) | |
Interest income | |
| | |
| | |
| | |
| |
Interests and fees on loans | |
| $1,673 ,559 | | |
$ | 3,275,026 | | |
$ | 4,530,033 | | |
$ | 6,187,104 | |
Interests on deposits with banks | |
| 9,093 | | |
| 21,327 | | |
| 51,541 | | |
| 118,494 | |
Total interest and fees income | |
| 1,682,652 | | |
| 3,296,353 | | |
| 4,581,574 | | |
| 6,305,598 | |
| |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| | | |
| | | |
| | | |
| | |
Interest expense on short-term bank loans | |
| (247,935 | ) | |
| (316,697 | ) | |
| (493,125 | ) | |
| (622,852 | ) |
Net interest income | |
| 1,434,717 | | |
| 2,979,656 | | |
| 4,088,449 | | |
| 5,682,746 | |
| |
| | | |
| | | |
| | | |
| | |
Provision for loan losses | |
| (4,607,866 | ) | |
| (352,872 | ) | |
| (5,196,046 | ) | |
| (841,088 | ) |
Net interest (loss) income after provision for loan losses | |
| (3,173,149 | ) | |
| 2,626,784 | | |
| (1,107,597 | ) | |
| 4,841,658 | |
| |
| | | |
| | | |
| | | |
| | |
Commissions and fees on financial guarantee services | |
| 90,050 | | |
| 361,867 | | |
| 388,360 | | |
| 773,076 | |
(Under) Over provision on financial guarantee services | |
| (1,567,355 | ) | |
| 104,530 | | |
| (1,877,208 | ) | |
| 148,700 | |
Commission and fees on guarantee services, net | |
| (1,477,305 | ) | |
| 466,397 | | |
| (1,488,848 | ) | |
| 921,776 | |
| |
| | | |
| | | |
| | | |
| | |
Revenue after loan expenses | |
| (4,650,454 | ) | |
| 3,093,181 | | |
| (2,596,445 | ) | |
| 5,763,434 | |
| |
| | | |
| | | |
| | | |
| | |
Non-interest income | |
| | | |
| | | |
| | | |
| | |
Government incentive | |
| 81,408 | | |
| - | | |
| 81,408 | | |
| 25,775 | |
Other non-interest income | |
| 48,369 | | |
| - | | |
| 169,329 | | |
| - | |
Total non-interest income | |
| 129,777 | | |
| - | | |
| 250,737 | | |
| 25,775 | |
| |
| | | |
| | | |
| | | |
| | |
Non-interest expense | |
| | | |
| | | |
| | | |
| | |
Salaries and employee surcharge | |
| (222,268 | ) | |
| (146,931 | ) | |
| (408,403 | ) | |
| (344,875 | ) |
Rental expenses | |
| (65,232 | ) | |
| (64,810 | ) | |
| (130,982 | ) | |
| (128,847 | ) |
Business taxes and surcharge | |
| (45,776 | ) | |
| (143,142 | ) | |
| (158,388 | ) | |
| (257,589 | ) |
Other operating expenses | |
| (600,380 | ) | |
| (419,506 | ) | |
| (1,132,494 | ) | |
| (870,370 | ) |
Total non-interest expense | |
| (933,656 | ) | |
| (774,389 | ) | |
| (1,830,267 | ) | |
| (1,601,681 | ) |
| |
| | | |
| | | |
| | | |
| | |
(Loss) Income Before Taxes | |
| (5,454,333 | ) | |
| 2,318,792 | | |
| (4,175,975 | ) | |
| 4,187,528 | |
Income tax expense | |
| 173,633 | | |
| (354,969 | ) | |
| (11,092 | ) | |
| (653,837 | ) |
Net (Loss) Income | |
| (5,280,700 | ) | |
| 1,963,823 | | |
| (4,187,067 | ) | |
| 3,533,691 | |
| |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
(Loss) Earnings per Share- Basic and Diluted | |
$ | (0.467 | ) | |
$ | 0.218 | | |
$ | (0.383 | ) | |
$ | 0.393 | |
| |
| | | |
| | | |
| | | |
| | |
Weighted Average Shares Outstanding-Basic and Diluted | |
| 11,315,900 | | |
| 9,000,000 | | |
| 10,935,530 | | |
| 9,000,000 | |
| |
| | | |
| | | |
| | | |
| | |
Net (Loss) Income | |
| (5,280,700 | ) | |
| 1,963,823 | | |
| (4,187,067 | ) | |
| 3,533,691 | |
Other comprehensive income | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| 108,611 | | |
| 1,056,705 | | |
| (699,016 | ) | |
| 1,428,066 | |
Comprehensive (Loss) Income | |
$ | (5,172,089 | ) | |
$ | 3,020,528 | | |
$ | (4,886,083 | ) | |
$ | 4,961,757 | |
See notes to the consolidated financial statements
CHINA COMMERCIAL CREDIT, INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
| |
For The Six Months Ended June 30, | |
| |
2014 (Unaudited) | | |
2013 (Unaudited) | |
Cash Flows from Operating Activities: | |
| | |
| |
Net (loss) income | |
$ | (4,187,067 | ) | |
$ | 3,533,691 | |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | | |
| | |
Depreciation | |
| 55,890 | | |
| 55,279 | |
Provision for loan losses | |
| 5,196,046 | | |
| 841,088 | |
Provision on financial guarantee services | |
| 1,877,208 | | |
| (148,700 | ) |
Deferred tax expense | |
| 11,092 | | |
| 3,649 | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Interest receivable | |
| (339,850 | ) | |
| 219,611 | |
Tax receivable | |
| (929,440 | ) | |
| (363,381 | ) |
Other assets | |
| (8,169 | ) | |
| 240,965 | |
Unearned income from guarantee services | |
| (308,635 | ) | |
| (137,701 | ) |
Other current liabilities | |
| (392,592 | ) | |
| (120,035 | ) |
Net Cash Provided by Operating Activities | |
| 974,483 | | |
| 4,124,466 | |
| |
| | | |
| | |
Cash Flows from Investing Activities: | |
| | | |
| | |
Originated loans disbursement to third parties | |
| (32 ,304,906) | | |
| (138,596,425 | ) |
Originated loans disbursement to related parties | |
| (1,139,712 | ) | |
| - | |
Loans collection from third parties | |
| 30,355,559 | | |
| 134,476,939 | |
Payment of loans on behalf of guarantees | |
| (11,053,637 | ) | |
| - | |
Collection from guarantees for loan paid on behalf of guarantees | |
| 1,841,450 | | |
| - | |
Deposit released from banks for financial guarantee services | |
| 8,660,612 | | |
| 4,629,533 | |
Deposit paid to banks for financial guarantee services | |
| (4,890,133 | ) | |
| (1,836,509 | ) |
Purchases of property and equipment | |
| (15,191 | ) | |
| (58,758 | ) |
Net Cash Used in Investing Activities | |
| (8,545,958 | ) | |
| (1,385,220 | ) |
| |
| | | |
| | |
Cash Flows From Financing Activities: | |
| | | |
| | |
Issuance of Series A Preferred stocks | |
| - | | |
| 50,000 | |
Issuance of Series B Preferred Stocks | |
| - | | |
| 70,000 | |
Issuance cost of Series A and Series B Preferred Stocks | |
| - | | |
| (12,744 | ) |
Proceeds from second public offering | |
| 6,601,544 | | |
| - | |
Proceeds from exercise of underwriter over-allotment | |
| 25,000 | | |
| - | |
Second public offering cost | |
| (912,830 | ) | |
| (80,019 | ) |
Capital contribution from a shareholder | |
| 11,571 | | |
| - | |
Cash disbursed to a non- controlling shareholder | |
| (1,150,820 | ) | |
| - | |
Cash repaid from a non- controlling shareholder | |
| 1,135,940 | | |
| - | |
Cash collected from a founder shareholder, net | |
| - | | |
| 41,000 | |
Net Cash Provided by Financing Activities | |
| 5,710,405 | | |
| 68,237 | |
| |
| | | |
| | |
Effect of Exchange Rate Changes on Cash and Cash Equivalents | |
| (145,028 | ) | |
| 45,650 | |
| |
| | | |
| | |
Net (Decrease) Increase In Cash and Cash Equivalents | |
| (2,006,098 | ) | |
| 2,853,133 | |
Cash and Cash Equivalents at Beginning of Period | |
| 9,405,865 | | |
| 1,588,061 | |
Cash and Cash Equivalents at End of Period | |
$ | 7,399,767 | | |
$ | 4,441,194 | |
| |
| | | |
| | |
Supplemental Cash Flow Information | |
| | | |
| | |
Cash paid for interest expense | |
$ | 425,556 | | |
$ | 622,852 | |
Cash paid for income tax | |
$ | 930,437 | | |
$ | 1,016,497 | |
See notes to the consolidated financial statements
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 1. | ORGANIZATION AND PRINCIPAL ACTIVITIES |
China Commercial Credit, Inc. (“CCC”
or “the Company”) is a holding company that was incorporated under the laws of the State of Delaware on December 19,
2011.
Wujiang Luxiang Rural Microcredit Co., Ltd
(“Wujiang Luxiang”) is a company established under the laws of the PRC on October 21, 2008 and its shareholders consists
of 11 companies established under the laws of the People's Republic of China (“PRC”) and 1 PRC individual, Mr. Qin
Huichun, the Company's former CEO (collectively, the "Wujiang Luxiang Shareholders"). The Company is a microcredit company
primarily engaged in providing direct loans and financial guarantee services to small-to-medium sized enterprises (“SMEs”),
farmers and individuals in Wujiang City, Jiangsu Province, PRC.
On August 7, 2012, CCC entered into certain
share exchange agreements with 16 PRC individuals, each of whom is the sole shareholder of a British Virgin Island company (collectively
“16 BVI entities”), and the 16 BVI entities. These 16 PRC individuals represent the ultimate owners of the Wujiang
Luxiang Shareholders.
Upon completion of the share exchange, the
16 PRC individuals, through their respective BVI entities, acquired 7,270,920 shares of Common Stock, par value $0.001
per share (the "Common Stock") of CCC in exchange for their agreement to cause the Wujiang Luxiang Shareholders to enter
into the VIE Agreements. As a result of the share exchange, the 16 BVI entities became CCC shareholders, who collectively owned
approximately 90% of CCC’s total issued and outstanding shares of Common Stock at the time of the share exchange.
Since at the time of the share exchange neither
CCC nor the 16 BVI entities had any operations and only a minor amount of net assets, the share exchange shall be considered as
a capital transaction in substance, rather than a business combination.
The share exchange is recorded as a “reverse
recapitalization”, equivalent to the issuance of stock to the 16 BVI entities for the net monetary assets of CCC. The accounting
for the transaction is identical to a reverse acquisition, except that no goodwill is recorded.
Management of the Company looked through the
16 BVI entities and treated the share exchange as a reverse merger between CCC and Wujiang Luxiang for accounting purposes, even
though the share exchange was between CCC and the 16 BVI entities, because of the following reasons: (i) neither CCC nor the 16
BVI entities had any operations and only a minor amount of net assets; (ii) the 16 PRC individual, who are the owners of the 16
BVI entities, are the ultimate owners of Wujiang Luxiang, and (iii) the sole purpose of the share exchange was to issue approximately
90% of pre-public offering CCC shares to the ultimate owners of the Wujiang Luxiang Shareholders.
VIE AGREEMENTS WITH WUJIANG LUXIANG
Subsequent to the share exchange, on September
26, 2012, the Company through its indirectly wholly owned subsidiary, Wujiang Luxiang Information Technology Consulting Co. Ltd.
(“WFOE”), entered into a series of VIE Agreements with Wujiang Luxiang and the Wujiang Luxiang Shareholders. The purpose
of the VIE Agreements is solely to give WFOE the exclusive control over Wujiang Luxiang’s management and operations.
The significant terms of the VIE Agreements
are summarized below:
Exclusive Business Cooperation Agreement
Pursuant to the Exclusive Business Cooperation
Agreement between Wujiang Luxiang and WFOE, WFOE provides Wujiang Luxiang with technical support, consulting services and other
management services relating to its day-to-day business operations and management, on an exclusive basis, utilizing its advantages
in technology, human resources, and information. Additionally, Wujiang Luxiang grants an irrevocable and exclusive option to WFOE
to purchase from Wujiang Luxiang any or all of its assets at the lowest purchase price permitted under PRC laws. For services rendered
to Wujiang Luxiang by WFOE under the Agreement, the service fee Wujiang Luxiang is obligated to pay shall be calculated based on
the time of services rendered multiplied by the corresponding rate, which is approximately equal to the net income of Wujiang Luxiang.
The Exclusive Business Cooperation Agreement
shall remain in effect for ten years unless it is terminated by WFOE with 30-day prior notice. Wujiang Luxiang does not have the
right to terminate the agreement unilaterally. WFOE may unilaterally extend the term of this agreement with prior written notice.
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 1. | ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED) |
Share Pledge Agreement
Under the Share Pledge Agreement between the
Wujiang Luxiang Shareholders and WFOE, the 12 Wujiang Luxiang Shareholders pledged all of their equity interests in Wujiang Luxiang
to WFOE to guarantee the performance of Wujiang Luxiang’s obligations under the Exclusive Business Cooperation Agreement.
Under the terms of the agreement, in the event that Wujiang Luxiang or its shareholders breach their respective contractual obligations
under the Exclusive Business Cooperation Agreement, WFOE, as pledgee, shall be entitled to certain rights, including, but not limited
to, the right to collect dividends generated by the pledged equity interests. The Wujiang Luxiang Shareholders also agreed that
upon occurrence of any event of default, as set forth in the Share Pledge Agreement, WFOE is entitled to dispose of the pledged
equity interest in accordance with applicable PRC laws. The Wujiang Luxiang Shareholders further agreed not to dispose of the pledged
equity interests or take any actions that would prejudice WFOE’s interest.
Exclusive Option Agreement
Under the Exclusive Option Agreement, the Wujiang
Luxiang Shareholders irrevocably granted WFOE (or its designee) an exclusive option to purchase, to the extent permitted under
PRC law, once or at multiple times, at any time, part or all of their equity interests in Wujiang Luxiang. The option price is
equal to the capital paid in by the Wujiang Luxiang Shareholders subject to any appraisal or restrictions required by applicable
PRC laws and regulations.
Power of Attorney
Under the Power of Attorney, the Wujiang Luxiang
Shareholders authorize WFOE to act on their behalf as their exclusive agent and attorney with respect to all rights as shareholders,
including but not limited to: (a) attending shareholders' meetings; (b) exercising all the shareholder's rights, including
voting, that shareholders are entitled to under the laws of China and the Articles of Association, including but not limited to
the sale or transfer or pledge or disposition of shares in part or in whole; and (c) designating and appointing on behalf of shareholders
the legal representative, the executive director, supervisor, the chief executive officer and other senior management members of
Wujiang Luxiang. The Power of Attorney is coupled with an interest and shall be irrevocable and continuously valid from the date
of execution, so long as the Wujiang Shareholder is a shareholder of the Company.
Timely Reporting Agreement
To ensure Wujiang Luxiang promptly provides
all of the information that WFOE and the Company need to file various reports with the SEC, a Timely Reporting Agreement was entered
between Wujiang Luxiang and the Company.
Under the Timely Reporting Agreement, Wujiang
Luxiang agrees that it is obligated to make its officers and directors available to the Company and promptly provide all information
required by the Company so that the Company can file all necessary SEC and other regulatory reports as required.
INCORPORATION OF PFL
On September 5, 2013, CCC HK established Pride
Financial Leasing (Suzhou) Co. Ltd. (“PFL”) to offer financial leasing of machinery and equipment, transportation vehicles,
and medical devices to municipal government agencies, hospitals and SMEs in Jiangsu Province and beyond. As of June 30, 2014, PFL
did not have any significant operations except for initial organizational activities.
VIE AGREEMENTS WITH PRIDE INFORMATION
On February 19, 2014, WFOE entered into certain
contractual arrangements with Mr. Huichun Qin and Pride Information Technology Co. Ltd. (“Pride Information”), a domestic
entity established on February 19, 2014 and 100% owned by Mr. Qin. Pursuant to these contractual arrangements, WFOE shall have
the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Pride
Information, including absolute control rights and the rights to the assets, property and revenue of Pride Information and as a
result, approximately 100% of the net income of Pride Information shall be paid as a service fee to WFOE.
The contractual arrangements between WFOE,
Pride Information and its sole shareholder, Mr. Huichun Qin, have substantially the same terms as those between WFOE, Wujiang Luxiang
and its shareholders.
Pride Information operates an online portal
(www. pridelendingclub.com) to match prospective borrowers with lenders. As of June 30, 2014, Pride Information is in the beginning
stage of operation and has generated minimum revenue.
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
(a) Basis of presentation and principle of consolidation
The unaudited interim consolidated financial
statements are prepared and presented in accordance with accounting principles generally accepted in the United States (“U.S.
GAAP”).
The interim financial information as of June
30, 2014 and for the three months and six months ended June 30, 2014 and 2013 have been prepared without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission (the “SEC”) pursuant to Regulation S-X. Certain information
and footnote disclosures, which are normally included in annual financial statements prepared in accordance with U.S. GAAP, have
been omitted pursuant to those rules and regulations. The unaudited interim financial information should be read in conjunction
with the audited financial statements and the notes thereto, included in the Form 10-K for the fiscal year ended December 31, 2013
filed with the SEC on March 31, 2014.
In the opinion of management, all adjustments
(which include normal recurring adjustments) necessary to present a fair statement of the Company’s financial position as
of June 30, 2014, its results of operations for the three months and six months ended June 30, 2014 and 2013, and its cash flows
for the six months ended June 30, 2014 and 2013, as applicable, have been made. The unaudited interim results of operations are
not necessarily indicative of the operating results for the full fiscal year or any future periods.
(b) Operating segments
ASC 280, Segment Reporting requires companies
to report financial and descriptive information about their reportable operating segments, including segment profit or loss, certain
specific revenue and expense items, and segment assets. The Company has no reportable segments. All of the Company's activities
are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others.
For example, lending is dependent upon the ability of the Company to fund itself with registered capital and other borrowings and
manage interest rate and credit risk.
The Company has only one reportable segment,
which is to provide financial services in the PRC domestic market, primarily in Wujiang City, Jiangsu Province. The Company’s
chief operating decision-maker (“CODM”) has been identified as the Chief Executive Officer, who reviews operating results
to make decisions about allocating resources and assessing performance for both the direct lending and guarantee business and the
anticipated financial leasing business. The Company’s net revenues are all generated from customers in the PRC. Hence, the
Company operates and manages its business without segments. For the three months and six months ended June 30, 2014 and 2013, there
was no one customer that accounted for more than 10% of the Company's revenue.
(c) Reclassifications
Certain items in the financial statements of
comparative period have been reclassified to conform to the financial statements for the current period.
(d) Cash
Cash consists of bank deposits with original
maturities of three months or less, which are unrestricted as to withdrawal and use. The Company maintains accounts at banks and
has not experienced any losses from such concentrations.
(e) Restricted cash
Restricted cash represents cash pledged with
banks as guarantor deposit for the guarantee business customers. The banks providing loans to the Company’s guarantee service
customers generally require the Company, as the guarantor of the loans, to pledge a cash deposit of 10% to 20% of the guaranteed
amount to an escrow account and is restricted from use. The deposits are released after the guaranteed bank loans are paid off
and the Company’s guarantee obligation expires which is usually within 12 months.
(f) Loans receivable, net
Loans receivable primarily represent loan amount
due from customers. The management has the intent and ability to hold such receivable for the foreseeable future or until maturity
or payoff. Loans receivable are recorded at unpaid principal balances, net of unearned income and allowance that reflects the Company’s
best estimate of the amounts that will not be collected. Loan origination and commitment fees and certain direct loan origination
costs collected from customers are directly recorded in current year interests and fees on loans. The loans receivable portfolio
consists of corporate loans and personal loans (Note 6). The Company does not charge loan origination and commitment fees.
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
(g) Allowance for loan losses
The allowance for loan losses is increased
by charges to income and decreased by charge offs (net of recoveries). Recoveries represent subsequent collection of amounts previously
charged-off. The increase in allowance for loan losses is the netting effect of “reversal” and “provision”
for both business and personal loans. If the ending balance of the allowance for loan losses after any charge offs (net of recoveries)
is less than the beginning balance, it will be recorded as a “reversal”; if it is larger, it will be recorded as a
“provision” in the allowance for loan loss. The netting amount of the “reversal” and the “provision”
is presented in the consolidated statements of income and comprehensive income.
The Company recognizes a charge-off when management
determines that full repayment of a loan is not probable. The primary factor in making that determination is the potential outcome
of a lawsuit against the delinquent debtor. The Company will recognize a charge-off when the Company loses contact with the delinquent
borrower for more than six months or when the court rules against the Company to seize the collateral asset of the delinquent debt
from either the guarantor or borrower.
The allowance for loan losses is maintained
at a level believed to be reasonable by management to absorb probable losses inherent in the portfolio as of each balance sheet
date. The allowance is based on factors such as the size and current risk characteristics of the portfolio, an assessment of individual
loan and actual loss, delinquency, and/or risk rating record within the portfolio (Note 7). The Company evaluates its allowance
for loan losses on a quarterly basis or more often as necessary.
(h) Interest receivable
Interest on loans receivable is accrued and
credited to income as earned. The Company determines a loan past due status by the number of days that have elapsed since a borrower
has failed to make a contractual loan payment. Accrual of interest is generally discontinued when either (i) reasonable doubt exists
as to the full, timely collection of interest or principal or (ii) when a loan becomes past due by more than 90 days. Additionally,
any previously accrued but uncollected interest is reversed. Subsequent recognition of income occurs only to the extent payment
is received, subject to management’s assessment of the collectability of the remaining interest and principal. Loans are
generally restored to an accrual status when it is no longer delinquent and collectability of interest and principal is no longer
in doubt and past due interest is recognized at that time.
The interest reversed due to the above reason
was $624,777 and $210,136 as of June 30, 2014 and December 31, 2013, respectively.
(i) Property and equipment
The property and equipment are stated at cost
less accumulated depreciation. The depreciation is computed on a straight-line method over the estimated useful lives of the assets
with 5% salvage value. Estimated useful lives of property and equipment are stated in Note 11.
The Company eliminates the cost and related
accumulated depreciation of assets sold or otherwise retired from the accounts and includes any gain or loss in the statement of
income. The Company charges maintenance, repairs and minor renewals directly to expenses as incurred; major additions and betterment
to equipment are capitalized.
(j) Impairment of long-lived assets
The Company applies the provisions of ASC No.
360 Sub topic 10, "Impairment or Disposal of Long-Lived Assets"(ASC 360-10) issued by the Financial Accounting Standards
Board ("FASB"). ASC 360-10 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to
result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized
for the amount by which the carrying value exceeds the fair value.
The Company tests long-lived assets, including
property and equipment and finite lived intangible assets, for impairment at least annually or more frequently upon the occurrence
of an event or when circumstances indicate that the net carrying amount is greater than its fair value. Assets are grouped and
evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups
of assets. The Company considers historical performance and future estimated results in its evaluation of potential impairment
and then compares the carrying amount of the asset to the future estimated cash flows expected to result from the use of the asset.
If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount
of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally measured
by discounting expected future cash flows as the rate the Company utilizes to evaluate potential investments. The Company estimates
fair value based on the information available in making whatever estimates, judgments and projections are considered necessary.
There were no impairment losses in the three months and six months ended June 30, 2014 and 2013.
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
(k) Fair values of financial instruments
ASC Topic 825, Financial Instruments (“Topic
825”) requires disclosure of fair value information of financial instruments, whether or not recognized in the balance sheets,
for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based
on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments.
Topic 825 excludes certain financial instruments and all nonfinancial assets and liabilities from its disclosure requirements.
Accordingly, the aggregate fair value amounts do not represent the underlying value of the Company.
Level 1 |
inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
Level 2 |
inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. |
Level 3 |
inputs to the valuation methodology are unobservable and significant to the fair value. |
As of June 30, 2014 and December 31, 2013,
financial instruments of the Company primarily comprise of cash, restricted cash, accrued interest receivable, other receivable,
short-term bank loans, deposits payable and accrued expenses, which were carried at cost on the consolidated balance sheets, and
carrying amounts approximated their fair values because of their generally short maturities.
(l) Foreign currency translation
The reporting currency of the Company is United
States Dollars (“US$” or “U.S. dollars”), which is also the Company’s functional currency. The PRC
subsidiaries maintain their books and records in its local currency, the Renminbi Yuan (“RMB”), which is their functional
currencies as being the primary currency of the economic environment in which these entities operate.
For financial reporting purposes, the financial
statements of the Company prepared using RMB, are translated into the Company’s reporting currency, United States Dollars
at the exchange rates quoted by www.oanda.com. Assets and liabilities are translated using the exchange rate at each balance sheet
date. Revenue and expenses are translated using average rates prevailing during each reporting period, and shareholders’
equity is translated at historical exchange rates. Adjustments resulting from the translation are recorded as a separate component
of accumulated other comprehensive income in shareholders’ equity.
| |
June 30, 2014 | | |
December 31, 2013 | |
Balance sheet items, except for equity accounts | |
| 6.1565 | | |
| 6.1122 | |
| |
For
the six months ended June 30, | |
| |
2014 | | |
2013 | |
Items in the statements of income and comprehensive income, and statements of cash flows | |
| 6.1419 | | |
| 6.2437 | |
(m) Use of estimates
The preparation of consolidated financial statements
in conformity with U.S.GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts
of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, management
reviews these estimates using the currently available information. Changes in facts and circumstances may cause the Company to
revise its estimates. Significant accounting estimates reflected in the financial statements include: (i) the allowance for doubtful
debts; (ii) estimates of losses on unexpired loan contracts and guarantee service contracts (iii) accrual of estimated liabilities;
and (iv) contingencies and litigation.
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
(n) Revenue recognition
Revenue is recognized when there are probable economic benefits
to the Company and when the revenue can be measured reliably, on the following:
|
● |
Interest income on loans. Interest on loan receivables is accrued monthly in accordance with their contractual terms and recorded in accrued interest receivable. The Company does not charge prepayment penalty from customers. |
|
● |
Commission on guarantee service. The Company receives the commissions from guarantee services in full at inception and records as unearned income before amortizing it throughout the period of guarantee. |
|
● |
Non-interest income. Non-interest income mainly includes government incentive and rental income from the sub-leasing of certain of the Company’s leased office space to third parties. Government incentive is provided by Jiangsu Provincial government on a yearly basis to promote the development of micro credit agencies in Jiangsu Province. |
(o) Financial guarantee service contracts
Financial guarantee contracts provide guarantees
which protect the holder of a debt obligation against non-payment when due. Pursuant to such guarantee, the Company makes payments
if the obligor responsible for making payments fails to do so when scheduled.
The contract amounts reflect the extent of
involvement the Company has in the guarantee transactions and also represent the Company’s maximum exposure to credit loss
in its guarantee business.
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its customers. Financial instruments representing credit risk
are as follows:
| | |
June 30, 2014 (Unaudited) | | |
December 31, 2013 | |
| Guarantee | | |
$ | 29,139,933 | | |
$ | 59,692,091 | |
A provision for possible loss to be absorbed
by the Company for the financial guarantee it provides is recorded as an accrued liability when the guarantees are made and recorded
as “Accrual for financial guarantee services” on the consolidated balance sheet. This liability represents probable
losses and is increased or decreased by accruing an “(Under)/over provision on financial guarantee services” against
the income of commissions and fees on guarantee services reserve.
This is done throughout the life of the guarantee,
as necessary when additional relevant information becomes available. The methodology used to estimate the liability for possible
guarantee loss considers the guarantee contract amount and a variety of factors, which include, depending on the counterparty,
latest financial position and performance of the borrowers, actual defaults, estimated future defaults, historical loss experience,
estimated value of collaterals or guarantees the costumers or third parties offered, and other economic conditions such as the
economy trend of the area and the country. The estimates are based upon currently available information.
