NOTES
TO THE UNAUDITED CONDENSED 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.
VIE
AGREEMENTS WITH WUJIANG LUXIANG
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 UNAUDITED CONDENSED 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 March 31, 2017, PFL had two finance lease transactions.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2.
GOING CONCERN
The unaudited
condensed interim consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. The realization of assets and the satisfaction
of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to operate profitably,
to generate cash flows from operations, and to pursue financing arrangements to support its working capital requirements. The conditions
described below raises substantial doubt about the Company’s ability to continue as a going concern within one year from
the date of this filing.
|
1)
|
Limited funds necessary to maintain operations
|
The Company had
an accumulated deficit of US$71,519,733 as of March 31, 2017. In addition, the Company had net asset (total consolidated assets
exceeding total consolidated current liabilities) of US$1,134,807 as of March 31, 2017. As of March 31, 2017, the Company
had cash and cash equivalents of US$1,080,768, and total short-term borrowings of US$ nil. Caused by the limited funds, the management
assessed that the Company was not able to keep the size of lending business within one year from the filing.
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.
|
2)
|
Recurring operating loss
|
During the three
months ended March 31, 2017, the Company incurred operating loss of $1,285,077. Affected by the reduction of lending business
and guarantee business and increased loss loans, the management was in the opinion that recurring operating losses with be made
within one year from the issuance of the filing.
The Company continues
to use its best effort to improve collection of loan receivable and interest receivable. Management engaged two
PRC law firms to represent the Company in the legal proceedings against the borrowers and their counter guarantors.
|
3)
|
Negative operating cash flow
|
During
the three months ended March 31, 2017, the Company incurred negative operating cash flow of $363,048. Affected by
significant balance of charged-off interest receivable, the management assessed the Company would continue to have negative
operating cash flow within one year from the issuance of the filing.
The Company continues
to reduce the redundant headcount and entered into a new office lease with lower rent commitment since January 1, 2017 to
improve operating cash flow.
Most loan customers
are from textile industry which has been facing downward pressure. Additionally adversely affected by emergence of internet finance
entities, the Company was facing fierce competition. Considering the high risks from both customer base and competitors, management
assessed the Company would further reduced the loan business without strong financial support.
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.
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.
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Basis of presentation and principle of consolidation
The unaudited
condensed interim consolidated financial statements are prepared and presented in accordance with accounting principles generally
accepted in the United States (“U.S. GAAP”).
The unaudited
condensed interim financial information as of March 31, 2017 and for the three months ended March 31, 2017 and 2016 have been prepared
without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and pursuant
to Regulation S-X. Certain information and footnote disclosures, which are normally included in annual financial statements prepared
in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. The unaudited condensed interim financial
information should be read in conjunction with the audited financial statements and the notes thereto, included in the Form 10-K
for the fiscal year ended December 31, 2016 filed with the SEC on April 6, 2017.
In the opinion
of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s
unaudited condensed financial position as of March 31, 2017, its unaudited condensed results of operations for the three months
ended March 31, 2017 and 2016, and its unaudited condensed cash flows for the three months ended March 31, 2017 and 2016, as applicable,
have been made. The unaudited interim results of operations are not necessarily indicative of the operating results for the full
fiscal year or any future periods.
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 three
months ended March 31, 2017 and 2016, 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 condensed
consolidated statements of operations and comprehensive loss.
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(f)
Allowance for loan losses (continued)
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.
(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$2,604,172 as of March 31, 2017 and December 31, 2016, 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 three months ended March 31, 2017 and 2016.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED 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 March 31, 2017 and December 31, 2016,
financial instruments of the Company primarily comprise of cash, restricted cash, notes receivable, loan receivables, guarantee
paid on behalf of guarantee service customers and a related party, other receivable, and deposits payable, which were carried
at cost on the condensed 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.
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Balance sheet items, except for equity accounts
|
|
|
6.8912
|
|
|
|
6.9448
|
|
|
|
For the three months ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Items in the statements of operations and comprehensive loss, and statements of
cash flows
|
|
|
6.8891
|
|
|
|
6.5405
|
|
|
|
|
|
|
|
|
|
|
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 condensed
consolidated statements of comprehensive loss.
