As of June 30, 2016, the last
business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the common stock
held by non-affiliates of the registrant was approximately $19.7 million based on the closing price of $1.8101 for the registrant’s
common stock as reported on the NASDAQ Capital Market.
As of March 27, 2017, there were
16,823,429 shares of the Company’s common stock issued and outstanding.
PART
I
Item
1.
|
Description
of Business.
|
General
China
Commercial Credit, Inc., is a financial services firm operating in China. Our mission is to fill the significant void in the market
place by offering lending, financial guarantee and financial leasing products and services to a target market which has been significantly
under-served by the traditional Chinese financial community. Our current operations consist of providing direct loans, loan guarantees
and financial leasing services to small-to-medium sized businesses (“SMEs”), farmers and individuals in the city of
Wujiang, Jiangsu Province.
Our
loan and loan guarantee business is conducted through Wujiang Luxiang, a fully licensed microcredit company which we control through
our subsidiaries and certain contractual arrangements. Our financial leasing business is conducted through PFL, our wholly owned
subsidiary. Historically, many SMEs and farmers have been borrowing at high interest rates from unregulated and often illegal
lenders, referred to as “underground” lenders, to finance their operations and growth, contrary to the preferences
of Chinese banking authorities. Such high interest rate borrowing makes it difficult for businesses to grow, and also exacerbates
China’s concerns about inflation. By operating through licensed and regulated businesses, we seek to bridge the gap between
Chinese state-owned and commercial banks that have not traditionally served the capital needs of SMEs and higher interest rate
“underground” lenders.
Jiangsu,
which is an eastern coastal province, has among the highest population density in China and is home to many of the world’s
leading exporters of electronic equipment, chemicals and textiles. As a result, the city of Wujiang ranks as one of the most economically
successful cities in China. The SMEs, both in Jiangsu and other provinces in China, have historically been an under-served segment
of the Chinese banking market.
Since
Wujiang Luxiang’s inception in October 2008, it has developed a large number of borrowers in Wujiang City. All of our loans
are made from our sole office, located in Wujiang City. As of December 31, 2016, we have built a $58.5 million portfolio of direct
loans to 111 borrowers and a total of $10,9 million in loan guarantees for 14 borrowers.
During
2015 and 2016, the microcredit companies in Wujiang area went through the most difficult time since their inceptions in 2008.
Three of them went bankrupt while the remainder are struggling with high default rates due to the poor economic condition, especially
the slow-down in the textile industry. The operations of Wujiang Luxiang were also affected. For the year ended December 31, 2016,
we had a revenue of $2.2 million and a net loss of $2.0 million compared to a loss of $55.8 million and net loss of $61.3 million
in 2015, a decrease of 104% and 97%, respectively. As a result of the deteriorating economic condition, we experienced a substantial
increase in the amount of default loans in both our direct lending and guarantee business. The amount of underlying loans we guaranteed
has been reduced by 6.5% to $10.9 million as of December 31, 2016 compared to $11.7 million as of December 31, 2015. As the rate
of fees and commissions generated from the guarantee business has been decreasing, the Company decided that the revenue does not
justify the default risks involved in the guarantee business, and therefore expects to further reduce the traditional guarantee
business and hold off on pursuing the guarantee business to be provided via the Kaixindai Financing Services Jiangsu Co. Ltd (“Kaixindai”)
platform as previously planned. Management may actively resume the guarantee business in the future if economic conditions improve.
Our
financial leasing services are anticipated to be provided to a diverse base of customers, including textile and other manufacturing
companies, railroads, port facilities, local bus, and rail companies and municipal governments. Customers will include existing
clients of Wujiang Luxiang in addition to new clients. PFL, our wholly owned subsidiary, plans to provide leases on both new and
used manufacturing equipment, medical devices, transportation vehicles and industrial equipment, purchased both domestically and
from foreign suppliers, to meet its customer’s needs. As of the date of this Annual Report, PFL entered into two financial
leasing agreements for an aggregate of $5.61 million in lease receivables. We do not currently have further funds to deploy in
the financial leasing business and plan to hold off expansion of the leasing business until the economic environment improves.
Going
Concern
The accompanying
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.
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 December 31, 2016, its results of operations for the years ended December 31, 2016 and 2015, and its cash
flows for the years ended December 31, 2016 and 2015, as applicable, have been made. The results of operations are not necessarily
indicative of the operating results for the full fiscal year or any future periods.
The 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$70,234,656 as of December 31, 2016. In addition, the Company had working capital (total consolidated current assets
exceeding total consolidated current liabilities) of US$2,332,909, as of December 31, 2016. As of December 31, 2016, the Company
had cash and cash equivalents of US$768,501, and total short-term borrowings of US$ 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 within one year
from the date of this filing. 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 after
the financial statements are available to be issued, 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.
Emerging
Growth Company Status
We
are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, (the “JOBS Act”)
and we are eligible to take advantage of certain exemptions from various reporting and financial disclosure requirements that
are applicable to other public companies, that are not emerging growth companies, including, but not limited to, (1) presenting
only two years of audited financial statements and only two years of related management’s discussion and analysis of financial
condition and results of operations in our initial public offering, (2) not being required to comply with the auditor attestation
requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), (3) reduced disclosure obligations
regarding executive compensation in our periodic reports and proxy statements, and (4) exemptions from the requirements of holding
a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously
approved. We intend to take advantage of these exemptions. As a result, stockholders may have less information then they might
otherwise have.
In
addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition
period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying
with new or revised accounting standards. As a result, an emerging growth company can delay the adoption of certain accounting
standards until those standards would otherwise apply to private companies. We elected to opt out of such extended transition
period and acknowledge such election is irrevocable pursuant to Section 107 of the JOBS Act.
We
could remain an emerging growth company for up to five years, or until the earliest of (1) the last day of the first fiscal year
in which our annual gross revenues exceed $1 billion, (2) the date that we become a “large accelerated filer” as defined
in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates
exceeds $700 million as of the last business day of our most recently completed second fiscal quarter and we have been publicly
reporting for at least 12 months, or (3) the date on which we have issued more than $1 billion in non-convertible debt during
the preceding three-year period.
Corporate
Structure
China
Commercial Credit, Inc. is a holding company that was incorporated under the laws of the State of Delaware on December 19, 2011.
The Company, through its indirect wholly-owned subsidiary, Wujiang Luxiang Information Technology Consulting Co. Ltd. (“WFOE”),
a limited liability company formed under the laws of the PRC on September 26, 2012, controls Wujiang Luxiang, a company established
under the laws of the PRC on October 21, 2008, through a series of contractual arrangements. CCC International Investment Ltd.
(“CCC BVI”), a company incorporated under the laws of the British Virgin Islands (“BVI”) on August 21,
2012, is wholly owned by the Company. CCC BVI wholly owns CCC International Investment Holding Ltd. (“CCC HK”), a
company incorporated under the laws of the Hong Kong S.A.R. of the PRC on September 4, 2012. WFOE is wholly owned by CCC HK. On
September 5, 2013, CCC HK incorporated PFL a wholly owned subsidiary, to start our financial leasing business.
On
April 11, 2015, WFOE delivered a notice of termination to Pride Information Technology Co. Ltd. (“Pride Online”),
a domestic entity established on February 19, 2014 and 100% owned by Huichun Qin, a former officer and director of the Company,
to terminate the VIE agreements by and among the parties. The Company entered into the VIE agreements with Pride Online in order
to provide WFOE absolute control over the economic interest in Pride Online. As a result of the termination notice, the contractual
arrangements by and among the Company, Mr. Qin and Pride Online terminated as of May 11, 2015 and WFOE no longer controls Pride
Online.
The
following diagram illustrates our corporate structure as of the date of this Annual Report:
(1)
Pursuant to a series of contractual arrangements, WFOE effectively controls and manages the business activities of Wujiang Luxiang.
Contractual
Arrangements between WFOE and Wujiang Luxiang
There
are no PRC state, provincial or local laws, rules and regulations prohibiting or restricting direct foreign equity ownership in
companies engaged in rural microcredit business. However, the provincial authorities regulate microcredit companies through strict
licensing requirements and approval procedures. Direct controlling foreign ownership in a for-profit microcredit company has never
been approved by competent Jiangsu government authorities. Based on the current position taken by the competent Jiangsu government
authorities, direct foreign controlling ownership of a for-profit rural microcredit company will not be approved in the foreseeable
future.
As
such, neither we nor our subsidiaries own any equity interest in Wujiang Luxiang. Instead, we control and receive the economic
benefits of Wujiang Luxiang’s business operation through a series of contractual arrangements. WFOE, Wujiang Luxiang and
its shareholders entered into a series of contractual arrangements, also known as VIE Agreements, on September 26, 2012. The VIE
Agreements are designed to provide WFOE with the power, rights and obligations equivalent in all material respects to those it
would possess as the sole equity holder of Wujiang Luxiang, including absolute control rights and the rights to the assets, property
and revenue of Wujiang Luxiang. Based on a legal opinion issued by Dacheng Law Offices to WFOE, the VIE Agreements constitute
valid and binding obligations of the parties to such agreements, and are enforceable and valid in accordance with the laws of
the PRC.
Each
of the VIE Agreements is described in detail 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 granted
an irrevocable and exclusive option to WFOE to purchase from Wujiang Luxiang, any or all of Wujiang Luxiang’s assets at
the lowest purchase price permitted under the PRC laws. WFOE may exercise, at its sole discretion, the option to purchase equity
interests of Wujiang Luxiang from all the 12 equity holders of Wujiang Luxiang (the “Wujiang Shareholders”) permitted
by PRC laws. Should WFOE exercise such option, the parties shall enter into a separate asset transfer or similar agreement. For
services rendered to Wujiang Luxiang by WFOE under this agreement, WFOE is entitled to collect a service fee calculated based
on the time of services rendered multiplied by the corresponding rate, the plus amount of the services fees or ratio decided by
the board of directors of WFOE based on the value of services rendered by WFOE and the actual income of Wujiang Luxiang from time
to time, 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.
The
sole director and president of WFOE, Mr. Ling, is currently managing Wujiang Luxiang pursuant to the terms of the Exclusive Business
Cooperation Agreement. WFOE has absolute authority relating to the management of Wujiang Luxiang, including but not limited to
decisions with regard to expenses, salary raises and bonuses, hiring, firing and other operational functions. The Exclusive Business
Cooperation Agreement does not prohibit related party transactions. The audit committee of CCC is required to review and approve
in advance any related party transactions, including transactions involving WFOE or Wujiang Luxiang.
Share
Pledge Agreement
Under
the Share Pledge Agreement between the Wujiang Shareholders and WFOE, the Wujiang 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 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 Shareholders further agree not to dispose of the pledged equity
interests or take any actions that would prejudice WFOE’s interest.
The
Share Pledge Agreement shall be effective until all payments due under the Exclusive Business Cooperation Agreement have been
paid by Wujiang Luxiang. WFOE shall cancel or terminate the Share Pledge Agreement upon Wujiang Luxiang’s full payment of
fees payable under the Exclusive Business Cooperation Agreement.
Exclusive
Option Agreement
Under
the Exclusive Option Agreement, the Wujiang 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 Shareholders subject to any appraisal or restrictions
required by applicable PRC laws and regulations. As of the date of this report, if WFOE exercised such option, the total option
price that would be paid to all of the Wujiang Shareholders would be $51.2 million, which is the aggregate registered capital
of Wujiang Luxiang. The option purchase price shall increase in the event that the Wujiang Shareholders make additional capital
contributions to Wujiang Luxiang, including when the registered capital is increased upon Wujiang Luxiang receiving the proceeds
from our initial public offering.
The
agreement remains effective for a term of ten years and may be renewed at WFOE’s election.
Power
of Attorney
Under
the Power of Attorney, the Wujiang 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
of Wujiang Luxiang, 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.
Although
it is not explicitly stipulated in the Power of Attorney, the term of the Power of Attorney shall be the same as the term of that
of the Exclusive Option Agreement.
This
Power of Attorney is coupled with an interest and shall be irrevocable and continuously valid from the date of execution of this
Power of Attorney, so long as the Wujiang Shareholder is a shareholder of 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.
Although
it is not explicitly stipulated in the Timely Reporting Agreement, the parties agreed its term shall be the same as that of the
Exclusive Business Cooperation Agreement.
Our
Business
General
We
have three business lines, lending, guarantee and financial leasing.
For
our lending and guarantee services, we generally provide direct loans and guarantee services, to borrowers located within City
of Wujiang, Jiangsu Province of China. In our direct loan business, we provide short-term loans to the borrowers and generate
interest income. In our guarantee business, we act as a guarantor to borrowers applying for short-term direct loans with other
lenders and generate fee income. Our clients in both the direct loan and guarantee businesses are primarily SMEs, farmers and
individuals who generally use the proceeds of the loans for business related purposes. We are not dependent on any one borrower
in either our direct loan or guarantee business.