Based on the past experience, the Company
estimates the probable loss for immature financial guarantee services to be 1 % of contract amount and made a provision of
$291,399 as of June 30, 2014 for possible credit risk of its guarantees. Besides the Company accrued specific provisions for repayment
on behalf of guarantee customers who defaulted on their loans, in the amount of $2,165,861. The total accrual for financial
guarantee services amounted to $2,457,260 and $588,740 as of June 30, 2014 and December 31, 2013, respectively. The Company
reviews the provision on a quarterly basis.
(p) Non-interest expenses
Non-interest expenses primarily consist of
salary and benefits for employees, traveling cost, entertainment expenses, depreciation of equipment, office rental expenses, professional
service fee, office supply, etc.
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
(q) Income tax
Current income taxes are provided for in accordance
with the laws of the relevant taxing authorities. As part of the process of preparing financial statements, the Company is required
to estimate its income taxes in each of the jurisdictions in which it operates. The Company accounts for income taxes using the
liability method. Under this method, deferred income taxes are recognized for tax consequences in future years of differences between
the tax bases of assets and liabilities and their reported amounts in the financial statements at each year-end and tax loss carry
forwards. Deferred tax assets and liabilities are measured using enacted tax rates applicable for the differences that are expected
to affect taxable income.
(r) Comprehensive income
Comprehensive income includes net income and
foreign currency adjustments. Comprehensive income is reported in the statements of operations and comprehensive income.
Accumulated other comprehensive income, as
presented on the balance sheets, are the cumulative foreign currency translation adjustments.
(s) Operating leases
The Company leases its principal office under
a lease agreement that qualifies as an operating lease. The Company records the rental under the lease agreement in the operating
expense when incurred.
(t) Commitments and contingencies
In the normal course of business, the Company
is subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of
matters, including, among others, government investigations and tax matters. In accordance with ASC No. 450 Sub topic 20, “Loss
Contingencies”, the Company records accruals for such loss contingencies when it is probable that a liability has been incurred
and the amount of loss can be reasonably estimated.
(u) Recently issued accounting standards
The FASB issued ASU No. 2014-05, Service Concession Arrangements.
A service concession agreement is an arrangement between a public-sector entity and an operating entity under which the operating
entity operates the grantor's infrastructure. This ASU specifies that an operating entity should not account for a service concession
arrangement within the scope of this ASU as a lease in accordance with ASC 840 - Leases. An operating entity should refer to other
ASUs as applicable to account for various aspects of a service concession arrangement. The amendments also specify that the infrastructure
used in a service concession agreement should not be recognized as property, plant and equipment of the operating entity. The amendments
in this ASU are effective using a modified retrospective approach for annual reporting periods beginning after December 15, 2014
and interim periods within those annual periods. The adoption of this standard is not expected to have a material impact on the
Company’s (consolidated) financial position and results of operations.
The FASB has issued ASU No. 2014-07, Applying Variable Interest
Entities Guidance to Common Control Leasing Arrangements. Under current U.S. GAAP, a company is required to consolidate an entity
in which it has a controlling financial interest. The new guidance allows a private company to elect (when certain conditions exist)
not to apply the variable interest entity guidance to a lessor under common control. Instead, the private company would make certain
disclosures about the lessor and the leasing arrangement. If elected, the accounting alternative should be applied to all leasing
arrangements meeting the conditions in this ASU. The alternative should be applied retrospectively to all periods presented, and
is effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December
15, 2015. Early application is permitted for all financial statements that have not yet been made available for issuance. The adoption
of this standard is not expected to have a material impact on the Company’s (consolidated) financial position and results
of operations.
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
The FASB has issued ASU No. 2014-09, Revenue
from Contracts with Customers. This ASU supercedes the revenue recognition requirements in Accounting Standards Codification 605
- Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the company expects to be entitled in exchange for those goods or services. This ASU is effective on January 1, 2017 and should
be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially
applying the ASU recognized at the date of initial application. For all other entities (nonpublic entities), the amendments in
this ASU are effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods
beginning after December 15, 2018. A nonpublic entity may elect to apply this guidance earlier, however, only as prescribed in
this ASU. The adoption of this standard is not expected to have a material impact on the Company’s (consolidated) financial
position and results of operations.
The FASB has issued ASU No. 2014-12, Compensation
– Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance
Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting,
and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance
target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation
cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent
the compensation cost attributable to the period(s) for which the requisite service has already been rendered.. The amendments
in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015.
Earlier adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated
financial position and results of operations.
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 3. | VARIABLE INTEREST ENTITIES AND OTHER CONSOLIDATION MATTERS |
On September 26, 2012, the Company, through
WFOE, entered into a series of contractual arrangements, also known as “VIE Agreements” with Wujiang Luxiang and the
Wujiang Luxiang Shareholders.
On February 19, 2014, WFOE entered into certain
contractual arrangements, having substantially the same terms as those of the VIE Agreements with Pride Information and its sole
shareholder, Mr. Huichun Qin.
The significant terms of the VIE Agreements
are summarized in Note 1.
VIEs are entities that have either a total
equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial
support, or whose equity investors lack the characteristics of a controlling financial interest, such as through voting rights,
right to receive the expected residual returns of the entity or obligation to absorb the expected losses of the entity. The variable
interest holder, if any, that has a controlling financial interest in a VIE is deemed to be the primary beneficiary and must consolidate
the VIE. WFOE is deemed to have a controlling financial interest and be the primary beneficiary of the entities mentioned in Note
1 above, because it has both of the following characteristics:
|
1. |
power to direct activities of a VIE that most significantly impact the entity’s economic performance, and |
|
2. |
obligation to absorb losses of the entity that could potentially be significant to the VIE or right to receive benefits from the entity that could potentially be significant to the VIE. |
In addition, as all of these contractual arrangements
are governed by PRC law and provide for the resolution of disputes through either arbitration or litigation in the PRC, they would
be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal
environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in
the PRC legal system could further limit the Company’s ability to enforce these contractual arrangements. Furthermore, these
contracts may not be enforceable in China if PRC government authorities or courts take a view that such contracts contravene PRC
laws and regulations or are otherwise not enforceable for public policy reasons. In the event the Company is unable to enforce
these contractual arrangements, it may not be able to exert effective control over Wujiang Luxiang, and its ability to conduct
its business may be materially and adversely affected.
All of the Company’s main current operations
are conducted through Wujiang Luxiang. Current regulations in China permit Wujiang Luxiang to pay dividends to us only out of its
accumulated distributable profits, if any, determined in accordance with their articles of association and PRC accounting standards
and regulations. The ability of Wujiang Luxiang to make dividends and other payments to the Company may be restricted by factors
that include changes in applicable foreign exchange and other laws and regulations.
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 3. | VARIABLE INTEREST ENTITIES AND OTHER CONSOLIDATION MATTERS (CONTINUED) |
The following financial statement amounts and
balances of the VIEs were included in the accompanying consolidated financial statements as of June 30, 2014 and December 31, 2013
and for the three and six months ended June 30, 2014 and 2013:
| |
June 30, 2014 (Unaudited) | | |
December 31, 2013 | |
Total assets | |
$ | 103,166,814 | | |
$ | 105,477,241 | |
Total liabilities | |
| 24,565,148 | | |
| 28,053,542 | |
| |
For The Three Months Ended
June 30, | | |
For The Six Months Ended
June 30, | |
| |
2014 (Unaudited) | | |
2013 (Unaudited) | | |
2014 (Unaudited) | | |
2013 (Unaudited) | |
Revenue | |
$ | 1,770,784 | | |
$ | 3,658,220 | | |
$ | 4,963,736 | | |
$ | 7,078,674 | |
Net (loss)/income | |
| (4,879,905 | ) | |
| 2,060,629 | | |
| (3,641,869 | ) | |
| 3,699,857 | |
All of the Company’s current revenue
is generated in RMB. Any future restrictions on currency exchanges may limit our ability to use net revenues generated in RMB to
make dividends or other payments in US$ or fund possible business activities outside China.
Foreign currency exchange regulation in China
is primarily governed by the following rules:
|
· |
Foreign Exchange Administration Rules (1996), as amended in August 2008, or the Exchange Rules; and |
|
· |
Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules. |
Under the Administration Rules, RMB is freely
convertible for current account items, including the distribution of dividends, interest payments, trade and service related foreign
exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments and investments
in securities outside of China, unless the prior approval of the State Administration of Foreign Exchange (“SAFE”)
is obtained and prior registration with the SAFE is made. Foreign-invested enterprises like WFOE that need foreign exchange for
the distribution of profits to their shareholders may affect payment from their foreign exchange accounts or purchase and pay foreign
exchange rates at the designated foreign exchange banks to their foreign shareholders by producing board resolutions for such profit
distribution. Based on their needs, foreign invested enterprises are permitted to open foreign exchange settlement accounts for
current account receipts and payments of foreign exchange along with specialized accounts for capital account receipts and payments
of foreign exchange at certain designated foreign exchange banks.
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(a) Credit risk
Credit risk is one of the most significant
risks for the Company’s business. Credit risk exposures arise principally in lending activities and financial guarantee activities
which is an off-balance sheet financial instrument.
Credit risk is controlled by the application
of credit approvals, limits and monitoring procedures. The Company manages credit risk through in-house research and analysis of
the Chinese economy and the underlying obligors and transaction structures. To minimize credit risk, the Company requires collateral
in the form of rights to cash, securities or property and equipment.
The Company identifies credit risk collectively
based on industry, geography and customer type. This information is monitored regularly by management.
1.1 Lending activities
In measuring the credit risk of lending loans
to corporate customers, the Company mainly reflects the “probability of default” by the customer on its contractual
obligations and considers the current financial position of the customer and the exposures to the customer and its likely future
development. For individual customers, the Company uses standard approval procedures to manage credit risk for personal loans.
The Company measures and manages the credit
quality of loans to corporate and personal customers based on the “Guideline for Loan Credit Risk Classification” (the
“Guideline”) issued by the China Banking Regulatory Commission, which requires commercial banks and micro-credit institutions
to classify their corporate and personal loans into five categories: (1) pass, (2) special-mention, (3) substandard, (4) doubtful
and (5) loss, among which loans classified in the substandard, doubtful and loss categories are regarded as non-performing loans.
The Guideline also determines the percentage of each category of non-performing loans as allowances, which are 2% on special-mention
loan, 25% on substandard loans, 50% on doubtful loans and 100% on loss loans.
The five categories are defined as follows:
|
(1) |
Pass: loans for which borrowers can honor the terms of the contracts, and there is no reason to doubt their ability to repay principal and interest of loans in full and on a timely basis. |
|
(2) |
Special-mention: loans for which borrowers are still able to service the loans currently, although the repayment of loans might be adversely affected by some factors. |
|
(3) |
Substandard: loans for which borrowers’ ability to service loans is apparently in question and borrowers cannot depend on their normal business revenues to pay back the principal and interest of loans. Certain losses might be incurred by the Company even when guarantees are executed. |
|
(4) |
Doubtful: loans for which borrowers cannot pay back principal and interest of loans in full and significant losses will be incurred by the Company even when guarantees are executed. |
|
(5) |
Loss: principal and interest of loans cannot be recovered or only a small portion can be recovered after taking all possible measures and resorting to necessary legal procedures. |
Five-category loan classifications are re-examined
on a quarterly basis. Adjustments are made to these classifications as necessary according to customers’ operational and
financial position.
The Guideline stipulates that micro-credit
companies, which are limited to provide short-term loans and financial guarantee services to only small to medium size businesses,
should choose a reasonable methodology to provide allowance for the probable loss from the credit risk, and the allowance should
not be less than the allowance amount derived from the five-category analysis. The Company continuously performs the analysis and
believes that the allowance amount it provided is consistently more than the allowance amount derived from the five-category analysis.
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.2 Guarantee activities
The off-balance sheet commitments arising from
guarantee activities carry similar credit risk to loans and the Company takes a similar approach on risk management.
Off-balance sheet commitments with credit exposures
are also assessed and categorized with reference to the Guideline .
(b) Liquidity risk
The Company is also exposed to liquidity risk
which is risk that it is unable to provide sufficient capital resources and liquidity to meet its commitments and business needs.
Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When necessary, the Company
will turn to other financial institutions and the owners to obtain short-term funding to meet the liquidity shortage.
(c) Foreign currency risk
A majority of the Company’s operating activities and a significant portion of the Company’s assets and liabilities
are denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either
through the Peoples’ Bank of China (“PBOC”) or other authorized financial institutions at exchange rates quoted
by PBOC. Approval of foreign currency payments by the PBOC or other regulatory institutions requires submitting a payment application
form together with suppliers' invoices and signed contracts. The value of RMB is subject to changes in central government policies
and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System
market.
Restricted cash represents cash pledged with
banks as guarantor deposit for the Company's guarantee service customers, amounting to $4.0 and $10.8 million as of June 30, 2014
and December 31, 2013, respectively. The banks providing loans to the Company’s guarantee service customers generally require
the Company, as the guarantor of the loans, to pledge a cash deposit usually in the range of 10% to 20% of the guaranteed amount.
The deposits are released after the guaranteed bank loans are paid off and the Company’s guarantee obligation expires which
is usually within 12 months.
At the same time, the Company requires the
guarantee service customers to make a deposit to the Company of the same amount as the deposit the Company pledged to the banks
for their loans . The Company recorded the deposit received as “deposits payable” on the unaudited consolidated
balance sheet. The deposit is returned to the customer after the customer repays the bank loan and the Company’s guarantee
obligation expires.
The interest rates on loan issued ranged between
9.6%~18.0% and 9.6% ~ 21.6% for the six months ended June 30, 2014 and 2013, respectively.
6.1 Loans receivable consist of the following:
| |
June 30,
2014 (Unaudited) | | |
December 31,
2013 | |
| |
| | |
| |
Business loans | |
$ | 56,134,831 | | |
$ | 56,620,893 | |
Personal loans | |
| 35,128,726 | | |
| 33,582,520 | |
Total Loans receivable | |
| 91,263,557 | | |
| 90,203,413 | |
Allowance for impairment losses | |
| | | |
| | |
Collectively assessed | |
| (6,549,771 | ) | |
| (1,375,948 | ) |
Individually assessed | |
| - | | |
| - | |
Allowance for loan losses | |
| (6,549,771 | ) | |
| (1,375,948 | ) |
Loans receivable, net | |
$ | 84,713,786 | | |
$ | 88,827,465 | |
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
6. LOANS RECEIVABLE, NET (CONTINUED)
The Company originates loans to customers located
primarily in Wujiang City, Jiangsu Province. This geographic concentration of credit exposes the Company to a higher degree of
risk associated with this economic region.
All loans are short-term loans that the Company
has made to either business or individual customers. As of June 30, 2014 and December 31, 2013, the Company had 103 and 105 business
loan customers, and 106 and 112 personal loan customers, respectively. Most loans are either guaranteed by a third party whose
financial strength is assessed by the Company to be sufficient or secured by collateral. Allowance on loan losses are estimated
on quarterly basis in accordance with “The Guidance on Provision for Loan Losses” published by PBOC (Note 7).
For the three months ended June 30, 2014 and
2013, a provision of $4,607,866 and $352,872 were charged to the consolidated statement of income, respectively. For the six months
ended June 30, 2014 and 2013, a provision of $5,196,046 and $841,088 were charged to the consolidated statement of income, respectively.
No write-offs against allowances have occurred for these periods.
Interest on loans receivable is accrued and
credited to income as earned. The Company determines a loan's past due status by the number of days that have elapsed since a borrower
has failed to make a contractual loan payment. Accrual of interest is generally discontinued when either (i) reasonable doubt exists
as to the full, timely collection of interest or principal or (ii) when a loan becomes past due by more than 90 days.
The following table presents nonaccrual loans
with aging over 90 days by classes of loan portfolio as of June 30, 2014 and December 31, 2013, respectively:
| |
June 30,
2014 (Unaudited) | | |
December 31, 2013 | |
| |
| | |
| |
Business loans | |
$ | 4,610,201 | | |
$ | 1,866,436 | |
Personal loans | |
| 2,041,745 | | |
| 948,922 | |
| |
$ | 6,651,946 | | |
$ | 2,815,358 | |
The following table represents the aging of loans as of June 30,
2014 by type of loan:
| |
1-89 Days
Past Due | | |
Greater Than 90 Days Past Due | | |
Total Past
Due | | |
Current | | |
Total Loans (Unaudited) | |
| |
| | |
| | |
| | |
| | |
| |
Business loans | |
$ | 7,965,140 | | |
$ | 4,610,201 | | |
$ | 12,575,341 | | |
$ | 43,559,490 | | |
$ | 56,134,831 | |
Personal loans | |
| 5,650,938 | | |
| 2,041,745 | | |
| 7,692,683 | | |
| 27,436,043 | | |
| 35,128,726 | |
| |
$ | 13,616,078 | | |
$ | 6,651,946 | | |
$ | 20,268,024 | | |
$ | 70,995,533 | | |
$ | 91,263,557 | |
The following table represents the aging of loans as of December
31, 2013 by type of loan:
| |
1-89 Days
Past Due | | |
Greater Than 90 Days Past Due | | |
Total Past
Due | | |
Current | | |
Total Loans | |
| |
| | |
| | |
| | |
| | |
| |
Business loans | |
$ | 2,039,559 | | |
$ | 1,866,436 | | |
$ | 3,905,995 | | |
$ | 52,714,898 | | |
$ | 56,620,893 | |
Personal loans | |
| 312,993 | | |
| 948,922 | | |
| 1,261,915 | | |
| 32,320,605 | | |
| 33,582,520 | |
| |
$ | 2,352,552 | | |
$ | 2,815,358 | | |
$ | 5,167,910 | | |
$ | 85,035,503 | | |
$ | 90,203,413 | |
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
6. LOANS RECEIVABLE, NET (CONTINUED)
6.2 Analysis of loans by credit quality
indicator
The following table summarizes the Company’s
loan portfolio by credit quality indicator as of June 30, 2014 and December 31, 2013, respectively:
Five Categories | |
June
30, 2014 (Unaudited) | | |
% | | |
December 31, 2013 | | |
% | |
| |
| | |
| | |
| | |
| |
Pass | |
| $ 65,47 2,914 | | |
| 71.7 | % | |
$ | 85,035,503 | | |
| 94.2 | % |
Special mention | |
| 6,946,074 | | |
| 7.6 | % | |
| 2,207,565 | | |
| 2.4 | % |
Substandard | |
| 15,678,123 | | |
| 17.2 | % | |
| 867,118 | | |
| 1.0 | % |
Doubtful | |
| 1,350,254 | | |
| 1.5 | % | |
| 1,948,240 | | |
| 2.2 | % |
Loss | |
| 1,816,192 | | |
| 2.0 | % | |
| 144,987 | | |
| 0.2 | % |
Total | |
$ | 91,263,557 | | |
| 100 | % | |
$ | 90,203,413 | | |
| 100 | % |
6.3 Analysis of loans by collateral
The following table summarizes the Company’s
loan portfolio by collateral as of June 30, 2014:
| |
June 30,
2014 | | |
| |
| |
Business
Loans | | |
Personal
Loans | | |
Total (Unaudited) | |
Guarantee backed loans | |
$ | 51,501,759 | | |
$ | 32,601,316 | | |
$ | 84,103,075 | |
Pledged assets backed loans | |
| 3,252,417 | | |
| 2,527,410 | | |
| 5,779,827 | |
Collateral backed loans | |
| 1,380,655 | | |
| - | | |
| 1,380,655 | |
| |
$ | 56,134,831 | | |
$ | 35,128,726 | | |
$ | 91,263,557 | |
The following table summarizes the Company’s loan portfolio
by collateral as of December 31, 2013:
| |
December 31,
2013 | | |
| |
| |
Business Loans | | |
Personal Loans | | |
Total | |
Guarantee backed loans | |
$ | 51,909,006 | | |
$ | 29,576,912 | | |
$ | 81,485,918 | |
Pledged assets backed loans | |
| 3,321,226 | | |
| 4,005,608 | | |
| 7,326,834 | |
Collateral backed loans | |
| 1,390,661 | | |
| - | | |
| 1,390,661 | |
| |
$ | 56,620,893 | | |
$ | 33,582,520 | | |
$ | 90,203,413 | |
Collateral Backed Loans
A collateral backed loan is a loan in which
the borrower puts up an asset under their ownership, possession or control, as collateral for the loan. An asset usually is land
use rights, inventory, equipment or buildings. The loan is secured against the collateral and we do not take physical possession
of the collateral at the time the loan is made. We will verify ownership of the collateral and then register the collateral with
the appropriate government entities to complete the secured transaction. In the event that the borrower defaults, we can then
take possession of the collateral asset and sell it to recover the outstanding balance owed. If the sale proceeds of the collateral
asset is not sufficient to pay off the debt, we will file a lawsuit against the borrower and seek judgment for the remaining balance.
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
6. LOANS RECEIVABLE, NET (CONTINUED)
Pledged Asset Backed Loans
Pledged asset backed loans are loans with pledged
assets. The pledged assets are usually certificates of deposit. Lenders take physical possession of the pledged assets at the time
the loan is made and do not need to register them with government entities to secure the loan. If the borrower defaults, we can
sell the assets to recover the outstanding balance owed.
Both collateral loans and pledged loans are
considered secured loans. The amount of a loan that lenders provide depends on the value of the collateral pledged. Beginning 2011,
the Company does not provide unsecured loans.
Guarantee Backed Loans
A guaranteed backed loan is a loan guaranteed
by a third party who is usually a corporation or high net worth individual. As of June 30, 2014 and December 31, 2013, guaranteed
loans make up 92.2% and 90.3% of our direct loan portfolio, respectively.
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 7. | ALLOWANCE FOR LOAN LOSSES |
The allowance for loan losses is maintained
at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation
of the adequacy of the allowance. The allowance is based on the Company’s past loan loss history, known and inherent risks
in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying
collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently
subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.
The allowance is calculated at portfolio-level
since our loans portfolio is typically of smaller balance homogenous loans and is collectively evaluated for impairment.
For the purpose of calculating portfolio-level
reserves, we have grouped our loans into two portfolio segments: Corporate and Personal. The allowance consists of the combination
of a quantitative assessment component based on statistical models, a retrospective evaluation of actual loss information to loss
forecasts, value of collaterals and could include a qualitative component based on management judgment.
In estimating the probable loss of the loan
portfolio, the Company also considers qualitative factors such as current economic conditions and/or events in specific industries
and geographical areas, including unemployment levels, trends in real estate values, peer comparisons, and other pertinent factors
such as regulatory guidance. Finally, as appropriate, the Company also considers individual borrower circumstances and the condition
and fair value of the loan collateral, if any.
In addition, the Company also calculates the
provision amount in accordance with PRC regulation “The Guidance for Loan Losses” (“The Provision Guidance”)
issued by PBOC and is applied to all financial institutes as below:
|
1. |
General Reserve - is based on total loan receivable balance and to be used to cover unidentified probable loan loss. The General Reserve is required to be no less than 1% of total loan receivable balance. |
|
2. |
Specific Reserve - is based on the level of loss of each loan after categorizing the loan according to their risk. According to the so-called “Five-Tier Principle” set forth in the Provision Guidance, the loans are categorized as “pass”, “special-mention”, “substandard”, “doubtful” or “loss”. Normally, the provision rate is 2% for “special-mention”, 25% for “substandard”, 50% for “doubtful” and 100% for “loss”. |
|
3. |
Special Reserve - is fund set aside covering losses due to risks related to a particular country, region, industry or type of loans. The reserve rate could be decided based on management estimate of loan collectability. |
To the extent the general loan loss reserve
rate of 1% as required by PBOC differs from management’s estimates, the management elects to use the higher rate. As of June
30, 2014, the Company utilized Specific Reserve in estimating the loan loss as it is higher than the amount calculated based
on the General Reserve.
While management uses the best information
available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and
other conditions or changes in accounting guidance.
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 7. | ALLOWANCE FOR LOAN LOSS (CONTINUED) |
The following tables present the activity
in the allowance for loan losses and related recorded investment in loans receivable by classes of the loans individually and
collectively evaluated for impairment as of and for the three months ended June 30, 2014 and 2013:
| |
Business
Loans | | |
Personal
Loans | | |
Total (Unaudited) | |
For the three months ended June 30, 2014 | |
| | |
| | |
| |
Beginning balance | |
$ | 1,438,275 | | |
$ | 510,125 | | |
$ | 1,948,400 | |
Charge-offs | |
| - | | |
| - | | |
| - | |
Recoveries | |
| - | | |
| - | | |
| - | |
Provisions | |
| 3,100,483 | | |
| 1,500,888 | | |
| 4,601,371 | |
Ending balance | |
| 4,538,758 | | |
| 2,011,013 | | |
| 6,549,771 | |
Ending balance: individually evaluated for impairment | |
| - | | |
| - | | |
| - | |
Ending balance: collectively evaluated for impairment | |
$ | 4,538,758 | | |
$ | 2,011,013 | | |
$ | 6,549,771 | |
| |
Business
Loans | | |
Personal
Loans | | |
Total (Unaudited) | |
For the three months ended June 30, 2013 | |
| | |
| | |
| |
Beginning balance | |
$ | 1,177,410 | | |
$ | 173,904 | | |
$ | 1,351,314 | |
Charge-offs | |
| - | | |
| - | | |
| - | |
Recoveries | |
| - | | |
| - | | |
| - | |
Provisions | |
| 35,400 | | |
| 338,512 | | |
| 373,912 | |
Ending balance | |
| 1,212,810 | | |
| 512,416 | | |
| 1,725,226 | |
Ending balance: individually evaluated for impairment | |
| - | | |
| - | | |
| - | |
Ending balance: collectively evaluated for impairment | |
$ | 1,212,810 | | |
$ | 512,416 | | |
$ | 1,725,226 | |
The following tables present the activity in
the allowance for loan losses and related recorded investment in loans receivable by classes of the loans individually and collectively
evaluated for impairment as of and for the six months ended June 30, 2014 and 2013:
| |
Business
Loans | | |
Personal
Loans | | |
Total (Unaudited) | |
For the six months ended June 30, 2014 | |
| | |
| | |
| |
Beginning balance | |
$ | 1,049,836 | | |
$ | 326,112 | | |
$ | 1,375,948 | |
Charge-offs | |
| - | | |
| - | | |
| - | |
Recoveries | |
| - | | |
| - | | |
| - | |
Provisions | |
| 3,488,922 | | |
| 1,684,901 | | |
| 5,173,823 | |
Ending balance | |
| 4,538,758 | | |
$ | 2,011,013 | | |
$ | 6,549,771 | |
Ending balance: individually evaluated for impairment | |
| - | | |
| - | | |
| - | |
Ending balance: collectively evaluated for impairment | |
$ | 4,538,758 | | |
$ | 2,011,013 | | |
$ | 6,549,771 | |
| |
Business
Loans | | |
Personal
Loans | | |
Total (Unaudited) | |
For the six months ended June 30, 2013 | |
| | |
| | |
| |
Beginning balance | |
$ | 638,471 | | |
$ | 219,342 | | |
$ | 857,813 | |
Charge-offs | |
| - | | |
| - | | |
| - | |
Recoveries | |
| - | | |
| - | | |
| - | |
Provisions | |
| 574,339 | | |
| 293,074 | | |
| 867,413 | |
Ending balance | |
| 1,212,810 | | |
| 512,416 | | |
| 1,725,226 | |
Ending balance: individually evaluated for impairment | |
| - | | |
| - | | |
| - | |
Ending balance: collectively evaluated for impairment | |
$ | 1,212,810 | | |
$ | 512,416 | | |
$ | 1,725,226 | |
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
7. ALLOWANCE FOR LOAN LOSS (CONTINUED)
The following table presents the classes of
the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful
within the Company's internal risk rating system as of June 30, 2014:
| |
Pass | | |
Special Mention | | |
Substandard | | |
Doubtful | | |
Loss | | |
Total (Unaudited) | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Business loans | |
$ | 38,743,441 | | |
$ | 3,934,623, | | |
$ | 11,243,785 | | |
$ | 1,127,725 | | |
$ | 1,085,257 | | |
$ | 56,134,831 | |
Personal loans | |
| 26,729,473 | | |
| 3,011,451 | | |
| 4,434,338 | | |
| 222,529 | | |
| 730,935 | | |
| 35,128,726 | |
| |
$ | 65,472,914 | | |
$ | 6,946,074 | | |
$ | 15,678,123 | | |
$ | 1,350,254 | | |
$ | 1,816,192 | | |
$ | 91,263,557 | |
The following table presents the classes of
the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful
within the Company's internal risk rating system as of December 31, 2013:
| |
Pass | | |
Special Mention | | |
Substandard | | |
Doubtful | | |
Loss | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Business loans | |
$ | 52,714,898 | | |
$ | 1,894,572 | | |
$ | 130,886 | | |
$ | 1,735,550 | | |
$ | 144,987 | | |
$ | 56,620,893 | |
Personal loans | |
| 32,320,605 | | |
| 312,993 | | |
| 736,232 | | |
| 212,690 | | |
| - | | |
| 33,582,520 | |
| |
$ | 85,035,503 | | |
$ | 2,207,565 | | |
$ | 867,118 | | |
$ | 1,948,240 | | |
$ | 144,987 | | |
$ | 90,203,413 | |
A loan is considered impaired when, based on
current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s
prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on
a loan by loan basis for corporate and personal loans by either the present value of expected future cash flows discounted at the
loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.