(l)
Use of estimates
The preparation of unaudited condensed
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 unaudited condensed
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 unaudited
condensed 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 UNAUDITED CONDENSED 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
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”). 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 UNAUDITED CONDENSED 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:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Guarantee
|
|
$
|
10,977,840
|
|
|
$
|
10,893,089
|
|
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 condensed 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% of contract amount as of both March 31, 2017 and December 31, 2016, and made a provision of US$6,052,334
and US$6,005,609 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$11,725,240
and US$11,641,868 as of March 31, 2017 and December 31, 2016, respectively. The total accrual for financial guarantee services
amounted to US$17,777,574 and US$17,647,477 as of March 31, 2017 and December 31, 2016, respectively. The Company reviews the provision
on a quarterly basis.
The
Company reversed provision of US$7,207 and US$1,411,494 for the three months ended March 31, 2017 and 2016, respectively, as
the Company collected from guarantee customers for payments on behalf
of in the amount of US$7,258 and US$1,411,494,for the three month ended March 31, 2017 and 2016, respectively. Among the collection,
US$7,207 and US$1,411,494 were accrued of 100% allowance as of pervious year end.
As
of March 31, 2017 and December 31, 2016, the management charged off specific provision for two and two customers in the amount
of US$144,079 and US$142,966, 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
loss includes net loss and foreign currency adjustments. Comprehensive loss is reported in the statements of operations and comprehensive
loss.
Accumulated
other comprehensive income, as presented on the balance sheets are the cumulative foreign currency translation adjustments.
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED 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
March 2017, the FASB issued Accounting Standards Board Update No. 2017-07: Improving the Presentation of Net Periodic Pension
Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). ASU 2017-07 requires that an employer report
the service cost component of its net periodic pension and postretirement benefit costs (“net benefit cost”) in the
same line item or items as other compensation costs arising from services rendered by employees during the period. Additionally,
ASU 2017-07 only allows the service cost component of net benefit cost to be eligible for capitalization into inventory. All other
components of net benefit cost, which primarily include interest cost, expected return on assets and the annual mark-to-market
liability remeasurement, are required to be presented in the income statement separately from the service cost component and outside
of income from operations. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods
within that reporting period, and early adoption is only permitted in the first quarter of 2017. The Company is currently evaluating
the impact and timing adopting this guidance will have on the condensed consolidated financial statements.
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 condensed consolidated financial statements.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4.
VARIABLE INTEREST ENTITIES AND OTHER CONSOLIDATION MATTERS
As
of March 31, 2017, the Company had only one VIE.
The
significant terms of the VIE Agreements are summarized in Note 1.
VIEs
are entities that have either a total equity investment that is insufficient to permit the entity to finance its activities without
additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest,
such as through voting rights, right to receive the expected residual returns of the entity or obligation to absorb the expected
losses of the entity. The variable interest holder, if any, that has a controlling financial interest in a VIE is deemed to be
the primary beneficiary and must consolidate the VIE. WFOE is deemed to have a controlling financial interest and be the primary
beneficiary of the entities mentioned in Note 1 above, because it has both of the following characteristics:
|
1.
|
power
to direct activities of a VIE that most significantly impact the entity’s economic performance, and
|
|
2.
|
obligation
to absorb losses of the entity that could potentially be significant to the VIE or right to receive benefits from the entity
that could potentially be significant to the VIE
|
In
addition, as all of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through
either arbitration or litigation in the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved
in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such
as the United States. As a result, uncertainties in the PRC legal system could further limit the Company’s ability to enforce
these contractual arrangements. Furthermore, these contracts may not be enforceable in China if PRC government authorities or
courts take a view that such contracts contravene PRC laws and regulations or are otherwise not enforceable for public policy
reasons. In the event the Company is unable to enforce these contractual arrangements, it may not be able to exert effective control
over Wujiang Luxiang and Pride Information and its ability to conduct its business may be materially and adversely affected.
All
of the Company’s main current operations are conducted through Wujiang Luxiang and PFL. Current regulations in China permit
Wujiang Luxiang and PFL to pay dividends to us only out of its accumulated distributable profits, if any, determined in accordance
with their articles of association and PRC accounting standards and regulations. The ability of Wujiang Luxiang and PFL to make
dividends and other payments to the Company may be restricted by factors including changes in applicable foreign exchange and
other laws and regulations.