We
fund our lending and guarantee operations by using our registered capital, drawing down from the line of credit we have with state-owned
or commercial banks, and using cash generated from our operations. We currently have only one line of credit agreement with Agricultural
Bank of China, the amount we are allowed to finance through debt financing is limited at 50% of our net capital. As of December
31, 2016, we had repaid all outstanding bank loans and had US$nil balance of short-term loans. Currently there is $4.5 million
(RMB 29 million) available under the line of credit. This line of credit was granted to Wujiang Luxiang since its inception in
2008 as a provincial government's measure to support rural microcredit company's operations. The total line of credit decreased
from RMB 150 million to RMB 100 million during 2014 due to PBOC’s tightened monetary policy. Interest rates under this line
of credit vary, but have been no more than 110% of the PBOC benchmark interest rate (the "PBOC Rate").
On
September 5, 2013, we formed PFL to start our financial leasing business. PFL is licensed by SAIC to provide leasing services
in all of the Chinese provinces. PFL offers financial leases on machinery and equipment, public transportation vehicles, and medical
devices to municipal government agencies, public transportation agencies, hospitals and SMEs in Jiangsu Province and other provinces.
As of December 31, 2016, PFL incurred two finance lease transactions with total lease receivables of $5.61 million.
Our
Services
Direct
Loans
We
provide direct loans to borrowers with terms not exceeding one year. During 2016 and 2015 the average principal loan amount we
provided was approximately $527,234 and $208,527, respectively. The interest rate we charge on a specific direct loan depends
on a number of factors, including the type of borrower and whether the loan is secured or unsecured. We also take into account
the quality of the collateral or guarantee given and the term of the loan.
Interest
on our loans is usually payable monthly and averaged 12.68% and 13.50% for our direct loan portfolio for the twelve months ended
December 31, 2016 and 2015, respectively. Under certain Jiangsu banking regulations, since August 2012, we are allowed to charge
an interest rate within the range of 0.9 time and 3 times PBOC Rate. As of December 31, 2016, the PBOC Rate was set at 4.35% per
annum for one-year term loans and 4.35% for six-month term loans. During the fiscal year ended 2016, the average interest rate
we charged to SMEs was three times the PBOC Rate or 13.39% for one-year term loans and 11.61% for six-month term loans. The interest
on loans to farmers is subsidized by the Jiangsu government and usually results in farmers paying a rate lower than that of loans
to SME’s. A portion of the difference between the lower rate charged to farmers and the rate charged to SME’s is remitted
to us annually by the government as a government incentive. It is within the provincial government's discretion as to the amount
of incentive to be remitted to us. The revenue we generated from such government incentive has always been less than 5% of our
gross revenue since Wujiang Luxiang's inception.
We
offer both secured and unsecured direct loans. As of December 31, 2016, there were 111 direct loans outstanding, with a total
aggregate outstanding balance of approximately $58.5 million and interest rates ranging from 9.6% to 19.44% and original terms
of the loans ranging from 1 month to 12 months, none of which were unsecured loans. The following table sets forth a summary of
our direct loan portfolio as of December 31, 2015 and 2016:
|
|
Total Outstanding Balance as of
12/31/2015
|
|
|
Percentage of the Total Loan Portfolio as of
12/31/2015
|
|
|
Total Outstanding Balance as of
12/31/2016
|
|
|
Percentage of the Total Loan Portfolio as of
12/31/2016
|
|
Guarantee-backed loans
|
|
|
59,008,573
|
|
|
|
93.6
|
%
|
|
|
55,461,801
|
|
|
|
94.8
|
%
|
Pledge assets-backed loans
|
|
|
4,068,147
|
|
|
|
6.4
|
%
|
|
|
3,061,180
|
|
|
|
5.2
|
%
|
Collateral-backed loans
|
|
|
-
|
|
|
|
0
|
%
|
|
|
-
|
|
|
|
0
|
%
|
Total:
|
|
|
63,076,720
|
|
|
|
100
|
%
|
|
|
58,522,981
|
|
|
|
100
|
%
|
All
our loans are secured. We offer three types of secured loans:
●
|
loans
guaranteed by a third party, referred to in China as “guarantee-backed loans;”
|
|
|
●
|
loans
secured by real property, referred to in China as “collateral-backed loans;” and
|
|
|
●
|
loans
secured by personal property, referred to in China as “pledge-backed loans.”
|
In
the case of guarantee-backed loans, the third party guarantor and the borrower are jointly and severally liable for the repayment
of the loan. The third party guarantor, whether being an individual or legal entity, must be creditworthy. We do not require any
asset from the borrower as collateral for such guarantee-backed loans.
Collateral-backed loans
In
the case of collateral-backed loans, the borrowers provide land use rights or building ownership as collateral for the loan.
For
loans secured by land use rights, the principal amount we grant is no more than 50-70% of the value of the land use rights. The
percentage varies depending on the liquidity of the land use rights. For loans secured by building ownership, the principal amount
we grant can be up to 100% of the value of the building. We engage independent appraisal firms to determine the value of the land
use rights or the building.
Prior
to funding a direct loan secured by land use rights or building ownership, we register our security interest in the collateral
with the appropriate government authority. In the event the borrower defaults, we take legal actions including legal proceedings
against the default borrower and enforcement action resulting in the court’s sale of the asset through an auction.
Pledge-backed
loans
In
the case of pledge-backed loans, the borrowers pledge negotiable instruments as collateral for the loan. The maximum principal
amount of pledge-backed loans we extend is generally within 90% of the value of the pledged negotiable instrument.
We
will take physical possession of the negotiable instrument at the time the loan is made and do not need to register such security
interest with any government authority. If the borrower defaults, we can acquire ownership of the negotiable instrument upon the
borrower’s consent. If the borrower refuses to settle the outstanding balance amicably by rendering ownership to the pledged
instrument to us, we will then initiate legal proceedings in which the court will be required to enforce transfer of the ownership.
We
require the business owners or individual shareholders of business borrowers to be jointly and severally liable for the repayment
of the loan. In addition, we also require either a guarantee from a third party or certain assets as collateral.
Guarantee
Services
For
a fee, we also provide guarantees to third party lenders on behalf of borrowers applying for loans with such other lenders. Our
guarantee is a commitment by us to repay the loan to the lender if the borrower defaults. We, as the third party guarantor, are
jointly and severally liable with the borrower for the repayment of the full amount of the loan. We have cooperation agreements
with six state-owned and commercial banks pursuant to which we are accepted as a guarantor.
In
order for us to agree to act as a guarantor, a borrower must provide a counter-guarantor to us or acceptable collateral to the
third party lender such as land use rights, building ownership, or a negotiable instrument. In addition, the borrower must deposit
cash with us in an amount equal to the amount we are required to deposit with the third party lender which is usually 10% to 20%
of the principal amount of the loan. If the borrower defaults and we pay the lender on the borrower’s behalf, we will first
recover from the cash deposit the borrower provided us and then demand the counter-guarantor make payment to us or recover the
payment from the sale proceeds of the collateral asset.
In
exchange for our guarantee, the borrowers pay us guarantee fees. We charge a per annum guarantee fee ranging from 1.56% to 1.80%
of the principal amount of the underlying loan. The guarantee fees are payable in full when the guarantee is made. The criteria
in determining the guarantee fee paid by the borrower are summarized in the following table:
Types
of Security Interest
|
|
New
Client
|
|
Previous
or Existing Client
|
Land
Use Rights or Building Ownership
|
|
1.68%
of the principal amount of the
underlying
loan multiplied by the number
of
years of the guarantee
|
|
1.56%
of the principal amount of the
underlying
loan multiplied by the number
of
years of the guarantee
|
|
|
|
|
|
Counter-Guarantor
|
|
1.80
% of the principal amount of the
underlying
loan multiplied by the number
of
years of the guarantee
|
|
1.62
% of the principal amount of the
underlying
loan multiplied by the number of
years
of the guarantee
|
In
addition to the fee income, we earn interest on the refundable cash deposits provided to us by the borrowers. Such cash deposits
are required to be made to our bank account when we approve the guarantee application. After the expiration of the guarantee term,
such cash deposits, without interest, will be refunded to the borrower once we receive a notice from the third party lender confirming
termination of our guarantee obligation.
As
of December 31, 2016, we have provided guarantees for a total of $10.9 million underlying loans to approximately 14 borrowers.
Due
to a substantial increase in the amount of default loans in the loan guarantee business, the amount of underlying loans we guaranteed
has been reduced by 6.5% as of December 31, 2016 compared to as of December 31, 2015. As the rate of fees and commissions generated
from the guarantee business has been decreasing, the Company has decided that the revenue does not justify the default risks involved,
and therefore expects to further reduce the traditional guarantee business and hold off on pursuing the guarantee business to
be provided via the Kaixindai platform as previously planned. Management may actively resume the guarantee business in the future
if economic conditions improve.
Financial
Leasing Services
On
September 5, 2013, we formed PFL, a wholly owned subsidiary, to start our financial leasing business. PFL is licensed by SAIC
to provide leasing services in all of the Chinese provinces. PFL plans to offer financial leases on machinery and equipment, public
transportation vehicles, and medical devices to municipal government agencies, public transportation agencies, hospitals and SMEs
in Jiangsu Province and other provinces. As of the date of this annual report, PFL entered into two financial leasing agreements
for an aggregate of $5.61 million in loan receivables. We do not currently have further funds to deploy in the financial leasing
business.
We
had used substantially all of the net proceeds from the follow-on public offering closed in May 2014 to increase the registered
capital of PFL and corresponding financing leasing capacity. Currently, PFL is approved to have a registered capital of $50 million.
We were required to contribute 15% of the $50 million by December 4, 2013. In 2014, we orally obtained an extension from the relevant
government authority to delay the initial contribution without any monetary penalty. In October 2014, approximately $5.7 million
(RMB 30.7 million) of the net proceeds raised in our follow-on public offering closed in May 2014 was transferred to PFL to increase
its registered capital.
Due
to the short history of China’s financial leasing industry, there are certain gaps in relevant PRC law. There is no nation-wide
uniform equipment title registration process and system in China and each municipality adopts different procedures. As such, our
ownership interest on the leased property may be threatened. In addition, there is no guidance on the reserve requirement for
financial leasing companies. Based on the past experience and expected customer default status of financial leasing services,
the Company estimates the probable loss for financial leasing services to be approximately 70% of outstanding balance as of December
31, 2016 We believe such reserve should be sufficient to cover potential financial leasing loss in the first few years of PFL’s
operations. We may adjust these rates as we roll out our operations.
Loan/Guarantee
Application, Review and Approval Process
We
have a standard process with regard to how a loan or guarantee application is reviewed, processed and approved. The same process
applies to both applications for direct loans and for guarantees.
The
application process starts with an inquiry from potential borrowers to our Loan Officer. The Loan Officer has the discretion whether
to accept the inquirer as an applicant. If accepted, the Loan Officer assists in the preparation of an application package and
implements a field visit of the applicant.
The
application package usually includes the following items in order for it to be considered:
●
|
Summary
of the desired loan/guaranty: general description of the borrower, use of proceeds, amount, term of the loan, guarantee,
collateral or counter-guarantee to be provided.
|
●
|
Identity
information: if the borrower is a legal entity, we require articles of incorporation, business license, state and local
tax registration certificates, copies of the personal identification cards of all the shareholders and the legal representative;
if the borrower is an individual, we require copies of personal identification cards of all the borrowers.
|
●
|
Banking
relationship documents: including loan application with banks or other lenders, permission to open bank accounts, and
credit record.
|
●
|
Financial
reports such as prior three years’ financial statements, interim financial reports, and recent tax returns.
|
●
|
Business
operation documents including samples of sales contracts or customer contracts, and utility bills over the past few months.
|
●
|
Consents:
if the borrower is an entity, board or shareholder consent for the loan.
|
The
flow chart below summarizes the loan/guarantee application, review and approval process.
The
reviews during steps 1, 2, 3 and 4 are deemed Level One review. The Loan Review Committee’s review is deemed Level Two review.
The General Manager’s final review is the Level Three review. Typically it takes one to two weeks to complete our review.
Loan
Extension and Renewal
In
our direct loan business, if a borrower has difficulty repaying the principal amount and/or accrued interest in full at the maturity
date due to a temporary situation, the borrower may choose to either apply for an extension of the term or a renewal of the loan.
The extension or renewal applications are reviewed in accordance with the same loan application, review and approval process outlined
above. In our guarantee business, we generally do not extend the guarantee period.
Loan
Extension
We
will generally approve loan extensions for borrowers who have made timely interest payments, are capable of paying the
balance and have loans secured by sufficient collateral or guaranteed by an acceptable guarantor. The term of the loan
extensions we grant is generally no longer than the term of the original loan and we only agree to extend a loan one time. If
the loan extension application is not approved prior to the original maturity date of the loan, it will be transferred to the
collection department and labeled as a default loan. As of December 31, 2016 and 2015, extended loans constituted 0.00% and
1.33% of our total outstanding direct loan balance, respectively. During 2015, the Company approved extensions to certain
default customers who demonstrated a strong likelihood to repay or already paid part of this outstanding principal and
interest. Management believes that extending the term of the default loans instead of suing the borrowers will give the
borrowers a better chance to recover during the extended term and thus make the repayment. We treated these extended loans
according to their original terms in our loan loss reserve provision calculation.