An allowance for loan losses is established
for an impaired loan if its carrying value exceeds its estimated fair value. Currently, estimated fair values of substantially
all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral which approximates
to the carrying value due to the short term nature of the loans.
Loans with modified terms are classified as
troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing
financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary below market rate reduction
in interest rate or an extension of a loan’s stated maturity date. Non-accrual troubled debt restructurings are restored
to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification.
Loans classified as troubled debt restructurings are designated as impaired.
Even though the Company allows a one-time loan
extension with a period up to the original loan period, which is usually twelve months, such extension is not considered to be
a troubled debt restructuring because the Company does not grant a concession to borrowers. The principal of the loan remains the
same and the interest rate is fixed at the current interest rate at the time of extension. Therefore, there were no troubled debt
restructurings during the three months and six months ended June 30, 2014 and 2013, respectively.
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 9. | GUARANTEE PAID ON BEHALF OF GUARANTEE CUSTOMERS |
| |
June 30,
2014 (Unaudited) | | |
December 31, 2013 | |
Guarantee paid on behalf of guarantee service customers | |
$ | 8,841,659 | | |
$ | 1,082,486 | |
Payments on behalf of guarantee service customers
represents payment made by the Company to banks on behalf of eleven of its guarantee service customers who defaulted on their
loan repayments to the banks. Management performs an evaluation of the adequacy of the allowance. The allowance is based on the
Company’s past loan loss history, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s
ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions
and other relevant factors. As of June 30, 2014 and December 31, 2013, the Company accrued allowance on the balance in “accrual
for financial guarantee services” in the value of $2,457,260 and $588,740, respectively.
Other assets as of June 30, 2014 and December
31, 2013 consisted of:
| |
June 30,
2014 (Unaudited) | | |
December 31, 2013 | |
Prepaid bank service charges | |
$ | 58,511 | | |
$ | 181,641 | |
Prepaid interest expense to bank | |
| 12,566 | | |
| 80,554 | |
Prepaid issuance cost | |
| 59,062 | | |
| - | |
Prepaid expenses to investor relationship service providers (Note 19 ) | |
| 888,131 | | |
| - | |
Other prepaid expense | |
| 149,546 | | |
| 283,800 | |
Other receivables | |
| 448,682 | | |
| 156,622 | |
| |
$ | 1,616,498 | | |
$ | 702,617 | |
Prepaid interest expense to banks represents
prepaid borrowing costs for its short-term bank borrowings. The balance is amortized over the period of the bank borrowings which
is within 12 months.
Other receivables mainly represents the court
filing fees and legal fees which will be claimed from default customers.
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 11. | PROPERTY AND EQUIPMENT |
The Company’s property and equipment
used to conduct day-to-day business are recorded at cost less accumulated depreciation. Depreciation expenses are calculated using
straight-line method over the estimated useful life below:
Property and equipment consist of the following:
| |
Useful Life (years) | | |
June 30,
2014 (Unaudited) | | |
December 31, 2013 | |
Furniture and fixtures | |
| 5 | | |
$ | 23,034 | | |
$ | 23,201 | |
Vehicles | |
| 4 | | |
| 242,462 | | |
| 244,220 | |
Electronic equipment | |
| 3 | | |
| 125,119 | | |
| 126,026 | |
Leasehold improvement | |
| 3 | | |
| 180,106 | | |
| 181,410 | |
Less: accumulated depreciation | |
| | | |
| (373,517 | ) | |
| (320,062 | ) |
Property and equipment, net | |
| | | |
$ | 197,204 | | |
$ | 254,795 | |
Depreciation expense totaled $27,939
and $28,785 for the three months ended June 30, 2014 and 2013, respectively. For the six months ended June 30, 2014 and 2013,
depreciation expense totaled $55,890 and $55,279 respectively.
Bank Name | |
Interest rate | |
Term | | |
June 30,
2014 (Unaudited) | | |
December 31,
2013 | |
Agricultural Bank Of China | |
Fixed annual rate of 6.00% | |
From September 26, 2013 to September 25, 2014 | | |
| 4,872,899 | | |
| 4,908,216 | |
Agricultural Bank Of China | |
Fixed annual rate of 6.00%, | |
From October 15, 2013 to October 14, 2014 | | |
| 4,872,899 | | |
| 4,908,216 | |
Agricultural Bank Of China | |
Fixed annual rate of 6.00%, | |
From October 18, 2013 to October 17, 2014 | | |
| 6,497,197 | | |
| 6,544,289 | |
| |
| |
| | | |
$ | 16,242,995 | | |
$ | 16,360,721 | |
As of June 30, 2014 and December 31, 2013,
the short-term bank loans have maturity terms within 1 year. These loans were guaranteed by the Wujiang Luxiang shareholders.
Interest expense incurred on short-term loans
for the three months ended June 30, 2014 and 2013 was $247,935 and $316,697, respectively, and $493,125 and $622,852 for the six
months ended June 30, 2014 and 2013, respectively.
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Deposits payable are security deposits required
from customers in order to obtain loans and guarantees from the Company. The deposits are refundable to the customers when the
customers fulfill their obligations under loan and guarantee contracts.
| 14. | UNEARNED INCOME FROM GUARANTEE SERVICES |
The Company receives guarantee commissions
in full at the inception and records unearned income before amortizing it throughout the guarantee service life. Unearned income
from guarantee services was $170,657 and $482,029 as of June 30, 2014 and December 31, 2013, respectively.
| 15. | OTHER CURRENT LIABILITIES |
Other current liabilities as of June 30, 2014
and December 31, 2013 consisted of:
| |
June 30,
2014 (Unaudited) | | |
December 31, 2013 | |
Accrued payroll | |
$ | 15,380 | | |
$ | 459,623 | |
Other tax payable | |
| 115,204 | | |
| 157,507 | |
Other payable | |
| 11,857 | | |
| 11,943 | |
| |
$ | 142,441 | | |
$ | 629,073 | |
| 16. | OTHER OPERATING EXPENSE |
Other operating expense for the three and six months ended June
30, 2014 and 2013 consisted of:
| |
For The Three Months Ended
June 30, | | |
For The Six Months Ended
June 30, | |
| |
2014 (Unaudited) | | |
2013 (Unaudited) | | |
2014 (Unaudited) | | |
2013 (Unaudited) | |
Depreciation | |
$ | 27,939 | | |
$ | 28,785 | | |
$ | 55,890 | | |
$ | 55,279 | |
Travel expenses | |
| 13,591 | | |
| 44,346 | | |
| 28,331 | | |
| 52,142 | |
Entertainment expenses | |
| 7,432 | | |
| 12,023 | | |
| 32,911 | | |
| 31,727 | |
Promotion expenses | |
| - | | |
| 41,892 | | |
| 7,111 | | |
| 83,284 | |
Legal and consulting expenses | |
| 358,492 | | |
| 49,033 | | |
| 494,613 | | |
| 179,278 | |
Car expenses | |
| 18,882 | | |
| 18,938 | | |
| 43,317 | | |
| 43,343 | |
Bank charges | |
| 74,950 | | |
| 100,701 | | |
| 138,946 | | |
| 199,435 | |
Audit-related expense | |
| 13,808 | | |
| 81,395 | | |
| 133,280 | | |
| 154,306 | |
Insurance expense | |
| 70,875 | | |
| - | | |
| 141,750 | | |
| - | |
Other expenses | |
| 14,411 | | |
| 42,393 | | |
| 56,345 | | |
| 71,576 | |
Total | |
| 600,380 | | |
| 419,506 | | |
| 1,132,494 | | |
| 870,370 | |
| 17. | EMPLOYEE RETIREMENT BENEFIT |
The Company has made employee benefit contributions
in accordance with relevant Chinese regulations, including retirement insurance, unemployment insurance, medical insurance, housing
fund, work injury insurance and birth insurance. The Company recorded the contribution in the salary and employee charges when
incurred. The contributions made by the Company were $20,580 and $21,403 for the three months ended June 30, 2014 and 2013, respectively,
and $42,936 and $43,882 for the six months ended June 30, 2014 and 2013, respectively
| 18. | DISTRIBUTION OF PROFIT |
The Company did not distribute any dividend
to its shareholders for the three months and six months ended June 30, 2014 and 2013, respectively.
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Initial Public Offering
On August 16, 2013, the Company closed an initial
public offering (“IPO”) of 1,370,000 shares of Common Stock. On August 26, 2013, the Company sold additional 45,657
shares of Common Stock from the exercise of the overallotment option of shares granted to the underwriters. The public offering
price of the shares sold in the IPO was $6.50 per share. The total gross proceeds from the offering were $9.2 million. After deducting
underwriting discounts and commissions and offering expenses payable by the Company, the aggregate net proceeds received by the
Company totaled approximately $7.6 million.
Upon the consummation of the Company’s
IPO on August 16, 2013, the Series A Stock and the Series B Stock (defined below) were automatically converted into shares of Common
Stock.
Follow-on Public Offering
On May 13, 2014, the Company closed its second
public offering (“Follow-on Offering”) of 1,750,000 shares of Common Stock and 1,750,000 warrants to purchase an additional
875,000 shares of Common Stock. The public offering price of the shares was $3.99 per share and the offering pricing for the warrants
was $0.01 per warrant. 1,650,386 shares of Common Stock were newly issued by the Company and 99,614 shares of Common Stock were
sold by certain selling stockholders. On June 12, 2014, the representative in the Follow-on Offering exercised its over-allotment
option to purchase 252,000 warrants to purchase 126,250 shares of Common Stock. The total gross proceeds in the Follow-on Offering
and the over-allotment were $6.6 million. After deducting underwriting discounts and commissions and offering expenses payable
by the Company and the proceeds to the selling stockholders, the aggregate net proceeds received by the Company totaled approximately
$5.7 million.
Common Stock
The Company is authorized to issue up to 100,000,000
shares of Common Stock.
As of December 31, 2013, there were 10,430,657
shares of Common Stock issued and outstanding.
On March 7, 2014, the Company issued an aggregate
of 15,769 shares of Common Stock to a certain investor relations services provider to the Company, at a par value of $0.001
per share and recorded it as a deferred expense and amortized over service term. (Note 10)
On April 9 and April 24, 2014, the Company
issued an aggregate of 20,000 and 130,000 shares of Common Stock, respectively, to one consulting firm in consideration of certain
investor relations services to be rendered by such firm, at a par value of $0.001 per share and recorded it as a deferred
expense and amortized over service term. (Note 10)
On May 13, 2014, the Company closed the Follow-on
Offering of 1,750,000 shares of Common Stock and 1,750,000 warrants to purchase 875,000 shares of Common Stock. Among the 1,750,000
shares of Common Stock, 1,650,386 shares were newly issued by the Company and 99,614 shares were offered by certain selling stockholders.
As of June 30, 2014, there were 12,246,812
shares of Common Stock issued and outstanding.
Warrants
The IPO underwriters’ and their affiliates’
received warrants to purchase an aggregate of 95,900 shares of Common Stock, which are exercisable at any time, and from time
to time, in whole or in part, during the three-year period from February 10, 2014. The warrants are initially exercisable at a
per share price of $6.50.
Warrants to purchase an aggregate of 875,000
shares of Common Stock were issued in the Follow-on Offering on May 13, 2014. The issuance price was $0.01 per warrant, and are
exercisable at any time, and from time to time, in whole or in part, during the three-year period from May 13, 2014. The warrants
are initially exercisable at a per share price of $5.60 .
Warrants to purchase 252,500 shares of Common
Stock were issued to the underwriters in the Follow-on Offering. The warrants have a cashless exercise provision and are exercisable
at any time, and from time to time, in whole or in part, during the three-year period from May 13, 2014. The warrants are initially
exercisable at a per share price of $4.80.
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
19. CAPITAL TRANSACTION (CONTINUED)
Preferred Stock
The Company is authorized to issue up to 10,000,000
shares of preferred stock, of which 1,000,000 shares are designated as Series A Convertible Preferred Stock (the “Series
A Stock”) and 5,000,000 shares are designated as Series B Convertible Preferred Stock (the “Series B Stock”).
The Series A Stock ranked (i) prior to the
Common Stock and to all other classes and series of equity securities of the Company which by their terms do not rank senior to
the Series A Stock, and (ii) junior to any class or series of equity securities which by its terms ranked senior to the Series
A Stock. The Series A Stock was subordinate to and ranked junior to all indebtedness of the Company. Each share of the Series A
Stock was on the day on which the Company consummated its IPO, automatically and without any action on the part of the holder thereof
converted into issued and outstanding shares of Common Stock beneficially owned by a consultant who received the shares on December
19, 2011. The number of shares of Common Stock issued upon conversion of the Series A Stock was equal to the purchase price of
the Series A Stock divided by a per share conversion price of 50% of the price of a share of Common Stock in the IPO. No new shares
were issued by the Company at the conversion. In addition, the holders were not permitted to convert their preferred stock prior
to consummation of the IPO.
The Series B Preferred Stock ranked (i) prior
to the Common Stock and to all other classes and series of equity securities of the Company which by their terms do not rank senior
to the Series B Preferred Stock and (ii) junior to any class or series of equity securities which by its terms ranked senior to
the Series B Preferred Stock. The Series B Stock was subordinate to and ranked junior to all indebtedness of the Company. Each
share of the Series B Stock was on the day on which the Company consummated its IPO, automatically and without any action on the
part of the holder thereof converted into issued and outstanding shares of Common Stock beneficially owned by a consultant who
received the shares on December 19, 2011. The number of shares of Common Stock issued upon conversion of the Series B Stock was
equal to the purchase price of the Series B Stock divided by a per share conversion price of 25% of the price of a share of Common
Stock in the IPO. No new shares were issued by the Company at the conversion. In addition, the holders were not permitted to convert
their preferred stock prior to consummation of the IPO.
Between January 1, 2012 and April 1, 2013,
the Company issued a total of 745 shares of Series A Stock to an aggregate of 11 investors pursuant to certain subscription agreements.
We received gross proceeds of $372,500 and incurred costs associated with this private placement of $93,125.
Between October 12, 2012 and May 8, 2013, the
Company issued a total of 760 shares of Series B Stock to an aggregate of 44 investors pursuant to certain subscription agreements.
We received gross proceeds of $380,000 and incurred costs associated with this private placement of $95,000.
On August 16, 2013 when the Company closed
its IPO, all outstanding shares of the Series A Stock and Series B Stock were converted into an aggregate of 348,462 shares of
already issued and outstanding Common Stock beneficially owned by a consultant who received our shares on December 19, 2011, automatically
and without any action on the part of the holder thereof. The per share conversion price of Series A Stock and Series B Stock was
equal to $3.25 and $1.63, respectively.
The discount on the Series A and B Stock was
accounted for as a beneficial conversion feature upon conversion. The total amount of discount was $752,500, which was accounted
for as a reduction to retained earnings and an offsetting increase to additional paid in capital in the Company's financial statements.
In accordance with the PRC Regulations on Enterprises
with Foreign Investment and the articles of association of the Company’s PRC subsidiaries, a foreign-invested enterprise
established in the PRC is required to provide statutory reserve, which is appropriated from net profit as reported in the enterprise’s
PRC statutory accounts. A foreign-invested enterprise is required to allocate at least 10% of its annual after-tax profit to the
general reserve until such reserve has reached 50% of its respective registered capital based on the enterprise’s PRC statutory
accounts. The Company allocates 15% of its annual after-tax profit to the statutory reserve. The statutory reserve can only be
used for specific purposes and are not distributable as cash dividends. WFOE was established as a foreign-invested enterprise and,
therefore, is subject to the above mandated restrictions on distributable profits. For the six months ended June 30, 2014, the
Company did not accrue the statutory reserve for the current loss position.
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 21. | (LOSS) EARNINGS PER COMMON SHARE |
The following table sets forth the computation
of basic and diluted (loss) earnings per common share for the three months and six months ended June 30, 2014 and 2013, respectively:
| |
For the Three Months Ended | | |
For the Six Months Ended | |
| |
June 30, | | |
June 30, | |
| |
2014 (Unaudited) | | |
2013 (Unaudited) | | |
2014 (Unaudited) | | |
2013 (Unaudited) | |
| |
| | |
| | |
| | |
| |
Net (loss) income attributable to the common shareholders | |
$ | (5,280,700 | ) | |
$ | 1,963,823 | | |
$ | (4,187,067 | ) | |
$ | 3,533,691 | |
| |
| | | |
| | | |
| | | |
| | |
Basic weighted-average common shares outstanding | |
| 11,315,900 | | |
| 9,000,000 | | |
| 10,935,530 | | |
| 9,000,000 | |
Effect of dilutive securities | |
| - | | |
| - | | |
| - | | |
| - | |
Diluted weighted-average common shares outstanding | |
| 11,315,900 | | |
| 9,000,000 | | |
| 10,935,530 | | |
| 9,000,000 | |
| |
| | | |
| | | |
| | | |
| | |
(Loss)earnings per share: | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | (0.467 | ) | |
$ | 0.218 | | |
$ | (0.383 | ) | |
$ | 0.393 | |
Diluted | |
$ | (0.467 | ) | |
$ | 0.218 | | |
$ | (0.383 | ) | |
$ | 0.393 | |
As of June 30, 2014 and December 31, 2013, the Company did not have
dilutive securities outstanding.
| 22. | INCOME TAXES AND TAX RECEIVABLE |
Effective January 1, 2008, the New Taxation
Law of PRC stipulates that domestically owned enterprises and foreign invested enterprises (the “FIEs”) are subject
to a uniform tax rate of 25%. While the New Tax Law equalizes the tax rates for FIEs and domestically owned enterprises, preferential
tax treatment may continue to be given to companies in certain encouraged sectors and to entities classified as high-technology
companies, regardless of whether these are domestically-owned enterprises or FIEs. In November 2009, the Jiangsu Province Government
issued Su Zheng Ban Fa [2009] No. 132 which stipulates that Micro-credit companies in Jiangsu Province is subject to
preferential tax rate of 12.5%. As a result, the Company is subject to the preferential tax rate of 12.5% for the periods presented.
The taxation practice implemented by the tax authority governing the Company is that the Company pays enterprise income taxes at
rate of 25% on a quarterly basis, and upon annual tax settlement done by the Company and the tax authority in five (5) months after
December 31 the tax authority will refund the Company the excess enterprise income taxes it paid beyond the rate of 12.5%.
The Company evaluates the level of authority
for each uncertain tax position (including the potential application of interest and penalties) based on the technical merits,
and measures the unrecognized benefits associated with the tax positions. For the six months ended June 30, 2014 and 2013, the
Company had no unrecognized tax benefits.
The Company does not anticipate any significant
increase to its liability for unrecognized tax benefit within the next 12 months. The Company will classify interest and penalties
related to income tax matters, if any, in income tax expense.
Income tax receivable/ (payable) is comprised
of:
| |
As of
June 30,
2014 (Unaudited) | | |
As of
December 31,
2013 | |
| |
| | |
| |
Income tax payable | |
$ | - | | |
$ | (164,806 | ) |
Income tax receivable | |
| 1,741,858 | | |
| 985,332 | |
Total income tax receivable /(payable), net | |
$ | 1,741,858 | | |
$ | 820,526 | |
Income tax payable represented enterprise income
tax at a rate of 25% that the Company accrued but had not paid as of June 30, 2014 and December 31, 2013, respectively. Income
tax receivable represented the income tax refund the Company will receive from the tax authority in the annual income tax settlement.
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 22. | INCOME TAXES AND TAX RECEIVABLE (CONTINUED) |
Income tax expense is comprised of:
| |
For The Six Months Ended | |
| |
June 30, | |
| |
2014 (Unaudited) | | |
2013 (Unaudited) | |
| |
| | |
| |
Current income tax | |
$ | - | | |
$ | 650,187 | |
Deferred income tax | |
| 11,092 | | |
| 3,650 | |
Total provision for income taxes | |
$ | 11,092 | | |
$ | 653,837 | |
The effective tax rate for the six months ended
June 30, 2014 and 2013 was negative 0.27% and 15.02%, respectively the significant change in effective tax rate was due to the
large provision for loans accrued during the period.
Deferred tax liability arises from government
incentive for the purpose of covering the Company’s actual loan losses and ruled that the income tax will be imposed on the
subsidy if the purpose is not fulfilled within 5 years after the Company receives the subsidy. As of June 30, 2014 and December
31, 2013, the deferred tax liability amounted to $342,282 and $333,617, respectively.
As of June 30, 2014 and December 31, 2013,
the Company intends to permanently reinvest the undistributed earnings from its foreign subsidiaries to fund future operations.
The amount of unrecognized deferred tax liabilities for temporary differences related to investments in foreign subsidiaries is
not determined because such a determination is not practicable.
| 23. | RELATED PARTY TRANSACTIONS AND BALANCES |
| 1) | Nature of relationships with related parties |
|
Name |
|
Relationships with the Company |
|
Wujiang Chunjia Textile
Trading Co., Ltd (“Chunjia Textile”) |
|
Controlled by major shareholders |
| 2) | Related party transactions |
Loans to related party consisted
of the following:
| |
For The Six Months Ended | |
| |
June 30, | |
| |
2014 (Unaudited) | | |
2013 | |
| |
| | | |
| | |
Chunjia Textile | |
$ | 1,137,010 | | |
$ | - | |
Amount
due from related party represents loan balances as follows:
| |
| June 30, 2014 (Unaudited) | | |
| December
31, 2013 | |
| |
| | | |
| | |
Chunjia Textile | |
$ | 1,137,010 | | |
$ | - | |
The related party loan
is subject to an annual interest rate of 14.4%. The amount was fully repaid in July 2014.
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 24. | CONCENTRATION AND CREDIT RISKS |
As of June 30, 2014 and December 31, 2013,
the Company held cash of $7,399,767 and $9,405,865, respectively that is uninsured by the government authority. To limit exposure
to credit risk relating to deposits, the Company primarily places cash deposits only with large financial institutions in the
PRC with acceptable credit ratings.
The Company’s operations are carried
out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC as well as by the general state of the PRC’s economy. The business
may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other things.
No customer accounted for more than 10% of
total loan balance as of June 30, 2014 and December 31, 2013.
| 25. | COMMITMENTS AND CONTINGENCIES |
The Company extended its lease agreement of
its principal office for a 5-year period from October 1, 2013 to September 30, 2018. The following table sets forth the Company’s
contractual obligations as of June 30, 2014 in future periods:
| |
Rental payments (Unaudited) | |
| |
| |
Within 1 year | |
$ | 196,007 | |
Within 1-2 years | |
| 261,343 | |
Within 2-3 years | |
| 261,343 | |
More than 3 years | |
| 326,679 | |
Total | |
$ | 1,045,372 | |
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 25. | COMMITMENTS AND CONTINGENCIES (CONTINUED) |
The guarantees will terminate upon payment
and/or cancellation of the obligation; however, payments by the Company would be triggered by failure of the guaranteed party to
fulfill its obligation covered by the guarantee. Generally, the average guarantee expiration terms ranged within 6 to 12 months
and the average percentage of the guarantee amount as security deposit is 10% ~ 20%.
The
Company is involved in various legal actions arising in the ordinary course of its business. During six month ended June 30,
2014, the Company was involved in 33 lawsuits, among which 21 were related to its loan business and 12 were related to
guarantee business. The Company initiated legal proceedings to collect delinquent balances from borrowers. 12 of these cases
with an aggregated claim of $5.53 million have been adjudicated by the Court in favor of the Company and these cases are
settled or in the process of enforcement. The remaining 21 cases with an aggregated claim of $8.64 million have not been
adjudicated by the Court as of June 30, 2014.
Contingencies
During
the period from July 1, 2014 to the date of this report, the Company was involved in 41 new lawsuits, 31 of which are related
to its loan business and 10 are related to its guarantee business. The Company initiated legal proceedings to collect
delinquent loan balance from borrowers. Cases with a total claim of $1.15 million have been adjudicated by the court and
cases with a total claim of $19.56 million are still at the initial stage of the litigation.
Departure and Appointment of Executive Officers
On August 21, 2014, Mr. Huichun Qin notified
the Company of his resignation from the board of directors of the Company (the “Board”) and as the Chief Executive
Officer of the Company effective immediately.
Simultaneously with above resignations, Mr.
Huichun Qin also resigned from all positions he held with the Company’s subsidiaries and affiliated entities, including
from the board of directors and as Chief Executive Officer and General Manager of Wujiang Luxiang, from the board of directors
and as General Manager of WFOE and from the board of directors and as Chief Executive Officer of Pride Financial Leasing (Suzhou)
Co. Ltd. (“PFL”). Both WFOE and PFL are indirectly owned subsidiaries of the Company and WFOE controls Wujiang Luxiang
and PFL through a series of contractual arrangements. Effective August 21, 2014, the Board appointed Mr. Long Yi, the Company’s
Chief Financial Officer, to serve as the interim Chief Executive Officer while the Company actively searched for a permanent Chief
Executive Officer as well as replacements for the other vacancies created by Mr. Qin’s resignation. Effective August 21,
2014, the Board appointed Mr. Xinhua Sun as a director and the Chief Executive Officer and General Manager of Wujiang Luxiang.
On December 29, 2014, the Board of Directors appointed Mr. Jingen Ling as the Chief Executive Officer and President of the Company
and simultaneously Mr. Long Yi, the Chief Financial Officer of the Company, ceased to be the Interim Chief Executive Officer of
the Company.
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 26. | SUBSEQUENT EVENTS (CONTINUED) |
Completion of the Internal Review
Based on the Chief Financial Officer’s review of the books
and records of the Company, the Company has made a preliminary determination that following the close of the fiscal quarter ended
June 30, 2014, RMB 7 million (approximately $1.1 million) was transferred (the “Transfer at Issue”) from the bank account
of WFOE, without authorization to the personal account of a former executive officer of the Company, who was still an
executive officer at the time of the transfer. The funds were supposed to be used for the purpose of increasing the registered
capital account of Wujiang Luxiang. The Company has sought return of the funds but to date has not recovered them. The Company’s
Board of Directors explored all means, including legal avenues, to recover the funds and has formed a Special Committee to undertake
an internal review of the circumstances surrounding the transfer
On January 26, 2014, the Special Committee
notified the Board of Directors that the internal review surrounding the Transfer at Issue was completed. The internal review confirmed
that Mr. Qin transferred RMB 7 million (approximately $1.1 million) from WFOE’s bank account to his personal bank account.
