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 consist 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 Variable Interest Entity (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 stocks 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 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,
will 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 agree 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, 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. As of September 30, 2016, PFL had two finance lease transactions.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES (CONTINUED)
|
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 will
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.
On
April 11, 2015, WFOE delivered a notice of termination to Pride Information. As a result, the contractual arrangements between
WFOE, Pride Information and Mr. Qin were terminated effective on May 11, 2015 and WFOE no longer controls Pride Information.
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 had formed a Special Committee to undertake an internal review of the circumstances surrounding the transfer.
On
January 26, 2015, 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 has taken various steps to improve its internal controls
and procedures, including implementing a new fund transfer approval policy and procedures and new standards of credit risk assessment
which are carried out by the newly formed Loan Review Committee. 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.
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
interim financial information as of September 30, 2016 and for the three and nine months ended September 30, 2016 and 2015 have
been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”)
and 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, 2015 filed with the SEC on April 14, 2016.
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 September 30, 2016, its results of operations for the three and nine months ended
September 30, 2016 and 2015, and its cash flows for the nine months ended September 30, 2016 and 2015, 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.
The
unaudited interim consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. The realization of assets and the satisfaction
of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to operate profitably,
to generate cash flows from operations, and to pursue financing arrangements to support its working capital requirements.
The
Company has suffered an accumulated deficit of US$69,460,635 as of September 30, 2016. In addition, the Company had working capital
(total consolidated current assets exceeding total consolidated current liabilities) of US$2,745,893, as of September 30, 2016.
As of September1 30, 2016, the Company had cash and cash equivalents of US$1,167,361, and total short-term borrowings of US$ nil.
These
and other factors disclosed in this quarterly report raise substantial doubt as to the Company’s ability to continue
as a going concern. Management believes that it has developed a liquidity plan, as summarized below, that, if executed successfully,
will provide sufficient liquidity to meet the Company obligations for a reasonable period of time.
The
Company is actively seeking other strategic investors with experience in lending business. If necessary, the shareholders of Wujiang
Luxiang will contribute more capital into Wujiang Luxiang. On June 8, 2016, the Company closed a private placement with
a third-party individual investor to issue 2,439,025 common shares, at a per share price of US$0.41, and raised US$1,000,000 from
therefrom. This transaction was at arm’s length. The shares shall be authorized for listing on the NASDAQ capital
market, and the net proceeds of the sale of the shares shall be used by the Company for working capital and general corporate
purpose. These issued and outstanding shares are deemed a permanent equity of the Company.
|
●
|
Improvement
in Working Capital Management
|
In
order to meet the capital needs for our continued operations, we continue to use our best effort to improve our collection of
loan receivable and interest receivable. We engaged four law firms, Jiangsu Zhenyuzhen Law Firm, Jiangsu Tianbian Law Firm, Jiangsu
Mingren Law Firm and He-Partners Law Firm to represent us in the legal proceedings against the borrowers and their counter guarantors.
Among them, He-Partners Law Firm, is one of the largest law firms in Suzhou City.
While
management believes that the measures in the liquidity plan will be adequate to satisfy its liquidity and cash flow requirements
for the twelve months ending September 30, 2017, there is no assurance that the liquidity plan will be successfully implemented.
Failure to successfully implement the liquidity plan will have a material adverse effect on the Company’s business, results
of operations and financial position, and may materially adversely affect its ability to continue as a going concern.
All
significant inter-company accounts and transactions have been eliminated in consolidation.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
(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
and nine months ended September 30, 2016 and 2015, there was no one customer that accounted for more than 10% of the Company's
revenue.
(c)
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.
(d)
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.
(e)
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 allowance
for loan losses 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.
(f)
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 operations and comprehensive income (loss).
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.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
(g)
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 US$3,955,890 and US$2,593,611 as of September 30, 2016 and December 31, 2015, respectively.
(h)
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 12.
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.
(i)
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 and nine months ended September 30, 2016 and 2015.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
(j)
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 September 30, 2016 and December 31, 2015, financial instruments of the Company primarily comprise of cash, restricted cash,
notes receivable, loan receivables, 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.
(k)
Foreign currency translation and transaction
The
reporting currency of the Company is United States Dollars (“US$”), which is also the Company’s functional currency.
The PRC subsidiaries and VIEs 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.
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Balance sheet items, except for equity accounts
|
|
|
6.6702
|
|
|
|
6.4917
|
|
|
|
For the nine months ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Items in the statements of income and comprehensive income, and statements of cash flows
|
|
|
6.5802
|
|
|
|
6.1735
|
|
Transactions
denominated in currencies other than the functional currency are translated into prevailing functional currency at the exchange
rates prevailing at the dates of the transactions. The resulting exchange differences are included in the consolidated statements
of comprehensive loss.
(l)
Use of estimates
The
preparation of consolidated financial statements in conformity with 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; (iv) useful lives of long-lived assets; (v) the impairment of long-lived assets;
(vi) the valuation allowance of deferred tax assets; and (vii) contingencies and litigation.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
(m)
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. Additionally, any previously accrued
but uncollected interest is discontinued of accrual and reversed, 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.
|
|
|
|
|
●
|
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.
|
|
|
|
|
●
|
Income
on direct financing lease. The financing agreements are classified as direct financing lease as prescribed by the Financial
Accounting Standards Board ("FASB Codification"). Revenues representing the capitalized costs of the investment
are recognized as income upon inception of the leases. The portion of revenues representing the difference between the gross
investment in the lease (the sum of the minimum lease payments and the guaranteed residual value, if any) and the sum of the
present value of the two components is recorded as unearned income and amortized over the lease term
|
Taxes
assessed by governmental authorities that are directly imposed on revenue-producing transactions between the Company and its customers
(which may include, but are not limited to, sales, use, value added and some excise taxes) are excluded from revenues.
Lessees
are responsible for all taxes, insurance and maintenance costs.
|
●
|
Non-interest
income. Non-interest income mainly includes rental income from the sub-leasing of certain of the Company’s leased office
space to third parties and income from disposal of property and equipment
|
(n)
Financial guarantee service contract
Financial
guarantee service contracts provides guarantee which protects the holder of a debt obligation against default. Pursuant to such
guarantee, the Company makes payments if the obligor responsible for making payments fails to do so as scheduled.