Loan
Renewal
Many
of our borrowers repay their loans and re-borrow at a later date, being referred to as a “loan renewal”. We consider
a renewed loan a new loan, not a loan extension, despite our previous relationship with the borrower. Prior to the maturity date
of the loan, the borrower may choose to apply to renew the loan. In order for the loan renewal application to be approved, the
borrower must agree to repay the existing loan’s principal amount and accrued interest in full before the renewal application
is approved. Although we do not have a specific clean-up period policy, we do require that the period of time between repayment
of the existing loan and the funding of the new loan to be 2-10 days. As of December 31, 2016 and 2015, renewed loans constituted
0.00% and 15.2% of our total outstanding direct loan balance, respectively. During 2016, we did not approve any loan renewal.
Collection
Procedure
We
have standard collection procedures in our direct loan business. We call every borrower approximately 15 days prior to the maturity
date to remind them that if we do not receive the repayment in full on the maturity date, we will send a written collection notice
within 7 days after the maturity date. The Loan Officer will frequently call and make on-site visits to a borrower upon a loan
going into default. Within 90 days after the default, our legal counsel will send warning letters to the default borrower. If
the outstanding amount cannot be collected within 180 days after the maturity date and the parties could not reach an agreement
on a specific repayment plan, we will initiate legal proceedings in the court.
We
apply the same collection procedure in our guarantee business. The only difference is that we will collect from both the borrowers
(including recovery from the cash deposit the borrowers deposit with us) and the counter-guarantor or pursue recovery from the
collateral.
We
will apply the same collection procedure in our financial leasing business.
Description
of Our Financial Leasing Business
Target
Customers
PFL
plans to serve a diverse base of customers, including textile and other manufacturing companies, railroads, port facilities, local
bus and rail companies and municipal governments. Customers will include existing clients of the Company in addition to new clients.
(1)
Municipal Governments - Municipal governments throughout China have begun to realize the benefits of leasing equipment utilized
to manage and run China’s large newly developed infrastructure. PFL believes this is an opportunity for substantial growth
of its leasing business, especially as a result of the Company’s strong and long-term relationship with Wujiang and other
Jiangsu municipal government agencies.
(2)
Public Transportation Agencies - PFL plans to lease transportation vehicles to public transportation agencies which would replace
existing municipally and regionally owned buses, subway cars, and trains. For example, PFL has been engaged in discussions with
a local transportation authority to provide leases for the replacement of existing buses on several city bus routes.
(3)
Hospitals - The Company has existing relationships with several local hospitals that are potential customers to lease medical
devices, such as x-ray equipment. Since healthcare and medical technologies are constantly improving, frequently making existing
medical technology and equipment obsolete, hospitals and other healthcare facilities are increasingly interested in leasing versus
purchasing more modern equipment. The switch from one-time cash purchases to leasing will allow hospitals to preserve more of
their working capital for other purposes, such as building upgrades, education and training programs and/or the leasing of additional
equipment and devices.
(4)
SMEs - PFL plans to lease a variety of industrial equipment and machinery to local SMEs in Jiangsu Province and beyond. Potential
customers include local manufacturing businesses, mining companies, farmers and individuals. PFL initially targeted the Company’s
existing SME lending clients since it has a relationship with these customers and understands their operational and credit history
and financing needs.
As
PFL’s business develops further, we expect to provide leases to customers in other sectors as opportunities arise. PFL,
although not required by government mandate, will only lease to businesses that are within the sectors encouraged by the Chinese
national industry development and planning policy and environmentally friendly businesses.
The
two customers whom PFL provided financial leasing to during 2015 are local SMEs in the manufacturing industry. They are existing
borrowers in our lending business. They paid off the outstanding principal and interest of their loans before the Company provided
the financial leasing to them.
Leased
Equipment
PFL
plans to provide leases on both new and used manufacturing equipment, medical devices, transportation vehicles and industrial
equipment, purchased both domestically and from foreign suppliers to meet its customer’s needs. PFL may attempt to import
technologically advanced transportation vehicles, engines, other vehicular components, industrial equipment and machinery identified
by its lessees. PFL anticipates its potential customers will have strong demand for imported technologically advanced equipment
and machinery and expects to lease these to its customers at a significant premium due to the real and perceived technical and
superior performance and durability characteristics of these imported products.
PFL
leased manufacturing equipment to the two current customers.
Lease
Underwriting
PFL
underwrites the leases via a 3-step process:
(1)
A potential customer applies to PFL for a lease on certain equipment that the customer has already identified from a seller;
(2)
PFL performs a detailed legal and credit analysis to determine the potential customer’s creditworthiness and ability to
make the lease payments; and
(3)
If the application is approved, PFL will purchase the asset from the seller, take ownership of such asset, and then lease it to
the customer/lessee. Sometimes PFL will require a third party guarantor, who must be pre-approved by PFL, who will guaranty the
monthly payment obligations of the lessee.
The
underwriting process takes approximately 2 weeks.
Lease
Terms
The
terms and conditions of the lease will generally include following:
(1)
A lease term ranging between 3 and 10 years.
(2)
The lessee will be required to pay 30% of the purchase price to the seller and PFL will pay 70% of the purchase price (which will
be the lease value) to the seller.
(3)
The lessee will pay a deposit equal to 10% of the lease value to PFL and PFL will finance the remaining 90%.
(4)
The lessee will pay a one-time servicing fee equal to 1% of the total lease value multiplied by the number of years of the lease
(for example, a four-year lease requires a 4% service fee.
(5)
The lessee will make amortized lease payments consisting of principal and interest (generally at the interest rate of 12%), which
will be due monthly or quarterly.
(6)
Lessees must (i) operate the leased equipment and perform minimum maintenance in accordance with the manufacturer’s instructions
during the entire term of the lease; (ii) insure the equipment against property and casualty loss; and (iii) make all scheduled
lease and interest payment regardless of the performance of the equipment.
(7)
At the end of the lease term, the lessee will have the option to purchase the leased asset for its residual value. We expect to
enter into our boiler plate lease contracts with lessees. Pursuant to the terms of these lease agreements, lessee shall either
pay RMB 1,000 (approximately $160) to acquire or automatically acquire the title of the leased assets at the end of the lease
term. The buy-back purchase price of RMB 1,000 shall be paid along with the last installment of the rent.
Collateral
and Default Assumptions
Some
of PFL’s initial target customers are our direct loan customers. We are very familiar with these businesses and individuals
and their growth prospects, credit worthiness, management teams, and profitability. We will take advantage of this knowledge and
lease to creditworthy customers only, thereby potentially reducing defaults and bad debt expense. When evaluating potential customers
with which we do not have a pre-existing relationship, we will utilize our prior experience in the risk assessment of lending
clients to timely evaluate a new customer’s creditworthiness.
PFL
may require a third party guarantor to reduce financial exposure in the event of a default. PFL may choose to work with a third
party to assist with the repossession, storage and sale of the leased equipment in the event of lease defaults.
Risk
Management
Credit
Risk
As
a microcredit lender, credit risk is the most significant risk for our business. In our direct loan business, we suffer financial
loss when a borrower defaults and full collection cannot be achieved. In our guarantee business, in the event the borrower defaults
in its payment obligation and we pay the lender on behalf of the borrower, we suffer financial loss when we cannot recover the
full amount of the payment we paid to the lender (after collection from the cash deposit provided by the borrower) from the counter
guarantor or the sale proceeds of the collateral. In our financial leasing business, we suffer financial loss when a lessee defaults
while we are unable to lease the equipment at the same or better leasing terms in a timely manner.
Risk
Assessment
We
apply the same risk assessment approach and procedures for direct lending, guarantee as well as financial leasing activities.
We have a dedicated Risk Department which assesses and evaluates the credit risks through in-house research and analysis. We follow
the methodology and procedure outlined in our risk assessment guidelines. According to our risk assessment guidelines, the basic
principle is that the bench mark ratio multiplied by the financial risk quotient and non-financial risk quotient and the result
is the comprehensive risk ratio. The financial risk quotient takes into consideration 16 factors in three categories, i.e. leverage,
profitability and growth. The non-financial risk quotient takes into consideration 12 factors in four categories, i.e. industry
risk, enterprise risk, management risk and other risks. In summary, our Risk Department assesses the credit risks based on the
payment ability of the underlying obligors, transaction structure as well as the industry of borrower and the general economic
condition of the market in which we operate.
Risk
Control
In
our direct lending business, we assess, monitor and control the credit risks both before and after the loan is extended.
As
discussed above, we assess the risks through the loan application, review and approval process. Our Risk Department quantifies
the risks related to a loan application in a risk assessment report by classifying the loan into one of three categories. A loan
with a score of less than 0.35 points is deemed to be a low-risk loan. A loan with a score of between 0.35 and 0.5 points is considered
a medium-risk loan. A loan with a score higher than 0.5 points will be classified as a high-risk loan. We have higher requirements
for the collateral and require the guarantor to be of higher payment capacity for loans labeled as higher risk.
After
the loan or guarantee application is approved, we continue to monitor the credit risk. Our Loan Officers collect the borrower’s
financial statements at the end of each quarter and conduct periodic field trips to the borrower’s facilities to observe
its operation, sales, ability to make timely repayments, etc. Based on the Loan Officer’s report, the comprehensive risk
ratio of each loan is reviewed on a quarterly basis and adjustments are made to the ratio as necessary, according to the borrower’s
operational and financial position and other factors outlined above. We label each outstanding loan as “Good”, “Maintenance”
or “Contraction”. For “Good” loans, we may extend further credit. For “Maintenance” loans,
we will maintain the current credit level. For “Contraction” loans, we may reduce credit to the borrower.
We
will apply the same risk control procedure for the financial leasing business.
Liquidity
Risk
Liquidity
risk is the risk to a bank's earnings and capital arising from its inability to timely meet obligations when they come due without
incurring unacceptable losses. As a microcredit company, we are prohibited by PRC banking regulations to accept deposits from
the public. Our funding sources include our registered capital, draw-down ability from any lines of credit we have with state-owned
or commercial banks as well as cash generated from our operations. Liquidity risk in our operation is therefore limited. We monitor
the repayment of loans drawn from the line of credit with Agricultural Bank of China, the only line of credit we currently have.
Allowance
for Loan Loss
Reserve
for Direct Loan
In
our direct loan business, we apply three loan loss reserve measurements:
●
|
Measurement
1- The Specific Reserve:
|
In
determining our loan loss reserve, we follow the guidelines for the specific reserve set forth in “
The Guidance on Provisioning
for Loan Losses
” (the “Provision Guidance”) issued by PBOC.
Specific
reserves are funds set aside based on the anticipated level of loss of each loan after categorizing the loan according to the
risks. Such specific reserves are to be used to cover specific losses. According to the “Five-Tier Principle” set
forth in the Provision Guidance, the loans are categorized as “pass”, “special-mention”, “substantial”,
“doubtful” or “loss”. The definition and provision rate for each category is set forth below.
Tier
|
|
Definition
|
|
Reserve
Rate
|
Pass
|
|
Loans
for which borrowers are expected to honor the terms of the contracts, and there is no reason to doubt their ability to repay
the principal and accrued interest in full and on a timely basis.
|
|
0%
|
Special-mention
|
|
Loans
for which borrowers are currently able to repay the principal and accrued interest in full, although the repayment of loans
might be adversely affected by some factors.
|
|
2%
|
Substantial
|
|
Loans
for which borrowers’ ability to repay the principal and accrued interest in full is apparently in question and borrowers
cannot depend on the revenues generated from ordinary operations to repay the principal and accrued interest in full. Lender
may suffer some losses even though the underlying obligation is guaranteed by a third party or collateralized by certain assets.
|
|
25%
|
Doubtful
|
|
Loans
for which borrowers are unable to repay principal and accrued interest in full. Lender will suffer significant losses even
though the underlying obligation is guaranteed by a third party or collateralized by certain assets.
|
|
50%
|
Loss
|
|
Principal
and accrued interest cannot be recovered or only a small portion can be recovered after taking all possible measures and resorting
to necessary legal procedures.
|
|
100%
|
●
|
Measurement
2 - The General Reserve:
|
General
reserves are funds set aside based on certain percentage of the total outstanding balance and to be used to cover unidentified
probable loan loss. The General Reserve is required to be no less than 1% of total outstanding balance. We use 1% of total outstanding
balance in our calculation for the General Reserve.
●
|
Measurement
3 - Special Reserve
|
Special
reserves are funds set aside covering losses due to risks related to a particular country, region, industry or type of loans.
The reserve rate could be decided based on management estimates of loan collectability.
For
the fiscal year ended December 31, 2014, we utilized Special Reserve and Five-Tiers Principal in estimating the loan loss as it
is higher than the amount calculated based on the General Reserve. For the fiscal year ended December 31, 2015, we utilized Specific
Reserve in estimating the loan loss as it is higher than the amount calculated based on the General Reserve. We review the loss
reserve on a quarterly basis.