The internal review team was unable to interview Mr. Qin. The missing funds have not yet been recovered and the Company has engaged
local PRC counsel to assist in the matter.
During the internal review, the independent counsel examined whether
other transfers had occurred that were similar to the Transfer at Issue, in that the Company’s funds were transferred to
a related party in a manner that was not consistent with the Company’s corporate governance and internal control procedures.
The independent counsel identified four transfers made by Mr. Qin that were not consistent with the Company’s corporate governance
and internal control procedures. With respect to the first three transfers, all funds were either returned to the Company or applied
to the Company’s business. With respect to the fourth transfer, the funds were used to increase the registered capital of
Wujiang Luxiang, a variable interest entity the Company controls via a series of contractual arrangements, as intended and reflected
in an application made to the PRC government for such increase of registered capital.
The internal review indicated that the Company’s control deficiencies
contributed to the Transfer at Issue. The internal review also found that, since the discovery of the Transfer at Issue, the Company
had taken various steps to improve its internal controls and procedures that apply to fund transfers. The internal review observed
that such new controls and procedures appear to be much more thorough and comprehensive.
Legal Proceedings
On August 6, 2014, a purported shareholder Andrew Dennison filed
a putative class action complaint in the United States District Court District of New Jersey (the “N.J. district court”)
relating to a July 25, 2014 press release about the Company’s progress in recovering a significant portion of the $5.4 million
the Company paid in the first quarter of 2014 on behalf of loan guarantee customers. The action is captioned Andrew Dennison
v. China Commercial Credit, Inc., et al., Case No. 2:2014-cv-04956. The action alleges that the Company and its current and former
officers and directors Huichun Qin, Long Yi, Jianming Yin, Jinggen Ling, Xiangdong Xiao, and John F. Levy violated the federal
securities laws by misrepresenting in prior public filings certain material facts about the risks associated with its loan guarantee
business. On October 2, 2014, two purported shareholders Zhang Yun and Sanjiv Mehrotra (the “Yun Group”) asserted substantially
similar claims against the same defendants in a putative class action captioned Zhang Yun v. China Commercial Credit, Inc., et
al., Case No. 2:14-cv-06136 (D. N.J.). Neither complaint states the amount of damages sought.
On or about October 6, 2014, Dennison, the Yun Group and another
purported shareholder, Jason Stark, filed motions to consolidate the cases, be appointed as lead plaintiff and to have their respective
counsel appointed as lead counsel. On October 31, 2014, the N.J. district court entered an order consolidating the cases under
the caption “In re China Commercial Credit Inc. Securities Litigation” and appointing the Yun Group as lead plaintiff
and the Yun Group’s counsel as lead counsel.
On November 18, 2014, the Yun Group and the Company, which at that
point was the only defendant served, entered into a stipulation to transfer of the case to the Southern District of New York. On
December 18, 2014, Mr. Levy, who had by then been served, joined in the stipulation. On December 29, 2014, the N.J. district court
entered an order transferring the action. The transfer was effected on January 22, 2015, and assigned docket number 1:15-cv-00557-ALC
(S.D.N.Y.).
Under the schedule stipulated by the parties, the Yun Group is to
file an amended complaint within 60 days of the date that the transfer was effected, and the defendants’ date to answer or
move is within 60 days of that filing. The Company and Mr. Levy anticipate that they will file a motion to dismiss the amended
complaint. The Company believes that this lawsuit is without merit and intends to vigorously defend against it. At this early stage
of the proceedings, the Company is not able to estimate the probability of success or loss.
Item 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion
and analysis of our financial condition and results of operations for the six and three months ended June 30, 2014 should
be read in conjunction with the Financial Statements and corresponding notes included in this Quarterly Report on Form 10-Q. Our
discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our
plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated
in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors and Notes
Regarding Forward-Looking Statements in this report. We use words such as “anticipate,” “estimate,” “plan,”
“project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,”
“may,” “will,” “should,” “could,” “target”, “forecast”
and similar expressions to identify forward-looking statements.
Overview
We are a financial services firm operating
in China. Our current operations are mainly conducted through Wujiang Luxiang, a fully licensed microcredit company which we control
through our subsidiaries and certain contractual arrangement, and consist of providing short-term direct loans and loan guarantees
to SMEs located in Wujiang City, Jiangsu Province of China. As of June 30, 2014, we have built a $92.4 million portfolio of direct
loans to 209 borrowers and a total of $29.1 million in loan guarantees for 31 borrowers. We were established under the 2008 Guidance
on the Small Loan Company Pilot of the China Banking Regulatory Commission and the People's Bank of China (“PBOC”)
(No.23) (“Circular No. 23”) to extend short term loans and loan guarantees to SMEs, a class of borrowers that we believe
have been underserved in the Chinese lending market. The loans that we provide bridge the gap between Chinese-state run banks that
have not traditionally served the capital needs of SMEs and high interest rate “underground” lenders, and our loans
provide capital at more favorable terms and sustainable interest rates.
Due to substantial increase in the amount of
default loans in the loan guarantees business, the amount of underlying loans we guaranteed has been reduced by 51.2% as of June
30, 2014 compared to as of December 31, 2013. As the rate of fees and commissions generated from the guarantee business has been
decreasing, the Company has declined that the revenue does not justify the default risks involved, and therefore expects to further
reduce the traditional guarantee business and hold off on pursuing the guarantee business
to be provided via the Kaixindai Financing Services Jiangsu Co. Ltd (“Kaixindai”) platform as previously planned.
Management may actively resume the guarantee business if economic conditions improve in the future.
On September 5, 2013, our wholly
owned subsidiary, CCC International Investment Holding Ltd. (“CCC HK”), established Pride Financial Leasing
(Suzhou) Co. Ltd. (“PFL”) in Jiangsu Province, China. PFL was expected to offer financial leasing of machinery
and equipment, transportation vehicles, and medical devices to municipal government agencies, hospitals and SMEs in
Jiangsu Province and beyond. During the six months ended June 30, 2014, PFL did not have any operations except for
initial organizational activities. As of the date of this quarterly report, PFL entered into two financial leasing agreements
for an aggregate of $5.0 million (one with a monthly principle and interest income of $81,300 and the other with a
quarterly principle and interest income of $341,463. We do not currently have further funds to deploy in the financial leasing
business.
On February 19, 2014, WFOE entered into certain
contractual arrangements with Mr. Huichun Qin and Suzhou Pride Information Technology Co. Ltd. (“Pride Online”), a
domestic entity established on February 19, 2014 and 100% owned by Mr. Qin. Pursuant to these contractual arrangements, WFOE shall
have the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder
of Pride Online, including absolute control rights and the rights to the assets, property and revenue of Pride Online and as a
result, approximately 100% of the net income of Pride Online will be paid as a service fee to WFOE. Pride Online operates
an online platform (www. pridelendingclub.com) to match prospective borrowers with lenders. As of the date of this quarterly report,
Pride Online did not generate any income and management expect to terminate the contractual arrangements with Pride Online. The
registered capital contributed to Pride Online by WFOE, after deduction of certain organizational costs and certain start-up operational
expenses, will be returned to WFOE.
Key Factors Affecting Our Results of Operation
Our business and operating results are
affected by China’s overall economic growth local, economic condition, market interest rate and the borrowers repayment
ability. Unfavorable changes could affect the demand for the services that we provide and could materially and adversely affect
our results of operations. Our results of operations are also affected by the regulations and industry policies related to
the microcredit industry in the PRC.
Due to changes in the applicable microcredit
lending regulations in Jiangsu Province, starting August 2012 we elected to charge no more than three times the PBOC Benchmark
Rate. Prior to August 2012, we were allowed to charge up to four times the PBOC Benchmark Rate. The decrease in the PBOC Benchmark
Rate and the revised restriction on the allowable points above PBOC Benchmark Rate have slowed our growth in net interest income.
Our results of operations are also affected
by the provision for loan losses which is a noncash item and represents an assessment of the risk of future loan losses. Increases
in the allowance for loan losses are achieved through provision for loan losses that are charged against net interest income.
Although we have generally benefited from China’s
economic growth and the policies to encourage lending to farmers and SMEs, we are also affected by the complexity, uncertainties
and changes in the PRC regulations governing the micro lending industry. Due to PRC legal restrictions on foreign equity ownership
of and investment in the micro lending sector in China, we rely on contractual arrangements with Wujiang Luxiang, and its shareholders
to conduct most of our current business in China. We face risks associated with our control over our variable interest entity,
as our control is based upon contractual arrangements rather than equity ownership.
Results of Operations
Three Months Ended June 30, 2014 as Compared
to Three Months Ended June 30, 2013
CHINA COMMERCIAL CREDIT, INC
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
| |
For
the three Months Ended | |
| |
June
30, | |
| |
2014 | | |
2013 | | |
Amount | | |
Change
% | |
Interest income | |
| | |
| | |
| | |
| |
Interests
and fees on loans | |
| 1,673,559 | | |
| 3,275,026 | | |
| (1,601,467 | ) | |
| -49 | % |
Interests on deposits
with banks | |
| 9,093 | | |
| 21,327 | | |
| (12,234 | ) | |
| -57 | % |
Total
interest and fees income | |
| 1,682,652 | | |
| 3,296,353 | | |
| (1,613,701 | ) | |
| -49 | % |
| |
| | | |
| | | |
| | | |
| | |
Interest
expense | |
| | | |
| | | |
| | | |
| | |
Interest expense on short-term
bank loans | |
| (247,935 | ) | |
| (316,697 | ) | |
| 68,762 | | |
| -22 | % |
Net
interest income | |
| 1,434,717 | | |
| 2,979,656 | | |
| (1,544,939 | ) | |
| -52 | % |
| |
| | | |
| | | |
| | | |
| | |
Provision for loan losses | |
| (4,607,866 | ) | |
| (352,872 | ) | |
| (4,254,994 | ) | |
| 1206 | % |
Net
interest (loss) income after provision for loan losses | |
| (3,173,149 | ) | |
| 2,626,784 | | |
| (5,799,933 | ) | |
| -221 | % |
| |
| | | |
| | | |
| | | |
| | |
Commissions and fees
on financial guarantee services | |
| 90,050 | | |
| 361,867 | | |
| (271,817 | ) | |
| -75 | % |
(Under) Over provision
on financial guarantee services | |
| (1,567,355 | ) | |
| 104,530 | | |
| (1,671,885 | ) | |
| -1599 | % |
Commission
and fees on guarantee services, net | |
| (1,477,305 | ) | |
| 466,397 | | |
| (1,943,702 | ) | |
| -417 | % |
| |
| | | |
| | | |
| | | |
| | |
Net
(Loss) Revenue | |
| (4,650,454 | ) | |
| 3,093,181 | | |
| (7,743,635 | ) | |
| -250 | % |
| |
| | | |
| | | |
| | | |
| | |
Non-interest income | |
| | | |
| | | |
| | | |
| | |
Government incentive | |
| 81,408 | | |
| - | | |
| 81,408 | | |
| 100 | % |
Other non-interest income | |
| 48,369 | | |
| - | | |
| 48,369 | | |
| 100 | % |
Total non-interest
income | |
| 129,777 | | |
| - | | |
| 129,777 | | |
| 100 | % |
| |
| | | |
| | | |
| | | |
| | |
Non-interest expense | |
| | | |
| | | |
| | | |
| | |
Salaries and employee
surcharge | |
| (222,268 | ) | |
| (146,931 | ) | |
| (75,337 | ) | |
| 51 | % |
Rental expenses | |
| (65,232 | ) | |
| (64,810 | ) | |
| (422 | ) | |
| 1 | % |
Business taxes and surcharge | |
| (45,776 | ) | |
| (143,142 | ) | |
| 97,366 | | |
| -68 | % |
Other operating expenses | |
| (600,380 | ) | |
| (419,506 | ) | |
| (180,874 | ) | |
| 43 | % |
Total
non-interest expense | |
| (933,656 | ) | |
| (774,389 | ) | |
| (159,267 | ) | |
| 21 | % |
| |
| | | |
| | | |
| | | |
| | |
(Loss)
Income Before Taxes | |
| (5,454,333 | ) | |
| 2,318,792 | | |
| (7,773,125 | ) | |
| -335 | % |
Income tax expense | |
| 173,633 | | |
| (354,969 | ) | |
| 528,602 | | |
| -149 | % |
Net
(Loss) Income | |
| (5,280,700 | ) | |
| 1,963,823 | | |
| (7,244,523 | ) | |
| -369 | % |
| |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
(Loss)
Earnings per Share- Basic and Diluted | |
| (0.467 | ) | |
| 0.218 | | |
| (0.685 | ) | |
| -314 | % |
| |
| | | |
| | | |
| | | |
| | |
Weighted Average
Shares Outstanding-Basic and Diluted | |
| 11,315,900 | | |
| 9,000,000 | | |
| 2,315,900 | | |
| 26 | % |
| |
| | | |
| | | |
| | | |
| | |
Net
(Loss) Income | |
| (5,280,700 | ) | |
| 1,963,823 | | |
| (7,244,523 | ) | |
| -369 | % |
Other comprehensive income | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation
adjustment | |
| 108,611 | | |
| 1,056,705 | | |
| ((948,094 | ) | |
| -90 | % |
Comprehensive
(Loss) Income | |
| (5,172,089 | ) | |
| 3,020,528 | | |
| (8 ,192,617) | | |
| -271 | % |
The Company’s net loss for the three
months ended June 30, 2014 was $5,280,700 representing a decrease of $7,244,523, or 369 %, from net income of $1,963,823 for the
three months ended June 30, 2013. The net loss for the three months ended June 30, 2014 was the net effect of the changes in the
following components:
● a decrease in net interest
income of $1,544,939;
● an increase in the provision for
loan losses of $4,254,994
● a decrease in net commission and
fees from our guarantee business of $271,817;
● an increase of provision on financial
guarantee services of $1,671,885
● an increase in other non-interest
expense of $159,267; and
● an increase in enterprise income
tax of $528,602
The following paragraphs discuss changes in
the components of net (loss)/income in greater details during the three months ended June 30, 2014, as compared to the three months
ended June 30, 2013.
Net Interest income
Net interest income is equal to interest income
we generated less interest expenses we incurred. The Company’s net interest income decreased by $1,544,939 or 52%, to $1,434,717
during the three month ended June 30, 2014, as compared to net interest income of $2,979,656 for the three months ended June 30,
2013.
The decrease is due to the combined effect
of: (1) decrease in effective weighted average loan interest rate from 14.57% for the loan portfolio as of June 30, 2013 to 14.36%
as of June 30, 2014 due to the mandatory requirement promulgated by Jiangsu Finance Bureau in June of 2013 that effective from October
1, 2013 the maximum interest rate a microcredit company in Jiangsu province is permitted to charge shall be fifteen percent compared
to eighteen percent previously permitted; (2) reversal of interest income of $371,605 due from some long-aging customers according
to interest waive agreement between Wujiang Luxiang and these customers; and (3) the decrease in the amount of monthly interest
received. Compared to the same period last year, a substantial amount of borrowers chose to repay the principal and the interest
due at the maturity of the loan term instead of making monthly interest payments. Both payments are permissible under the agreements
we have with the borrowers. When a borrower chooses to repay the principal and the interest due at the maturity of the loan term,
the interest payments are only recognized as revenue when they are paid at the maturity of the loan.
Since the beginning of 2014,
People’s Bank of China continued to withdraw a significant amount of liquidity from the market, which has made it even
harder for SMEs to gain access to capital. The bank lenders usually require an old loan be paid in full upon maturity
before they approve a new loan to the same borrower. Some SMEs have to borrow from so-called “underground”
lenders, or shadow banks to repay the loans due to the banks. During the three months ended June 30, 2014, the banks denied
to extend new loans to some SMEs even after they made the full repayment for the loans due and satisfied other conditions.
Management is concerned that the borrowers may use the proceeds from the loans we grant to them as a means of repayment to
the other banks or even to the underground lenders, instead of using them in operations. Therefore, management decided to
grant new loans in a more cautious manner. The number of new loans/renewed loans reduced from 326 as of June 30, 2013 to 92
as of June 30 2014 and as a result, the interest income declined.
Due to the long-term nature of our restricted
deposits with third party banks, we utilized these deposits as term deposits during the three months ended June 30, 2014 which
in turn generated interest income on deposits with banks of $9,093 as compared to $21,327 during the three months ended June 30,
2013. The decrease was mainly due to the reduction of our traditional guarantee business with banks, and we have closed several
restricted deposit accounts with banks through which we provided guarantee services to our customers. As of June 30, 2014, the
balance of restricted cash was $3,988,679, a decrease of 66.9% from $12,040,245 as of June 30, 2013.
Interest expense represents interest incurred
on short-term bank loans. The interest incurred on short term bank loans decreased by $68,762, or 22%. This was mainly caused by
a decrease of the total bank borrowing balance of $4.8 million, from $21.0 million as of June 30, 2013 to $16.2 million as of June
30, 2014. The aggregate amount of credit available to us under the line of credit we have with the Agriculture Bank of China remains
unchanged as RMB100 million (approximately $16 million) as of June 30, 2014 and as of the date of this report.
Provision for Loan Losses
The Company’s provision for loan losses
were $4,607,866 and $352,872 for the three months ended June 30, 2014 and 2013, respectively. The
provision for loan losses was determined by comparing the beginning and ending balance of allowance for loan losses for business
and personal loans. If the ending balance of the allowance of loan losses after any charge offs (net of recoveries)
is less than the beginning balance, it will be recorded as a “reversal”; if it is larger, it will be recorded as a
“provision” in the allowance for loan loss. The netting amount of “reversal” and “provision”
is presented in the consolidated statements of income and comprehensive income and the components of the provision for loan losses
were disclosed in Note 7.
Increase
in provision for loan losses reflects the increase in the allowance for loan losses for the reporting period as our loan receivable
balance increased and hence higher risk was assessed. In accordance with the aging schedule, during the three months ended June
30, 2014, more “special mention” loans were moved
down to the “substandard” and “doubtful” category subject to the higher provision ratio of 25% and 50%,
respectively. We have initiated several legal proceedings against long-aging customers and it may take a long time to collect the
outstanding balance from these customers. In order to speed up the collection of past due loans, we engaged He-Partners Law Firm,
the largest law firm in Suzhou City to represent us in these lawsuits.
Since the beginning of 2014, the economic conditions
in the eastern part of China, especially the Yangtze River Delta region, has been challenging due to the downturn of the general
economic situation in China. Wujiang, which is in the heart of this region, has been significantly affected. The textile industry,
which is the pillar industry in Wujiang area, as well as other industries, have been facing downward pressure. As the local SMEs’
profitability and repayment ability deteriorates, “special mentioned”, “substandard” and “doubtful’
bank loans drastically increased. As such, our provision for loan losses substantially increased during this quarter.
Net Commission and Fees from Our Guarantee
Business
The Company also generated net income by charging
fees for financial guarantee services provided to our customers to help them obtain loans from other banks. We generally charge
a one-time fee of 1.62% multiplied by the amount of loans being guaranteed based on the nature of the guarantee and whether the
customer is new or existing. The commissions and fees generated from our financial guarantee services decreased from $361,867
for the three months ended June 30, 2013, to $90,050 for the three months ended June 30, 2014, representing a decrease of $271,817
or 75%.
As of June 30, 2014, we have provided guarantees
for a total of $29.1 million underlying loans to approximately 31 borrowers, a reduction of 51.2% as compared to December
31, 2013. We expect to further reduce our traditional guarantee services and gradually get out from this business, as the rate
of fees and commissions generated from this service has been decreasing and the revenue does not justify the default risks involved.
Provision on Financial Guarantee Services
The provision on financial guarantee services
increased from an over provision of $104,530 for the three months ended June 30, 2013, to an under provision of $1,567,355 for
the three months ended June 30, 2014, representing an increase of $1,671,885.
The methodology the Company used to estimate
the liability for probable guarantee loss considers the guarantee contract amount and a variety of factors, which include, dependence
on the counterparty, latest financial position and performance of the customers, actual defaults, estimated future defaults, historical
loss experience, estimated value of collaterals or guarantees the costumers or third parties offered, and other economic conditions
such as the economic trend of the area and the country. The estimates are based upon currently available information.
Based on the past experience, we estimates
the probable loss for immature financial guarantee services to be 1% of contract amount and made a provision for possible
credit risk of its guarantee. Additionally we accrued allowance on matured but defaulted financial guarantee services. During the
three months ended June 30, 2014, a number of our financial guarantee customers defaulted on their loans and we repaid for the
underlying loans. As of June 30, 2014, the outstanding repayment balance amounted to $8.8 million.
As explained above, since the beginning of
2014, People’s Bank of China continued to withdraw a significant amount of liquidity from the market, which has made it even
harder for SMEs to gain access to capital. The bank lenders usually require an old loan be paid in full upon maturity before
they approve a new loan to the same borrower. During the first six months of 2014, the banks denied to extend new loans to many
SMEs even after they made the full repayment for the loans due and satisfied other conditions. As a result, some of the SME borrowers
for which we provided the guarantees decided to default on the bank loans. Therefore the amount of repayment we made to the bank
lenders substantially increased during the three months ended June 30, 2014.
We are in the process of negotiating and possibly
litigating against both the borrowers and their counter-guarantors. Due to the uncertainty of the outcome, we increased our provision
for the guarantee services significantly from an over provision of $104,530 for the three months ended June 30, 2013, to an under
provision of $1,567,355 for the three months ended June 30, 2014, representing an increase of $1,671,885. We engaged He-Partners
Law Firm, the largest law firm in Suzhou City, to represent us in the legal proceedings against the borrowers and their counter
guarantors, and expect to collect part of the outstanding balance in a period ranging from six months to one year upon adjudication
by the Court in favor of the Company. The timing of collection and ultimate amount of funds we can recover depend on a few factors,
including the repayment ability of the borrower and their counter-guarantors, the execution time of the court, other obligations
the borrowers have and the priority over the claim for the Company.
We accrued specific provision on the balance
of repayment on behalf of defaulted customers according to “Five-Tier” principal. The Specific Reserve is based on
the level of loss of each repayment after categorizing the repayment according to their risk. According to the “Five-Tier
Principle” set forth in the Provision Guidance, the guarantees are categorized as “special-mention”, “substandard”,
“doubtful” or “loss”. Normally, the provision rate is 2% for “special-mention”, 25% for “substandard”,
50% for “doubtful” and 100% for “loss”.
Non-interest expenses
Non-interest expenses increased from $774,389
for the three months ended June 30, 2013 to $933,656 for the three months ended June 30, 2014, representing an increase of $159,267
or 21%. Non-interest expenses primarily consisted of salary and benefits for employees, business tax and surcharge, traveling cost,
entertainment expenses, depreciation of equipment, office rental expenses, professional service fees, and office supplies. The
increase was mainly attributable to (1) salaries and employee surcharge, which increased by $75,337, and (2) an increase in
other operating expenses of $180,874. Other operating expenses were higher during the three months ended June 30, 2014 as compared
to the same period of 2013, primarily due to an increase in D&O insurance premium of $70,875 and an increase in legal and consulting
expense of $309,459, netting off against a decrease in bank charges of $25,751, a decrease in promotion expense of $41,892 and
a decrease in audit-related expenses of $67,587.
Income tax
Income taxes decreased from an income tax expense
of $354,969 for the three months ended June 30, 2013 to an income tax credit of $173,633 for the three months ended June
30, 2014, representing a decrease of $528,602. The decrease in income tax is mainly due to the decrease of pre-tax income for the
three months ended June 30, 2014.
Six Months Ended June 30, 2014 as Compared
to Six Months ended June 30, 2013
CHINA COMMERCIAL CREDIT, INC
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
| |
For the Six Months Ended | |
| |
June 30, | |
| |
2014 | | |
2013 | | |
Amount | | |
Change
% | |
Interest income | |
| | |
| | |
| | |
| |
Interests
and fees on loans | |
| 4,530,033 | | |
| 6,187,104 | | |
| (1,657,071 | ) | |
| -27 | % |
Interests on deposits
with banks | |
| 51,541 | | |
| 118,494 | | |
| (66,953 | ) | |
| -57 | % |
Total
interest and fees income | |
| 4,581,574 | | |
| 6,305,598 | | |
| (1,724,024 | ) | |
| -27 | % |
| |
| | | |
| | | |
| | | |
| | |
Interest
expense | |
| | | |
| | | |
| | | |
| | |
Interest expense on short-term
bank loans | |
| (493,125 | ) | |
| (622,852 | ) | |
| 129,727 | | |
| -21 | % |
Net
interest income | |
| 4,088,449 | | |
| 5,682,746 | | |
| (1,594,297 | ) | |
| -28 | % |
| |
| | | |
| | | |
| | | |
| | |
Provision for loan losses | |
| (5,196,046 | ) | |
| (841,088 | ) | |
| (4,354,958 | ) | |
| 518 | % |
Net
interest (loss) income after provision for loan losses | |
| (1,107,597 | ) | |
| 4,841,658 | | |
| (5,949,255 | ) | |
| -123 | % |
| |
| | | |
| | | |
| | | |
| | |
Commissions and fees
on financial guarantee services | |
| 388,360 | | |
| 773,076 | | |
| (384,716 | ) | |
| -50 | % |
(Under) Over provision
on financial guarantee services | |
| (1,877,208 | ) | |
| 148,700 | | |
| (2,025,908 | ) | |
| -1362 | % |
Commission
and fees on guarantee services, net | |
| (1,488,848 | ) | |
| 921,776 | | |
| (2,410,624 | ) | |
| -262 | % |
| |
| | | |
| | | |
| | | |
| | |
Net
(Loss) Revenue | |
| (2,596,445 | ) | |
| 5,763,434 | | |
| (8,359,879 | ) | |
| -145 | % |
| |
| | | |
| | | |
| | | |
| | |
Non-interest income | |
| | | |
| | | |
| | | |
| | |
Government incentive | |
| 81,408 | | |
| 25,775 | | |
| 55,633 | | |
| 216 | % |
Other non-interest income | |
| 169,329 | | |
| - | | |
| 169,329 | | |
| 100 | % |
Total non-interest
income | |
| 250,737 | | |
| 25,775 | | |
| 224,962 | | |
| 873 | % |
| |
| | | |
| | | |
| | | |
| | |
Non-interest expense | |
| | | |
| | | |
| | | |
| | |
Salaries and employee
surcharge | |
| (408,403 | ) | |
| (344,875 | ) | |
| (63,528 | ) | |
| 18 | % |
Rental expenses | |
| (130,982 | ) | |
| (128,847 | ) | |
| (2,135 | ) | |
| 2 | % |
Business taxes and surcharge | |
| (158,388 | ) | |
| (257,589 | ) | |
| 99,201 | | |
| -39 | % |
Other operating expenses | |
| (1,132,494 | ) | |
| (870,370 | ) | |
| (262,124 | ) | |
| 30 | % |
Total
non-interest expense | |
| (1,830,267 | ) | |
| (1,601,681 | ) | |
| (228,586 | ) | |
| 14 | % |
| |
| | | |
| | | |
| | | |
| | |
(Loss)
Income Before Taxes | |
| (4,175,975 | ) | |
| 4,187,528 | | |
| (8,363,503 | ) | |
| -200 | % |
Income tax expense | |
| (11,092 | ) | |
| (653,837 | ) | |
| 642,745 | | |
| -98 | % |
Net
(Loss) Income | |
| (4,187,067 | ) | |
| 3,533,691 | | |
| (7,720,758 | ) | |
| -218 | % |
| |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
(Loss)
Earnings per Share- Basic and Diluted | |
| (0.383 | ) | |
| 0.393 | | |
| (0 .776) | | |
| -197 | % |
| |
| | | |
| | | |
| | | |
| | |
Weighted Average
Shares Outstanding-Basic and Diluted | |
| 10,935,530 | | |
| 9,000,000 | | |
| 1,935,530 | | |
| 22 | % |
| |
| | | |
| | | |
| | | |
| | |
Net
(Loss) Income | |
| (4,187,067 | ) | |
| 3,533,691 | | |
| (7,720,758 | ) | |
| -218 | % |
Other comprehensive income | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation
adjustment | |
| (699,016 | ) | |
| 1,428,066 | | |
| (2,127,082 | ) | |
| -149 | % |
Comprehensive
(Loss) Income | |
| (4,886,083 | ) | |
| 4,961,757 | | |
| (9,847,840 | ) | |
| -198 | % |
The Company’s net loss for the six months
ended June 30, 2014 was $ 4,187,067, representing a decrease of $7,720,758 or 218%, from net income of $3,533,691 for the six months
ended June 30, 2013. The decrease in net income for the six months ended June 30, 2014 was the net effect of the changes in the
following components:
| · | a decrease in net interest income of $1,594,297; |
| · | an increase in the provision for loan losses of $4,354,958; |
| · | a decrease in net commission and fees on guarantee services of $384,716; |
| · | an increase of provision on financial guarantee services of $2,025,908; |
| · | an increase in total non-interest expense of $228,586; and |
| · | a decrease in enterprise income tax of $642,745; |
The following paragraphs discuss changes in
the components of net (loss)/income in greater details during the six months ended June 30, 2014, as compared to the six months
ended June 30, 2013.