The
contract amounts reflect the extent of involvement the Company has in the guarantee transaction and also represent the Company’s
maximum exposure to credit loss in its guarantee business.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
(n)
Financial guarantee service contract (continued)
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:
|
|
September 30, 2016
(Unaudited)
|
|
|
December 31,
2015
|
|
Guarantee
|
|
$
|
11,341,455
|
|
|
$
|
11,653,342
|
|
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
sheets. This liability represents probable losses and is increased or decreased by accruing a “(Provision of)/Reversal of
provision for 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 customers 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 and expected customer default status of financial guarantee services, the Company estimates the probable
loss for immature financial guarantee services to be approximately 50% or 100% of contract amount as of September 30, 2016
and December 31, 2015, and made a provision of US$6,015,092 and US$5,691,253 as of these two reporting dates, respectively,
for possible credit risk of its guarantees. In addition, the Company accrued specific provisions for repayment on behalf of guarantee
customers who defaulted on their loans, in the amount of US$12,294,889 and US$13,631,304 as of September 30, 2016 and December
31, 2015, respectively. The total accrual for financial guarantee services amounted to US$18,309,981 and US$19,322,557 as of September
30, 2016 and December 31, 2015, respectively. The Company reviews the provision on a quarterly basis.
The
Company provided provision of US$385,352 and reversed provision of US$9,035,700 for the nine months ended September, 2016 and
2015, respectively. The provision for the financial guarantee services was US$599,808 and US$7,322,936 for the three months ended
September 30, 2016 and 2015, respectively.
During
nine months ended September 30, 2016 and December 31, 2015, the management charged off specific provision for one and one customer
in the amount of US$116,856 and US$262,422, considering remote collectability from the customers. The Company charged off US $Nil
and US$262,422 for the three months ended September 30, 2016 and 2015, respectively.
(o)
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 supplies, etc.
(p)
Income tax
Current
income tax expenses 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 approach. 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.
(q)
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.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
(r)
Share-based awards
Share-based
awards granted to the Company's employees are measured at fair value on grant date and share-based compensation expense is recognized
(i) immediately at the grant date if no vesting conditions are required, or (ii) using the accelerated attribution method, net
of estimated forfeitures, over the requisite service period. The fair value of restricted shares is determined with reference
to the fair value of the underlying shares.
At
each date of measurement, the Company reviews internal and external sources of information to assist in the estimation of various
attributes to determine the fair value of the share-based awards granted by the Company, including but not limited to the fair
value of the underlying shares, expected life, expected volatility and expected forfeiture rates. The Company is required to consider
many factors and make certain assumptions during this assessment. If any of the assumptions used to determine the fair value of
the share-based awards changes significantly, share-based compensation expense may differ materially in the future from that recorded
in the current reporting period.
(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
In
February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU")
No. 2016-02,
Leases (Topic 842)
. Under the new guidance, lessees will be required recognize the following for all
leases (with the exception of short-term leases) at the commencement date: 1) A lease liability, which is a lessee's obligation
to make lease payments arising from a lease, measured on a discounted basis; and 2) A right-of-use asset, which is an asset
that represents the lessee's right to use, or control the use of, a specified asset for the lease term. The new lease guidance
simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease
liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. The amendments in this ASU are effective
for fiscal years beginning after December 15, 2019, including interim periods within those years. The Company is evaluating
this ASU and has not determined the effect of this standard on its ongoing financial reporting.
In
June 2016, the FASB issued new accounting guidance for recognition of credit losses on financial instruments, which is effective
January 1, 2020, with early adoption permitted on January 1, 2019. The guidance introduces a new credit reserving model known
as the Current Expected Credit Loss (CECL) model, which is based on expected losses, and differs significantly from the incurred
loss approach used today. The CECL model requires measurement of expected credit losses not only based on historical experience
and current conditions, but also by including reasonable and supportable forecasts incorporating forward-looking information and
will likely result in earlier recognition of credit reserves. Credco does not intend to adopt the new standard early and is currently
evaluating the impact the new guidance will have on its financial position, results of operations and cash flows; however, it
is expected that the new CECL model will alter the assumptions used in calculating credit losses on Card Member receivables and
loans, among other financial instruments, and may result in material changes to Credco’s credit reserves.
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. These VIE Agreements were terminated on May 11, 2015
and will be accounted for as a deconsolidation. Pride Information did not have any business since its inception. (See Note
1)
As
of September 30, 2016, the Company had only one VIE.
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 Pride Information 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 and PFL. Current regulations in China permit
Wujiang Luxiang and PFL 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 and PFL to make
dividends and other payments to the Company may be restricted by factors including changes in applicable foreign exchange and
other laws and regulations.
The
following financial statement amounts and balances of the VIE were included in the unaudited consolidated financial statements
as of September 30, 2016 and audited consolidated financial statements as of December 31, 2015 and for the three and nine months
ended September 30, 2016 and 2015:
|
|
September 30, 2016
(Unaudited)
|
|
|
December 31, 2015
|
|
Total assets
|
|
$
|
20,216,911
|
|
|
$
|
22,920,730
|
|
Total liabilities
|
|
$
|
20,267,692
|
|
|
$
|
23,932,841
|
|
|
|
For the three months ended September 30,
|
|
|
For the nine months ended September 30,
|
|
|
|
2016
(Unaudited)
|
|
|
2015
(Unaudited)
|
|
|
2016
(Unaudited)
|
|
|
2015
(Unaudited)
|
|
Revenue
|
|
$
|
672,646
|
|
|
$
|
120,929
|
|
|
$
|
1,151,308
|
|
|
$
|
2,272,057
|
|
Net income/(loss)
|
|
$
|
2,807
|
|
|
$
|
(36,925,013
|
)
|
|
$
|
910,203
|
|
|
$
|
(40,083,818
|
)
|
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3.
|
VARIABLE INTEREST ENTITIES AND OTHER CONSOLIDATION
MATTERS (CONTINUED)
|
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;
|
|
●
|
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 currency for the distribution of profits to their shareholders may validate payment from their foreign
currency accounts or purchase and pay foreign currencies 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 currency settlement accounts for current account receipts and payments of foreign exchange along with specialized
accounts for capital account receipts and payments of foreign currency 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, finance lease 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.
In
addition, the Company calculates the provision amount as below:
|
1.
|
General
Reserve - is based on total loan receivable balance and to be used to cover unidentified probable loan loss. According to
management assessment, the General Reserve is required to be no less than 1% of total loan receivable balance.
|
|
2.
|
Special
Reserve - is fund set aside covering losses due to risks related to a particular country, region, industry, company or type
of loans. The reserve rate could be decided based on management estimate of loan collectability. The Loan portfolio did not
include any loans outside of the PRC.
|
|
3.
|
Specific
Reserve – is based on a loan by loan basis covering losses due to risks related to the ability and intension of repayment
of each customer. The reserve rate was individually assessed based on management estimate of loan collectability.
|
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 and include additional
amounts on a specific basis.
(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.
(d)
Concentration risk
As
of September 30, 2016 and December 31, 2015, the Company held cash of US$1,167,361 and US$306,401, 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 September 30, 2016 and December 31, 2015.