In
February and March 2015, the Company revisited the classification of its loan portfolios within its rating system to test the
adequacy of the allowances calculated thereby. As a result of such testing, the Company decided to reclassify certain loans into
different categories. The Company reviewed the profile, financial condition and other relevant information and documents of each
customer in the lending businesses. For customers with several loans with different due dates, if one loan was past due, the Company
decided to reclassify all of this customer's loans as past due (even the other loans that were not mature yet). For extended loans,
the Company re-evaluated the customer's repayment ability in a more cautions manner and reclassified the loans of customers without
very strong financial condition into the past due category. These reclassifications affected numerous customer accounts.
As
of December 31, 2016 and 2015, the total outstanding balance we guaranteed was and $10,893,089 and $11,653,342 and the accrual
for financial guarantee services was $17,647,477 and $19,322,557, respectively.
Reserve
for the Guarantee Services.
In
our guarantee business, we are required to set aside reserves consisting of no less than 1% of the total outstanding balance of
loans we guaranteed at the end of fiscal year and 50% of the income generated by our guarantee business during the fiscal year
to cover probable losses. The reserve of 50% of the income is applicable only to commission income. Since it is our standard practice
to receive the guarantee fee in full in advance when the guarantee is made, we did not think we were exposed to any risk with
regard to receipt of such income. Therefore we did not set aside the reserve based on the 50% of the commission income.
We
follow the same “Five-Tier Principal” in our measurement of reserve for the guarantee business. We review the loss
reserve on a quarterly basis. For the fiscal year ended December 31, 2014, our reserve measurements indicate the aggregate amount
calculated based on Five-Tier Principal is higher than the amount calculated based on the statutory requirement of 1% of the total
outstanding guarantee portfolio, as such, the reserve we made for the guarantee business was the aggregate amount calculated based
on Five-Tier Principal.
In
February and March 2015, the Company revisited the classification of its guarantee portfolios within its rating system to test
the adequacy of the allowances calculated thereby. As a result of such testing, the Company decided to reclassify certain guarantees
into different categories. The Company reviewed the profile, financial condition and other relevant information and documents
of each customer in the guarantee businesses. For customers with several guarantees with different due dates, if one guaranteed
loan was past due, the Company decided to reclassify all of this customer's guaranteed loans as past due (even the other loans
that were not mature yet). These reclassifications affected numerous customer accounts. We engaged He-Partners Law Firm, one of
the largest law firms in Suzhou City, to represent us in the legal proceedings against the borrowers and their counter guarantors,
and expect to collect part of the outstanding balance in a period ranging from six months to one year upon adjudication by the
court in favor of the Company. The timing of collection and ultimate amount of funds we can recover depend on a few factors, including
the repayment ability of the borrower and their counter-guarantors, the execution time of the court, other obligations the borrowers
have and priority over the claim for the Company.
As
of December 31, 2016 and 2015, the total outstanding balance we guaranteed was and $10,893,089 and $11,653,342 and the accrual
for financial guarantee services was $17,647,477 and $19,322,557, respectively.
Reserve
for the Financial Leasing Services
We
plan to follow the same “Five-Tier Principal” in our measurement of reserve for the financial leasing business except
at different reserve rates. We will have reserve rates of 0%, 2%, 25%, 50% and 100% for the leases categorized as “pass”,
“special-mention”, “substantial”, “doubtful” and “loss”, respectively.
Business
Strategy
As
we anticipate the economic condition will remain challenging in the next 12 months, the Company plans to aggressively collect
the default loans and guarantees with all available legal remedies. The Company also plans to closely monitor the trend in the
microfinance industry and may explore microfinance products and services other than lending, guarantee and financial leasing to
SMEs.
When
the economic condition substantially improves in the future, we intend to implement three primary strategies to expand and grow
the size of our Company: (i) increase our lending capacity through the cash generated from operations and through increases in
our registered capital by additional equity and/or debt financing, (ii) implementation of our financial leasing business plan
in Jiangsu province and other Chinese provinces, and (iii) potential acquisitions of similar microcredit companies in Jiangsu
Province, China.
Organic
growth will occur through expansion of our direct loan and guarantee services directed at SMEs and farmers. Our existing direct
loan and guarantee services could also be expanded by increasing our registered capital base with proceeds of future financings.
The lending capacity of Wujiang Luxiang is limited to the aggregate of its registered capital, any proceeds from borrowings and
profits generated from operation, subject to certain statutory reserve deductions required under the PRC laws and regulation.
According to a policy named “Opinions Regarding Further Pushing Forward the Reform of Rural Microcredit Companies,”
Su Zheng Ban Fa (2011) No. 8 (“Jiangsu Document No. 8”), the maximum obligation Wujiang Luxiang is allowed to provide
guarantees for is three times its net capital. As of December 31, 2016, the registered capital of Wujiang Luxiang was approximately
$51.2 million. Under PRC laws, the registered capital refers to the total amount of equity investment made by the shareholders.
Once the registered capital is established, it cannot be used for purposes beyond the approved business scope of that entity.
Because our target market has been historically underserved by the state-owned and commercial banks in China, we believe there
will be a continued high demand for our services and we will be able to attract a steady flow of borrowers.
Also,
we believe that we may have the opportunity to acquire other microcredit companies of similar size and scope in Jiangsu province,
China. As a result of such acquisitions, we may expand our geographic coverage by obtaining requisite licenses to conduct business
in other cities in Jiangsu province. We intend to actively pursue acquisition opportunities as they arise, although we currently
do not have any written or oral binding agreements, arrangements or understandings with any acquisition target and there can be
no assurance that we will be able to locate any target or negotiate definitive agreements with them.
Competition
for Our Lending and Guarantee Business
The
number of microcredit companies in China is increasing rapidly. According to data compiled by PBOC and released on its website,
as of December 2016, there were approximately 8,910 microcredit companies in China and the total loan balance from microcredit
companies stood at $149.5 billion (RMB 941.0 billion). In Jiangsu province, there are about 636 microcredit companies with total
paid-in capital of $13.90 billion (RMB 89.6 billion) and a total outstanding balance of $16.55 billion (RMB 106.1 billion) as
of December 31, 2016, according to PBOC.
Due
to the poor economic condition in the Wujiang area, especially the slow-down in the local textile industry, many microcredit companies
including most of our competitors went bankrupt during 2015. We believe currently we have only one competitor in the Wujiang region.
Competitive
Strengths for Our Lending and Guarantee Business
We
believe there are several key factors that will continue to differentiate us from other microcredit companies in the city of Wujiang.
●
|
Experienced
Management Team
. We have a senior management team that has time-tested, hands-on experience with a high degree of
market knowledge and a thorough understanding of the lending industry in China. Members of our management team have an average
of over 25 years of previous banking, accounting or other relevant experience. We believe that our management’s significant
experience in the lending industry and our efficient underwriting process allow us to more carefully determine to whom to
lend to and how to structure the loans.
|
●
|
Stable
Relationship with State-Owned Banks and Commercial Banks
. We have established relationships with local branches of
the state-owned and provincial commercial banks. We currently have a credit facility agreement in the amount of approximately
$4.5 million (RMB 29 million), all of which is currently available, with Agricultural Bank of China pursuant to which it extended
a line of credit to us. We also have established guarantee cooperation relationships with China Construction Bank, Agricultural
Bank of China, Bank of Communications, China CITIC Bank Agriculture Commercial Bank and Jiangsu Bank pursuant to which these
banks previously have agreed to accept us as a guarantor for third party loans. Although there is no written agreement or
understanding between these banks and us with regard to the referral of lending business, we believe that the reputation of
our management team will enable us to maintain and develop good relationships with the local branches of these state owned
and commercial banks.
|
●
|
Early Entrance and Good Reputation
. We
are one of the first microcredit companies approved in the city of Wujiang region. We have strong brand recognition among the
small borrowers in the city of Wujiang, which we believe should create a steady flow of business from borrowers.
|
●
|
Stable
Borrower Base
. Our early entrance into the micro credit market has resulted in our creating a sizeable market share.
We have been able to retain a stable borrower base with recurring borrowing needs and good repayment histories.
|
We
believe we have the following competitive strengths compared to the local branches of state-owned banks and commercial banks which
are permitted to extend credit to microcredit borrowers.
●
|
Fast
Service
. We are able to close loans more quickly than traditional Chinese banks due to our efficient yet comprehensive
underwriting process and a less bureaucratic environment, which is important to SMEs, farmers and individuals.
|
●
|
Favorable
Interest Rates to Borrowers with Good Track Records
. We offer favorable interest rates to borrowers who have good
repayment histories with us, especially to the borrowers who provide real property as collateral. SMEs appear more willing
to establish and maintain good relationship with us than with the local branches of the state-owned and commercial banks which
may not provide the same level of services to SMEs.
|
●
|
A
Greater Willingness to Lend to SMEs
. We are focused on providing credit to SMEs, farmers and individuals in the city
of Wujiang. With our extensive knowledge and experience working with local SMEs, farmers and individuals, we are better equipped
to attract such borrowers and maintain a long-standing relationship with them.
|
Competition
for Our Financial Leasing Business
As
one of the few leasing companies in Jiangsu Province, PFL enjoys little competition in Jiangsu province at this time. In fact,
very few companies have received a leasing business license, and the companies that have licenses are mostly selling to a smaller
and narrower customer base. However, in China, we compete with a number of international, national, regional and local banks and
finance companies, financial leasing companies and equipment manufacturers that lease or finance the sale of their own products.
Due
to the Company’s strong relationships with local business owners and government agencies and its expertise in evaluating
the financial health of local businesses, PFL believes it is in a strong position to grow its leasing business in Jiangsu Province
once it has the financial means. However, we currently do not have further funds to deploy in the financial leasing business.
Competitive
Strengths for Our Financial Leasing Business
We
believe we could thrive in the financial leasing business even with future competition in Jiangsu province due to following competitive
advantages:
●
|
Substantial
experience in identifying potential lessees.
Our financial and industrial lending experience in the local Jiangsu
marketplace and our relationships with local business owners will enable us to identify potential leasing customers, and knowledge
of these customers will allow us to more accurately anticipate and serve their financial leasing needs.
|
●
|
An
early entrant to financial leasing segment in the Jiangsu region
. As one of the few leasing companies in Jiangsu province,
PFL enjoys little competition and we believe that being an early entrant will enable us to develop brand recognition and customer
loyalty.
|
●
|
Strong
relationships with local and regional government agencies
. As a result of our relationships with local and regional
government agencies, PFL may be afforded access to participate in projects sponsored by those government and public transportation
agencies.
|
●
|
Local
government support.
PFL has been afforded certain tax benefits and incentives by the government. PFL will be exempted
from Jiangsu provincial income tax for the first five years, followed by a provincial income tax rate at half of normal tax
rates for the following five years. PFL will also receive a registered capital bonus payment from the Wujiang city government
equivalent to 2% of the actually contributed registered capital.
|
●
|
Our
status as a NASDAQ listed company
. We believe we have a marketing advantage over other financial leasing companies
due to our status as a NASDAQ listed company.