The following financial statement amounts
and balances of the VIE were included in the unaudited condensed interim consolidated financial statements as of March 31, 2017
and December 31, 2016 and for the three months ended March 31, 2017 and 2016:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
|
(unaudited)
|
|
|
|
|
Total assets
|
|
$
|
18,395,905
|
|
|
$
|
19,609,945
|
|
Total liabilities
|
|
$
|
19,273,195
|
|
|
$
|
19,654,760
|
|
|
|
For the three months ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue
|
|
$
|
69,145
|
|
|
$
|
231,074
|
|
Net loss
|
|
$
|
706,530
|
|
|
$
|
1,220,370
|
|
CHINA COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED 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.
5.
RISKS
(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 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5.
RISKS (CONTINUED)
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 March 31, 2017 and December 31, 2016, the Company held cash of US$1,080,768 and US$768,501, 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 March 31, 2017 and December 31, 2016.
6.
RESTRICTED CASH
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 March 31, 2017 and December 31, 2016, the balances of restricted
cash were minimal, amounting to US$0.01 million and US$0.01 million, respectively.
At the same time, the Company requires
the guarantee service customers to make a deposit to the Company of the same amount as the deposit the Company pledged to the
banks for their loans. The Company recorded the deposit received as “deposits payable” on the unaudited condensed
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 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7.
LOANS RECEIVABLE, NET
The
interest rates on loan issued ranged between 9.6%~ 19.44% and 9.6%~ 19.44% % for the three months ended March 31, 2017 and 2016,
respectively.
7.1
Loans receivable consist of the following:
|
|
March 31, 2017
|
|
|
December 31,
2016
|
|
|
|
(unaudited)
|
|
|
|
|
Business loans
|
|
$
|
37,966,008
|
|
|
$
|
37,786,657
|
|
Personal loans
|
|
|
20,897,657
|
|
|
|
20,736,324
|
|
Total Loans receivable
|
|
|
58,863,665
|
|
|
|
58,522,981
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
Collectively assessed
|
|
|
(49,803,547
|
)
|
|
|
(50,481240
|
)
|
Individually assessed
|
|
|
(3,089,468
|
)
|
|
|
(1,226,822
|
)
|
Allowance for loan losses
|
|
|
(52,893,015
|
)
|
|
|
(51,708,062
|
)
|
Loans receivable, net
|
|
$
|
5,970,650
|
|
|
$
|
6,814,919
|
|
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 March 31, 2017 and December
31, 2016, the Company had 70 business loan customers and 41 personal loan customers. Most loans are
either guaranteed by a third party whose financial strength is assessed by the Company to be sufficient or secured by collateral.
Allowance on loan losses are estimated loan by loan on a quarterly basis based on an assessment of specific evidence indicating
doubtful collection, historical experience, loan balance aging and prevailing economic conditions.
For
the three months ended March 31, 2017 and 2016, a provision of US$782,882 and US$102,632 were charged to the condensed
consolidated statement of income, respectively. No write-offs against allowances have occurred for the three months ended
March 31, 2017 and 2016, 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 March 31, 2017 and December
31, 2016, respectively:
|
|
March 31, 2017
|
|
|
December 31,
2016
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Business loans
|
|
$
|
36,050,509
|
|
|
$
|
35,885,947
|
|
Personal loans
|
|
|
20,897,657
|
|
|
|
20,693,126
|
|
|
|
$
|
56,948,166
|
|
|
$
|
56,579,073
|
|
The
following table represents the aging of loans as of March 31, 2017 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
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Business loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16,138,384
|
|
|
|
19,912,125
|
|
|
$
|
36,050,509
|
|
|
$
|
1,915,499
|
|
|
$
|
37,966,008
|
|
Personal loans
|
|
|
-
|
|
|
|
43,534
|
|
|
|
6,283,417
|
|
|
|
14,570,706
|
|
|
|
20,897,657
|
|
|
|
-
|
|
|
|
20,897,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
43,534
|
|
|
$
|
22,421,801
|
|
|
|
34,482,831
|
|
|
$
|
56,948,166
|
|
|
$
|
1,915,499
|
|
|
$
|
58,863,665
|
|
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7.