Restricted
cash represents cash pledged with banks as guarantor deposit for the Company's guarantee service 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 usually in the range of 10% to 30% 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. However, due to high
default rate in the financial guarantee services, the Company narrowed its financial guarantee business from the year ended December
31, 2015. As a result, the Company did not continue guarantor agreements with banks and was not subject to restrictions on deposits
in banks. As of September 30, 2016 and December 31, 2015, the balances of restricted cash were minimal, amounting to US$0.01 million
and US$0.4 million, respectively.
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.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The
interest rates on loan issued ranged between 9.6%~ 19.44% and 9.6%~ 19.44% % for the nine months ended September 30, 2016 and
2015, respectively.
6.1
Loans receivable consist of the following:
|
|
September 30, 2016
(Unaudited)
|
|
|
December 31, 2015
|
|
Business loans
|
|
$
|
37,913,015
|
|
|
$
|
40,498,813
|
|
Personal loans
|
|
|
21,627,323
|
|
|
|
22,577,907
|
|
Total Loans receivable
|
|
|
59,540,338
|
|
|
|
63,076,720
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
Collectively assessed
|
|
|
(54,104,303
|
)
|
|
|
(55,595,653
|
)
|
Individually assessed
|
|
|
-
|
|
|
|
-
|
|
Allowance for loan losses
|
|
|
(54,104,303
|
)
|
|
|
(55,595,653
|
)
|
Loans receivable, net
|
|
$
|
5,436,035
|
|
|
$
|
7,481,067
|
|
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 September 30, 2016 and
December 31, 2015, the Company had 66 and 68 business loan customers, and 42 and 47 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 loan by loan on a quarterly basis based on an assessment of specific evidence
indicating doubtful collection, historical experience, loan balance aging and prevailing economic conditions.
For
the three months ended September 30, 2016 and 2015, a reversal of provision of US$226,694 and a provision of US$29,210,186 were
charged to the consolidated statement of income, respectively. For the nine months ended September 30, 2016 and 2015, a reversal
of provision of US$133,177 and a provision of US$30,762,076 were charged to the consolidated statement of income, respectively.
No Write-offs against allowances have occurred for the three and nine months ended September 30, 2016 and 2015, respectively.
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 September 30, 2016 and December
31, 2015, respectively:
|
|
September 30, 2016
(Unaudited)
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Business loans
|
|
$
|
28,914,735
|
|
|
$
|
21,907,409
|
|
Personal loans
|
|
|
11,867,525
|
|
|
|
10,211,501
|
|
|
|
$
|
40,782,260
|
|
|
$
|
32,118,910
|
|
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6.
|
LOANS RECEIVABLE, NET (CONTINUED)
|
The
following table represents the aging of loans as of September 30, 2016 by type of loan:
|
|
1-89 Days
Past Due
(Unaudited)
|
|
|
90 - 179 Days Past Due
(Unaudited)
|
|
|
180 - 365 Days Past Due
(Unaudited)
|
|
|
Over 1 year Past Due
(Unaudited)
|
|
|
Total Past Due
(Unaudited)
|
|
|
Current
(Unaudited)
|
|
|
Total Loans
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business loans
|
|
$
|
8,998,280
|
|
|
$
|
4,950,601
|
|
|
$
|
7,080,726
|
|
|
|
16,883,408
|
|
|
$
|
37,913,015
|
|
|
$
|
-
|
|
|
$
|
37,913,015
|
|
Personal loans
|
|
|
9,714,822
|
|
|
|
-
|
|
|
|
4,627,883
|
|
|
|
7,239,642
|
|
|
|
21,582,347
|
|
|
|
44,976
|
|
|
|
21,627,323
|
|
|
|
$
|
18,713,102
|
|
|
$
|
4,950,601
|
|
|
$
|
11,708,609
|
|
|
|
24,123,050
|
|
|
$
|
59,495,362
|
|
|
$
|
44,976
|
|
|
$
|
59,540,338
|
|
The
following table represents the aging of loans as of December 31, 2015 by type of loan:
|
|
1-89 Days
Past Due
|
|
|
90 - 179 Days Past Due
|
|
|
180 - 365 Days Past Due
|
|
|
Over 1 year Past Due
|
|
|
Total Past Due
|
|
|
Current
|
|
|
Total Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business loans
|
|
$
|
77,021
|
|
|
$
|
4,313,200
|
|
|
$
|
7,555,846
|
|
|
|
10,038,363
|
|
|
$
|
21,984,430
|
|
|
$
|
18,514,383
|
|
|
$
|
40,498,813
|
|
Personal loans
|
|
|
924,257
|
|
|
|
1,848,514
|
|
|
|
3,749,403
|
|
|
|
4,613,584
|
|
|
|
11,135,758
|
|
|
|
11,442,149
|
|
|
|
22,577,907
|
|
|
|
$
|
1,001,278
|
|
|
$
|
6,161,714
|
|
|
$
|
11,305,249
|
|
|
|
14,651,947
|
|
|
$
|
33,120,188
|
|
|
$
|
29,956,532
|
|
|
$
|
63,076,720
|
|
6.2
Analysis of loans by credit quality indicator
The
following table summarizes the Company’s loan portfolio by credit quality indicator as of September 30, 2016 and December
31, 2015, respectively:
Five Categories
|
|
September 30, 2016
(Unaudited)
|
|
|
%
|
|
|
December 31, 2015
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Special mention
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Substandard
|
|
|
-
|
|
|
|
-
|
|
|
|
2,695,750
|
|
|
|
4.3
|
%
|
Doubtful
|
|
|
10,872,069
|
|
|
|
18.3
|
%
|
|
|
9,841,658
|
|
|
|
15.6
|
%
|
Loss
|
|
|
48,668,269
|
|
|
|
81.7
|
%
|
|
|
50,539,312
|
|
|
|
80.1
|
%
|
Total
|
|
$
|
59,540,338
|
|
|
|
100
|
%
|
|
$
|
63,076,720
|
|
|
|
100
|
%
|
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6.
|
LOANS RECEIVABLE, NET (CONTINUED)
|
6.3
Analysis of loans by collateral
The
following table summarizes the Company’s loan portfolio by collateral as of September 30, 2016:
|
|
September 30, 2016
(Unaudited)
|
|
|
|
|
|
|
Business Loans
|
|
|
Personal Loans
|
|
|
Total
|
|
Guarantee backed loans
|
|
$
|
35,592,373
|
|
|
$
|
20,760,785
|
|
|
$
|
56,353,158
|
|
Pledged assets backed loans
|
|
|
2,320,642
|
|
|
|
866,538
|
|
|
|
3,187,180
|
|
Collateral backed loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
37,913,015
|
|
|
$
|
21,627,323
|
|
|
$
|
59,540,338
|
|
The
following table summarizes the Company’s loan portfolio by collateral as of December 31, 2015:
|
|
December 31, 2015
|
|
|
|
|
|
|
Business Loans
|
|
|
Personal Loans
|
|
|
Total
|
|
Guarantee backed loans
|
|
$
|
37,498,183
|
|
|
$
|
21,510,390
|
|
|
$
|
59,008,573
|
|
Pledged assets backed loans
|
|
|
3,000,630
|
|
|
|
1,067,517
|
|
|
|
4,068,147
|
|
Collateral backed loans
|
|
|
-
|
|
|
|
--
|
|
|
|
-
|
|
|
|
$
|
40,498,813
|
|
|
$
|
22,577,907
|
|
|
$
|
63,076,720
|
|
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 agencies 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 proceed of the collateral asset is not sufficient to pay off the debt, we will file a lawsuit against the borrower
and seek payment for the remaining balance.