|
Applicable
Government Regulations
Our
operations are subject to extensive and complex state, provincial and local laws, rules and regulations including but not limited:
●
|
PRC
Company Law and its implementation rules;
|
|
|
●
|
Wholly
Foreign-Owned Enterprise Law and its implementation rules;
|
|
|
●
|
Guidance
on Microcredit Company Pilot (Yin Jian Fa [2008]23) (the “Circular 23”) issued by the CBRC and the PBOC on May
4, 2008 and effective on May 4, 2008;
|
|
|
●
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Reply
to Certain Issues on Microcredit Company Organization Yin Jian Fa [2006] 246 issued by the CBRC on September 20, 2006 and
effective on September 20, 2006;
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|
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●
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Guidance
on Great Promotion to Rural Microcredit Business of the Banking Industry (Yin Jian Fa [2007] 67) issued by the CBRC on August
6, 2007 and effective on August 6 ,2007;
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|
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●
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Circular
on Implementing the “Accounting Rule for Financial Enterprise” to Microcredit Company (Cai Jin [2008]185) issued
by Ministry of Finance on December 24, 2008 and effective on December 24, 2008;
|
|
|
●
|
Circular
on Relevant Policies for Rural Bank, Loan Company, Rural Mutual Cooperative and Microcredit Company (Yin Fa [2008]137) issued
by the PBOC and the CBRC on April 24, 2008 and effective on April 24, 2008;
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|
|
●
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Opinions
on the pilot work for developing the Rural Microcredit Company (Trial) (Su Zheng Ban Fa [2007]142) (the “Jiangsu Document
No. 142”) issued by General Office of Jiangsu Province Government promulgated on November 24, 2007;
|
|
|
●
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Opinions
on Promoting Fast and Well Development of Rural Microcredit Company (Su Zheng Ban Fa [2009]132) (the “Jiangsu Document
No. 132”) issued by General Office of Jiangsu Province Government promulgated on November 28, 2009;
|
●
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Implementation
Rules on Supervision and Regulation of Rural Microcredit Companies (Su Fu Ban [2010] 288) issued by General Office of Suzhou
Government on October 26, 2010 and effective on November 1, 2010;
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|
|
●
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Opinions
Regarding Further Pushing Forward the Reform of Rural Microcredit Company (Su Zheng Ban Fa [2011]8) (the “Jiangsu Document
No. 8”) issued by General Office of Jiangsu Province Government on January 27, 2011 and effective on January 27, 2011;
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|
|
●
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Interim
Measures for the Administration of Financing Guarantee(Yin Jian Hui Ling [2010] 3) issued by the CBRC, National Development
and Reform Commission, Ministry of Industry and Information Technology, Ministry of Finance, MOFCOM, PBOC and State Administration
for Industry and Commerce on March 8, 2010 and effective on March 8, 2010;
|
|
|
●
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Provisional
Supervision and Rating System for Rural Microcredit Companies (the “Jiangsu Document No. 53”) issued by Finance
Office of Jiangsu Province Government on August 7, 2012;
|
|
|
●
|
Financial
Practices of Rural Microcredit Companies issued by Finance Office of Jiangsu Province Government in 2009 and effective on
January 1, 2010;
|
|
|
●
|
The
Guidance on Provisioning for Loan Losses (the “Provision Guidance”) issued by PBOC in 2002 and effective on January
1, 2002;
|
|
|
●
|
PRC
Contract Law, in particular the chapters with regard to lease contracts and financial leasing contracts;
|
|
|
●
|
Measures
for the Administration of Foreign Investment in Leasing Industry issued by the MOFCOM effective on March 5, 2005;
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|
|
●
|
Regulations
promulgated by the Ministry of Commerce and State Administration of Industry and Commerce with regard to the formation, registered
capital and leverage requirement and risk control of financial leasing companies; and
|
|
|
●
|
Accounting
treatment and tax regulations and policy with regard to finance lease transactions.
|
We
are supervised by many provincial and local government authorities, including Finance Office of Jiangsu Province Government, CBRC,
PBOC, local tax bureaus, local government, local AIC, local Bureau of Finance, local Public Security Bureau and local rural employment
department, etc.
Establishment
Wujiang
Luxiang was established on October 21, 2008 pursuant to Circular No. 23, Jiangsu Document No. 142 and Jiangsu Document No. 132
which allowed for the establishment of a new type of financial vehicle that is permitted to lend to small-to-medium sized business,
farmers and individuals. PFL was established on September 5, 2013 and is permitted to provide financial leasing services in China.
Source
of Funds
Pursuant
to the Circular 23, the main sources of funds are capital contributions paid by its shareholders, donated funds, and debt financings
from no more than two banking financial institutions. Pursuant to Jiangsu Document No. 132, we believe the amount of debt financings
we are allowed to obtain may be up to 100% of our net capital. Pursuant to the Foreign Investment in Leasing Industry Regulations,
PFL is permitted to leverage up to 10 times its registered capital to finance its leases.
Direct
Loans
Pursuant
to Jiangsu Document No. 8, the maximum amount of our actual liabilities (including bank loans) is limited to 100% of our net capital.
Pursuant to Jiangsu Document No. 142 and Circular 23, the aggregate loan balance amount to one borrower cannot exceed 10% of our
registered capital and must be less than 5% of our net assets. Pursuant to Jiangsu Document No. 132, the aggregate microcredit
loan balances as a percentage of our total outstanding loan balances, must be not less than 70%. The aggregate balances of operational
loans of with terms longer than three months, as a percentage of total outstanding loan balances, must exceed 70%. The aggregate
balances of loans made to agricultural or rural borrowers or farmers, as a percentage of our total outstanding loan balance must
be no less than 70%. A loan equal or under the amount of $725,000 (RMB 4,500,000) is deemed a microcredit loan according to Implementation
Rules on Supervision and Regulation of Rural Microcredit Companies (Su Fu Ban [2010] 288).
Prior
to August 7, 2012, the maximum interest rate a microcredit lender was allowed to charge on microcredit loans was four times of
the PBOC’s Benchmark Rate according to PBOC’s Notice on Cracking Down on the Underground Lenders and Lending at Excessive
High Interest Rate promulgated by the PBOC and Several Opinion Regarding the Trial of Cases promulgated by the Supreme Court of
PRC. On August 7, 2012, the Finance Office of Jiangsu Province implemented the Jiangsu Document No. 53. Microcredit companies
are assessed and ranked according to Jiangsu Document No.53 and the microcredit companies in the highest ranking will, among other
things, enjoy preferential treatments and government subsidies. As such, we have chosen to comply with the lower maximum interest
rate requirement set forth in the Jiangsu Document No. 53. In a document issued by Finance Office of Jiangsu Province on October
25, 2013 (the “Jiangsu Document No. 83”), we were rated as “AAA” and thus eligible for government subsidies
and certain preferential treatment including be permitted to operate the online guarantee business as disclosed above, partly
due to the fact that the maximum interest rate we charged in 2012 is no more than 3 times the Bench Mark Rate. We expect that
we will continue to receive the highest ranking as we continue to adhere with our maximum interest rate protocol and other lending
practices. In the event we receive less than BBB ranking, we will not be permitted to operate the online guarantee business, among
other things.
In
accordance with the Provision Guidance and Jiang Su Financial Practice, we are required to set aside a loan loss reserve according
to the following three measurements:
●
|
Measurement
1- The Specific Reserve:
|
Specific
reserves are funds set aside based on the anticipated level of loss of each loan after categorizing the loan according to the
risks. Such specific reserves are to be used to cover specific losses. According to the “Five-Tier Principle” set
forth in the Provision Guidance, the loans are categorized as “pass”, “special-mention”, “substantial”,
“doubtful” or “loss”. The definition and provision rate for each category is set forth below.
Tier
|
|
Definition
|
|
Reserve
Rate
|
Pass
|
|
Loans
for which borrowers are expected to honor the terms of the contracts, and there is no reason to doubt their ability to repay
the principal and accrued interest in full and on a timely basis.
|
|
0%
|
Special-mention
|
|
Loans
for which borrowers are currently able to repay the principal and accrued interest in full, although the repayment of loans
might be adversely affected by some factors.
|
|
2%
|
Substantial
|
|
Loans
for which borrowers’ ability to repay the principal and accrued interest in full is apparently in question and borrowers
cannot depend on the revenues generated from ordinary operations to repay the principal and accrued interest in full. Lender
may suffer some losses even though the underlying obligation is guaranteed by a third party or collateralized by certain assets.
|
|
25%
|
Doubtful
|
|
Loans
for which borrowers are unable to repay principal and accrued interest in full. Lender will suffer significant losses even
though the underlying obligation is guaranteed by a third party or collateralized by certain assets.
|
|
50%
|
Loss
|
|
Principal
and accrued interest cannot be recovered or only a small portion can be recovered after taking all possible measures and resorting
to necessary legal procedures.
|
|
100%
|
●
|
Measurement
2 - The General Reserve:
|
General
reserves are funds set aside based on certain percentage of the total outstanding balance and to be used to cover unidentified
probable loan loss. The General Reserve is required to be no less than 1% of total outstanding balance.
We
believe we are required to make our loan loss reserve based on the higher of the amounts calculated based on the General Reserve
and the Specific Reserve.
●
|
Measurement
3 - Special Reserve
|
Special
reserves are funds set aside covering losses due to risks related to a particular country, region, industry or type of loans.
The reserve rate could be decided based on management estimates of loan collectability.
Guarantee
Services
Pursuant
to Jiangsu Document No. 8, the aggregate amount of liabilities we are allowed to be exposed to in our guarantee business shall
not exceed 300% of our net capital. Pursuant to the Interim Measures for the Administration of Financing Guarantee, guarantees
we are allowed to provide to a single borrower shall not exceed 10% of our net assets, and not exceed 15% of our net assets if
the guarantee is provided to a single borrower and the person’s affiliated parties. We are prohibited to provide guarantees
to our subsidiaries and/or parent company.
For
our guarantee business, pursuant to Interim Measures for the Administration of Financing Guarantee, we are required to set aside
reserves not less than 1% of the aggregate outstanding balance of loans we guaranteed at end of fiscal year and 50% of the income
generated by our guarantee business during the fiscal year.
Financial
Leasing Services
Pursuant
to the Foreign Investment in Leasing Industry Regulations, PFL is permitted to leverage up to 10 times its registered capital
to finance its leases.
We
believe there is no clear guidance on the reserve requirement for financial leasing companies.
Summaries
of Certain Key PRC Laws
Below
are summaries of the material terms of Circular 23, Jiangsu Document No. 8, Jiangsu Document No. 132 and Jiangsu Document No.
142, which are essential to our business.
Circular
23
Circular
23 divides “microcredit companies” into two categories: a “company with limited liability” or a “company
limited by shares” that consists of equity interests held by private parties, including individuals, corporate entities
and other organizations. The shareholders of a microcredit company shall meet the minimum requirement set by applicable laws.
A company with limited liability shall be established with capital contributions from no more than fifty (50) shareholders; while
a company limited by shares shall have 2-200 promoters, more than 50% of whom shall domicile in the PRC. The promoters are the
shareholders after the incorporation of the company. The source of registered capital of a microcredit company shall be true and
legal. All the registered capital shall be fully paid in cash by the capital contributors or the promoters. The registered capital
of a company with limited liability shall be no less than RMB 5,000,000 and the registered capital of a company limited by shares
shall be no less than RMB 10,000,000. Any single individual, corporate entity or social organization (and their respective affiliates)
shall not contribute more than 10% of the registered capital of a microcredit company. Circular 23 also provides that the sources
of funds of a microcredit company shall be limited to the capital contributions paid by its shareholders, profit from operations,
monetary donations, and loans provided by no more than two (2) banking financial institutions. Pursuant to applicable laws, administrative
rules and regulations, the outstanding loans owed by a microcredit company to banking financial institutions shall not exceed
50% of its net registered capital. The interest rate and the terms for such loans shall be determined based on arms-length negotiations
between the company and the financial institutions and such interest rate shall be determined using the “Shanghai inter-bank
borrowing interest rate” for the same period as prime rate plus basis points. Circular 23 also states that a provincial
government who is able to clearly specify an authority-in-charge (finance office or relevant government organs) to be in charge
of the supervision and administration of microcredit companies and is willing to assume the liabilities for the risk management
of microcredit companies, such provincial government may, within its own province, roll out the trial run for the establishment
of microcredit companies. A microcredit company shall abide by all applicable laws and shall not conduct any illegal fund-raising
in any form. In the event an illegal fund-raising activity is conducted within the provincial territory, it shall be handled by
the local government at the provincial level. Other activities in violation of the laws or the administrative rules and regulations
will be fined by local authorities or prosecuted in the event a criminal offense has been committed.
Wujiang
Luxiang is a microcredit company limited by shares. There are currently 12 shareholders all of whom are domiciled in PRC. Except
one entity shareholder, none of the shareholders owns more than 10% of Wujiang Luxiang’s registered capital. Pursuant to
Administrative Measures of Microcredit Companies issued by Jiangsu provincial government on November 30, 2011, major promoters
are permitted to hold more than 10% of the registered capital of a microcredit company. We believe the requirement that none of
the shareholders shall own more than 10% of the registered capital of a microcredit company set forth in Circular No. 23, which
is a pilot program giving guidance to the provincial government, has been superseded by the later Jiangsu provincial regulations.
In addition, the current equity structure of Wujiang Luxiang has been approved by the Finance Office of Jiangsu, which is the
governing authority of Wujiang Luxiang. We believe such approval is evidence of the Jiangsu government authority’s acknowledgement
of such equity structure. Wujiang Luxiang’s current operations are in line with the other requirements set forth in Circular
23.
Jiangsu
Document No. 8
Jiangsu
Document 8 stresses the importance of encouraging the development of rural microcredit companies. The business scope of these
companies approved by local authorities generally includes the following: providing loans to companies or individuals in agriculture
industry located in rural areas, providing financial guarantees, and serving as agents for financial institutions. The aggregate
outstanding balance of bank loans a rural microcredit company is allowed to obtain is up to 100% of the net capital of such company.
The
business scope of Wujiang Luxiang is to provide small loans, guarantees, and other business approved by the provincial authority
for agriculture related industry, which is in line with the Jiangsu Document No.8. As of December 31, 2015, Wujiang Luxiang’s
net capital was approximately $51.2 million and its outstanding balance of bank loans was $2.6 million, which is line with the
requirement set forth in the Jiangsu Document No. 8.