Net Interest Income
Net interest income is equal to interest income
we generated less interest expenses we incurred. The Company’s net interest income decreased by $1,594,297, or 28% to $4,088,449
during the six months ended June 30, 2014, as compared to net interest income of $5,682,746 for the six months ended June 30,
2013.
The interest and fees on loans decreased by
$1,657,071, or 27% from $6,187,104 for the six months ended June 30, 2013 to $4,530,033 for the six months ended June 30, 2014.
The decrease is the combined effect of: (1) decrease in effective weighted average loan interest rate from 14.57% for the loan
portfolio as of June 30, 2013 to 14.36% as of June 30, 2014 due to the mandatory requirement promulgated by Jiangsu Finance Bureau
in June of 2013 that effective from October 1, 2013 the maximum interest rate a microcredit company in Jiangsu province is
permitted to charge shall be fifteen percent compared to eighteen percent previously permitted; (2) reversal of interest income
of $371,605 due from some long-aging customers according to interest waive agreement between Wujiang Luxiang and these customers:
and (3) the decrease in the amount of monthly interest received. Compared to the same period last year, a substantial amount of
borrowers chooses to repay the principal and the interest due at the maturity of the loan term instead of making monthly interest
payments. Both payments are permissible under the agreements we have with the borrowers. When a borrower chose to repay the principal
and the interest due at the maturity of the loan term, the interest payments are only recognized as revenue when they are paid
at the maturity of the loan.
Since the beginning of 2014, People’s
Bank of China continued to withdraw a significant amount of liquidity from the market, which has made it even harder for SMEs to
gain access to capital. The bank lenders usually require an old loan be paid in full upon maturity before they approve a new
loan to the same borrower. Some SMEs have to borrow from so-called “underground” lenders, or shadow banks to repay
the loans due to the banks. During the three months ended June 30, 2014, the banks denied to extend new loans to some SMEs even
after they made the full repayment for the loans due and satisfied other conditions. Management is concerned that the borrowers
may use the proceeds from the loans we grant to them as a means of repayment to the other banks or even to the underground lenders,
instead of using them in operations. Therefore, management decided to grant new loans in a more cautious manner.
During
the six months ended June 30, 2014, we granted 92 loans and the average loan size was approximately $361,000, as compared to 326
loans with an average loan size of $429,000 during the six months ended June 30, 2013.
Due to the long-term nature of our restricted
deposits with third party banks, we utilized these deposits as term deposits which in turn generated interest income on deposits
with banks of $51,541 during the six months ended June 30, 2014 as compared to $118,494 during the six months ended June 30, 2013.
The decrease was mainly due to the reduction of our traditional guarantee business with banks, and we have closed several restricted
deposit accounts with banks through which we provided guarantee services to our customers. As of June 30, 2014, the balance of
restricted cash was $3,988,679, a decrease of 66.9% from $12,040,245 as of June 30, 2013.
Interest expense represents interest incurred
on short-term bank loans. The interest incurred on short term bank loans decreased by $129,727, or 21%. This was mainly caused
by a decrease of total bank borrowing balance by $4.8 million from $21.0 million as of June 30, 2013 to $16.2 million as of June
30, 2014. During both six months ended June 30, 2014 and 2013, there was no interest expense related to the loans from related
parties, as a result of our effort to reduce related party transactions.
Provision for Loan Losses
The Company’s provision for loan losses
were $5,196,046 and $841,088 for the six months ended June 30, 2014 and 2013, respectively. The
provision for loan losses was determined by comparing the beginning and ending balance of allowance for loan losses for business
and personal loans. If the ending balance of the allowance of loan losses after any charge offs (net of recoveries)
is less than the beginning balance, it will be recorded as a “reversal”; if it is larger, it will be recorded as a
“provision” in the allowance for loan loss. The netting amount of “reversal” and “provision”
is presented in the consolidated statements of income and comprehensive income and the components of the provision for loan losses
were disclosed in Note 7.
Increase in provision for loan losses reflects
the increase in the allowance for loan losses for the reporting period as our loan receivable balance increased and hence higher
risk was assessed. In accordance with the aging schedule, during the six month ended June 30, 2014, there was an increase of $4.8
million in “special mention ” loans which are subject to a provision ratio of 2%. Besides more “special
mention” loans were moved down to the “substandard” and “doubtful” category subject to the
higher provision ratio of 25% and 50%, respectively. We have initiated several legal proceedings against long-aging customers and
it may take a long time to settle the case. In order to speed up the collection of past due loans, we, engaged He-Partners Law
Firm, the largest law firm in Suzhou City to represent us in these lawsuits.
Since the beginning of 2014, the economic conditions
in the eastern part of China, especially the Yangtze River Delta region, has been challenging due to the downturn of the general
economic situation in China. Wujiang, which is in the heart of this region, has been significantly affected. The textile industry,
which is the pillar industry in the Wujiang area, as well as other industries, have been facing downward pressure. As the local
SMEs’ profitability and repayment ability deteriorates, “special mentioned”, “substandard” and “doubtful’
bank loans drastically increased. As such, our provision for loan losses substantially increased during this quarter.
Net Commission and Fees on Guarantee
Business
The Company also generated net income by charging
fees for financial guarantee services provided to our customers to help them obtain loans from other banks. We generally charge
a one-time fee of 1.62%-3.60% multiplied by the amount of loans being guaranteed, based on the nature of the guarantee and whether
the customer is new or existing. The commissions and fees generated from our financial guarantee services decreased from $773,076 for
the six months ended June 30, 2013 to $388,360 for the six months ended June 30, 2014, representing a decrease of $384,716, or
50%.
As of June 30, 2014, we have provided guarantees
for a total of $29.1 million underlying loans to approximately 31 borrowers, a reduction of 51.2% compared to December 31, 2013 .
Provision on Financial Guarantee Services
The provision on financial guarantee services
increased from an over provision of $148,700 for the six months ended June 30, 2013, to an under provision of $1,877,208 for the
six months ended June 30, 2014, representing an increase of $2,025,908.
The methodology the Company used to estimate
the liability for probable guarantee loss considers the guarantee contract amount and a variety of factors, which include, dependence
on the counterparty, latest financial position and performance of the customers, actual defaults, estimated future defaults, historical
loss experience, estimated value of collaterals or guarantees the costumers or third parties offered, and other economic conditions
such as the economic trend of the area and the country. The estimates are based upon currently available information.
As explained above, since the beginning of
2014, People’s Bank of China continued to withdraw a significant amount of liquidity from the market, which has made it even
harder for SMEs to gain access to capital. The bank lenders usually require an old loan be paid in full upon maturity before
they approve a new loan to the same borrower. During the first six months of 2014, the banks denied to extend new loans to many
SMEs even after they made the full repayment for the loans due and satisfied other conditions. As a result, some of the SME borrowers
for which we provided the guarantees decided to default on the bank loans. Therefore the amount of repayment we made to the bank
lenders substantially increased during the six months ended June 30, 2014. We are in the process of negotiating and possibly litigating
against both the borrowers and their counter-guarantors. Due to the uncertainty of the outcome, we increased our provision for
the guarantee services significantly from an over provision of $148,700 for the six months ended June 30, 2013, to an under provision
of $1,877,208 for the six months ended June 30, 2014, representing an increase of $2,025,908. We engaged He-Partners Law Firm,
the largest law firm in Suzhou City, to represent us in the legal proceedings against the borrowers and their counter guarantors,
and expect to collect part of the outstanding balance in a period ranging from six months to one year upon adjudication by the
Court in favor of the Company. The timing of collection and ultimate amount of funds we can recover depend on a few factors, including
the repayment ability of the borrower and their counter-guarantors, the execution time of the court, other obligations the borrowers
have and priority over the claim for the Company.
We accrued specific provision on the balance
of repayment on behalf of defaulted customers according to “Five-Tier” principal. The Specific Reserve is based on
the level of loss of each loan after categorizing the loan according to their risk. According to the “Five-Tier Principle”
set forth in the Provision Guidance, the guarantees are categorized as “special-mention”, “substandard”,
“doubtful” or “loss”. Normally, the provision rate is 2% for “special-mention”, 25% for “substandard”,
50% for “doubtful” and 100% for “loss”.
Non-interest Expenses
Non-interest expenses increased from $1,601,681
for the six months ended June 30, 2013 to $1,830,267 for the six months ended June 30, 2014, representing an increase of
$228,586 or 14%. Non-interest expenses primarily consisted of salary and employee surcharge, office rental expense, business
tax and surcharge, depreciation of equipment, travel expenses, entertainment expenses, professional service fees, and other office
supplies. The increase was mainly attributable to an increase in salaries and employee surcharge by $63,528 and an increase
of other operating expenses by $262,124, or 30%. Other operating expenses were higher during the six months ended June 30, 2014
as compared to the six months ended June 30, 2013, primarily due to a net effect of an increase in legal and consulting fee of
315,335, an increase in D&O insurance premium of $141,750, against a decrease in bank charge of $60,489, a decrease in promotion
fee of $76,173 and a decrease in travel expenses of $23,811.
Income Tax
Income taxes decreased from $653,837
for the six months ended June 30, 2013 to $11,092 for the six months ended June 30, 2014, representing a decrease of $642,745 or
98 %. The decrease in income tax is mainly attributable to a decrease of income before tax of $8,363,503 or 200%, from
$4,187,528 for the six month ended June 30, 2013 to a loss of $4,175,975 for the six months ended June 30, 2014.
Loan Portfolio Quality
One of our key objectives is to maintain a
high level of loan portfolio quality. When a borrower fails to make a scheduled payment, we attempt to cure the deficiency by personally
contacting the borrower. Initial contacts typically are made seven days after the date the payment is due, and warning letters
are sent by our legal counsel approximately 90 days after the default. In most cases, deficiencies are promptly resolved. If the
outstanding amount cannot be collected within 180 days after the maturity date and the parties could not reach an agreement on
a specific repayment program, we will initiate legal proceedings.
We also keep the frequency of visits
to our customers and observe their daily production on site from time to time to observe their operating condition and collect
their financial information. Since most of our customers are in the Jiangsu area, it is also relatively easy to obtain information
about our customers. Due to the bad economic condition of the first six months of 2014, we increased the frequency of our visits
in order to better identify the potential default risk.
On loans where the collection of principal
or interest payments is doubtful, the accrual of interest income ceases and become “non-accrual” loans. Except for
loans that are sufficiently secured and in the process of collection, it is our policy to discontinue accruing additional interest
and reverse any interest accrued on any loan which is 90 days or more past due.
We account for our impaired loans in accordance
with U.S. GAAP. An impaired loan generally is one for which it is probable, based on current information, that the lender will
not collect all the amounts due under the contractual terms of the loan. Loans that experience insignificant payment delays and
payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including
the length of the delay, the reasons for the delay, the borrower’s prior payment history and the amount of the shortfall
in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for business and personal loans
by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value
of the collateral if the loan is collateralized.
We allow a one-time loan extension with time
duration up to the original loan term, which is usually within twelve months. In order to qualify, the borrower must be current
with its interest payments. We do not grant concession to borrowers as the principal of the loan remains the same and interest
rate is fixed at the current interest rate at the time of extension.
We use a comprehensive methodology to monitor
credit quality and prudently manage credit concentration within our portfolio of loans. Currently our loan portfolio concentrates
in the textile industry and during the six months ended June 30, 2014, both the domestic and international demand for textile products
have been decreasing. To maintain our loan portfolio quality, we have modified our loan policy to accept only textile companies
with real estate as collateral or guaranteed by guarantee companies.
In addition, we plan to diversify our risks
by concentrating in smaller amount loans that are below $490,000 (or approximately RMB 3.0 million). We have also eliminated related
party loans and extended more loans to agriculture related business since 2012.
Currently,
the banking industry encourages SMEs to apply for loans as individual with recourse so that when it is past due, both the SME
and the responsible individual are both liable for the past due amount and the individual borrower carries personal liability.
As of June 30, 2014, our business loan balance decreased by 0.86% as compared to that as of Dec 31, 2013 while personal loan increased
by 4.60%.
The following table sets forth the classification
of loans receivable as of June 30, 2014 and December 31, 2013, respectively:
| |
June 30,
2014 (Unaudited) Amount | | |
Percent of Total | | |
December 31, 2014 Amount | | |
Percent of Total | |
| |
| | |
| | |
| | |
| |
Business loans | |
| 56,134,831 | | |
| 61.51 | % | |
| 56,620,893 | | |
| 62.77 | % |
Personal loans | |
| 35,128,726 | | |
| 38.49 | % | |
| 33,582,520 | | |
| 37.23 | % |
| |
| | | |
| | | |
| | | |
| | |
Total Loans receivable | |
| 91,263,557 | | |
| | | |
| 90,203,413 | | |
| | |
Nonaccrual loans totaled $6.7 million, or 5.98%
of total assets as of June 30, 2014, up from $2.8 million, or 2.49% of total assets, as of December 31, 2013. The allowance for
loan losses was $6.55 million, representing 7.18% of loans receivable and 98.46% of non-accrual loans as of June 30, 2014. As of
December 31, 2013, the allowance for loan losses was $1.38 million, representing 1.53% of loans receivable and 48.87% of non-accrual
loans.
The following table sets forth information
concerning our nonaccrual loans as of June 30, 2014 and December 31, 2013, respectively:
| |
June 30,
2014 | | |
December 31,
2013 | |
| |
| | |
| |
Nonaccrual loans | |
$ | 6,651,946 | | |
$ | 2,815,358 | |
Allowance for loan losses | |
$ | 6,549,771 | | |
$ | 1,375,948 | |
Loans receivable | |
$ | 91,263,557 | | |
$ | 90,203,413 | |
Total assets | |
$ | 111,295,184 | | |
$ | 113,003,448 | |
Nonaccrual loans to loans receivable | |
| 7.29 | % | |
| 3.12 | % |
Nonperforming assets to total assets | |
| 5.98 | % | |
| 2.49 | % |
Allowance for loan losses to loans receivable | |
| 7.18 | % | |
| 1.53 | % |
Allowance for loan losses to non-accrual loans | |
| 98.46 | % | |
| 48.87 | % |
Since the beginning of 2014, the economic conditions
in eastern part of China, especially the Yangtze River Delta region, has been challenging due to the downturn of the general economic
situation in China. Wujiang, which is in the heart of this region, has been significantly affected. The textile industry, which
is the pillar industry in Wujiang area, as well as other industries, have been facing downward pressure. As the local SMEs’
profitability and repayment ability deteriorates, “special mentioned”, “substandard” and “doubtful’
bank loans drastically increased. As such, our provision for loan losses substantially increased during this quarter.
Cash Flows and Capital Resources
We have financed our operations primarily through
shareholder contributions, cash flow from operations and bank loans, and from public offerings of securities. As a result of our
total cash activities, net cash decreased from $9,405,865 as of December 31, 2013 to $7,399,767 as of June 30, 2014.
We require cash for working capital, making
loans, repayment of debt and guarantee, salaries, commissions and related benefits and other operating expenses and income taxes.
We expect that without the needs of future business expansion, our current working capital is sufficient to support our routine
operations for the next twelve months.
However, as a micro-credit company regulated
by the Chinese Banking Regulatory Commission, we are prohibited from providing saving or checking services to our customers; our
borrowing capacity from other financial institutions is also limited to 50% of our equity.
In order to meet the capital needs
for our continued operations, we may take the following actions: (1) continue to improve our collection of loan receivable
and interest receivable; (2) if necessary, raise additional capital through the sale of equity; and/or (3) enter into new, or
refinance existing, short- and/or long term commercial loans. We cannot assure you that financing will be available in the amounts
we need or on terms acceptable to us, if at all. On May 13, 2014, the Company closed its second public offering (“Follow-on
Offering”) offering of 1,750,000 shares of Common Stock and 1,750,000 warrants to purchase 875,000 shares of Common Stock.
The public offering price of the shares sold in the Follow-on Offering was $3.99 per share and the offering pricing for the warrants
was $0.01 per warrant. 1,650,386 shares of Common Stock was newly issued by the Company and 99,614 shares of Common Stock were
registered and sold by existing shareholders. The aggregate gross proceeds in the Follow-on Offering were $6.6 million. After
deducting underwriting discounts and commissions and offering expenses payable by the Company and the proceeds to the selling
shareholders, the aggregate net proceeds received by the Company totaled approximately $5.7 million. The sale of additional
equity securities, including convertible debt securities, would dilute our current shareholders. The incurrence of debt could
result in operating and financial covenants that would restrict our operations and our ability to pay dividends to our shareholders.
If we are unable to obtain additional equity or debt financing as required, our business, operations and prospects may be adversely
affected.
In
March 2014, approximately $5.7 million (RMB 30 million) of the net proceeds raised in our IPO was transferred and have
already been contributed to Wujiang Luxiang and approved as an increase of the registered capital of Wujiang Luxiang. In
October 2014, approximately $5million (RMB 30.7 million) of the net proceeds raised in our follow-on offering was
transferred to PFL to fund its operation.
Statement of Cash Flows
The following table sets forth a summary of
our cash flows for the six months ended June 30, 2014 and 2013, respectively:
| |
For the six months Ended
June 30 | |
| |
2014 (Unaudited) | | |
2013 (Unaudited) | |
| |
| | |
| |
Net cash provided by operating activities | |
$ | 974,483 | | |
$ | 4,124,466 | |
Net cash used in investing activities | |
$ | (8,545,958 | ) | |
$ | (1,385,220 | ) |
Net cash provided by financing activities | |
$ | 5,710,405 | | |
$ | 68,237 | |
Effects of exchange rate changes on cash | |
$ | (145,028 | ) | |
$ | 45,650 | |
Net cash (outflow) inflow | |
$ | (2,006,098 | ) | |
$ | 2,853,133 | |
Net Cash Provided by Operating
Activities
During the six
months ended June 30, 2014, we had positive cash flow from operating activities of $ 974,483,
a decrease of $ 3,149,983 from the six months ended June 30, 2013, during which we had cash
flow from operating activities of $ 4,124,466. The net income for the six months ended June
30, 2014 decreased by $7,720,758 as compared to the Six months ended June 30, 2013. The decrease in net cash provided by operating
activities was the result of several factors, including:
| · | An increase in cash flow due to an increase of non-cash items which was primarily due
to the increase in the provision for loan losses of $4,354,958 and the increase in the provision for financial guarantee services
of $2,025,908. |
| · | A decrease in cash flow due to the increase in changes in interest receivable by $559,461. The
interest receivable increased by $339,850 and $219,611 as of June 30, 2014 and 2013, respectively, as compared to December 31,
2013 and 2012. This is mainly attributable to a significant increase in interest receivable overdue 90 days as of June 30, 2014. |
| · | A decrease in cash flow due to the increase in changes in net tax receivable by $566,059. The net
tax receivable as of June 30, 2014 and 2013 is $1,741,858 and $820,526, respectively. The Company was required to prepay enterprise
income taxes at a rate of 25% on a quarterly basis when the applicable tax rate was 12.5% to loan business and 25% to guarantee
business, respectively. Within five months after fiscal year end, the Company and the tax authority resolved the difference between
the taxes paid and taxes due. |
Net Cash Used in Investing Activities
Net cash used in investing activities for the
six months ended June 30, 2014 was $8,545,958, as compared to net cash used in investing activities of $1,385,220 for the six months
ended June 30, 2013. The cash used in investing activities for the six months ended June 30, 2014 was mainly used for repayment
of defaulted customers in the financial guarantee service.
Net Cash Provided by Financing
Activities
Net cash provided by financing activities for
the six months ended June 30, 2014 totaled $5,710,405, as compared to net cash used in financing activities of $68,237 for the
six months ended June 30, 2013. The cash provided by financing activities for the six months ended June 30, 2014 was mainly attributable
the net proceeds of $5.7 million received from issuance of common stock and warrants in the Follow-on Offering closed on May 13,
2014.
Contractual Obligations
As of June 30, 2014, the annual amounts of
future minimum payments under certain of our contractual obligations were:
| |
Payment due by period |
| |
Total | | |
Less than 1 year | | |
1-2 years | | |
2-3 years | | |
3-5 years | | |
5 years and after |
Contractual obligations: | |
| | |
| | |
| | |
| | |
| | |
|
Short term bank loans (1) | |
| 16,242,995 | | |
| 16,242,995 | | |
| - | | |
| - | | |
| - | | |
|
Operating lease (2) | |
| 1,045,372 | | |
| 196,007 | | |
| 261,343 | | |
| 261,343 | | |
| 326,679 | | |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
|
| |
| 17,288,367 | | |
| 16,439,002 | | |
| 261,343 | | |
| 261,343 | | |
| 326,679 | | |
|
(1) |
The bank loans bear an average annual interest rate of 6.0%. |
(2) |
Our renewed lease for our office in Wujiang commenced on October 1, 2013 and will expire on September 30, 2018. The Company has the right to extend the lease before its expiration with a one-month's prior written notice. |
Off-Balance Sheet Arrangements
These financial guarantee contracts consist
of providing guarantees to banks on behalf of borrowers to help them obtain loans from banks. The contract amounts reflect the
extent of involvement the Company has in the guarantee business and also represents the Company’s maximum exposure to credit
loss.
The Company is party to financial instruments
with off-balance-sheet risk in the normal course of business to meet the financing needs of its borrowers. Financial instruments
whose contract amounts represent credit risk are as follows.
| | |
June 30, 2014 (Unaudited) | | |
December 31, 2013 | |
| Guarantee | | |
$ | 29,139,933 | | |
$ | 59,692,091 | |
Critical Accounting Policies
We prepare our financial statements in conformity
with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect our reported amount of assets and liabilities
and the disclosure of contingent assets and liabilities as of the date of the financial statements, and reported amounts of revenue
and expenses during the reporting periods. We continually evaluate these estimates and assumptions based on the most recently available
information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances.
Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations
as a result of changes in our estimates.
An accounting policy is considered critical
if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such
estimate is made and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates
that are reasonably likely to occur, could materially impact the condensed financial statements. We believe that the following
accounting policies involve a higher degree of judgment and complexity in their application and require us to make significant
accounting estimates. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction
with our condensed financial statements and other disclosures included in this report.
Revenue recognition
Revenue is recognized when there are probable
economic benefits to the Company and when the revenue can be measured reliably, on the following:
| ● | Interest income on loans. Interest on loan receivables is accrued monthly in accordance with their contractual terms and recorded
in accrued interest receivable. The Company does not charge prepayment penalty from customers. |
| ● | Commission on guarantee service. The Company receives the commissions from guarantee services in full at inception and records
as unearned income before amortizing it throughout the period of guarantee. |
| ● | Non-interest income. Non-interest income mainly includes government incentive and rental income from the sub-leasing of certain
of the Company’s leased office space to third parties. Government incentive is provided by Jiangsu Provincial government
on a yearly basis to promote the development of micro credit agencies in Jiangsu Province. |
Loans receivable, net
Loans receivable primarily represent loan amount
due from customers that the management has the intent and ability to hold for the foreseeable future or until maturity or payoff.
Loans receivable are recorded at unpaid principal balances, net of unearned income and allowance that reflects the Company’s
best estimate of the amounts that will not be collected. Loan origination and commitment fees and certain direct loan origination
costs collected from customers are directly recorded as interests and fees on loans. The loans receivable portfolio consists of
business loans and personal loans. The Company does not charge loan origination and commitment fees.
Allowance for loan losses and
loan impairment
The allowance for loan losses is maintained
at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation
of the adequacy of the allowance. The allowance is based on the Company’s past loan loss history, known and inherent risks
in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying
collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently
subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.
The allowance is calculated at portfolio-level
since our loans portfolio is typically of smaller balance homogenous loans and is collectively evaluated for impairment.
For the purpose of calculating portfolio-level
reserves, we have grouped our loans into two portfolio segments: Business and Personal. The allowance consists of the combination
of a quantitative assessment component based on statistical models, a retrospective evaluation of actual loss information to loss
forecasts, value of collaterals and potentially a qualitative component based on management judgment.
The allowance for loan losses is increased by charges to income
and decreased by charge offs (net of recoveries). Recoveries represent subsequent collection of amounts previously charged-off.
The increase in allowance for loan losses is the netting effect of “reversal” and “provision” for both
business and personal loans. If the ending balance of the allowance for loan losses after any charge offs (net of recoveries) is
less than the beginning balance, it will be recorded as a “reversal”; if it is larger, it will be recorded as a “provision”
in the allowance for loan loss. The netting amount of the “reversal” and the “provision” is presented in
the consolidated statements of income and comprehensive income
The Company recognizes a charge-off when management determines that
full repayment of a loan is not probable. The primary factor in making that determination is the potential outcome of a lawsuit
against the delinquent debtor. The Company will recognize a charge-off when the Company loses contact with the delinquent borrower
for more than six months or when the court rules against the Company to seize the collateral asset of the delinquent debt from
either the guarantor or borrower. The Company has not recorded a charge-off to date.
In estimating the probable loss of the loan portfolio, the Company
also considers qualitative factors such as current economic conditions and/or events in specific industries and geographical areas,
including unemployment levels, trends in real estate values, peer comparisons, and other pertinent factors such as regulatory guidance.
Finally, as appropriate, the Company also considers individual borrower circumstances and the condition and fair value of the loan
collateral, if any.
In addition, the Company also calculates the provision amount in
accordance with PRC regulation “The Guidance for Loan Losses” (“The Provision Guidance”) issued by PBOC
and is applied to all financial institutes as below:
|
1. |
General Reserve - is based on total loan receivable balance and
to be used to cover unidentified probable loan loss. The General Reserve is required to be no less than 1% of total loan receivable
balance.
|
|
2. |
Specific Reserve - is based on the level of loss of each loan after categorizing the loan according to their risk. According to the so-called “Five-Tier Principle” set forth in the Provision Guidance, the loans are categorized as “pass”, “special-mention”, “substandard”, “doubtful” or “loss”. Normally, the provision rate is 2% for “special-mention”, 25% for “substandard”, 50% for “doubtful” and 100% for “loss”. |
|
3. |
Special Reserve - is fund set aside covering losses due to risks related to a particular country, region, industry or type of loans. The reserve rate could be decided based on management estimate of loan collectability. |
To the
extent the mandatory loan loss reserve rate of 1% as required by PBOC differs from management’s estimates, the management
elects to use the higher rate. As of June 30, 2014, the Company utilized Specific Reserve in the determination of the loan loss
reserve as it is higher than the amount calculated based on the General Reserve.