Pledged
Asset Backed Loans
Pledged
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 agencies 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 loan is a loan guaranteed by a third party who is usually a corporation or high net worth individual. As of September
30, 2016 and December 31, 2015, guaranteed loans make up 94.6% and 93.6% 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. Additionally, the management also reviewed the portfolio on a loan by loan basis and individually evaluated
for impairment if any.
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 calculates the provision amount as below:
|
1.
|
General
Reserve - is based on total loan receivable balance and to be used to cover unidentified probable loan loss. The management
assessed the General Reserve is required to be no less than 1% of total loan receivable balance.
|
|
2.
|
Special
Reserve - is fund set aside covering losses due to risks related to a particular country, region, industry, company or type
of loans. The reserve rate could be decided based on management estimate of loan collectability. The Loan portfolio did not
include any loans outside of the PRC.
|
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.
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 September 30,
2016 and 2015:
|
|
Business Loans
(Unaudited)
|
|
|
Personal Loans
(Unaudited)
|
|
|
Total
(Unaudited)
|
|
For the three months ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
34,326,727
|
|
|
$
|
20,161,476
|
|
|
$
|
54,488,203
|
|
Charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Recoveries
|
|
|
(50,612
|
)
|
|
|
(121,435
|
)
|
|
|
(172,047
|
)
|
Provisions
|
|
|
(360
|
)
|
|
|
-
|
|
|
|
(360
|
)
|
Foreign exchange impact
|
|
|
(133,237
|
)
|
|
|
(78,256
|
)
|
|
|
(211,493
|
)
|
Ending balance
|
|
|
34,142,518
|
|
|
|
19,961,785
|
|
|
|
54,104,303
|
|
Ending balance: individually evaluated for impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
34,142,518
|
|
|
$
|
19,961,785
|
|
|
$
|
54,104,303
|
|
|
|
Business Loans
(Unaudited)
|
|
|
Personal Loans
(Unaudited)
|
|
|
Total
(Unaudited)
|
|
For the three months ended September 30, 2015
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
16,598,522
|
|
|
$
|
9,597,444
|
|
|
$
|
26,195,966
|
|
Charge-offs
|
|
|
(26,341,752
|
)
|
|
|
(14,792,268
|
)
|
|
|
(41,134,020
|
)
|
Recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Provisions
|
|
|
18,839,288
|
|
|
|
10,275,122
|
|
|
|
29,114,410
|
|
Ending balance
|
|
|
9,096,058
|
|
|
|
5,080,298
|
|
|
|
14,176,356
|
|
Ending balance: individually evaluated for impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
9,096,058
|
|
|
$
|
5,080,298
|
|
|
$
|
14,176,356
|
|
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
7.
|
ALLOWANCE FOR LOAN LOSSES (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 nine months ended September 30,
2016 and 2015:
|
|
Business Loans
(Unaudited)
|
|
|
Personal Loans
(Unaudited)
|
|
|
Total
(Unaudited)
|
|
For the nine months ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
35,083,738
|
|
|
$
|
20,511,915
|
|
|
$
|
55,595,653
|
|
Charge-offs
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Recoveries
|
|
|
(127,977
|
)
|
|
|
(1,155
|
)
|
|
|
(129,132
|
)
|
Provisions
|
|
|
125,729
|
|
|
|
-
|
|
|
|
125,729
|
|
Foreign exchange impact
|
|
|
(938,972
|
)
|
|
|
(548,975
|
)
|
|
|
(1,487,947
|
)
|
Ending balance
|
|
|
34,142,518
|
|
|
|
19,961,785
|
|
|
|
54,104,303
|
|
Ending balance: individually evaluated for impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
34,142,518
|
|
|
$
|
19,961,785
|
|
|
$
|
54,104,303
|
|
|
|
Business Loans
(Unaudited)
|
|
|
Personal Loans
(Unaudited)
|
|
|
Total
(Unaudited)
|
|
For the nine months ended September 30, 2015
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
14,836,650
|
|
|
$
|
9,654,071
|
|
|
$
|
24,490,721
|
|
Charge-offs
|
|
|
(26,341,752
|
)
|
|
|
(14,792,268
|
)
|
|
|
(41,134,020
|
)
|
Recoveries
|
|
|
-
|
|
|
|
(56,627
|
)
|
|
|
(56,627
|
)
|
Provisions
|
|
|
20,601,160
|
|
|
|
10,275,122
|
|
|
|
30,876,282
|
|
Ending balance
|
|
|
9,096,058
|
|
|
|
5,080,298
|
|
|
|
14,176,356
|
|
Ending balance: individually evaluated for impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
9,096,058
|
|
|
$
|
5,080,298
|
|
|
$
|
14,176,356
|
|
The
following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings
of special mention, substandard, doubtful and loss within the Company's internal risk rating system as of September 30, 2016:
|
|
Pass
(Unaudited)
|
|
|
Special Mention
(Unaudited)
|
|
|
Substandard
(Unaudited)
|
|
|
Doubtful
(Unaudited)
|
|
|
Loss
(Unaudited)
|
|
|
Total
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,540,994
|
|
|
$
|
30,372,021
|
|
|
$
|
37,913,015
|
|
Personal loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,331,075
|
|
|
|
18,296,248
|
|
|
|
21,627,323
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,872,069
|
|
|
$
|
48,668,269
|
|
|
$
|
59,540,338
|
|
The
following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings
of special mention, substandard, doubtful and loss within the Company's internal risk rating system as of December 31, 2015:
|
|
Pass
|
|
|
Special Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,618,729
|
|
|
$
|
6,103,192
|
|
|
$
|
31,776,892
|
|
|
$
|
40,498,813
|
|
Personal loans
|
|
|
-
|
|
|
|
-
|
|
|
|
77,021
|
|
|
|
3,738,466
|
|
|
|
18,762,420
|
|
|
|
22,577,907
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,695,750
|
|
|
$
|
9,841,658
|
|
|
$
|
50,539,312
|
|
|
$
|
63,076,720
|
|
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 and nine months ended September 30, 2016 and 2015, respectively.