Jiangsu
Document No. 132
Jiangsu
Document No. 132 reflects the current developing status of rural microcredit companies. It empowers various local authorities
to promote development of rural microcredit companies by facilitating access to capital markets and promoting good morals. The
Document encourages establishment of rural microcredit companies in Jiangsu province. In each of the counties with economic importance,
a local officer has been charged with responsibility to manage and oversee the establishment of the microcredit companies, including
establishing pilot programs in certain territories. The number of pilot rural microcredit companies may be increased. Local governments
at county level meeting certain criteria should, at the beginning of each year, provide a plan which sets forth an estimate of
the number of newly established rural microcredit companies to be approved to do business during that year. Such plan will need
to be reviewed first by the financial office at the municipal level and approved by the respective finance bureaus at the provincial
level. A rural microcredit company that has been operating for more than one year, in good standing, with good financial conditions
and risk management systems may be allowed to establish branch offices in various towns where there is no such rural microcredit
company located in the same town as such company. Rural microcredit companies in southern Jiangsu region with capital of more
than RMB 50 million can set up one additional branch for each additional RMB 30 million in excess of RMB 50 million; rural microcredit
companies in central Jiangsu region with capital of more than RMB 30 million can set up one additional branch for each additional
RMB 25 million exceeding RMB 30 million; rural microcredit companies in northern Jiangsu region with capital of more than RMB
20 million can set up one additional branch for each additional RMB 15 million exceeding RMB 20 million. The amount of debt financings
a rural microcredit company serving the agriculture industry, with effective operations, good risk control and reasonable interest
levels is allowed to obtain may be up to 100% of its registered capital. Sources of the funds for these companies may include:
1) loans or financing funding from commercial banks; 2) approved large-amount direct loans (mainly shareholders’ loans);
3) approved transfers and lending of funds between rural microcredit companies; and 4) explore the feasibility of loans from the
government funds, the PBOC re-lending loans supporting agriculture, insurance funds and other funds which desire to play a role
in servicing “agriculture, farmers and rural areas” through rural microcredit companies.
As
of December 31, 2015, Wujiang Luxiang’s registered capital was approximately $51.2 million and its total debt financing
was approximately $2.6 million, less than 50% of its registered capital, in line with the requirement set forth in Jiangsu Document
No. 132. Wujiang Luxiang’s major source of financing has been loans from commercial banks.
Jiangsu
Document No. 142
Jiangsu
Document No. 142 provides for general rules with respect to the establishment of microcredit companies. It includes the following
material terms:
1.
Shareholder: In general, the shareholders of a rural microcredit organization shall be three to five individuals (excluding members
or employees of the Communist Party, governmental organizations, financial organizations as well as state-owned public institutions)
or enterprise legal persons. The number of shareholders shall not exceed ten. Shareholders shall comply with laws, with good credibility
and have no civil or criminal record indicating violation of laws and serious discredit. The capital contributed by shareholders
for equity interest shall be legitimate self-owned capital.
Wujiang
Luxiang currently has 12 shareholders, which is more than the 10 shareholders requirement set forth in Jiangsu Document No. 42.
However, Circular 23 permits up to 200 shareholders in a microcredit company limited by shares. We believe we will not be subject
to any penalty by the Finance Office of Jiangsu Province, which is the governing authority of Wujiang Luxiang and the government
body implementing the Jiangsu Document No. 42, since it approved the establishment of Wujiang Luxiang and its current shareholder
structure.
2.
Capital: The paid-up registered capital of a rural microcredit organization shall be no less than RMB 50 million for southern
Jiangsu area, RMB 30 million for central Jiangsu area, and RMB 20 million for northern Jiangsu area. The registered capital shall
be paid in cash.
As
of December 31, 2015, Wujiang Luxiang’s registered capital was RMB 333 million which is more than the RMB 50 million required
for Wujiang Luxiang as a microcredit company in the Southern Jiangsu area.
3.
Offices: A rural microcredit organization shall have fixed operating premises which comply with the safety standards required
by the public security department and other departments and is situated below township levels (including township).
4.
Employees: A rural microcredit organization shall have no fewer than five main employees, who shall comply with laws, with good
credibility and have no civil or criminal record. Among them, the chief person in charge shall be less than 65 years old with
at least Technical Secondary School and have been engaged in financial industry for more than 4 years or economic industry for
more than 8 years (with at least 2 years working experience in the financial area); the person in charge of credit shall have
been engaged in financial industry for more than 3 years or economic industry (with a focus on agriculture) for more than 5 years;
each accounting staff shall hold an Accounting Certificate and have been engaged in accounting and financial industry for more
than 3 years; other personnel shall have been engaged in other related economic industry for more than 3 years. All key employees
shall participate in a professional training program held by the Provincial Financial Office. Qualified trainees will be issued
a qualification certificate which is required for their employment.
We
believe our management, accounting staff and other personnel meet the requirements set forth in the Jiangsu Document No. 142.
5.
Articles of Association: Rural microcredit organizations shall adopt Articles of Association of the organizations in accordance
with the Company Law of the People’s Republic of China and the provisions of these provisions in the Jiangsu Document No.
142, and carry out business and operating activities according to their Articles of Association.
Wujiang
Luxiang has carried out its business and operations according to its Articles of Associations, as amended.
6.
Markit Exit: When a rural microcredit organization has any of the following activities, in addition to investigation and fine
by law enforcement authorities, the provincial Rural Microcredit Organization Pilot Program Management Group may terminate its
pilot program, report it to the local AIC to revoke its business license, or impose other punitive measures:
|
1)
|
Violating
the provisions in the Jiangsu Document No. 142 with respect of business scope and provision of loans;
|
|
2)
|
Illegally
solicit funding from the general public directly or indirectly;
|
|
3)
|
Issuing
loans with excessive interest rates in violation of relevant national provisions to make exorbitant profits;
|
|
4)
|
Other
behaviors deemed by the provincial and local Rural Microcredit Organization Pilot Program Management Groups as material violation
of relevant laws and regulations and these provisions in the Jiangsu Document No. 142.
|
We
believe we were not involved in any of the prohibited activities set forth in the sections above.
Employees
As
of the date of this report, we have 5 employees all of which are full time. We have employment contracts with all of our employees
in accordance with PRC Labor Law and Labor Contract Law. The contracts comply with the PRC laws. There are no collective bargaining
contracts covering any of our employees. We believe our relationship with our employees is satisfactory.
We
have made employee benefit contributions in accordance with relevant Chinese regulations, including retirement insurance, unemployment
insurance, medical insurance, housing fund, work injury insurance and birth insurance. The Company recorded the contribution in
the general administration expenses when incurred.
Intellectual
Property
We
do not own or have any significant intellectual property rights.
There is no change to the risk factors included in our registration
statement on Form S-8 filed on November 23, 2016 other than inclusion of the following risk factor:
The substantial and continuing losses, and significant
operating expenses incurred in the past few years may cause us to be unable to pursue all of our operational objectives if sufficient
financing and/or additional cash from revenues is not realized. This raises doubt as to our ability to continue as a going concern.
We
have a accumulated deficit of US$70,234,656 as of December 31, 2016 and a working capital (total consolidated current assets exceeding
total consolidated current liabilities) of US$2,332,909, as of December 31, 2016.
Although
we have previously been able to attract financing as needed, such financing may not continue to be available at all, or if available,
on reasonable terms as required. Further, the terms of such financing may be dilutive to existing shareholders or otherwise on
terms not favorable to us or existing shareholders. If we are unable to secure additional financing, as circumstances require,
or do not succeed in meeting our sales objectives, we may be required to change or significantly reduce our operations or ultimately
may not be able to continue our operations. As a result of our historical accumulated deficit, these conditions raise substantial
doubt as to the Company’s ability to continue as a going concern.
Item
1B.
|
Unresolved
Staff Comments.
|
Not
applicable.
Item
2.
|
Description
of Property.
|
Our
principal executive offices are located at No.1 Zhongying Commercial Plaza, Zhong Ying Road, Wujiang, Suzhou, Jiangsu Province,
China, where we leased approximately 4236.24 square foot of office space pursuant to a lease agreement entered on [ ], whose term
is from January 1, 2017 to December 31, 2019 with annual rents in the amount of RMB142,068 (approximately USD$20,619) for the
year of 2017, RMB164,039 (approximately USD$23,808) for the year of 2018, and RMB174,039 (approximately USD$25,260) for the year
of 2019. As a result, from January 1, 2017, we have terminated the lease agreement previously entered on May 26, 2015 for our
former principal office, which was to expire on May 31, 2021. No default penalty was paid for the early termination. We do not
own any real property or have any land use rights.
Item
3.
|
Legal
Proceedings.
|
The
Company is involved in various legal actions arising in the ordinary course of its business.
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.) (the “Securities Class Action”).
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.
On
April 22, 2016, the Company entered into a Stipulation and Agreement of Settlement (the “Stipulation”) to settle the
Securities Class Action. The Stipulation resolves the claims asserted against the Company and certain of its current and former
officers and directors in the Securities Class Action without any admission or concession of wrongdoing or liability by the Company
or the other defendants. The Stipulation also provides, among other things, a settlement payment by the Company of $225,000 in
cash and the issuance of 750,000 shares of its common stock (the “Settlement Shares”) to the class members. The terms
of the Stipulation are subject to approval by the Court following notice to all class members. The issuance of the Settlement
Shares is expected to be exempt from registration pursuant to Section 3(a)(10) of the Securities Act of 1933, as amended. It is
probable that the Stipulation will be approved by the Court and take effect. The Company accrued settlement cost aggregating US$
690,000 during the six months ended June 30, 2016.
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 for each
of the 30 consecutive trading days prior to the date of the agreement.
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.
Item
4.
|
Mine
Safety Disclosures.
|
Not
applicable.
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”). 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 December 31, 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
The
accompanying 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.
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 December 31, 2016, its results of operations for the years ended December 31,
2016 and 2015, and its cash flows for the years ended December 31, 2016 and 2015, as applicable, have been made. The results of
operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.
The
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$70,234,656 as of December 31, 2016. In addition, the Company had working capital
(total consolidated current assets exceeding total consolidated current liabilities) of US$2,332,909, as of December 31, 2016.
As of December 31, 2016, the Company had cash and cash equivalents of US$768,501, and total short-term borrowings of US$ nil.
These and other
factors disclosed in this annual report raise substantial doubt as to the Company’s ability to continue as a going concern
within one year from the date of this filing. 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 after the financial statements are available to be issued, 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
3.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
(a) Basis of presentation and
principle of consolidation
The accompanying
consolidated financial statements of CCC and its subsidiaries and VIEs have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the U.S. Securities
and Exchange Commission (“SEC”).
All significant
inter-company accounts and transactions have been eliminated in consolidation.
(b)
Operating segments
Accounting
Standard Codification (“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 years
ended December 31, 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 7). 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
3.
|
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$2,604,172 and US$2,593,611 as of December 31, 2016 and 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 13.
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 years ended December 31, 2016 and 2015.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
3.
|
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 December 31, 2016 and 2015, financial
instruments of the Company primarily comprise of cash, restricted cash, notes receivable, loan receivables, other receivable, short-term
bank loans and deposits payable, 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.
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Balance sheet items, except for equity accounts
|
|
|
6.9448
|
|
|
|
6.4917
|
|
|
|
For the years ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Items in the statements of operations and comprehensive loss, and statements of cash flows
|
|
|
6.6441
|
|
|
|
6.2288
|
|
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
3.
|
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 exercise 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
3.
|
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:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Guarantee
|
|
$
|
10,893,089
|
|
|
$
|
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 “Reversal of provision /(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 55% and 50% of contract amount as of December 31, 2016 and
2015, and made a provision of US$6,005,609 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$11,641,868 and US$13,631,304 as of December 31, 2016 and 2015, respectively. The
total accrual for financial guarantee services amounted to US$17,647,477 and US$19,322,557 as of December 31, 2016 and 2015, respectively.
The Company reviews the provision on a quarterly basis.
The
Company reversed provision of US$283,816 and provided provision of US$14,939,203 for the years ended December 31, 2016 and 2015,
respectively.
As
of December 31, 2016 and 2015, the management charged off specific provision for two and one customer in the amount of US$142,966
and US$262,422, considering remote collectability from the customers.
(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 loss
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
3.
|
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
January 2017, the FASB issued ASU No. 2017-04,
Intangibles-Goodwill and Other (Topic 350)
:
Simplifying the Test for
Goodwill Impairment
. The amended guidance simplifies the subsequent measurement of goodwill by eliminating Step 2 from the
goodwill impairment test. Under the amended guidance, we will perform our annual or interim goodwill impairment test by comparing
the fair value of a reporting unit with its carrying value, and an impairment charge is recognized for the amount by which the
carrying value exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting
unit. This guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December
15, 2021, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January
1, 2017. We are currently evaluating the impact and timing adopting this guidance will have on the
consolidated
financial statements.
In
November 2016, the FASB issued ASU 2016-18, "
Statement of Cash Flows (Topic 230): Restricted Cash
." ASU 2016-18
requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts
generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash
and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending balances
shown on the statement of cash flows. The guidance is effective for the Company in the first quarter of 2019 and early adoption
is permitted. ASU 2016-18 must be applied retrospectively to all periods presented. The Company is currently evaluating what impact
the adoption of this update will have on our consolidated statements of cash flows.