While management uses the best information available to make loan
loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or
changes in accounting guidance.
Income Tax
Current income taxes are provided for in accordance
with the laws of the relevant taxing authorities. As part of the process of preparing financial statements, the Company is required
to estimate its income taxes in each of the jurisdictions in which it operates. The Company accounts for income taxes using the
liability method. Under this method, deferred income taxes are recognized for tax consequences in future years of differences between
the tax bases of assets and liabilities and their reported amounts in the financial statements at each year-end and tax loss carry
forwards. Deferred tax assets and liabilities are measured using enacted tax rates applicable for the differences that are expected
to affect taxable income.
Recently issued accounting standards
The FASB issued ASU No. 2014-05, Service Concession Arrangements.
A service concession agreement is an arrangement between a public-sector entity and an operating entity under which the operating
entity operates the grantor's infrastructure. This ASU specifies that an operating entity should not account for a service concession
arrangement within the scope of this ASU as a lease in accordance with ASC 840 - Leases. An operating entity should refer to other
ASUs as applicable to account for various aspects of a service concession arrangement. The amendments also specify that the infrastructure
used in a service concession agreement should not be recognized as property, plant and equipment of the operating entity. The amendments
in this ASU are effective using a modified retrospective approach for annual reporting periods beginning after December 15, 2014
and interim periods within those annual periods. The adoption of this standard is not expected to have a material impact on the
Company’s (consolidated) financial position and results of operations.
The FASB has issued ASU No. 2014-07, Applying Variable Interest
Entities Guidance to Common Control Leasing Arrangements. Under current U.S. GAAP, a company is required to consolidate an entity
in which it has a controlling financial interest. The new guidance allows a private company to elect (when certain conditions exist)
not to apply the variable interest entity guidance to a lessor under common control. Instead, the private company would make certain
disclosures about the lessor and the leasing arrangement. If elected, the accounting alternative should be applied to all leasing
arrangements meeting the conditions in this ASU. The alternative should be applied retrospectively to all periods presented, and
is effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December
15, 2015. Early application is permitted for all financial statements that have not yet been made available for issuance. The adoption
of this standard is not expected to have a material impact on the Company’s (consolidated) financial position and results
of operations.
The FASB has issued ASU No. 2014-09, Revenue
from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605
- Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the company expects to be entitled in exchange for those goods or services. This ASU is effective on January 1, 2017 and should
be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially
applying the ASU recognized at the date of initial application. For all other entities (nonpublic entities), the amendments in
this ASU are effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods
beginning after December 15, 2018. A nonpublic entity may elect to apply this guidance earlier, however, only as prescribed in
this ASU. The adoption of this standard is not expected to have a material impact on the Company’s (consolidated) financial
position and results of operations.
The FASB has issued ASU No. 2014-12, Compensation
– Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance
Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting,
and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance
target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation
cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent
the compensation cost attributable to the period(s) for which the requisite service has already been rendered.. The amendments
in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015.
Earlier adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated
financial position and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and
Procedures
Based on an evaluation under the supervision
and with the participation of the Company’s management, the Company’s principal executive officer and principal financial
officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act were not effective as of June 30, 2014 to provide reasonable assurance that information required to be disclosed
by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission (“SEC”) rules and forms, and (ii) accumulated
and communicated to the Company’s management, including its principal executive officer and principal financial officer,
as appropriate, to allow timely decisions regarding required disclosure.
Inherent Limitations Over Internal Controls
The Company’s internal control over
financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with U.S GAAP. The Company’s internal control over financial
reporting includes those policies and procedures that:
| i) | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the Company’s assets; |
| ii) | provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with U.S. GAAP, and that the Company’s receipts and expenditures are being made only
in accordance with authorizations of the Company’s management and directors; and |
| iii) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the Company’s assets that could have a material effect on the financial statements. |
Management, including the Company’s
principal executive officer and principal financial officer, does not expect that the Company’s internal controls will prevent
or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only 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. Because of the
inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control
issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods
are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial
Reporting
There were no changes in our internal control
over financial reporting during the second quarter of 2014 that have materially affected or are reasonably likely to materially
affect our internal control over financial reporting.
As the Company’s control deficiencies
contributed to the transfer (“Transfer at Issue”) of RMB7 million (approximately $1.1 million) by the Company’s
former CEO from the bank account of Wujiang Luxiang to his personal bank account without proper authorization, the Company has
since taken various steps to improve its internal controls and procedures that apply to fund transfers. The internal review conducted
by independent counsel engaged by the Special Committee of the Board of Directors observed that such new controls and procedures
appear to be much more thorough and comprehensive.
PART II. OTHER
INFORMATION
ITEM 1. LEGAL
PROCEEDINGS
Except
as disclosed in this quarterly report, we know of no pending legal proceedings to which we are a party which are material or potentially
material, either individually or in the aggregate. We are from time to time, during the normal course of our business operations,
subject to various litigation claims and legal disputes. We do not believe that the ultimate disposition of any of these matters
will have a material adverse effect on our financial position, results of operations or liquidity.
ITEM 1A. RISK
FACTORS
An investment in
our common stock involves a high degree of risks. You should carefully consider the following material risk factors and other information
in this report before deciding to invest in our common stock. If any of the following risks actually occur, our business, financial
condition, results of operations and prospects for growth could be seriously impacted. As a result, the trading price, if any,
of our common stock could decline and you could lose part or all of your investment.
Risks Relating to
Recent Events
Trading of our common stock on NASDAQ
is currently suspended due to the NASDAQ’s request for additional information related to the Transfer at Issue. If we are
not able to satisfy NASDAQ’s requests, then our shareholders may not have a liquid market to sell their shares.
On September 11, 2014, the NASDAQ Stock Market
announced that trading was halted in the Company’s common stock for “additional information requested” from the
Company and that trading will remain halted until the Company has fully satisfied NASDAQ’s request for additional information
related to the unauthorized transfer of RMB 7 million (approximately $1.1 million) from the bank account of WFOE to the personal
account of Mr. Huichun Qin, who was the Chairman of the Board and the CEO of the Company at the time of the transfer. The
funds were supposed to be used for the purpose of increasing the registered capital account of Wujiang Luxiang. The Company has
sought return of the funds but to date has not recovered them. The Company’s Board of Directors explored all means, including
legal avenues, to recover the funds and formed a Special Committee to undertake an internal review of the circumstances surrounding
the transfer and delegated and designated the necessary power, authority and resources to the Special Committee to expeditiously
conduct such review, including utilizing legal counsel and other third-party experts to assist with the review. The internal review
has been completed as of the date of this report and the Company has publicly disclosed the findings from the internal review.
However, NASDAQ may request additional information related to the Transfer at Issue, which the Company may not be able to provide,
in which case NASDAQ may not resume trading of our common stock and our stockholders may not have a liquid market in which to sell
their shares.
We have received notices of non-compliance
from NASDAQ related to our failure to timely file this report and the Form 10-Q for the quarter ended September 30, 2014. If we
are not able to file these reports to the satisfaction of NASDAQ, then our shares of common stock will be delisted.
On November 19, 2014
the Company received a Nasdaq Staff Deficiency Letter indicating that, as a result of the Company’s failure to timely file
its Quarterly Reports on Form 10-Q for the quarters ended June 30, 2014 ended September 30, 2014 (the “Late 10-Qs”),
the Company failed to comply with the periodic filing requirements for continued listing set forth in Rule 5250(c)(1) of the Nasdaq
Listing Rules. The Company submitted its plan to regain compliance to NASDAQ; in which the Company undertook to file the Late 10-Qs
by February 17, 2015 (the “Plan Period”). Failure by us to file to Late 10-Qs by the end of the Plan Period may result
in NASDAQ initiating delisting proceedings. If our common stock is delisted from NASDAQ and transferred to the over-the-counter
market, the spreads between the bid and ask prices for our common stock may increase and the execution time for orders may be longer.
The delisting of our common stock from NASDAQ may result in decreased liquidity, thereby making the trading of our common stock
more difficult.
We are
the subject of pending class action lawsuits, which could require us to
pay substantial damages or could otherwise have a material adverse effect on us.
On August 6, 2014,
a purported shareholder filed a putative class action complaint in the United States District Court District of New Jersey (the
“N.J. district court”) relating to a July 25, 2014 press release about the Company’s progress in recovering
a significant portion of the $5.4 million the Company paid in the first quarter of 2014 on behalf of loan guarantee customers.
The action alleges that the Company and its current and former officers and directors violated the federal securities laws by
misrepresenting in prior public filings certain material facts about the risks associated with its loan guarantee business.
On October 2, 2014, two other purported shareholders (the “Yun Group”) asserted substantially similar claims against
the same defendants. Neither complaint states the amount of damages sought. On October 31, 2014, the N.J. district court entered
an order consolidating the cases under the caption “In re China Commercial Credit Inc. Securities Litigation” and
appointing the Yun Group as lead plaintiff and the Yun Group’s counsel as lead counsel. On December 29, 2014, the N.J. district
court entered an order transferring the action to the Southern District of New York. The transfer was effected on January
22, 2015. Under the schedule stipulated by the parties, the Yun Group is to file an amended complaint within 60 days of the date
that the transfer was effected, and the defendants’ date to answer or move is within 60 days of that filing. The Company
and Mr. Levy anticipate that they will file a motion to dismiss the amended complaint. The Company believes that this lawsuit
is without merit and intends to vigorously defend against it. At this early stage of the proceedings, the Company is not
able to estimate the probability of success or loss. For detailed description of this law suit, see Subsequent Event footnote
on page 33 of this report.
While we believe
the claims contained in these lawsuits to be without merit and intend to defend these cases vigorously, our efforts will be
both expensive and time consuming and ultimately, due to the nature of the litigation, there can be no assurance that our
efforts will be successful. In addition, our bylaws and our amended articles of incorporation require us to indemnify our
directors for breaches of fiduciary duties, subject to certain limited exceptions. According to such documents, we are
obligated to pay for certain costs and expenses of our directors and may be liable for substantial damages, costs and
expenses if the plaintiffs prevail. Such litigation could also divert the attention of our management and our resources in
general from day-to-day operations. Such diversion of assets and potential monetary damages could have a material adverse
effect on our financial conditions.
Risks Relating to
Our Lending and Guarantee Business
Our limited operating history makes
it difficult to evaluate our business and prospects.
Wujiang Luxiang commenced
operations in October 2008 and has a limited operating history. As of June 30, 2014, we have built a $92.4 million portfolio of
direct loans to 209 borrowers and a total of $29.1 million in loan guarantees for 31 borrowers. For the years ended December 31,
2013 and 2012, we generated $12,541,075 and $12,586,724 of net revenue with $7,704,970 and $8,312,469 of net income,
respectively. However our growth rate since 2008 may not be indicative of our future performance. We may not be able to achieve
similar results or grow at the same rate as we did in the past. In fact, we had a net loss of $5,280,700 for the three months ended
June 30, 2014, representing a decrease of $7,244,523, or 369%, from net income of $1,963,823 for the three months ended June 30,
2013.
It is also difficult
to evaluate our prospects, as we may not have sufficient experience in addressing the risks to which companies operating in new
and rapidly evolving markets such as the microcredit industry, may be exposed. We will continue to encounter risks and difficulties
that companies at a similar stage of development frequently experience, including the potential failure to:
timely
respond to the liquidity change driven by PBOC’s policy and manage the credit risk inherent to our loan and guarantee business;
|
● |
obtain sufficient working
capital and increase our registered capital to support expansion of our loan and guarantee portfolios; |
|
● |
comply with any changes in the laws
and regulations of the PRC or local province that may affect our lending operations; |
|
● |
expand our borrowers base; |
|
● |
collect from default borrowers; |
|
● |
maintain adequate control of default
risks and expenses allowing us to realize anticipated revenue growth; |
|
● |
implement our customer development,
risk management and acquisition strategies and adapt and modify them as needed; |
|
● |
integrate any future acquisitions;
and |
|
● |
anticipate and adapt to changing conditions
in the Chinese lending industry resulting from changes in government regulations, mergers and acquisitions involving our competitors,
and other significant competitive and market dynamics. |
If we are unable to
address any or all of the foregoing risks, our business may be materially and adversely affected.
PRC regulation
of loans to, and direct investments in, PRC entities by offshore holding companies and the unauthorized transfer of certain funds
by our former chief executive officer have prevented us from using the entire proceeds from our initial public offering to increase
the registered capital of Wujiang Luxiang.
As an offshore holding
company with PRC subsidiaries, we may transfer funds to our PRC subsidiaries or finance our operating entity by means of loans
or capital contributions. Any loans to our PRC subsidiaries, which are foreign-invested enterprises, cannot exceed statutory limits
based on the difference between the amount of our investments and registered capital in such subsidiaries, and shall be registered
with SAFE, or its local counterparts. Furthermore, any capital increase contributions we make to our PRC subsidiaries, which are
foreign-invested enterprises, shall be approved by MOFCOM, or its local counterparts. The majority of the net proceeds from our
initial public offering completed in August 2013, approximately $7 million, is intended to increase the registered capital
of Wujiang Luxiang and therefore its corresponding lending and guarantee capacity. Approximately $5.6 million of the net proceeds
have already been contributed to Wujiang Luxiang and approved as an increase of the registered capital of Wujiang Luxiang.
An additional $1.4 million was supposed to be transferred from WFOE to Wujiang Luxiang to further increase its registered capital. $1.5
million of the proceeds was initially transferred to WFOE to be used for the registered capital requirements of WFOE. Due to the
subsequent reduction of WFOE's registered capital requirement from $10 million to $100,000, $100,000 was supposed to remain at
WFOE to satisfy its new registered capital requirement and the remaining $1.4 million was supposed to be used to further increase
the registered capital of Wujiang Luxiang. However, as previously reported by the Company, RMB 7 million (approximately $1.1 million)
was transferred from the bank account of WFOE to the personal account of Mr. Huichun Qin, the Company’s former CEO and Chairman
of the Board. The Company has not been able to recover the missing funds. The delay and potential failure to use the remaining
IPO proceeds to increase Wujiang Luxiang’s registered capital, currently prevents us from further expanding Wujiang Luxiang’s
business.
Our current operations in China are
geographically limited to the city of Wujiang.
In accordance with
the PRC state and provincial laws and regulations with regard to microcredit companies, we are not allowed to make loans and provide
guarantees to businesses and individuals located outside of the city of Wujiang. Our future
growth opportunities depend on the growth and stability of the economy in the city of Wujiang. A downturn in the local
economy or the implementation of local policies unfavorable to SMEs may cause a decrease in the demand for our loan
or guarantee services and may negatively affect borrowers’ ability to repay their
loans on a timely basis, both of which could have a negative impact on our profitability and business.
If the Jiangsu government subsidy
we currently receive from the Jiangsu government for loans to farmers is not renewed, we would suffer a loss of revenues.
Pursuant to certain
Jiangsu government policies on promotion of rural economic reform, the interest on loans to farmers is subsidized by the government.
Therefore, we charge the farmers at an interest rate lower than that of loans to SME’s. A portion of the difference between
the lower rate charged to farmers and the rate charged to SME’s is remitted to us annually by the Jiangsu government as a
government subsidy. We also received other types of government subsidies from Jiangsu government which are, among other things,
intended to incentivize microcredit companies to establish and maintain strict financial operation systems. Applicants for these
subsidies are required to apply for such subsidies annually. The standards for granting this subsidy is presently flexible and
the number of applicants applying for such subsidies varies from year to year. In addition, the amount of funds which will be available
for the Jiangsu government to use for these government subsidies each year is uncertain and depend on the needs of microeconomic
development of Jiangsu province, the government’s budget and other factors. In the event our application for such subsidy
in the future is not granted or the funds we receive are reduced, we would suffer loss of revenues.
Changes in the interest rates and
spread could have a negative impact on our revenues and results of operations.
Our revenues and financial
condition are primarily dependent on interest income, which is the difference between interest earned from loans we provide and
interest paid to the lines of credit we obtain from other financial institutions. A narrowing interest rate spread could adversely
affect our earnings and financial conditions. If we are not able to control our funding costs or adjust our lending interest rate
in a timely manner, our interest margin will decline. In addition, the interest rates we charge to the borrowers in our direct
loan business are linked to the PBOC benchmark interest rate (the “PBOC Benchmark Rate”). The PBOC Benchmark Rate may
fluctuate significantly due to changes in the PRC government’s monetary policy. Due to the restriction that our interest
rate cannot be higher than three times the PBOC Benchmark Rate pursuant to certain Jiangsu banking regulations released in October
2012, if we have to reduce the interest rate we charge the borrowers to reflect the decrease of the PBOC Benchmark Rate, our interest
rate spread will be negatively affected.
As a microcredit company, our business
is subject to greater credit risks than larger lenders, which could adversely affect our results of operations.
There are inherent
risks associated with our lending and guarantee activities, including credit risk, which is the risk that borrowers may not repay
the outstanding loans balances in our direct loan business or that we may not recover the full amount of the payment we made to
the lender in our guarantee business. As a microcredit company, we extend credits to SMEs, farmer and individuals. These borrowers
generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and may have fewer financial
resources to weather a downturn in the economy. Such borrowers may expose us to greater credit risks than lenders lending to larger,
better-capitalized state-owned businesses with longer operating histories. Conditions such as inflation, economic downturn, local
policy change, adjustment of industrial structure and other factors beyond our control may increase our credit risk more than such
events would affect larger lenders. In addition, since we are only permitted to provide financial services to borrowers located
in the city of Wujiang, our ability to geographically diversify our economic risks is limited by the local markets and economies.
Also, decreases in local real estate value could adversely affect the values of the real property used as collateral in our direct
loan and guarantee business. Such adverse changes in the local economy may have a negative impact on the ability of borrowers to
repay their loans and the value of our collateral and our results of operations and financial condition may be adversely affected.
Our allowance
for loan losses may not be sufficient to absorb future losses or prevent a material adverse effect on our business, financial condition,
or results of operations.
Our risk assessment
procedure uses historical information to estimate any potential losses based on our experience, judgment, and expectations regarding
our borrowers and the economic environment in which we and our borrowers operate. The allowance for both loan losses and guarantee
services were estimated based on 1% of the quarterly outstanding loan and guarantee portfolio balances. To the extent the mandatory
loan loss reserve rate of 1% as required by PBOC differs from management’s estimates, the management elects to use the higher
rate. We believe we are required to establish an allowance for loan losses pursuant to “The Guidance on Provisioning for
Loan Losses” (the “Provision Guidance”) issued by PBOC and “Financial Practices of Rural Microcredit
Companies of Jiangsu Province Pilot” (the “Jiangsu Financial Practices”) issued by Finance Office of Jiangsu
Province in 2009. However, our implementation of the measurements set forth in the Provision Guidance and the Jiangsu Financial
Practices, especially the Five-Tier approach in making the specific reserve, may be deemed not in compliance with the applicable
banking regulations. Our loan loss reserves may not be sufficient to absorb future loan losses or prevent a material adverse effect
on our business, financial condition, or results of operations.
Increases
to the provision for loan losses and provision on financial guarantee services will cause our net income to decrease.
Our business is subject
to fluctuations based on local economic conditions. These fluctuations are neither predictable nor within our control and may have
a material adverse impact on our operations and financial condition. We may decide to increase our provision for loan losses and
provision on financial guarantee services in light of the borrower’s repayment ability and/or the lack of clarity in the
applicable banking regulations with regard to microcredit companies. The regulatory authority may also require an increase in the
provision for loan losses and provision on financial guarantee services or the recognition of further loan charge-offs, based on
judgments different from those of our management. Any increase in the provision for loan losses and provision on financial guarantee
services will result in a decrease in net income and may have a material adverse effect on our financial condition and results
of operations.
We lack significant
product and business diversification. Accordingly, our future revenues and earnings are more susceptible to fluctuations than a
more diversified company.
Currently, our primary
business activities include offering direct loans and providing guarantee services to our customers. If we are unable to maintain
and grow the operating revenues from our business or develop additional revenue streams, our future revenues and earnings are not
likely to grow and could decline. Our lack of significant product and business diversification could inhibit the opportunities
for growth of our business, revenues and profits.
Competition
in the microcredit industry is growing and could cause us to lose market share and revenues in the future.
We believe that the
microcredit industry is an emerging market in China. We may face growing competition in the microcredit industry and we believe
that the microcredit market is becoming more competitive as this industry matures and begins to consolidate. We currently compete
with traditional financial institutions, other microcredit companies, and some cash-rich state-owned companies or individuals that
lend to SMEs. Some of our competitors have larger and more established borrower bases and substantially greater financial, marketing
and other resources than we have. As a result, we could lose market share and our revenues could decline, thereby adversely affecting
our earnings and potential for growth.
If we fail to
implement and maintain an effective system of internal controls (or fail to remediate the deficiency/material weakness in our internal
control over financial reporting that has been identified), we may be unable to accurately report our results of operations or
prevent misstatements, and investor confidence and the market price of our common stock may be materially and adversely affected.
Prior to our IPO,
we were a private company with limited accounting personnel and other resources with which to address our internal controls and
procedures. Our independent registered public accounting firm is not required to and has not conducted an audit or assessment of
our internal control over financial reporting. The internal review related to the Transfer at Issue indicated that the Company’s
control deficiencies contributed to the Transfer at Issue. Since Mr. Qin had the sole authority to approve fund transfers, there
was a lack of checks and balances over transfers. The internal review also found that, since the discovery of the Transfer at Issue,
the Company has taken various steps to improve its internal controls and procedures that apply to fund transfers. The internal
review observed that such new controls and procedures appear to be much more thorough and comprehensive. The Special Committee
is currently reviewing the recommendations from the internal review and will recommend further enhancements to the internal control
procedures and other remediation measures to the Board of Directors accordingly. Despite the remedies currently in place and to
be taken by the Company, we do not have internal staff with sufficient U.S. GAAP knowledge and experience in the internal
controls and disclosure controls and procedures. This may be deemed a material weakness in our internal control over financial
reporting which may result in our inability to accurately report our financial results or prevent material misstatements.
Our business
depends on the continuing efforts of members of our management. If we lose their services, our business may be severely disrupted.
Our business operations
depend on the continuing efforts of members of our management. If one or more of our management were unable
or unwilling to continue their employment with us, we might not be able to replace them in a timely manner, or at all. We may incur
additional expenses to recruit and retain qualified replacements. Our business may be severely disrupted and our financial condition
and results of operations may be materially and adversely affected. In addition, members of our management team may join a competitor
or form a competing company. We may not be able to successfully enforce any contractual rights we have with our management team,
in particular in China, where all of these individuals reside and where our business is operated through Wujiang Luxiang through
various VIE Agreements. As a result, our business may be negatively affected due to the loss of one or more members of our management.
We require highly
qualified personnel and if we are unable to hire or retain qualified personnel, we may not be able to grow effectively.
Our future success
also depends upon our ability to attract and retain highly qualified personnel. Expansion of our business and our management will
require additional managers and employees with industry experience, and our success will be highly dependent on our ability to
attract and retain skilled management personnel and other employees. We may not be able to attract or retain highly qualified personnel.
Competition for skilled personnel is significant in China. This competition may make it more difficult and expensive to attract,
hire and retain qualified managers and employees.
We have no insurance
coverage for our lending or guarantee business or our bank accounts, which could expose us to significant costs and business disruption.
Risks associated with
our business and operations include, but are not limited to, borrowers' failure to repay the outstanding principal and interest
when due and our loss reserve is not sufficient cover such failure, losses of key personnel, business interruption due to power
shortages or network failure, and risks posed by natural disasters including storms, floods and earthquakes, any of which may result
in significant costs or business disruption. We do not maintain any credit insurance, business interruption insurance, general
third-party liability insurance, nor do we maintain key-man life insurance or any other insurance coverage except the mandatory
social insurance for the employees of Wujiang Luxiang. If we incur any loss that is not covered by our loss reserve, our business,
financial condition and results of operations could be materially and adversely affected.
We maintain our
cash with various banks. Our cash accounts are not insured or otherwise protected. Should any bank or trust company holding
our cash deposits become insolvent, or if we are otherwise unable to withdraw funds, we could lose the cash on deposit with
that particular bank or trust company.
Risks Relating to
Our Financial Leasing Business
We
only generated a small amount of revenue from our financial leasing operations as of now and our financial leasing business plan
may not be executed as planned.
We
are currently at the initial stage of developing our financial leasing business. To date, we have generated approximately $66,000
of revenue for our financial leasing operations. The success of our financial leasing operations will highly depend upon our ability
to obtain funds to deploy and successfully develop and market our financial leasing services to the targeted customers. We may
not be able to develop our financial leasing business as planned and generate significant revenues. The revenue and income potential
of our proposed financial leasing business is unproven and the lack of operating history makes it difficult to evaluate the future
prospects of this business.
We have no experience
in the equipment leasing and financing business and our knowledge of the Chinese financial leasing market is limited.
None of the PFL management
has any prior experience in the operation or management of equipment financing and leasing. Our knowledge of the Chinese financial
leasing industry and market is very limited. Our perception of the potential customers’ needs and their acceptance of our
financial leasing services may not be accurate. We may not be able to work with equipment providers to successfully purchase qualified
equipment identified by our customers on terms acceptable to us. We may not be able to establish sound financial modeling in the
calculation of the interest rate and residual value. Such inexperience and lack of active knowledge may lead to failure of our
financial leasing business.
Lack of knowledge
of financial leasing benefits among potential customers may make it difficult for us to market our services.
Currently, a high
proportion of Chinese management, especially management of SMEs, still perceive leasing companies as a “second-class bank”,
and very few recognize the flexibility and benefits that financial leasing provides. We may need to invest a tremendous amount
of time and effort toward lease education so that potential customers can fully appreciate the flexibility leasing offers to deploy
their assets. Failure in such education may make it difficult for us to market our financial leasing services.
A protracted
economic downturn may cause an increase in defaults under our leases and lower demand for the commercial equipment we lease.
A protracted economic
downturn, similar to the one China experienced in recent years, could result in a decline in the demand for some of the types of
equipment or services we finance, which could lead to a decline in originations. A protracted economic downturn may slow the development
and continued operation of small commercial businesses, which is one of the primary markets for the commercial equipment leased
by us. In addition, a protracted downturn could result in an increase in delinquencies and defaults by our lessees and other obligors,
which could have an adverse effect on our cash flow and earnings. These factors could have a material adverse effect on our business,
financial condition and results of operations.
Our allowance
for lease credit losses may prove to be inadequate to cover future credit losses.
We will maintain
an allowance for credit losses on our leases, at an amount we believe is sufficient to provide adequate protection against losses
on the leases. We cannot be sure that our allowance for credit losses will be adequate over time to cover losses caused by adverse
economic factors, or unfavorable events affecting specific leases, industries or geographic areas. Losses in excess of our allowance
for credit losses may have a material adverse effect on our business, financial condition and results of operations.
We are vulnerable
to changes in the demand for the types of equipment we plan on leasing or price reductions in such equipment.
Our leasing portfolio
will be comprised of a wide variety of equipment including, but not limited to, public transportation vehicles such as subway cars,
trains, buses, medical equipment, equipment used in textile production and agricultural equipment. Reduced demand for financing
of the types of equipment we lease could adversely affect our lease origination volume, which in turn could have a material adverse
effect on our business, financial condition and results of operations. Technological advances may lead to a decrease in the price
of these types of equipment and a consequent decline in the need for financing of such equipment. These changes could reduce the
need for outside financing sources that would reduce our lease financing opportunities and origination volume in such products.