|
9.
|
GUARANTEE
PAID ON BEHALF OF GUARANTEE CUSTOMERS
|
|
|
September 30, 2016
(Unaudited)
|
|
|
December 31, 2015
|
|
Guarantee paid on behalf of guarantee service customers
|
|
$
|
12,147,982
|
|
|
$
|
14,031,603
|
|
Guarantee paid on behalf of a related party
|
|
|
324,005
|
|
|
|
622,807
|
|
Total
|
|
$
|
12,471,987
|
|
|
$
|
14,654,410
|
|
As
of September 30, 2016 and December 31, 2015, guarantee paid on behalf of guarantee service customers represents payment made by
the Company to banks on behalf of thirty-three and thirty-two 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 September 30, 2016 and December 31, 2015, the Company accrued allowance on the balance in “accrual
for financial guarantee services” in the value of US$18,309,981 and US$19,322,557, respectively.
Other
assets as of September 30, 2016 and December 31, 2015consisted of:
|
|
September 30, 2016
(Unaudited)
|
|
|
December 31, 2015
|
|
Other prepaid expense
|
|
|
11,993
|
|
|
|
30,809
|
|
Deposit for court filing fees and legal fees
|
|
|
219,595
|
|
|
|
222,934
|
|
Other receivables
|
|
|
45,815
|
|
|
|
39,457
|
|
|
|
$
|
277,403
|
|
|
$
|
293,200
|
|
Deposit
for court filing fees and legal fees will be claimed from default customers.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
11.
|
NET
INVESTMENT IN DIRECT FINANCING LEASE
|
On
September 25, 2014, PFL entered into a finance lease agreement for the leasing of manufacturing equipment with a total lease receivable
of US$2.73 million, with a lease term of 2 years. The lease bears an interest rate of 10.36% per annum.
On
October 13, 2014, PFL entered into another finance lease agreement for the leasing of manufacturing equipment with a total lease
receivable of US$2.88 million. The lease bears an interest rate of 11.11% per annum.
Future
minimum lease receipts under non-cancellable finance lease arrangements are as follows:
|
|
September 30,
2016
(Unaudited)
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
$
|
3,674,541
|
|
|
$
|
3,635,411
|
|
2 years
|
|
|
73,461
|
|
|
|
754,810
|
|
3 years
|
|
|
-
|
|
|
|
-
|
|
Total minimum lease receipts
|
|
|
3,748,002
|
|
|
|
4,390,221
|
|
Less: amount representing interest
|
|
|
(298,822
|
)
|
|
|
(464,100
|
)
|
Present value of minimum lease receipts
|
|
$
|
3,449,180
|
|
|
$
|
3,926,121
|
|
Following
is a summary of the components of the Company’s net investment in direct financing leases as of September 30, 2016 and December
31, 2015:
|
|
September 30,
2016
(Unaudited)
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Total minimum lease payments to be received
|
|
$
|
3,748,002
|
|
|
$
|
4,390,221
|
|
Less: Amounts representing estimated executory costs
|
|
|
-
|
|
|
|
-
|
|
Minimum lease payments receivable
|
|
|
3,748,002
|
|
|
|
4,390,221
|
|
Less Allowance for uncollectible
|
|
|
(2,542,163
|
)
|
|
|
(2,857,554
|
)
|
Net minimum lease payments receivable
|
|
|
1,205,839
|
|
|
|
1,532,667
|
|
Estimated residual value of leased property
|
|
|
-
|
|
|
|
-
|
|
Less: Unearned income
|
|
|
(298,822
|
)
|
|
|
(355,255
|
)
|
Net investment in direct financing lease
|
|
$
|
907,017
|
|
|
$
|
1,177,442
|
|
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
12.
|
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 with 5% salvage value below:
Property
and equipment consist of the following:
|
|
Useful Life
(years)
|
|
|
September 30, 2016
(Unaudited)
|
|
|
December 31, 2015
|
|
Furniture and fixtures
|
|
|
5
|
|
|
$
|
21,665
|
|
|
$
|
22,260
|
|
Vehicles
|
|
|
4
|
|
|
|
-
|
|
|
|
153,288
|
|
Electronic equipment
|
|
|
3
|
|
|
|
136,719
|
|
|
|
140,001
|
|
Leasehold improvement
|
|
|
3
|
|
|
|
297,563
|
|
|
|
86,418
|
|
Less: accumulated depreciation
|
|
|
|
|
|
|
(335,454
|
)
|
|
|
(275,847
|
)
|
Property and equipment, net
|
|
|
|
|
|
$
|
120,493
|
|
|
$
|
126,120
|
|
During
the nine months ended September 30, 2016, the Company disposed of one vehicle with net book value of US$7,459 (original cost of
US$149,186, accumulated depreciation of US$141,727). The Company generated non-interest income of US$48,945 from the disposal.
During
the nine months ended September 30, 2015, the Company disposed of two vehicles with net book value of US$4,073 (original cost
of US$81,459, accumulated depreciation of $77,386). The Company generated non-interest income of US$14,585 from the disposal.
Depreciation
expense totaled US$11,053 and US$27,107 for the three months ended September 30, 2016 and 2015, respectively. Depreciation expense
totaled US$43,062 and US$81,245 for the nine months ended September 30, 2016 and 2015, respectively.
Intangible
asset represents the software used for P2P platform, the useful life is estimated at 3 years.
|
|
Useful Life
(years)
|
|
September 30, 2016
(Unaudited)
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
3
|
|
$
|
969
|
|
|
$
|
4,435
|
|
Amortization
expense totaled US$1,115 and US$1,205 for the three months ended September 30, 2016 and 2015, respectively. Amortization expense
totaled US$3,393 and US$8,596 for the nine months ended September 30, 2016 and 2015, respectively.
|
14.
|
SHORT-TERM
BANK LOANS
|
Bank Name
|
|
Interest rate
|
|
Term
|
|
|
September 30,
2016
(Unaudited)
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural Bank Of China
|
|
Fixed annual rate of 6.31%
|
|
|
From October 30, 2015 to October 30, 2016
|
|
|
|
-
|
|
|
|
2,618,729
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
2,618,729
|
|
During
the nine months ended September 30, 2016, the Company repaid the all outstanding bank borrowings. As of September 30, 2016, the
Company did not have bank loans.
As
of December 31, 2015, 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 September 30, 2016 and 2015 were US$nil and US$152,664, respectively.