In
August 2016, the FASB issued ASU 2016-15, "
Classification of Certain Cash Receipts and Cash Payments (Topic 230)"
.
ASU 2016-15 adds and clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows,
reducing the existing diversity in practice that has resulted from the lack of consistent principles on this topic. ASU 2016-15
is effective for the Company beginning January 1, 2018. Early adoption is permitted. The Company is currently evaluating the impact
adopting this guidance will have on classifications in its consolidated statements of cash flows.
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.
In May
2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”).
ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” and some cost
guidance included in ASC Subtopic 605-35, “Revenue Recognition - Construction-Type and Production-Type Contracts.”
The core principle of ASU 2014-09 is that revenue is recognized when the transfer of goods or services to customers occurs in
an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.
ASU 2014-09 requires the disclosure of sufficient information to enable readers of the Company’s financial statements to
understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 also
requires disclosure of information regarding significant judgments and changes in judgments, and assets recognized from costs
incurred to obtain or fulfill a contract. ASU 2014-09 provides two methods of retrospective application. The first method would
require the Company to apply ASU 2014-09 to each prior reporting period presented. The second method would require the Company
to retrospectively apply ASU 2014-09 with the cumulative effect recognized at the date of initial application. ASU 2014-09 will
be effective for the Company beginning in fiscal 2019 as a result of ASU 2015-14, “Revenue from Contracts with Customers
(Topic 606): Deferral of the Effective Date,” which was issued by the FASB in August 2015 and extended the original effective
date by one year. The Company is currently evaluating the impact of adopting the available methodologies of ASU 2014-09 and 2015-14
upon its financial statements in future reporting periods. The Company has not yet selected a transition method. The Company is
in the process of evaluating the new standard against its existing accounting policies, including the timing of revenue recognition,
and its contracts with customers to determine the effect the guidance will have on its financial statements and what changes to
systems and controls may be warranted.
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.
There have been four new ASUs issued
amending certain aspects of ASU 2014-09, ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross Versus
Net),” was issued in March, 2016 to clarify certain aspects of the principal versus agent guidance in ASU 2014-09. In addition,
ASU 2016-10, “Identifying Performance Obligations and Licensing,” issued in April 2016, amends other sections of ASU
2014-09 including clarifying guidance related to identifying performance obligations and licensing implementation. ASU 2016-12,
“Revenue from Contracts with Customers - Narrow Scope Improvements and Practical Expedients” provides amendments and
practical expedients to the guidance in ASU 2014-09 in the areas of assessing collectability, presentation of sales taxes received
from customers, noncash consideration, contract modification and clarification of using the full retrospective approach to adopt
ASU 2014-09. Finally, ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,”
was issued in December 2016, and provides elections regarding the disclosures required for remaining performance obligations in
certain cases and also makes other technical corrections and improvements to the standard. With its evaluation of the impact of
ASU 2014-09, the Company will also consider the impact on its financial statements related to the updated guidance provided by
these four new ASUs.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
4.
|
VARIABLE INTEREST ENTITIES AND OTHER CONSOLIDATION
MATTERS
|
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 December 31, 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 audited consolidated financial statements as
of December 31, 2016 and 2015 and for the years ended December 31, 2016 and 2015:
|
|
December 31,
2016
|
|
|
December 31, 2015
|
|
Total assets
|
|
$
|
19,609,945
|
|
|
$
|
22,920,730
|
|
Total liabilities
|
|
$
|
19,654,760
|
|
|
$
|
23,932,841
|
|
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
$
|
1,239,194
|
|
|
$
|
2,741,190
|
|
Net income/(loss)
|
|
$
|
905,618
|
|
|
$
|
(58,005,789
|
)
|
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
4.
|
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 December 31, 2016 and 2015, the Company held cash of US$768,501 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 December 31, 2016 and 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 December 31, 2016 and 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 audited 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 years ended December 31, 2016 and 2015, respectively.
6.1
Loans receivable consist of the following:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Business loans
|
|
$
|
37,786,657
|
|
|
$
|
40,498,813
|
|
Personal loans
|
|
|
20,736,324
|
|
|
|
22,577,907
|
|
Total Loans receivable
|
|
|
58,522,981
|
|
|
|
63,076,720
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
Collectively assessed
|
|
|
(50,481240
|
)
|
|
|
(55,595,653
|
)
|
Individually assessed
|
|
|
(1,226,822
|
)
|
|
|
-
|
|
Allowance for loan losses
|
|
|
(51,708,062
|
)
|
|
|
(55,595,653
|
)
|
Loans receivable, net
|
|
$
|
6,814,919
|
|
|
$
|
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 December 31, 2016 and 2015,
the Company had 70 and 68 business loan customers, and 41 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 years ended December 31, 2016 and 2015, a reversal of provision of US$426,475 and a provision of US$41,133,808 were charged
to the consolidated statement of income, respectively. Write-offs of $11,519 and $7,058,495 against allowances have occurred for
the years ended December 31, 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 December 31, 2016 and 2015,
respectively:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Business loans
|
|
$
|
35,885,947
|
|
|
$
|
21,907,409
|
|
Personal loans
|
|
|
20,693,126
|
|
|
|
10,211,501
|
|
|
|
$
|
56,579,073
|
|
|
$
|
32,118,910
|
|
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
7.
|
LOANS RECEIVABLE, NET (CONTINUED)
|
7.1
Loans receivable consist of the following: (continued)
The
following table represents the aging of loans as of December 31, 2016 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
|
|
$
|
-
|
|
|
$
|
10,992,518
|
|
|
$
|
5,585,728
|
|
|
|
19,307,701
|
|
|
$
|
35,885,947
|
|
|
$
|
1,900,710
|
|
|
$
|
37,786,657
|
|
Personal loans
|
|
|
43,198
|
|
|
|
6,234,908
|
|
|
|
428,956
|
|
|
|
14,029,262
|
|
|
|
20,736,324
|
|
|
|
-
|
|
|
|
20,736,324
|
|
|
|
$
|
43,198
|
|
|
$
|
17,227,426
|
|
|
$
|
6,014,684
|
|
|
|
33,336,963
|
|
|
$
|
56,622,271
|
|
|
$
|
1,900,710
|
|
|
$
|
58,522,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
4,613,583
|
|
|
|
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
|
|
7.2
Analysis of loans by credit quality indicator
The
following table summarizes the Company’s loan portfolio by credit quality indicator as of December 31, 2016 and 2015, respectively:
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
7.
LOANS RECEIVABLE, NET (CONTINUED)
7.2
Analysis of loans by credit quality indicator (continued)
Five Categories
|
|
December 31, 2016
|
|
|
%
|
|
|
December 31, 2015
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
1,900,710
|
|
|
|
3.2
|
%
|
|
$
|
-
|
|
|
|
-
|
|
Special mention
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Substandard
|
|
|
-
|
|
|
|
-
|
|
|
|
2,695,750
|
|
|
|
4.3
|
%
|
Doubtful
|
|
|
9,866,430
|
|
|
|
16.9
|
%
|
|
|
9,841,658
|
|
|
|
15.6
|
%
|
Loss
|
|
|
46,755,841
|
|
|
|
79.9
|
%
|
|
|
50,539,312
|
|
|
|
80.1
|
%
|
Total
|
|
$
|
58,522,981
|
|
|
|
100
|
%
|
|
$
|
63,076,720
|
|
|
|
100
|
%
|
6.3
Analysis of loans by collateral
The
following table summarizes the Company’s loan portfolio by collateral as of December 31, 2016:
|
|
December 31, 2016
|
|
|
|
|
|
|
Business Loans
|
|
|
Personal Loans
|
|
|
Total
|
|
Guarantee backed loans
|
|
$
|
35,557,758
|
|
|
$
|
19,904,043
|
|
|
$
|
55,461,801
|
|
Pledged assets backed loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Collateral backed loans
|
|
|
2,228,899
|
|
|
|
832,281
|
|
|
|
3,061,180
|
|
|
|
$
|
37,786,657
|
|
|
$
|
20,736,324
|
|
|
$
|
58,522,981
|
|
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
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Collateral backed loans
|
|
|
3,000,630
|
|
|
|
1,067,517
|
|
|
|
4,068,147
|
|
|
|
$
|
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 December
31, 2016 and 2015, guaranteed loans make up 94.8% and 93.6% of our direct loan portfolio, respectively.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
8.
|
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 years ended December 31, 2016 and
2015:
|
|
Business Loans
|
|
|
Personal Loans
|
|
|
Total
|
|
For the year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
35,083,738
|
|
|
$
|
20,511,915
|
|
|
$
|
55,595,653
|
|
Charge-offs
|
|
|
(11,519
|
)
|
|
|
-
|
|
|
|
(11,519
|
)
|
Recoveries
|
|
|
(676,315
|
)
|
|
|
(162,204
|
)
|
|
|
(838,519
|
)
|
Provisions
Foreign exchange gain
|
|
|
230,580
(2,269,531)
|
|
|
|
347,602
(1,346,204)
|
|
|
|
578,182
(3,615,735)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
32,356,953
|
|
|
|
19,351,109
|
|
|
|
51,708,062
|
|
Ending balance: individually evaluated for impairment
|
|
|
254,,868
|
|
|
|
971,954
|
|
|
|
1,226,822
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
32,102,085
|
|
|
$
|
18,379,155
|
|
|
$
|
50,481,240
|
|
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
8.
|
ALLOWANCE FOR LOAN LOSSES (CONTINUED)
|
|
|
Business Loans
|
|
|
Personal Loans
|
|
|
Total
|
|
For the year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
14,836,650
|
|
|
$
|
9,654,071
|
|
|
$
|
24,490,721
|
|
Charge-offs
|
|
|
(6,017,116
|
)
|
|
|
(1,041,379
|
)
|
|
|
(7,058,495
|
)
|
Recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Provisions
|
|
|
26,264,204
|
|
|
|
11,899,223
|
|
|
|
38,163,427
|
|
Ending balance
|
|
|
35,083,738
|
|
|
|
20,511,915
|
|
|
|
55,595,653
|
|
Ending balance: individually evaluated for impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
35,083,738
|
|
|
$
|
20,511,915
|
|
|
$
|
55,595,653
|
|
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, 2016:
|
|
Pass
|
|
|
Special Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business loans
|
|
$
|
1,900,710
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,096,000
|
|
|
$
|
28,789,947
|
|
|
$
|
37,786,657
|
|
Personal loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,770,430
|
|
|
|
17,965,894
|
|
|
|
20,736,324
|
|
|
|
$
|
1,900,710
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,866,430
|
|
|
$
|
46,755,841
|
|
|
$
|
58,522,981
|
|
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 years ended December 31, 2016 and 2015, respectively.
10.
|
GUARANTEE
PAID ON BEHALF OF GUARANTEE CUSTOMERS
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Guarantee paid on behalf of guarantee service customers
|
|
$
|
11,642,755
|
|
|
$
|
14,031,603
|
|
Guarantee paid on behalf of a related party
|
|
|
196,001
|
|
|
|
622,807
|
|
Total
|
|
$
|
11,838,756
|
|
|
$
|
14,654,410
|
|
As
of December 31, 2016 and 2015, guarantee paid on behalf of guarantee service customers represents payment made by the Company
to banks on behalf of thirty-two and thirty-one of its third-party guarantee service customers who defaulted on their loan repayments
to the banks. Guarantee paid on behalf of a related party represents payment made by the Company to banks on behalf of one and
one of its related party customer. 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 December 31, 2016 and 2015, the Company accrued allowance on the balance
in “accrual for financial guarantee services” in the value of US$17,647,477 and US$19,322,557, respectively.