In the event that demand for financing the types of equipment that we lease declines, we will need to expand our efforts to provide
lease financing for other products.
We may face
growing competition, which could cause us to lower our lease rates, hurt our origination volume and strategic position and adversely
affect our financial results.
The Chinese financial
leasing industry is becoming competitive in recent years. We will compete for customers with a number of international, national,
regional and local banks and finance companies and financial leasing companies. Our competitors also include equipment manufacturers
that lease or finance the sale of their own products. Our competitors include larger, more established companies, some of which
may possess substantially greater financial, marketing and operational resources than us, including lower cost of funds and access
to capital markets and other funding sources which may be unavailable to us. If a competitor was to lower its lease rates, we could
be forced to follow such trend or be unable to retain origination volume, either of which would have a material adverse effect
on our business, financial condition and results of operations.
If PFL were
to lose key personnel, its operating results may suffer.
The success of our
financial leasing business depends to a large extent upon the abilities and continued efforts of senior management. The loss of
the services of one or more of the key members of our senior management before we are able to attract and retain qualified replacement
personnel could have a material adverse effect on the development and success of our financial leasing business.
Recently proposed
accounting changes may negatively impact the demand for equipment leases.
On August 17,
2010, the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) released a joint exposure
draft that would dramatically change lease accounting for both lessees and lessors by requiring balance sheet recognition of all
leases. At their June 13, 2012, joint board meeting, the International Accounting Standards Board (IASB) and the FASB (collectively,
the “Boards”) agreed on an approach for the accounting for lease expenses as part of their joint project to revise
lease accounting. In September 2012, the Boards reached tentative decisions regarding sale and leaseback transactions and other
lease accounting issues. The Boards issued revised exposure draft in May 2013, with a 120-day comment period. As part of the deliberation
process, the Boards reviewed nearly 800 comment letters and held public roundtable meetings and preparer workshops. A key issue
raised by stakeholders in this process was the front-loading of expense recognition for lessees in the proposal. The Boards have
tentatively agreed to change the expense recognition pattern and income statement presentation for certain leases. If these accounting
changes are adopted in a form that makes equipment leasing less attractive to small business owners, it could result in a reduction
in the demand for equipment leases, and could have an adverse effect on our results of operations and financial condition.
Risks Relating to
Doing Business in China
PRC regulation
of loans to, and direct investments in, PRC entities by offshore holding companies may delay or prevent us from using proceeds
from financing activities to make loans or additional capital contributions to our PRC operating subsidiaries.
As an offshore holding
company with PRC subsidiaries, we may transfer funds to our PRC subsidiaries or finance our operating entity by means of loans
or capital contributions. Any loans to our PRC subsidiaries, which are foreign-invested enterprises, cannot exceed statutory limits
based on the difference between the amount of our investments and registered capital in such subsidiaries, and shall be registered
with SAFE, or its local counterparts. Furthermore, any capital increase contributions we make to our PRC subsidiaries, which are
foreign-invested enterprises, shall be approved by MOFCOM, or its local counterparts. We may not be able to obtain these government
registrations or approvals on a timely basis, if at all. If we fail to receive such registrations or approvals,
our ability to provide loans or capital to increase contributions to our PRC subsidiaries may be negatively affected, which
could adversely affect our liquidity and our ability to fund and expand our business.
A slowdown of
the Chinese economy or adverse changes in economic and political policies of the PRC government could negatively impact China’s
overall economic growth, which could materially adversely affect our business.
We are a holding company
and all of our operations are entirely conducted in the PRC. Although the PRC economy has grown in recent years, such growth may
not continue. A slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in
the PRC may materially reduce the demand for our direct lending, guarantee and financial leasing services and may have a materially
advserse effect on our business.
China’s economy
differs from the economies of most other countries in many respects, including the amount of government involvement in the economy,
the general level of economic development, growth rates and government control of foreign exchange and the allocation of resources.
While the PRC economy has grown significantly over the past few decades, this growth has remained uneven across different periods,
regions and economic sectors.
The PRC government
also exercises significant control over China’s economic growth by allocating resources, controlling the payment of foreign
currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
Any actions and policies adopted by the PRC government could negatively impact the Chinese economy, which could materially adversely
affect our business.
Substantial
uncertainties and restrictions with respect to the political and economic policies of the PRC government and PRC laws and regulations
could have a significant impact upon the business we may be able to conduct in the PRC and accordingly on the results of our operations
and financial condition.
Our business operations
may be adversely affected by the current and future political environment in the PRC. The Chinese government exerts substantial
influence and control over the manner in which we must conduct our business activities. Our ability to operate in China may be
adversely affected by changes in Chinese laws and regulations. Under the current government leadership, the government of the PRC
has been pursuing economic reform policies that encourage private economic activities and greater economic decentralization. However,
the government of the PRC may not continue to pursue these policies, or may significantly alter these policies from time to time
without notice.
There are substantial
uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws
and regulations governing our business, or the enforcement and performance of our arrangements with borrowers in the event of
the imposition of statutory liens, death, bankruptcy or criminal proceedings. Only after 1979 did the Chinese government begin
to promulgate a comprehensive system of laws that regulate economic affairs in general, deal with economic matters such as foreign
investment, corporate organization and governance, commerce, taxation and trade, as well as encourage foreign investment in China.
Although the influence of the law has been increasing, China has not developed a fully integrated legal system and recently enacted
laws and regulations may not sufficiently cover all aspects of economic activities in China. Also, because these laws and regulations
are relatively new, and because of the limited volume of published cases and their lack of force as precedents, interpretation
and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing
and proposed future businesses may also be applied retroactively. In addition, there have been constant changes and amendments
of laws and regulations over the past 30 years in order to keep up with the rapidly changing society and economy in China. Because
government agencies and courts provide interpretations of laws and regulations and decide contractual disputes and issues, their
inexperience in adjudicating new business and new polices or regulations in certain less developed areas causes uncertainty and
may affect our business. Consequently, we cannot clearly foresee the future direction of Chinese legislative activities with respect
to either businesses with foreign investment or the effectiveness on enforcement of laws and regulations in China. The uncertainties,
including new laws and regulations and changes of existing laws, as well as judicial interpretation by inexperienced officials
in the agencies and courts in certain areas, may cause possible problems to foreign investors.
Our microcredit
business is subject to extensive regulation and supervision by state, provincial and local government authorities, which may interfere
with the way we conduct our business and may negatively impact our financial results.
We are subject to
extensive and complex state, provincial and local laws, rules and regulations with regard to our loan and guarantee operations,
capital structure, allowance for loan losses, among other things. These laws, rules and regulations are issued by different central
government ministries and departments, provincial and local governments while enforced by different local authorities in the city
of Wujiang. In addition, it is not clear whether microcredit companies are subject to certain banking regulations the state-owned
and commercial banks are subject to, including the regulation with regard to loan loss reserves. Therefore the interpretation and
implementation of such laws, rules and regulations may not be clear and occasionally we have to depend on oral inquiries with local
government authorities. As a result of the complexity, uncertainties and constant changes in these laws, rules and regulation,
including changes in interpretation and implementation of such, our business activities and growth may be adversely affected if
we do not respond to the changes in a timely manner or are found to be in violation of the applicable laws, regulations and policies
as a result of a different position from ours taken by the competent authority in the interpretation of such applicable laws, regulations
and policies. If we were found to be not in compliance with these laws and regulations, we may be subject to sanctions by regulatory
authorities, monetary penalties and/or reputation damage, which could have a material adverse affect on our business operation
and profitability.
Lack of financial
leasing regulations could negatively impact our business.
Currently, there is
no uniform equipment title registration process and system in China, as each municipality adopts different procedures. The pending
China Financial Leasing Law is expected to unify the registration procedures and protect the lessor against a “good-faith”
third-party claim if the leased assets are registered in the lessor’s name. In the absence of such central title registration
system, the lessors’ ownership interest on the leased equipment may be threatened. Loss of ownership to the leased equipment
will have a negative effect on our financial position.
We may be subject
to administrative sanctions in the event we are found to have charged excessive interest rates on some of the historical direct
loans we extended.
During 2010, 2011
and 2012, we provided certain financing consulting services to an aggregate of approximately 114 individuals and companies
and generated consulting fees of approximately US$693,555(RMB 4.6 million). According to the consulting arrangements we had with
these parties, we agreed to provide consulting services such as advising on the applicable lending rules and regulations, making
recommendations about financing plans, assisting the parties to complete and submit financing applications and providing general
guidance in the capital raising process. Some of these clients were also borrowers. We also charged additional consulting fees
when such borrowers asked to expedite the review and approval process of their loan applications, as such expedited lendings require
funds to be allocated from other positions at an additional cost to us. The maximum interest rate a microcredit lender is
allowed to charge on microcredit loans was four times the PBOC’s Benchmark Rate, according to Circular 23 and Several Opinion
Regarding the Trial of Cases promulgated by Supreme Court of PRC. Although none of these loans had interest rates higher than four
times the PBOC Benchmark Rate, the aggregate amount of interest we charged such borrower plus the consulting fee would exceed four
times the PBOC Benchmark Rate if the consulting fees paid by these borrowers were deemed as additional interest payments. We believe
such consulting fees were compensation payments for the consulting services we provided. Also we have stopped providing such consulting
services since July 31, 2012 and we do not anticipate engaging in such consulting service in the foreseeable future. However, in
the event the competent government authority determines these historical consulting fees were de facto interest
payments, we may be found to have charged excessive rates on these loans and, as a result, we may be subject to sanctions by the
government authority, which may include return of the excessive interest to affected borrowers, confiscation of illegal gains,
fine, suspension of operation and/or revocation of our business license.
We may be subject to administrative
sanctions in the event the extension we obtained on contribution of PFL’s registered capital is reversed or determined to
be not effective or if we are not able to contribute the remainder of the registered capital as required.
Pursuant to Foreign
Wholly-Owned Enterprise Law and relevant implementation rules, 15% of the U.S. $50 million registered capital of PFL is required
to be contributed within initial three months of PFL obtaining its business license on September 5, 2013 and the remainder to be
contributed within two years after the business license is granted. We did not make any contributions within the three month period
since we expected to fund such contribution with the proceeds from the follow-on offering. Based on our oral inquiries with the
local Commission of Commerce of Wujiang, we were told that the required initial installment would be reduced to 10% in 2014 and
that the competent authority would refrain from taking specific administrative measures against us once the first installment of
capital contribution is paid. In addition, we were told by Wujiang Economic and Technological Development Zone (“WETDZ”),
where PFL is incorporated and located, that there will be no penalty for the delayed contribution of the first installment of the
registered capital. In the event the orally granted extension or the advice we received from WETDZ is reversed or found to be not
valid by a relevant authority, we may be subject to administrative sanctions, including monetary penalties ranging from 5% to 15%
of the portion that has not been paid on time, or from $375,000 to $1,125,000 if none was contributed at the time of the sanction.
We had contribute all of the net proceeds raised in the following-on offering to the registered capital requirement of PFL.
In addition, the new
PRC Company Law that became effective on March 1, 2014, radically changed the registered capital requirements, including deleting
the requirement to contribute the registered capital within certain time frames and the minimum registered capital requirement.
However, it is unclear whether PFL will be subject to the loosened registered capital requirements under the new PRC Company Law
and, as a result, be exempted from contributing the remainder of the registered capital within two years after the business license
is granted. If it is later determined that PFL cannot enjoy the loosened registered capital requirement set forth in the new Company
Law, we would have to contribute 85% of the then registered capital of PFL prior to September 4, 2015. In the event we are not
able to make such contribution, we may be subject to administrative sanctions, including monetary penalties ranging from 5% to
15% of the portion that has not been paid on time, or from $2,125,000 to $6,375,000 if none of the remaining 85% was contributed
at the time of the sanction.
Since we conduct
substantially all of our operations in China, and almost all of our officers and directors reside outside the United
States, our stockholders may face difficulties in protecting their interests and exercising their rights as a stockholder of CCC.
Although we are incorporated
in Delaware, we conduct substantially all of our operations in China through Wujiang Luxiang, our consolidated VIE in China and
PFL. All of our current officers and almost all of our directors reside outside the United States and substantially all
of the assets of those persons are located outside of the United States. It may be difficult for you to conduct due diligence on
the Company or such directors in your election of the directors and attend shareholders meeting if the meeting is held in China.
We plan to have one shareholder meeting each year at a location to be determined, potentially alternating between United States
and China. As a result of all of the above, our public shareholders may have more difficulty in protecting their interests through
actions against our management, directors or major shareholders than would shareholders of a corporation doing business entirely
or predominantly within the United States.
You may
experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China
based upon United States laws, including the federal securities laws or other foreign laws against us or our management.
Substantially all
of our operations are conducted in China, and all of our assets are located in China. A majority of our officers are nationals
or residents of the PRC and a substantial portion of their assets are located outside the United States. As a result, Dacheng Law
Firm, our counsel as to PRC law, advised us that it may be difficult for a shareholder to effect service of process within the
United States upon these persons, or to enforce judgments against us which are obtained in United States courts, including judgments
predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.
Dacheng Law Firm further
advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts
may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on
treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China
does not have any treaties or other form of reciprocity with the United States that provide for the reciprocal recognition and
enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a
foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC
laws, national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would
enforce a judgment rendered by a court in the United States.
Dacheng Law Firm also
advised us that in the event that shareholders originate an action against a company without domicile in China for disputes related
to contracts or other property interests, the PRC courts may accept a course of action if (a) the disputed contract was concluded
or performed in the PRC, or the disputed subject matter is located in the PRC, (b) the company (as defendant) has properties that
can be seized within the PRC, (c) the company has a representative organization within the PRC, (d) the parties choose to submit
to jurisdiction of the PRC courts in the contract, or (e) the contract is executed or performed within the PRC. The action may
be initiated by the shareholder through filing a complaint with the PRC courts. The PRC courts will determine whether to accept
the complaint in accordance with the PRC Civil Procedures Law. The shareholder may participate in the action by itself or entrust
any other person or PRC legal counsel to participate on behalf of such shareholder. Foreign citizens and companies will have the
same right as PRC citizens and companies in an action unless such foreign country restricts the rights of PRC citizens and companies.
We may have
difficulty in establishing adequate management and financial controls in China.
The PRC has only recently
begun to adopt the management and financial reporting concepts and practices that investors in the U.S. are familiar with. We may
have difficulty in hiring and retaining employees in China who have the experience necessary to implement the kind of management
and financial controls that are required of a U.S. public company. If we cannot establish such controls, or if we are unable to
collect the financial data required for the preparation of our financial statements, or if we are unable to keep our books and
accounts in accordance with the U.S. accounting standards for business, we may not be able to continue to file required reports
with the SEC, which would likely have a material adverse affect on the performance of our shares of common stock.
WFOE’s
ability to pay dividends to us may be restricted due to foreign exchange control and other regulations of China.
As an offshore holding
company, we may rely principally on dividends from our subsidiaries in China, WFOE and PFL, for our cash requirements. Under the
applicable PRC laws and regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits,
if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China
is required to set aside a portion of its after-tax profit to fund specific reserve funds prior to payment of dividends. In particular,
at least 10% of its after-tax profits based on PRC accounting standards each year is required to be set aside towards its general
reserves until the accumulative amount of such reserves reach 50% of its registered capital. These reserves are not distributable
as cash dividends.
Furthermore, WFOE’s
and PFL’s ability to pay dividends may be restricted due to foreign exchange control policies and the availability of its
cash balance. Substantially all of our operations are conducted in China and all of our revenue received, by WFOE through VIE arrangement
and by PFL, are denominated in RMB. RMB is subject to exchange control regulation in China, and, as a result, WFOE and PFL may
be unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict our ability to convert
RMB into U.S. dollars.
The lack of dividends
or other payments from WFOE may limit our ability to make investments or acquisitions that could be beneficial to our business,
pay dividends or otherwise fund, and conduct our business. Our funds may not be readily available to us to satisfy obligations
which have been incurred outside the PRC, which could adversely affect our business and prospects or our ability to meet our cash
obligations. Accordingly, if we do not receive dividends from WFOE or PFL, our liquidity and financial condition will be materially
and adversely affected.
There is uncertainty
in the preferential tax treatment we currently enjoy and financial subsidy commitment we expect to enjoy. Any change in the preferential
tax treatment we currently enjoy in the PRC may materially adversely impact our net income.
Effective
January 1, 2008, the New Enterprise Income Tax Law of PRC stipulates that domestically owned enterprises and foreign invested
enterprises (the “FIEs”) are subject to a uniform income tax rate of 25%. While the New Enterprise Income Tax Law
equalizes the income tax rates for FIEs and domestically owned enterprises, preferential tax treatment may continue to be given
to companies in certain encouraged sectors and to entities classified as high-technology companies, regardless of whether these
are domestically-owned enterprises or FIEs. Pursuant to the Jiangsu Document No. 132 issued in November 2009, microcredit companies
in Jiangsu Province are subject to a preferential tax rate of 12.5%. As a result, Wujiang Luxiang has been subject to the preferential
income tax rate of 12.5% since its inception in 2008. The taxation practice implemented by the tax authority governing our business
from 2008 through 2011 was that we paid enterprise income taxes at a rate of 25% on a quarterly basis, and upon annual tax settlement
done by the Company and the tax authority within five (5) months after December 31, the tax authority refunded us the excess enterprise
income taxes we paid beyond the rate of 12.5% in tax credit. In 2013and 2012 the tax authority allowed us to pay enterprise income
tax, on a monthly basis, at 12.5% for our income generated from our direct loan business and at 25% for income generated from
our guarantee business. During the twelve month period ended December 31, 2013, we paid an aggregate $2,191,329 for income tax.
We received a refund of $985,332 in April 2014. The refund is the difference between actual income tax prepayment, which is made
at 25% for income generated from both our direct loan business and our guarantee business, and the income tax expense, which is
calculated at 12.5% for direct loan and 25% for our guarantee business. In addition, Wujiang Luxiang has been subject to business
tax at the preferential rate of 3% since its inception in 2008.
In April 2012 Wujiang
Luxiang received a notice from local tax authority, informing us that only income generated from Wujiang Luxiang’s direct
loan business was qualified to enjoy a preferential income tax rate of 12.5% and business tax of 3% under the Jiangsu Document
No. 132, but its taxable income arising from Wujiang’s other business such as the guarantee business was still subject to
a standard tax rate of 25% for income tax and 5% for business tax. The local tax authority required Wujiang Luxiang to implement
the above-mentioned policy starting with the tax filing for 2011 which was filed in April 2012, and the policy applies to all years
thereafter. The impact of the changed policy on the income tax provision on the issued financial statements of 2011 was $225,445.
However, we believe the underpayment was comparatively minimal as it only accounted for less than 3% of net income of 2011, thus
it recorded the underpayment of $225,445 in the financial statements for financial year of 2012. There was no underpayment penalty
assessed. Furthermore, such tax policy change may be applied retroactively to financial year of 2008, 2009 and 2010. Although we
have not received any notice from local tax authority to request Wujiang Luxiang to make any underpayment with surcharge, there
is no assurance that the local tax authority will not do so in the future.
There is a risk that
the competent tax authority may decide that Wujiang Luxiang will not be eligible for the preferential tax rates for the direct
loan business in the future. Moreover, the PRC government could eliminate any of these preferential tax treatments before their
scheduled expiration. Expiration, reduction or elimination of such preferential tax treatments will increase our income tax expenses
and in turn decrease our net income.
There is uncertainty
in the policy at the state and provincial levels as to how the direct loan and guarantee businesses carried out by the microcredit
companies shall be treated with regard to income tax and business tax. If the tax authority determines that the income tax,
business tax or other applicable tax we previously paid were less than what was required, we may be requested to make payment for
the overdue tax and interest on the overdue payment.
In addition, pursuant
to an agreement PFL has with the WETDZ, PFL expects to receive from a financial award equal to 100% of the portion of the enterprise
income tax proceeds contributed by PFL that is reserved by the WETDZ for the first five years following the date of its establishment,
and will further receive a financial award equal to 50% of the portion of the enterprise income tax proceeds contributed by PFL
that is reserved by the WETDZ for the following five years. PFL will receive a science and technology financial award from the
WETDZ for up to approximately $325,000 (RMB 2 million) to be paid pro rata according to the actually contributed registered capital.
In the event that the central government promulgates laws or regulations that expressly prohibit local governments from providing
financial subsidies for enterprises’ income tax payment obligation, this agreement with WETDZ may be rendered illegal and/or
unenforceable and therefore PFL’s business plan may be negatively affected.
Our global income
may be subject to PRC taxes under the PRC Enterprise Income Tax Law, which could have a material adverse effect on our results
of operations.
Under the PRC Enterprise
Income Tax Law, or the New EIT Law, and its implementation rules, which became effective in January 2008, an enterprise established
outside of the PRC with a “de facto management body” located within the PRC is considered a PRC resident enterprise
and will be subject to the enterprise income tax at the rate of 25% on its global income. The implementation rules define the term
“de facto management bodies” as “establishments that carry out substantial and overall management and control
over the manufacturing and business operations, personnel and human resources, finance and treasury, and acquisition and disposition
of properties and other assets of an enterprise.” On April 22, 2009, the State Administration of Taxation (the "SAT"),
issued a circular, or SAT Circular 82, which provides certain specific criteria for determining whether the “de facto
management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although the SAT Circular 82
only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals
or foreigners, the determining criteria set forth in the SAT Circular 82 may reflect the SAT’s general position on how
the “de facto management body” text should be applied in determining the resident status of all offshore enterprises
for the purpose of PRC tax, regardless of whether they are controlled by PRC enterprises or individuals. Although we do not believe
that our legal entities organized outside of the PRC constitute PRC resident enterprises, it is possible that the PRC tax authorities
could reach a different conclusion. In such case, we may be considered a PRC resident enterprise and may therefore be subject to
the 25% enterprise income tax on our global income. If we are considered a resident enterprise and earn income other than dividends
from our PRC subsidiary, a 25% enterprise income tax on our global income could significantly increase our tax burden and materially
and adversely affect our cash flow and profitability. In addition to the uncertainty regarding how the new PRC resident enterprise
classification for tax purposes may apply, it is also possible that the rules may change in the future, possibly with retroactive
effect.
Fluctuations
in the foreign currency exchange rate between U.S. Dollars and Renminbi could adversely affect our financial condition.
The value of the RMB
against the U.S. dollar and other currencies may fluctuate. Exchange rates are affected by, among other things, changes in
political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC
government changed its policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted
to fluctuate within a narrow and managed band against a basket of foreign currencies. Following the removal of the U.S. dollar
peg, the RMB appreciated more than 20% against the U.S. dollar over three years. From July 2008 until June 2010,
however, the RMB traded stably within a narrow range against the U.S. dollar. There remains significant international pressure
on the PRC government to adopt a more flexible currency policy, which could result in a further and more significant appreciation
of the RMB against foreign currencies. On June 20, 2010, the PBOC announced that the PRC government would reform the RMB exchange
rate regime and increase the flexibility of the exchange rate. We cannot predict how this new policy will impact the RMB exchange rate.
Our revenues and costs
are mostly denominated in the RMB, and a significant portion of our financial assets are also denominated in the RMB. Any significant
fluctuations in the exchange rate between the RMB and the U.S. dollar may materially adversely affect our cash flows, revenues,
earnings and financial position, and the amount of and any dividends we may pay on our common stock in U.S. dollars. In addition,
fluctuations in the exchange rate between the RMB and the U.S. dollar could also result in foreign currency translation losses
for financial reporting purposes.
Future inflation
in China may inhibit economic activity and adversely affect our operations.
The Chinese economy
has experienced periods of rapid expansion in recent years which can lead to high rates of inflation or deflation. This has caused
the PRC government to, from time to time, enact various corrective measures designed to restrict the availability of credit or
regulate growth and contain inflation. High inflation may in the future cause the PRC government to once again impose controls
on credit and/or prices, or to take other action, which could inhibit economic activity in China. Any action on the part of
the PRC government that seeks to control credit and/or prices may adversely affect our business operations.
PRC laws and
regulations have established more complex procedures for certain acquisitions of Chinese companies by foreign investors, which
could make it more difficult for us to pursue growth through acquisitions in China.
Further to the Regulations
on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rules, the Anti-monopoly Law of the
PRC, the Rules of Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors promulgated by MOFCOM or the MOFCOM Security Review Rules, was issued in August 2011, which
established additional procedures and requirements that are expected to make merger and acquisition activities in China by foreign
investors more time-consuming and complex, including requirements in some instances that MOFCOM be notified in advance of any change
of control transaction in which a foreign investor takes control of a PRC enterprise, or that the approval from MOFCOM be obtained
in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic
companies. PRC laws and regulations also require certain merger and acquisition transactions to be subject to merger control review
and or security review.
The MOFCOM Security
Review Rules, effective from September 1, 2011, which implement the Notice of the General Office of the State Council on Establishing
the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated on February 3,
2011, further provide that, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors
is subject to the security review by MOFCOM, the principle of substance over form should be applied and foreign investors are prohibited
from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases,
loans, control through contractual arrangements or offshore transactions.
Further, if the business
of any target company that we seek to acquire falls into the scope of security review, we may not be able to successfully acquire
such company either by equity or asset acquisition, capital contribution or through any contractual arrangement. We may grow our
business in part by acquiring other companies operating in our industry. Complying with the requirements of the relevant regulations
to complete such transactions could be time consuming, and any required approval processes, including approval from MOFCOM, may
delay or inhibit our ability to complete such transactions, which could affect our ability to maintain or expand our market share.
In addition, SAFE
promulgated the Circular on the Relevant Operating Issues concerning Administration Improvement of Payment and Settlement of Foreign
Currency Capital of Foreign-invested Enterprises, or Circular 142, on August 29, 2008. Its subsequent Supplementary Notice
on Issues Relating to the Improvement of Business Operations over Payment and Settlement of Foreign Exchange Capital of Foreign-Invested
Enterprises was promulgated by SAFE on July 18, 2011. Under Circular 142, registered capital of a foreign-invested company
settled in RMB converted from foreign currencies may only be used within the business scope approved by the applicable governmental
authority and may not be used for equity investments in the PRC. In addition, foreign-invested companies may not change how they
use such capital without SAFE’s approval, and may not in any case use such capital to repay RMB loans if they have not used
the proceeds of such loans according to the loan agreement. Furthermore, SAFE promulgated a circular on November 19, 2012,
or Circular 59, which requires the authenticity of settlement of net proceeds from offshore offerings to be closely examined
and the net proceeds to be settled in the manner described in the offering documents. Circular 142 and Circular 59 may
significantly limit our ability to effectively use the proceeds from future financing activities as the WFOE may not convert the
funds received from us in foreign currencies into RMB, which may adversely affect our liquidity and our ability to fund and expand
our business in the PRC.
Failure to comply
with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
As our ultimate holding
Company is a Delaware corporation, we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits
United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining
or retaining business. Foreign companies, including some that may compete with us, are not subject to these prohibitions. Corruption,
extortion, bribery, pay-offs, theft and other fraudulent practices may occur from time-to-time in the PRC. Our employees or other
agents may 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 and other consequences that may have a material adverse effect on our business,
financial condition and results of operations.
Recent SEC’s
administrative proceedings against the China affiliates of the five multi-national accounting firms may lead to the deregistering
of Chinese accounting firms by the PCAOB, which may affect our ability to engage qualified independent auditors.
The SEC recently commenced
administrative proceedings against BDO China Dahua Co. Ltd., Deloitte Touche Tohmatsu Certified Public Accountants Ltd., Ernst
& Young Hua Ming LLP, KPMG Huazhen (Special General Fund) and PricewaterhouseCoopers Zhong Tian CPAs Limited for refusing to
produce audit work papers and other documents related to PRC-based companies under investigation by the SEC for potential accounting
fraud against U.S. investors. The SEC has launched an initiative to address concerns arising from reverse mergers and foreign issuers.