Interest expense incurred on short-term loans for the nine months ended September 30, 2016 and 2015 were US$30,057 and US$325,830,
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.
|
16.
|
UNEARNED
INCOME FROM GUARANTEE SERVICES AND FINANCING LEASE 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 US$12,044 and $1,610 as of September 30, 2016 and December
31, 2015, respectively.
The
Company receives financing leasing service commissions at the inception and records unearned income before amortizing it throughout
the guarantee service life. Unearned income from financing leasing services was US$24,362 and US$59,692 as of September 30, 2016
and December 31, 2015, respectively.
|
17.
|
OTHER
CURRENT LIABILITIES
|
Other
current liabilities as of September 30, 2016 and December 31, 2015 consisted of:
|
|
September 30, 2016
(Unaudited)
|
|
|
December 31, 2015
|
|
Accrued payroll
|
|
$
|
30,938
|
|
|
$
|
85,144
|
|
Accrued office rental expenses
|
|
|
52,472
|
|
|
|
61,617
|
|
Other accrued expenses
|
|
|
24,930
|
|
|
|
-
|
|
Other tax (recoverable)/payable
|
|
|
(46,241
|
)
|
|
|
14,187
|
|
Accrued provision for cash settlement against legal proceedings
|
|
|
225,000
|
|
|
|
-
|
|
Other payable
|
|
|
9,960
|
|
|
|
21,294
|
|
|
|
$
|
297,059
|
|
|
$
|
182,242
|
|
On
April 22, 2016, we filed a stipulation and agreement of settlement ("Stipulation") with all persons and entities that
purchased or otherwise acquired CCCR shares between August 14, 2013 and July 25, 2014 (collectively "Led Defendants). Pursuant
to the Stipulation, CCCR shall cause (a) $225,000 to be transferred to the Escrow Agent within fifteen (15) business days of the
later of: (i) the Court’s entry of the Order for Notice and Hearing (or substantially similar order) as set forth in this
Stipulation; or (ii) Lead Counsel provision to Settling Defendants’ Counsel of written payment instructions and a completed
W-9 form; and (b) Cause CCCR to issue 750,000 shares of freely tradeable shares of CCCR common stock (the “Settlement Stock”)
to the Escrow Agent within fifteen (15) business days of the Court’s entry of the Order for Notice and Hearing (or substantially
similar order) as set forth in this Stipulation. In the opinion of management, it is highly probable for the Company to settle
such a Stipulation. The Company accounted for the cash settlement of $225,000 as an accrued liability and the share settlement
of 750,000 shares as an additional paid-in capital.
|
18.
|
OTHER
OPERATING EXPENSE
|
Other
operating expense for the three and nine months ended September 30, 2016 and 2015 consisted of:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Depreciation and amortization
|
|
$
|
12,168
|
|
|
$
|
27,829
|
|
|
$
|
46,455
|
|
|
$
|
89,841
|
|
Travel expenses
|
|
|
9,647
|
|
|
|
1,807
|
|
|
|
13,134
|
|
|
|
7,669
|
|
Entertainment expenses
|
|
|
42
|
|
|
|
334
|
|
|
|
11,970
|
|
|
|
15,604
|
|
Promotion expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
260
|
|
Legal and consulting expenses
|
|
|
1,002,804
|
|
|
|
164,573
|
|
|
|
1,642,316
|
|
|
|
998,094
|
|
Car expenses
|
|
|
3,726
|
|
|
|
12,897
|
|
|
|
21,541
|
|
|
|
40,813
|
|
Bank charges
|
|
|
540
|
|
|
|
10,613
|
|
|
|
2,256
|
|
|
|
33,011
|
|
Audit-related expense
|
|
|
31,382
|
|
|
|
25,329
|
|
|
|
100,955
|
|
|
|
255,779
|
|
Provision for settlement against legal proceedings
|
|
|
-
|
|
|
|
-
|
|
|
|
690,000
|
|
|
|
-
|
|
Other expenses
|
|
|
25,783
|
|
|
|
104,712
|
|
|
|
54,400
|
|
|
|
251,252
|
|
Total
|
|
$
|
1,086,092
|
|
|
$
|
348,094
|
|
|
$
|
2,583,027
|
|
|
$
|
1,692,323
|
|
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
19.
|
EMPLOYEE
RETIREMENT BENEFIT
|
The
Company has made employee benefit contribution in accordance with relevant Chinese regulations, including retirement insurance,
unemployment insurance, medical insurance, housing fund, work injury insurance and maternity insurance. The Company recorded the
contribution in the salary and employee charges when incurred. The contributions made by the Company were US$4,532 and US$15,109
for the three months ended September 30, 2016 and 2015, respectively. The contributions made by the Company were US$27,520 and
US$52,743 for the nine months ended September 30, 2016 and 2015, respectively.
|
20.
|
DISTRIBUTION
OF PROFIT
|
The
Company did not distribute any dividend to its shareholders for the three and nine months ended September 30, 2016 and 2015, respectively.
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.
Secondary
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, 2015, there were 12,390,062 shares of Common Stock issued and outstanding.
On
January 13, 2016, the Company issued 6,000 unregistered shares to John Levy, the Company’s Chairman of Audit Committee,
at a market value of US$0.32 per share, in the total amount of US$1,920, for his services provided.
On
April 15, 2016, the Company issued 637,592 unregistered shares to Pearlman Schenider LLP, the Company’s legal consultant,
at a market value of US$0.58 per share, in the total amount of US$369,803, for the services provided.
On
April 27, 2016, the Company issued 15,000, 195,000 and 155,000 unregistered shares to John Levy, the Company’s Chairman
of Audit Committee, Jingeng Ling, the Company’s Former Chief Executive Officer, and Long Yi, the Company’s Chief Financial
Officer, respectively. The shares were issued at a market value of US$0.58 per share, in the total amount of US$211,700, for the
services provided.
On
June 8, 2016, the Company closed a private placement to a third party individual investor to issue 2,439,025 common shares,
at a per share price of US$0.41, in the total amount of US$1,000,000. This transaction was at arm’s length. The shares
shall be authorized for listing on the NASDAQ capital market before closing, and the net proceeds of the sale of the shares shall
be used by the Company for working capital and general corporate purpose.
On
September 14, 2016, the Company issued 300,000 restricted shares to Shanchun Huang, the designee of Wealth Index Capital Limited,
for the consulting services provided. The shares were issued at a market value of US$2.57, in the total amount of $771,000.
As
of September 30, 2016, there were 16,137,679 shares of Common Stock issued and outstanding.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
21.
|
CAPITAL
TRANSACTION (CONTINUED)
|
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 the warrants 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 and are recorded
as additional paid-in capital.
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 and are recorded as additional paid-in capital.