Other
assets as of December 31, 2016 and 2015 consisted of:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Other prepaid expense
|
|
|
20,456
|
|
|
|
30,809
|
|
Deposit for court filing fees and legal fees
|
|
|
235,871
|
|
|
|
222,934
|
|
Other receivables
|
|
|
44,997
|
|
|
|
39,457
|
|
|
|
$
|
301,324
|
|
|
$
|
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
12.
|
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:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
$
|
3,599,831
|
|
|
$
|
3,635,411
|
|
2 years
|
|
|
-
|
|
|
|
754,810
|
|
3 years
|
|
|
-
|
|
|
|
-
|
|
Total minimum lease receipts
|
|
|
3,599,831
|
|
|
|
4,390,221
|
|
Less: amount representing interest
|
|
|
(287,009
|
)
|
|
|
(464,100
|
)
|
Present value of minimum lease receipts
|
|
$
|
3,312,822
|
|
|
$
|
3,926,121
|
|
Following
is a summary of the components of the Company’s net investment in direct financing leases as of December 31, 2016 and 2015:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Total minimum lease payments to be received
|
|
$
|
3,599,831
|
|
|
$
|
4,390,221
|
|
Less: Amounts representing estimated executory costs
|
|
|
-
|
|
|
|
-
|
|
Minimum lease payments receivable
|
|
|
3,599,831
|
|
|
|
4,390,221
|
|
Less Allowance for uncollectible
|
|
|
(2,441,663
|
)
|
|
|
(2,857,554
|
)
|
Net minimum lease payments receivable
|
|
|
1,158,168
|
|
|
|
1,532,667
|
|
Estimated residual value of leased property
|
|
|
-
|
|
|
|
-
|
|
Less: Unearned income
|
|
|
(287,009
|
)
|
|
|
(355,255
|
))
|
Net investment in direct financing lease
|
|
$
|
871,159
|
|
|
$
|
1,177,442
|
|
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
13.
|
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)
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Furniture and fixtures
|
|
5
|
|
$
|
20,808
|
|
|
$
|
22,260
|
|
Vehicles
|
|
4
|
|
|
-
|
|
|
|
153,288
|
|
Electronic equipment
|
|
3
|
|
|
131,314
|
|
|
|
140,001
|
|
Leasehold improvement
|
|
3
|
|
|
159,662
|
|
|
|
86,418
|
|
Less: accumulated depreciation
|
|
|
|
|
(291,815
|
)
|
|
|
(275,847
|
)
|
Property and equipment, net
|
|
|
|
$
|
19,969
|
|
|
$
|
126,120
|
|
During
the year ended December 31, 2016, the Company disposed of one vehicle with net book value of US$7,164 (original cost of US$143,288,
accumulated depreciation of US$136,124). The Company generated non-interest income of US$48,945 from the disposal. In addition,
the Company disposed of leasehold improvement of office with net book value of US$84,063 (original cost of US$126,138, accumulated
depreciation of US$42,075). The Company incurred other operating expense of US$87,867 from the disposal.
During
the year ended December 31, 2015, the Company disposed of two vehicles with net book value of $3,833 (original cost of $76,654,
accumulated depreciation of $72,821). The Company generated non-interest income of $14,388 from the disposal.
Depreciation
expense totaled $54,875 and $117,135 for the years ended December 31, 2016 and 2015, respectively.
Intangible
asset represents the software used for P2P platform, the useful life is estimated at 3 years.
|
|
Useful Life
(years)
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
3
|
|
$
|
-
|
|
|
$
|
4,435
|
|
Amortization
expense totaled $4,333 and US$9,714 for the years ended December 31, 2016 and 2015, respectively.
15.
|
SHORT-TERM
BANK LOANS
|
Bank Name
|
|
Interest rate
|
|
Term
|
|
December 31, 2016
|
|
|
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 year ended December 31, 2015, the Company repaid the all outstanding bank borrowings. As of December 31, 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 years ended December 31, 2016 and 2015 were US$29,588 and US$496,753, respectively.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Deposits
payable are security deposits required from customers in order to obtain guarantees and finance leases from the Company. The deposits
are refundable to the customers when the customers fulfill their obligations under guarantee and finance lease contracts.
17.
|
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$2,820 and $1,610 as of December 31, 2016 and 2015, respectively.
The
Company receives financing leasing service commissions at the inception and records unearned income before amortizing it throughout
the finance lease service life. Unearned income from financing leasing services was US$17,999 and US$59,692 as of December 31,
2016 and 2015, respectively.
18.
|
OTHER
CURRENT LIABILITIES
|
Other
current liabilities as of December 31, 2016 and 2015 consisted of:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Accrued payroll
|
|
$
|
37,575
|
|
|
$
|
85,144
|
|
Accrued office rental expenses
|
|
|
34,558
|
|
|
|
61,617
|
|
Other tax (recoverable)/payable
|
|
|
(44,007
|
)
|
|
|
14,187
|
|
Accrued provision for cash settlement against legal proceedings
|
|
|
225,000
|
|
|
|
-
|
|
Other payable
|
|
|
20,321
|
|
|
|
21,294
|
|
|
|
$
|
273,447
|
|
|
$
|
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 in the amount of US$465,000 (at market value of $0.62 per share) as an additional paid-in capital.
19.
|
OTHER
OPERATING EXPENSE
|
Other
operating expense for the years ended December 31, 2016 and 2015 consisted of:
|
|
For the years ended
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Depreciation and amortization
|
|
$
|
59,208
|
|
|
$
|
126,850
|
|
Travel expenses
|
|
|
15,089
|
|
|
|
7,718
|
|
Entertainment expenses
|
|
|
16,370
|
|
|
|
17,136
|
|
Promotion expenses
|
|
|
-
|
|
|
|
257
|
|
Legal and consulting expenses
|
|
|
1,802,480
|
|
|
|
1,016,711
|
|
Car expenses
|
|
|
25,263
|
|
|
|
53,302
|
|
Bank charges
|
|
|
3,400
|
|
|
|
37,202
|
|
Audit-related expense
|
|
|
105,957
|
|
|
|
282,544
|
|
Provision for settlement against legal proceedings
|
|
|
690,000
|
|
|
|
-
|
|
Other expenses
|
|
|
179,923
|
|
|
|
183,037
|
|
Total
|
|
$
|
2,897,690
|
|
|
$
|
1,724,757
|
|
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
20.
|
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$28,682 and US$61,495
for the years ended December 31, 2016 and 2015, respectively.
21.
|
DISTRIBUTION
OF PROFIT
|
The
Company did not distribute any dividend to its shareholders for the years ended December 31, 2016 and 2015, respectively.
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.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
22.
|
CAPITAL
TRANSACTION (CONTINUED)
|
Common
Stock (continued)
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.
On
December 21, 2016, the Company issued 500,000 restricted shares to one service provider, for the consulting services provided.
The shares were issued at a market value of US$1.22, in the total amount of 610,000.
As
of December 31, 2016, there were 16,637,679 shares of Common Stock issued and outstanding.
Warrants
The
IPO underwriters’ and their affiliates’ received warrants to purchase an aggregate of 95,900 shares of Common Stock,
which are exercisable at any time, and from time to time, in whole or in part, during the three-year period from February 10,
2014. The warrants are initially exercisable at a per share price of $6.50.
Warrants
to purchase an aggregate of 875,000 shares of Common Stock were issued in the Follow-on Offering on May 13, 2014. The issuance
price was $0.01 per warrant, and 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.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
22.
|
CAPITAL
TRANSACTION (CONTINUED)
|
Preferred
Stock (continued)
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 years ended December 31, 2016 and 2015, the Company did not accrue the statutory reserve due to accumulated deficit..
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
24.
|
LOSS
PER COMMON SHARE
|
The
following table sets forth the computation of basic and diluted earnings per common share for the years ended December 31, 2016
and 2015, respectively:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net loss attributable to the common shareholders
|
|
$
|
1,980,136
|
|
|
$
|
61,264,714
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
|
14,571,076
|
|
|
|
12,345,678
|
|
Effect of dilutive securities
|
|
|
-
|
|
|
|
-
|
|
Diluted weighted-average common shares outstanding
|
|
|
14,571,076
|
|
|
|
12,345,678
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.136
|
|
|
$
|
4.962
|
|
Diluted
|
|
$
|
0.136
|
|
|
$
|
4.962
|
|
Basic
loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period.
Diluted loss per share is the same as basic loss per share due to the lack of dilutive items in the Company for the years ended
December 31, 2016 and 2015. The number of warrants is omitted from the computation as the anti-dilutive effect.
|
25.
|
INCOME
TAXES AND TAX RECEIVABLE
|
Effective
January 1, 2008, the New Taxation Law of PRC stipulates that domestically owned enterprises and foreign invested enterprises (the
“FIEs”) are subject to a uniform tax rate of 25%. While the New Tax Law equalizes the tax rates for FIEs and domestically
owned enterprises, preferential tax treatment may continue to be given to companies in certain encouraged sectors and to entities
classified as high-technology companies, regardless of whether these are domestically-owned enterprises or FIEs. In November 2009,
the Jiangsu Province Government issued Su Zheng Ban Fa [2009] No. 132 which stipulates that micro-credit companies in Jiangsu
Province is subject to preferential tax rate of 12.5%. As a result, the Company is subject to the preferential tax rate of 12.5%
for 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 years
ended December 31, 2016 and 2015, the Company had no unrecognized tax benefits. For the years ended December 31, 2016, the Company
made net tax operating profit from its PRC subsidiaries and its consolidated VIE of US$479,493. As of December 31, 2016, the Company
has carry-forward tax operating losses from its PRC subsidiaries and its consolidated VIE of US$61,426,881, which will expire
from the year ending December 31, 2019 to 2020. The Company recognized deferred income tax assets of US$11,217,707 as of December
31, 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$11,217,707 as of December 31, 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 RECEIVABLE (CONTINUED)
|
Income
tax payable is comprised of:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Income tax payable
|
|
$
|
169,226
|
|
|
$
|
126,485
|
|
Income
tax expense for years ended December 31, 2016 and 2015 is comprised of:
|
|
For the years ended
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Current income tax expense
|
|
$
|
-
|
|
|
$
|
1,764,058
|
|
Deferred income tax expense
|
|
|
-
|
|
|
|
731,090
|
|
Total provision for income taxes
|
|
$
|
-
|
|
|
$
|
2,495,148
|
|
The
effective tax rates for the years ended December 31, 2016 and 2015 are 0% and -4.25%, respectively.
The
reconciliation between the effective income tax rate and the PRC statutory income tax rate of 25% is as follows:
|
|
For the years ended
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
PRC statutory tax rate
|
|
$
|
25
|
%
|
|
$
|
25
|
%
|
Effect of preferential income tax rate on loan business
|
|
|
3.88
|
%
|
|
|
-8.65
|
%
|
Effect of income tax rate difference in other jurisdiction
|
|
|
-38.18
|
%
|
|
|
-0.22
|
%
|
Effect of non-deductible expenses
|
|
|
-12.95
|
%
|
|
|
0.00
|
%
|
Effect of valuation allowances
|
|
|
22.25
|
%
|
|
|
-17.43
|
%
|
Effect of allowances on income tax receivable
|
|
|
0.00
|
%
|
|
|
-2.9
|
%
|
Effect of others
|
|
|
0.00
|
%
|
|
|
0.73
|
%
|
Total provision for income taxes
|
|
$
|
0.00
|
%
|
|
$
|
-4.25
|
%
|
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 December 31, 2016 and 2015, subsidy of US$1,353,810 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 December 31, 2016 and 2015, the deferred tax liability
amounted to US$139,947 and US$204,266, respectively.
As
of December 31, 2016 and 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
26.
|
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 year ended December 31, 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 December 31, 2016, all outstanding bank borrowings have been repaid.
During
the year ended December 31, 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. By December 31, 2016, the Company has collected US$1,454,563 from
the related party. As of December 31, 2016, the balance of US$469,418 was still outstanding. As of the date of filing, the balance
was collected.
3)
|
Related
party balances
|
Amount
due from related parties were as follows:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Suzhou Rongshengda Investment Holding Co., Ltd.
|
|
$
|
469,418
|
|
|
$
|
-
|
|
Chunjia Textile
|
|
|
196,001
|
|
|
|
622,807
|
|
Huichun Qin
|
|
$
|
1,007,953
|
|
|
$
|
1,078,300
|
|
As
of December 31, 2016, the Company provided financial guarantee service for Chunjia Textile to guarantee loans of US$196,001. The
Company accrued provision of US$98,001 on the outstanding balance as of December 31, 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 December 31, 2016, Huichun Qin has not repaid the balance. The amount was recorded as a deduction of the Company’s
equity as of December 31, 2016 and 2015, respectively.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
27.
|
COMMITMENTS
AND CONTINGENCIES
|
During
the year ended December 31, 2016, the Company leased its new office under a lease agreement from January 1, 2017 to December 31,
2019. As a result, in January 2017, the Company terminated the lease agreement for its former principal office which agreement
was to expire on May 31, 2021. No default penalty was paid for the earlier termination. The following table sets forth the Company’s
contractual obligations as of December 31, 2016 in future periods:
|
|
Rental payments
|
|
|
|
|
|
Year ending December 31, 2017
|
|
|
5,760
|
|
Year ending December 31, 2018
|
|
|
23,621
|
|
Year ending December 31, 2019 and thereafter
|
|
|
25,060
|
|
Total
|
|
$
|
54,441
|
|
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
December 31, 2016 and 2015, the loan amount guaranteed by the Company was US$10,893,089 and US$11,653,342, respectively, for its
financial guarantee service customers.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
27.
|
COMMITMENTS
AND CONTINGENCIES (CONTINUED)
|
The
Company is involved in various legal actions arising in the ordinary course of its business. As of December 31, 2016, the Company
was involved in 107 lawsuits, among which 76 were related to its loan business, 30 were related to guarantee business, and 1 was
related to financing lease business. The Company initiated legal proceedings to collect delinquent balances from borrowers and
guarantees. 82 of these cases with an aggregated claim of US$39.6 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 25 cases with an aggregated claim of USD 19.0 million
have not been adjudicated by the Court as of December 31, 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
|
27.
|
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.
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 and the Company’s attorney
,
it is highly probable for the Company to settle such a Stipulation.
During
the period from January 1, 2017 to the date of this report, the Company assessed the charged-off loan and guarantee balances recorded
as of December 31, 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.