The SEC charged these accounting firms with violations of the Securities Exchange Act and the Sarbanes-Oxley Act, which requires
foreign public accounting firms to provide, upon the request of the SEC, audit work papers involving any company trading on U.S.
markets. Under PRC law, auditors are not permitted to hand over audit work papers as books and records of Chinese companies are
afforded protection of secrecy laws. We are not in a position to assess the outcome or ramifications of these ongoing proceedings
and investigations. Unless the PRC government changes its secrecy laws, there are risks that the Public Company Accounting Oversight
Board (“PCAOB”) may deregister Chinese accounting firms whose audit work papers the PCAOB cannot inspect and such deregistering
of Chinese accounting firms by the PCAOB would, in turn, make it difficult for us to engage qualified independent auditors.
If we become
directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have
to expend significant resources to investigate and resolve the matter which could harm our business operations, and our reputation
and could result in a loss to our stockholders, especially if such matter cannot be addressed and resolved favorably.
Recently, U.S. public
companies that have substantially all of their operations in China, have been the subject of intense scrutiny, criticism and negative
publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative
publicity has centered around financial and accounting irregularities, a lack of effective internal controls over financial accounting,
inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of
the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased
in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and
SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect
this sector-wide scrutiny, criticism and negative publicity will have on our company and our business. If we become the subject
of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources
to investigate such allegations and/or defend the Company. This situation may be a major distraction to our management. If such
allegations are not proven to be groundless, our company and business operations will be severely hampered and your investment
in our stock could be rendered worthless.
The disclosures
in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of
any regulatory bodies in the PRC.
Our reports and other
filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities
Act and the Exchange Act. Our SEC filings and other disclosure and public pronouncements are not subject to the review or scrutiny
of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review
by CSRC, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly, you should review our SEC
reports, filings and our other public pronouncements with the understanding that no local regulator has done any review of our
company, our SEC reports, other filings or any of our other public pronouncements.
Risks
Relating to Our Corporate Structure
We conduct our
lending and guarantee business through Wujiang Luxiang by means of contractual arrangements. If the PRC courts or administrative
authorities determines that these contractual arrangements do not comply with applicable regulations, we could be subject to severe
penalties and our business could be adversely affected. In addition, changes in such Chinese laws and regulations may materially
and adversely affect our business.
There are uncertainties
regarding the interpretation and application of PRC laws, rules and regulations, including but not limited to the laws, rules
and regulations governing the validity and enforcement of the contractual arrangements between WFOE and each of Wujiang Luxiang. Although
we were advised by our PRC counsel, Dacheng Law Offices, that based on their understanding
of the current PRC laws, rules and regulations, the structure for operating our business in China (including our corporate structure
and contractual arrangements with Wujiang Luxiang and their respective shareholders) comply with all applicable PRC
laws, rules and regulations, and do not violate, breach, contravene or otherwise conflict with any applicable PRC laws, rules
or regulations, the PRC courts or regulatory authorities may determine that our corporate structure and contractual arrangements
violate PRC laws, rules or regulations. We are aware of a recent case involving Chinachem Financial Services where certain contractual
arrangements for a Hong Kong Company to gain economic control over a PRC Company were declared to be void by the PRC Supreme People's
Court. If the PRC courts or regulatory authorities determine that our contractual arrangements are in violation of applicable
PRC laws, rules or regulations, our contractual arrangements will become invalid or unenforceable.
If WFOE, Wujiang Luxiang
or their ownership structure or the contractual arrangements, are determined to be in violation of any existing or future PRC laws,
rules or regulations, or WFOE, or Wujiang Luxiang fails to obtain or maintain any of the required governmental permits or approvals,
the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including:
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revoking the business
and operating licenses of WFOE, or Wujiang Luxiang; |
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discontinuing or restricting
the operations of WFOE or Wujiang Luxiang; |
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imposing conditions
or requirements with which we, WFOE or Wujiang Luxiang may not be able to comply; |
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requiring
us, WFOE or Wujiang Luxiang to restructure the relevant ownership structure or operations; |
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● |
restricting or prohibiting
our use of the proceeds from our initial public offering to finance our business and operations in China; or |
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● |
imposing fines. |
The imposition of
any of these penalties would severely disrupt our ability to conduct business and have a material adverse effect on our financial
condition, results of operations and prospects.
On or around September
2011, various media sources reported that the China Securities Regulatory Commission (the “CSRC”) had prepared a report
proposing pre-approval by a competent central government authority of offshore listings by China-based companies with variable
interest entity structures, such as ours, that operate in industry sectors subject to foreign investment restrictions. However,
it is unclear whether the CSRC officially issued or submitted such a report to a higher level government authority or what any
such report provides, or whether any new PRC laws or regulations relating to variable interest entity structures will be adopted
or what they would provide. If our ownership structure, contractual arrangements or businesses of Wujiang Luxiang are found to
be in violation of any existing or future PRC laws or regulations, the relevant governmental authorities, including the CSRC, would
have broad discretion in dealing with such violation, including levying fines, confiscating our income or the income of Wujiang
Luxiang, revoking the business licenses or operating licenses of Wujiang Luxiang, discontinuing or placing restrictions or onerous
conditions on our operations, requiring us to undergo a costly and disruptive restructuring, restricting or prohibiting our use
of proceeds from overseas financings to finance our business and operations in China, and taking other regulatory or enforcement
actions that could be harmful to our business. Any of these actions could cause significant disruption to our business operations
and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition and results
of operations.
Our contractual
arrangements with Wujiang Luxiang may not be effective in providing control over Wujiang Luxiang.
All of our current
revenue and net income is derived from Wujiang Luxiang. According to our inquiries with Jiangsu provincial authorities, provincial
direct foreign controlling equity ownership in for-profit companies engaged in rural microcredit services in Jiangsu Province
has never been approved and such position will not change in the foreseeable future. Therefore, we do not intend to have an equity
ownership interest in Wujiang Luxiang but rely on contractual arrangements with Wujiang Luxiang to control and operate its business.
However, these contractual arrangements may not be effective in providing us with the necessary control over Wujiang Luxiang
and its operations. Any deficiency in these contractual arrangements may result in our loss of control over the management and
operations of Wujiang Luxiang, which will result in a significant loss in the value of an investment in our company. Because of
the practical restrictions on direct foreign equity ownership imposed by the Jiangsu provincial government authorities, we must
rely on contractual rights through our VIE structure to effect control over and management of Wujiang Luxiang, which exposes us
to the risk of potential breach of contract by the shareholders of Wujiang Luxiang. In addition, as Wujiang Luxiang is jointly
owned by its shareholders, it may be difficult for us to change our corporate structure if such shareholders refuse to cooperate
with us.
The failure
to comply with PRC regulations relating to mergers and acquisitions of domestic enterprises by offshore special purpose vehicles
may subject us to severe fines or penalties and create other regulatory uncertainties regarding our corporate structure.
On August 8,
2006, MOFCOM, joined by the CSRC, the State-owned Assets Supervision and Administration Commission of the State Council, the SAT,
the State Administration for Industry and Commerce (the “SAIC”), and SAFE, jointly promulgated regulations entitled
the Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the "M&A Rules"),
which took effect as of September 8, 2006, and as amended on June 22, 2009. This regulation, among other things, has certain
provisions that require offshore special purpose vehicles formed for the purpose of acquiring PRC domestic companies and controlled
directly or indirectly by PRC individuals and companies, to obtain the approval of MOFCOM prior to engaging in such acquisitions
and to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock market. On September 21,
2006, the CSRC published on its official website a notice specifying the documents and materials that are required to be submitted
for obtaining CSRC approval.
The application of
the M&A Rules with respect to our corporate structure remains unclear, with no current consensus existing among leading PRC
law firms regarding the scope and applicability of the M&A Rules. We believe that the MOFCOM and CSRC approvals under
the M&A Rules were not required in the context of our share exchange transaction because at such time the share exchange was
a foreign related transaction governed by foreign laws, not subject to the jurisdiction of PRC laws and regulations. However, we
cannot be certain that the relevant PRC government agencies, including the CSRC and MOFCOM, would reach the same conclusion, and
we cannot be certain that MOFCOM or the CSRC will not deem that the transactions effected by the share exchange circumvented the
M&A Rules, and other rules and notices, or that prior MOFCOM or CSRC approval is required for overseas financing. Further,
we cannot rule out the possibility that the relevant PRC government agencies, including MOFCOM, would deem that the M&A Rules
required us or our entities in China to obtain approval from MOFCOM or other PRC regulatory agencies in connection with WFOE’s
control of Wujiang Luxiang through contractual arrangements.
If the CSRC, MOFCOM,
or another PRC regulatory agency subsequently determines that CSRC, MOFCOM or other approval was required for the share exchange
transaction and/or the VIE arrangements between WFOE and Wujiang Luxiang, or if prior CSRC approval for overseas financings is
required and not obtained, we may face severe regulatory actions or other sanctions from MOFCOM, the CSRC or other PRC regulatory
agencies. In such event, these regulatory agencies may impose fines or other penalties on our operations in the PRC, limit our
operating privileges in the PRC, delay or restrict the repatriation of the proceeds from overseas financings into the PRC, restrict
or prohibit payment or remittance of dividends to us or take other actions that could have a material adverse effect on our business,
financial condition, results of operations, reputation and prospects, as well as the trading price of our common stock. The CSRC
or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to delay or cancel overseas
financings, to restructure our current corporate structure, or to seek regulatory approvals that may be difficult or costly to
obtain.
The M&A Rules,
along with certain foreign exchange regulations discussed below, will be interpreted or implemented by the relevant government
authorities in connection with our future offshore financings or acquisitions, and we cannot predict how they will affect our acquisition
strategy. For example, Wujiang Luxiang’s ability to remit its profits to us, or to engage in foreign-currency-denominated
borrowings, may be conditioned upon compliance with the SAFE registration requirements by such Chinese domestic residents, over
whom we may have no control.
SAFE regulations
relating to offshore investment activities by PRC residents may increase our administrative burdens and restrict our overseas and
cross-border investment activity. If our shareholders and beneficial owners who are PRC residents fail to make any required applications,
registrations and filings under such regulations, we may be unable to distribute profits and may become subject to liability under
PRC laws.
SAFE has promulgated
several regulations, including Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage
in Financing and Inbound Investment via Overseas Special Purpose Vehicles ("Circular No. 75"), issued on October 21,
2005 and effective as of November 1, 2005 and certain implementation rules issued in recent years, requiring registrations
with, and approvals from, PRC government authorities in connection with direct or indirect offshore investment activities by PRC
residents and PRC corporate entities. These regulations apply to our shareholders and beneficial owners who are PRC residents,
and may affect any offshore acquisitions that we make in the future.
SAFE Circular No. 75
requires PRC residents, including both PRC legal person residents and/or natural person residents to register with the local SAFE
branch before establishing or controlling any company outside of China for the purpose of equity financing with assets or equities
of PRC companies, referred to in the notice as an "offshore special purpose company." In addition, any PRC resident who
is a direct or indirect shareholder of an offshore company is required to update his registration with the relevant SAFE branches,
with respect to that offshore company, in connection with any material change involving an increase or decrease of capital, transfer
or swap of shares, merger, division, equity or debt investment or creation of any security interest. Moreover, failure to comply
with the various foreign exchange registration requirements described above could result in liabilities for such PRC subsidiary
under PRC laws for evasion of applicable foreign exchange restrictions.
In addition to the
disclosure obligation, the PRC onshore subsidiaries indirectly invested by a PRC resident through that offshore company are required
to coordinate and supervise the filing of SAFE registrations by the offshore company's shareholders who are PRC residents in a
timely manner. If a PRC shareholder with a direct or indirect stake in an offshore parent company fails to make the required SAFE
registration, such PRC resident will be subject to administrative penalties under PRC foreign administration regulations, including
fines.
Although we have requested
our PRC shareholders to complete the SAFE Circular No. 75 registration, we cannot be certain that all of our PRC resident
beneficial owners will comply with the SAFE regulations. The failure or inability of our PRC shareholders to receive any required
approvals or make any required registrations may subject us to fines and legal sanctions, restrict our overseas or cross-border
investment activities, prevent us from transferring the net proceeds of overseas financings or making other capital injection
into our PRC affiliates, limit our PRC affiliates' ability to make distributions or pay dividends or affect our ownership structure,
as a result of which our acquisition strategy and business operations and our ability to distribute profits to you could be
materially and adversely affected.
Under Notice of the
SAFE on Issues Related to Foreign Exchange Administration in Domestic Individual’s Participation in Equity Incentive Plans
of Companies listed Aboard (Hui Fa (2012) No. 7), issued and effective as of February 15, 2012 by SAFE ("Circular No. 7"),
SAFE requires PRC residents who are granted shares or share options by an overseas-listed company under such company’s employee
share option or share incentive plan, through such company’s PRC subsidiary or branch located in the PRC, any other PRC entity
that is under control of such company or other qualified PRC agents, or collectively the PRC agent, to register with SAFE and complete
certain other procedures related to the share option or other share incentive plan and to open a special foreign currency account
and to use such account to pay for funds required for exercising the option and to receive overseas share sale proceeds in foreign
exchange and to distribute such proceeds to relevant employees in U.S. dollars or in RMB after conversion. More specifically, the
PRC agent can also apply for the annual quota of currency conversion to convert overseas share sale proceeds in U.S. dollars into
RMB. In addition, an offshore entity must be appointed to act as trustee to handle share transfer transactions or option exercises
relating to the share option or other share incentive plan. We believe that all of our PRC employees who are granted share options
are subject to Circular No. 7. If we grant our PRC employees stock options, we will request our PRC management, personnel,
directors and employees who are to be granted stock options to register them with local SAFE pursuant to Circular No. 7. However,
each of these individuals may not successfully comply with all the required procedures above. If we or our PRC security
holders fail to comply with these regulations, we or our PRC security holders may be subject to fines and legal sanctions. Further,
failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for foreign
exchange evasion and we may become subject to a more stringent review and approval process with respect to our foreign exchange
activities.
Our agreements
with Wujiang Luxiang are governed by the laws of the PRC and we may have difficulty in enforcing any rights we may have under these
contractual arrangements.
As all of our contractual
arrangements with Wujiang Luxiang are governed by the PRC laws and provide for the resolution of disputes through arbitration in
the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures.
The legal environment in the PRC is not as developed as in the United States. As a result, uncertainties in the PRC legal system
could further limit our ability to enforce these contractual arrangements. Furthermore, these contracts may not be enforceable
in China if PRC government authorities or courts take a view that such contracts contravene PRC laws and regulations or are otherwise
not enforceable for public policy reasons. In the event we are unable to enforce these contractual arrangements, we may not be
able to exert effective control over Wujiang Luxiang, and our ability to conduct our business may be materially and adversely affected.
The Wujiang
Luxiang Shareholders have potential conflicts of interest with us, which may adversely affect our business.
All ultimate individual
shareholders of the 11 Chinese entities and Mr. Huichun Qin, which collectively own 100% of Wujiang Luxiang’s outstanding
equity interests, or their representatives, are beneficial owners of shares of common stock of CCC through their BVI
entities. Equity interests held by each of these shareholders in CCC is less than its interest in Wujiang Luxiang as
a result of our introduction of outside investors as shareholders of CCC. In addition, such shareholders’ equity interest
in our company will be further diluted as a result of any future offering of equity securities. As a result, conflicts of interest
may arise as a result of such dual shareholding and governance structure.
If such conflicts
arise, these shareholders may not act in our best interests and such conflicts of interest may not be resolved in our favor. In
addition, these shareholders may breach or cause Wujiang Luxiang to breach or refuse to renew the VIE Agreements that allow us
to exercise effective control over Wujiang Luxiang and to receive economic benefits from Wujiang Luxiang. Delaware law provides
that directors owe a fiduciary duty to a company, which requires them to act in good faith and in the best interests of the company
and not to use their positions for personal gain. If we cannot resolve any conflicts of interest or disputes between us and such
shareholders or any future beneficial owners of Wujiang Luxiang, we would have to rely on arbitral or legal proceedings to remedy
the situation. Such arbitral and legal proceedings may cost us substantial financial and other resources and result in disruption
of our business, the outcome of which may adversely affect the Company.
If Wujiang Luxiang,
or PFL fail to maintain the requisite registered capital, licenses and approvals required under PRC law, our business, financial
condition and results of operations may be materially and adversely affected.
Foreign investment
is highly regulated by the PRC government and the foreign investment in the lending industry is restricted by local authorities.
Numerous regulatory authorities of the central PRC government, provincial and local authorities are empowered to issue and
implement regulations governing various aspects of the lending industry. Foreign investment in the financial leasing industry is
also subject to foreign investment regulations. Each of Wujiang Luxiang and PFL are required to obtain and maintain certain
assets relevant to its business as well as applicable licenses or approvals from different regulatory authorities in order to provide
their current services. These registered capital and licenses are essential to the operation of our business and are generally
subject to annual review by the relevant governmental authorities. Furthermore, Wujiang Luxiang and PFL may be required to obtain
additional licenses. If we fail to obtain or maintain any of the required registered capital, licenses or approvals, our continued
business operations in the lending, and leasing industries may subject us to various penalties, such as confiscation of illegal
net revenue, fines and the discontinuation or restriction of our operations. Any such disruption in the business operations of
Wujiang Luxiang or PFL will materially and adversely affect our business, financial condition and results of operations.
Risks Relating to
Our Securities
Even if our
common stock resumes trading, it may be thinly traded and our stockholders may be unable to sell at or near ask prices or at all
if they need to sell their shares to raise money or otherwise desire to liquidate their shares.
Our common stock
may be “thinly-traded”, meaning that the number of persons interested in purchasing our common stock at or near bid
prices at any given time may be relatively small or non-existent. This situation may be attributable to a number of factors, including
the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and
others in the investment community that generate or influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-averse and might be reluctant to follow an unproven company such as ours or purchase or recommend
the purchase of our shares until such time as we became more seasoned. As a consequence, there may be periods of several days
or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and
steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. Broad
or active public trading market for our common stock may not develop or be sustained.
The market price for our common stock
may be volatile.
The market price for
our common stock may be volatile and subject to wide fluctuations due to factors such as:
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the perception of U.S. investors and regulators of U.S. listed Chinese
companies;
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actual or anticipated fluctuations in our quarterly operating results;
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changes in financial estimates by securities research analysts; |
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negative publicity, studies or reports; |
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conditions in Chinese credit markets; |
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changes in the economic performance or market valuations
of other microcredit companies; |
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announcements by us or our competitors of acquisitions,
strategic partnerships, joint ventures or capital commitments; |
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addition or departure of key personnel; |
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fluctuations of exchange rates between RMB and the U.S.
dollar; and |
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general economic or political conditions in China. |
In
addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related
to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market
price of our common stock.
Volatility in
our common stock price may subject us to securities litigation.
The market for our
common stock may have, when compared to seasoned issuers, significant price volatility and we expect that our share price may
continue to be more volatile than that of a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated
securities class action litigation against a company following periods of volatility in the market price of its securities. We
may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities
and could divert management’s attention and resources.
As an “emerging
growth company” under applicable law, we will be subject to lessened disclosure requirements. Such reduced disclosure may
make our common stock less attractive to investors.
For as long as we
remain an “emerging growth company” as defined in the JOBS Act, we will elect to take advantage of certain exemptions
from various reporting requirements that are applicable to other public companies that are not “emerging growth companies”,
including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions
from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute
payments not previously approved. Because of these lessened regulatory requirements, our stockholders would be left without information
or rights available to stockholders of more mature companies. If some investors find our common stock less attractive as a result,
there may be a less active trading market for our common stock and our stock price may be more volatile.
Our status as
an “emerging growth company” under the JOBS Act may make it more difficult to raise capital when we need to do it.
Because of the exemptions
from various reporting requirements provided to us as an “emerging growth company”, we may be less attractive to investors
and it may be difficult for us to raise additional capital as and when we need it. If we are unable to raise additional capital
as and when we need it, our financial condition and results of operations may be materially and adversely affected.
We will incur
increased costs and demands upon management as a result of complying with the laws and regulations that affect public companies,
which could materially adversely affect our results of operations, financial condition, business and prospects.
As a public company
and particularly after we cease to be an “emerging growth company,” we will incur significant legal, accounting and
other expenses that we did not incur as a private company, including costs associated with public company reporting and corporate
governance requirements. These requirements include compliance with Section 404(b) and other provisions of the Sarbanes-Oxley Act,
as well as Section 14 rules implemented by the SEC and NASDAQ. In addition, our management team will also have to adapt to the
requirements of being a public company. We expect that compliance with these rules and regulations will substantially increase
our legal and financial compliance costs and will make some activities more time-consuming and costly.
The increased costs
associated with operating as a public company will decrease our net income or increase our net loss, and may require us to reduce
costs in other areas of our business or increase the prices of our products or services. Additionally, if these requirements divert
our management’s attention from other business concerns, they could have a material adverse effect on our results of operations,
financial condition, business and prospects.
We are obligated
to develop and maintain proper and effective internal control over financial reporting. We may not complete our analysis of our
internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective,
which may adversely affect investor confidence in our company and, as a result, the value of our common stock.
We will be required,
pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness
of our internal control over financial reporting for fiscal 2014, the first fiscal year beginning after our initial public offering.
This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control
over financial reporting and, after we cease to be an “emerging growth company,” a statement that
our independent registered public accounting firm has issued an opinion on our internal control over financial reporting.
We are in the early
stages of the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation
needed to comply with Section 404. We may not be able to complete our evaluation, testing and any required remediation in a timely
fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over
financial reporting, we will be unable to assert that our internal controls are effective.
If we are unable to
assert that our internal control over financial reporting is effective, or if, when required, our independent registered public
accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence
in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline, and we may
be subject to investigation or sanctions by the SEC.
We will be required
to disclose changes made in our internal controls and procedures on a quarterly basis. However, our independent registered public
accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant
to Section 404 until the later of the year following our first annual report required to be filed with the SEC, or the date we
are no longer an “emerging growth company” as defined in the JOBS Act, if we take advantage of
the exemptions contained in the JOBS Act. We will remain an “emerging growth company” for up to
five years. However, if the market value of our common stock that is held by non-affiliates exceeds $700 million as
of any July 31 before that time, our revenues exceed $1 billion, or we issue more than $1 billion in non-convertible debt in a
three year period, we would cease to be an “emerging growth company” as of the following January
31. To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new
internal controls and procedures and hiring accounting or internal audit staff.
Our independent registered
public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting
until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer
an “emerging growth company.” At such time, our independent registered public accounting firm
may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed
or operating. Our remediation efforts may not enable us to avoid a material weakness in the future.
Provisions in
our By-laws and Delaware laws might discourage, delay or prevent a change of control of our company or changes in our management
and, therefore, depress the trading price of our common stock.
Provisions of our
by-laws and Delaware laws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may
consider favorable, including transactions in which you might otherwise receive a premium for your shares of our common stock.
These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions
include:
|
· |
the inability of stockholders to act by written consent or to call special meetings; |
|
· |
the ability of our board of directors to make, alter or repeal our by-laws; and |
|
· |
the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval. |
In addition, we are
subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging
in any of a broad range of business combinations with an interested stockholder for a period of three years following the date
on which the stockholder became an interested stockholder, unless such transactions are approved by our board of directors. The
existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in
the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood
that you could receive a premium for your common stock in an acquisition.
The elimination
of monetary liability against our directors, officers and employees under our certificate of incorporation and the existence of
indemnification of our directors, officers and employees under Delaware law may result in substantial expenditures by us and may
discourage lawsuits against our directors, officers and employees.
Our certificate of
incorporation contains provisions which eliminate the liability of our directors for monetary damages to us and our stockholders
to the maximum extent permitted under the corporate laws of Delaware. We may also provide contractual indemnification obligations
under agreements with our directors, officers and employees. These indemnification obligations could result in our incurring substantial
expenditures to cover the cost of settlement or damage awards against directors, officers and employees, which we may be unable
to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against directors, officers and
employees for breach of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders
against our directors, officers and employees even though such actions, if successful, might otherwise benefit the Company and
our shareholders.
ITEM 2. UNREGISTERED SALES
OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS
UPON SENIOR SECURITIES
None.
ITEM 4. MINE
SAFETY DISCLOSURES
Not
applicable.
ITEM 5. OTHER
INFORMATION
None.
ITEM 6. EXHIBITS
The
following exhibits are filed herewith:
Exhibit
No. |
|
Description |
|
|
|
31.1 |
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 |
31.2 |
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 |
32.1 |
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 |
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101.INS |
|
XBRL Instance Document |
101.SCH |
|
XBRL Taxonomy Extension Schema Document |
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
SIGNATURES
Pursuant to the requirements
of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
February 17, 2015 |
CHINA COMMERCIAL CREDIT, INC. |
|
|
|
By: |
/s/ Jingen
Lin |
|
|
Jingen Lin |
|
|
Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
|
|
By: |
/s/ Long Yi |
|
|
Long Yi |
|
|
Chief Financial Officer
(Principal Financial and Accounting Officer) |
EXHIBIT
INDEX
Exhibit
No. |
|
Description |
|
|
|
31.1 |
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 |
31.2 |
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 |
32.1 |
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 |
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101.INS |
|
XBRL Instance Document |
101.SCH |
|
XBRL Taxonomy Extension Schema Document |
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
73
EXHIBIT 31.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jingen Ling, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q for the period ended June 30, 2014 of China Commercial Credit, Inc.; |
|
|
|
2 |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
|
|
3 |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
|
|
4 |
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
|
|
|
a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
|
|
b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
|
|
c. |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
|
|
d. |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
|
|
|
5 |
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
|
|
|
|
a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
|
|
|
|
b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: February 17, 2015 |
By: |
/s/ Jingen Ling |
|
|
Jingen Ling
Chief Executive Officer
(Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION OF THE CHIEF FINANCIAL
OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Long Yi, certify that:
1 |
I have reviewed this quarterly report on Form 10-Q for the period ended June 30, 2014 of China Commercial Credit, Inc.; |
|
|
|
2 |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
|
|
3 |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
|
|
4 |
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
|
|
|
a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
|
|
b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
|
|
c. |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
|
|
d. |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
|
|
|
5 |
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
|
|
|
|
a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
|
|
|
|
b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: February 17, 2015 |
By: |
/s/ Long Yi |
|
|
Long Yi
Chief Financial Officer
(Principal Finance and Accounting Officer) |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF SARBANES-OXLEY ACT OF 2002
I, Jingen Ling, certify, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1350, that:
|
1. |
The Quarterly Report on Form 10-Q of China Commercial Credit, Inc. (the “Company”) for the period ended June 30, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (U.S.C. 78m or 78o(d)); and |
|
2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: February 17, 2015 |
By: |
/s/ Jingen Ling |
|
|
Jingen Ling |
|
|
Chief Executive Officer
(Principal Executive Officer) |
The foregoing certification is being furnished solely pursuant to
section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code)
and is not being filed as part of a separate disclosure document.
EXHIBIT
32.2
CERTIFICATION
PURSUANT TO
SECTION
906 OF SARBANES-OXLEY ACT OF 2002
I, Long
Yi, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
|
1. |
The
Quarterly Report on Form 10-Q of China Commercial Credit, Inc. (the “Company”) for the period ended
June 30, 2014 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 (U.S.C. 78m or 78o(d)); and |
|
2. |
The
information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company. |
Date: February
17, 2015 |
By: |
/s/ Long
Yi |
|
|
|
Long
Yi |
|
|
|
Chief
Financial Officer
(Principal
Financial and Accounting Officer) |
|
The
foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of a separate disclosure document.
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