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 Stocks 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 three and nine months ended September 30, 2016 and 2015, the Company did not accrue the statutory reserve due
to net loss.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
23.
|
LOSS
PER COMMON SHARE
|
The
following table sets forth the computation of basic and diluted earnings per common share for the three and nine months ended
September 30, 2016 and 2015, respectively:
|
|
For The Three Months Ended
|
|
|
For The Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016 (Unaudited)
|
|
|
2015 (Unaudited)
|
|
|
2016 (Unaudited)
|
|
|
2015 (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to the common shareholders
|
|
$
|
(624,445
|
)
|
|
$
|
(37,101,946
|
)
|
|
$
|
(1,206,116
|
)
|
|
$
|
(40,629,513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
|
15,889,853
|
|
|
|
12,390,062
|
|
|
|
14,026,815
|
|
|
|
12,330,721
|
|
Effect of dilutive securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted weighted-average common shares outstanding
|
|
|
15,889,853
|
|
|
|
12,390,062
|
|
|
|
14,026,815
|
|
|
|
12,330,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.039
|
)
|
|
$
|
(2.994
|
)
|
|
$
|
(0.086
|
)
|
|
$
|
(3.295
|
)
|
Diluted
|
|
$
|
(0.039
|
)
|
|
$
|
(2.994
|
)
|
|
$
|
(0.086
|
)
|
|
$
|
(3.295
|
)
|
Basic
loss per share are computed by dividing the net loss by the weighted average number of common shares outstanding during the period.
Diluted loss per share were the same as basic loss per share due to the lack of dilutive items in the Company for the three and
nine months ended September 30, 2016 and 2015. The number of warrants is omitted from the computation as the anti-dilutive effect.
|
24.
|
INCOME
TAXES AND TAX PAYABLE
|
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 its loan business 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%. However since 2015, the excess enterprise income taxes paid will not be refunded
but can be used to offset the future income tax payable arising from taxable income.
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 three
and nine months ended September 30, 2016 and 2015, the Company had no unrecognized tax benefits. For the nine months ended September
30, 2016, the Company made net tax operating profit from its PRC subsidiaries and its consolidated VIE of US$422,684. As of September
30, 2016, the Company has carry-forward tax operating losses from its PRC subsidiaries and its consolidated VIE of US$61,463,690,
which will expire from the year ending December 31, 2019 to 2021. The Company recognized deferred income tax assets of US$11,739,850
as of September 30, 2016. However, the Company estimates there will be no sufficient net income before income tax from years ending
December 31, 2016 to 2021 to realize the deferred income tax assets. The Company provided valuation allowance for deferred income
tax assets of US$11,739,850 as of September 30, 2016.
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.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
24.
|
INCOME TAXES AND TAX PAYABLE (CONTINUED)
|
Income
tax payable is comprised of:
|
|
September 30, 2016
(Unaudited)
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Income tax payable
|
|
$
|
162,206
|
|
|
$
|
126,485
|
|
Income
tax expense for the nine months ended September 30, 2016 and 2015 is comprised of:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2016 (Unaudited)
|
|
|
|
2015 (Unaudited)
|
|
|
|
2016 (Unaudited)
|
|
|
|
2015 (Unaudited)
|
|
Current income tax (credit)/expense
|
|
$
|
-
|
|
|
$
|
(53,999
|
)
|
|
$
|
-
|
|
|
$
|
7,508
|
|
Deferred income tax (credit)/expense
|
|
|
-
|
|
|
|
(4,610
|
)
|
|
|
-
|
|
|
|
587,142
|
|
Total provision for income taxes
|
|
$
|
-
|
|
|
$
|
(58,609
|
)
|
|
$
|
-
|
|
|
$
|
594,650
|
|
The
effective tax rates for the nine months ended September 30, 2016 and 2015 are 0% and 1.49%, respectively.
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 September 30, 2016 and December 31, 2015, subsidy of US$1,010,391 and US$1,011,877 did not fulfill the purpose within due
date and the related deferred tax liability was transferred to income tax payable. As of September 30, 2016 and December 31, 2015,
the deferred tax liability amounted to US$158,980 and US$204,266, respectively.
As
of September 30, 2016 and December 31, 2015, 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.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
25.
|
RELATED
PARTY TRANSACTIONS AND BALANCES
|
|
1)
|
Nature
of relationships with related parties
|
Name
|
|
Relationship
with the Company
|
Wujiang
Chunjia Textile Trading Co., Ltd (“Chunjia Textile”)
|
|
Controlled
by Huichun Qin
|
Suzhou
Rongshengda Investment Holding Co., Ltd.
|
|
Controlled
by shareholders of Wujiang Luxiang
|
Suzhou
Dingli Real Estate Co., Ltd.
|
|
Controlled
by Former Chief Executive Officer
|
Huichun
Qin
|
|
Non-controlling
shareholder and former CEO and chairman of board of directors
|
|
2)
|
Related
party transactions
|
During
the nine months ended September 30, 2016, Suzhou Dingli Real Estate Co., Ltd., a company controlled by Mr. Jingen Ling, the Former
Chief Executive Officer was involved to provide guarantee services for the bank borrowings. No commissions or fees are required
from the Company. Before September 30, 2016, all outstanding bank borrowings have been repaid.
During
the nine months ended September 30, 2016, the Company made a loan of US$1,945,224 to Suzhou Rongshengda Investment
Holding Co., Ltd., a company controlled by shareholders of Wujiang Luxiang. The loan was agreed to return by November 30, 2016.
Due to the short-term borrowing, the Company did not charge any interest or fees. As of September 30, the balance is still outstanding.
|
3)
|
Related
party balances
|
Amount
due from related parties were as follows:
|
|
September 30, 2016
(Unaudited)
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Suzhou Rongshengda Investment Holding Co., Ltd.
|
|
$
|
1,918,977
|
|
|
$
|
-
|
|
Chunjia Textile
|
|
|
324,005
|
|
|
|
622,807
|
|
Huichun Qin
|
|
$
|
1,049,441
|
|
|
$
|
1,078,300
|
|
As
of September 30, 2016, the Company provided financial guarantee service for Chunjia Textile to guarantee loans of US$324,005.
The Company accrued provision of US$162,002 on the outstanding balance as of September 30, 2016.
Huichun
Qin transferred $1,098,197(equivalent of RMB 7 million) to his personal account without proper authorization on July 2, 2014.
As of September 30, 2016, Huichun Qin has not repaid the balance. The amount was recorded as a deduction of the Company’s
equity as of September 30, 2016 and December 31, 2015, respectively.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
26.
|
COMMITMENTS
AND CONTINGENCIES
|
During
the year ended December 31, 2015, the Company leased its new office under a lease agreement from June 1, 2015 to May 31, 2021.
As a result, in October 2015, the Company terminated the lease agreement for its former principal office which agreement was to
expire on September 30, 2018. No default penalty was paid for the earlier termination. The following table sets forth the Company’s
contractual obligations as of September 30, 2016 in future periods:
|
|
Rental payments
(Unaudited)
|
|
|
|
|
|
Year ending September 30, 2017
|
|
|
59,968
|
|
Year ending September 30, 2018
|
|
|
71,962
|
|
Year ending September 30, 2019
|
|
|
71,962
|
|
Year ending September 30, 2020
|
|
|
71,962
|
|
Year ending September 30, 2021
|
|
|
47,975
|
|
Total
|
|
$
|
323,829
|
|
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 12 to 24 months and the average percentage of the guarantee amount as security deposit is 10% ~ 20% . As of
September 30, 2016 and December 31, 2015, the loan amount guaranteed by the Company was US$11,341,455 and US$11,653,342, respectively,
for its financial guarantee service customers.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
26.
|
COMMITMENTS
AND CONTINGENCIES (CONTINUED)
|
The
Company is involved in various legal actions arising in the ordinary course of its business. During nine months ended September
30, 2016, the Company was involved in 123 lawsuits, among which 85 were related to its loan business and 38 were related to guarantee
business. The Company initiated legal proceedings to collect delinquent balances from borrowers and guarantees. 88 of these cases
with an aggregated claim of USD 42.14 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 35 cases with an aggregated claim of USD 29 million have not been adjudicated
by the Court as of September 30, 2016.
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,
Andrew Dennison v. China Commercial Credit, Inc.
, et al., Case No. 2:2014-cv-04956, 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, 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 (“Class 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 was to file an amended complaint within 60 days of the date that the transfer
was effected, and the defendants’ date to answer or move was within 60 days of that filing. On April 7, 2015, the Class
Plaintiff filed a Second Amended Class Action Complaint (the “CAC”). The CAC also asserts securities law claims against
defendants Axiom Capital Management, Inc., Burnham Securities Inc. and ViewTrade Securities, Inc. (collectively, the “Underwriter
Defendants”). The CAC alleges that the Company engaged in a fraudulent scheme by engaging in undisclosed and improper lending
practices and made misleading representations regarding its underwriting policies, the loan portfolio quality, the loan loss allowance,
compliance with U.S. GAAP and its internal control systems.
In
accordance with the Court’s procedures, the Company and Mr. Levy and the Underwriter Defendants requested a Pre-Motion Conference
in anticipation of filing a motion to dismiss the CAC, which was held on June 25, 2015. At the conference, the Court adjourned
the date to answer or move in order to provide the Class Plaintiff with time to serve certain overseas defendants. After the conference,
the Class Plaintiff voluntarily dismissed Jianming Yin, Jinggen Ling and Xiangdong Xiao from the action, and Long Yi agreed to
waive service, which left Huichun Qin as the sole remaining defendant to serve. The case remains stayed pending service of Huichun
Qin.
Two
of the Underwriter Defendants, Axiom Capital Management, Inc., and ViewTrade Securities, Inc., have asserted their respective
rights to indemnification under the Underwriting Agreements entered into in connection with the Company’s initial public
offering and secondary offering. On or about March 16, 2016, CCCR entered into an Advance Funding and Escrow Agreement, under
which the CCCR agreed to deposit shares into escrow to fund the advancement obligation, with the initial deposit to be shares
valued at Two Hundred Thousand Dollars ($200,000), based upon 80% of the 30 day volume weighted average Trading Price ("VWAP")
for each of the 30 consecutive trading days prior to the date of the Agreement.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
26.
|
COMMITMENTS
AND CONTINGENCIES (CONTINUED)
|
|
3)
|
Contingencies
(continued)
|
On
February 3, 2015, a purported shareholder Kiram Kodali filed a putative shareholder derivative complaint in the United States
District Court for the Southern District of New York, captioned
Kiran Kodali v. Huichun Qin, et al
., Case No. 15-cv-806.
The action alleges that the Company and its current and former officers and directors Huichun Qin, Long Yi, Jianming Yin, Jinggen
Ling, Chunfang Shen, John F. Levy, Xiaofang Shen and Chunjiang Yu violated their fiduciary duties, grossly mismanaged the Company
and were unjustly enriched based upon the transfer that was the subject of the Internal Review and other grounds substantially
similar to those asserted in the class action complaints. Kodali did not serve a demand upon the Company and alleges that demand
is excused. The Company and Mr. Levy have been served. An amended derivative complaint was filed on April 20, 2015. On May 29,
2015, the Court “so ordered” a stipulation among Kodali, the Company and Mr. Levy staying all proceedings in the derivative
case except for service of process on individual defendants until the earlier of thirty days of termination of the stipulation,
dismissal of the class action with prejudice or the date any of the defendants in the class action file an answer to the CAC.
The Company believes that this lawsuit is without merit and intends to vigorously defend against it. At this stage of the proceedings,
the Company is not able to estimate the probability of success or loss.
On
May 18, 2015, WFOE filed a civil complaint against Huichun Qin with the Wujiang Region Suzhou City People’s Court claiming
Mr. Qin’s misappropriation of RMB 7 million in July 2014. The complaint was rejected due to a procedural issue. The Company
has since learned that Mr. Qin has been convicted and sentenced to a term of incarceration of approximately five years. In view
of this information, the Company is evaluating its strategic options.
1) Receipt of NASDAQ Deficiency Notice
On November 4, 2016, the Company received a
written notice from The Nasdaq Stock Market (“Nasdaq”) stating that the Company is no longer in compliance with the
minimum Market Value of Listed Securities requirement for continued listing on the Nasdaq Capital Market. Nasdaq 5550(b)(2) requires
listed companies to maintain a minimum Market Value of Listed Securities of at least $35 million. Further, as of November 4, 2016,
the Company did not meet the alternative compliance standards under Nasdaq Listing Rule 5550(b) of (i) net income from continuing
operations of $500,000 in its last completed fiscal year or in two of the last three fiscal years, or (ii) stockholders' equity
of at least $2.5 million.
The notification letter has no immediate effect
on the Company’s listing on the Nasdaq Capital Market. Nasdaq provided the Company a compliance period of 180 calendar days,
or until May 3, 2017, to regain compliance. The Company intends to promptly evaluate options available to regain compliance and
to timely submit a plan to regain compliance with Nasdaq’s minimum stockholders’ equity standard. There can be no assurance
that the Company’s plan will be accepted or that, if it is, the Company will be able to regain compliance with the applicable
Nasdaq listing requirements.
2)
Charged-off loans
During the period from October 1, 2016 to the
date of this report, the Company assessed the charged-off loan and guarantee balances recorded as of September 30, 2016 and was
of the opinion that these balances were uncollectible. In addition, the Company assessed the remaining balances of loan receivable
and financial guarantee and was of the opinion that it was not necessary to charge-off these balances.