LOANS RECEIVABLE, NET (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
|
|
7.2
Analysis of loans by credit quality indicator
The
following table summarizes the Company’s loan portfolio by credit quality indicator as of March 31, 2017 and December 31,
2016, respectively:
Five Categories
|
|
March 31, 2017
|
|
|
%
|
|
|
December 31,
2016
|
|
|
%
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
1,915,499
|
|
|
|
3.3
|
%
|
|
$
|
1,900,710
|
|
|
|
3.2
|
%
|
Special mention
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Substandard
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Doubtful
|
|
|
9,704,231
|
|
|
|
16.5
|
%
|
|
|
9,866,430
|
|
|
|
16.9
|
%
|
Loss
|
|
|
47,243,935
|
|
|
|
80.3
|
%
|
|
|
46,755,841
|
|
|
|
79.9
|
%
|
Total
|
|
$
|
58,863,665
|
|
|
|
100
|
%
|
|
$
|
58,522,981
|
|
|
|
100
|
%
|
7.3
Analysis of loans by collateral
The
following table summarizes the Company’s loan portfolio by collateral as of March 31, 2017:
|
|
March 31,
2017
(unaudited)
|
|
|
|
|
|
|
Business Loans
|
|
|
Personal Loans
|
|
|
Total
|
|
Guarantee backed loans
|
|
$
|
35,719,767
|
|
|
$
|
20,058,901
|
|
|
$
|
55,778,668
|
|
Collateral backed loans
|
|
|
2,246,241
|
|
|
|
838,756
|
|
|
|
3,084,997
|
|
|
|
$
|
37,966,008
|
|
|
$
|
20,897,657
|
|
|
$
|
58,863,665
|
|
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
|
|
Collateral backed loans
|
|
|
2,228,899
|
|
|
|
832,281
|
|
|
|
3,061,180
|
|
|
|
$
|
37,786,657
|
|
|
$
|
20,736,324
|
|
|
$
|
58,522,981
|
|
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7.
LOANS RECEIVABLE, NET (CONTINUED)
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 March 31,
2017 and December 31, 2016, guaranteed loans make up 94.8% and 94.8% of our direct loan portfolio, respectively.
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.
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.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8.
ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The
following tables present the activity in the allowance for loan losses and related recorded investment in loans receivable by
classes of the loans individually and collectively evaluated for impairment as of and for the three months ended March 31, 2017
and 2016:
|
|
Business Loans
|
|
|
Personal Loans
|
|
|
Total
|
|
For the three months ended March 31, 2017
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Beginning balance
|
|
$
|
32,356,953
|
|
|
$
|
19,351,109
|
|
|
$
|
51,708,062
|
|
Charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Recoveries
|
|
|
(57,337
|
)
|
|
|
-
|
|
|
|
(57,337
|
)
|
Provisions
|
|
|
143,468
|
|
|
|
696,751
|
|
|
|
840,219
|
|
Foreign exchange loss
|
|
|
251,720
|
|
|
|
150,351
|
|
|
|
402,071
|
|
Ending balance
|
|
|
32,694,804
|
|
|
|
20,198,211
|
|
|
|
52,893,015
|
|
Ending balance: individually evaluated for impairment
|
|
|
1,120,277
|
|
|
|
1,969,191
|
|
|
|
3,089,468
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
31,574,527
|
|
|
$
|
18,229,020
|
|
|
$
|
49,803,547
|
|
|
|
Business Loans
|
|
|
Personal Loans
|
|
|
Total
|
|
For the three months ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
35,083,738
|
|
|
$
|
20,511,915
|
|
|
$
|
55,595,653
|
|
Charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Recoveries
|
|
|
(80,014
|
)
|
|
|
-
|
|
|
|
(80,014
|
)
|
Provisions
|
|
|
495,683
|
|
|
|
133,499
|
|
|
|
629,182
|
|
Ending balance
|
|
|
35,499,407
|
|
|
|
20,645,414
|
|
|
|
56,144,821
|
|
Ending balance: individually evaluated for impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
35,499,407
|
|
|
$
|
20,645,414
|
|
|
$
|
56,144,821
|
|
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 March 31, 2017:
|
|
Pass
|
|
|
Special Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Total
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Business loans
|
|
$
|
1,915,499
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,912,246
|
|
|
$
|
29,138,263
|
|
|
$
|
37,966,008
|
|
Personal loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,791,985
|
|
|
|
18,105,672
|
|
|
|
20,897,657
|
|
|
|
$
|
1,915,499
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,704,231
|
|
|
$
|
47,243,935
|
|
|
$
|
58,863,665
|
|
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
|
|
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9.
LOAN IMPAIRMENT
A
loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect
the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered
by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal
and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for
the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest
owed. Impairment is measured on a loan by loan basis for corporate and personal loans by either the present value of expected
future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral
dependent.
An
allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. Currently,
estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value
of the loan’s collateral which approximates to the carrying value due to the short term nature of the loans.
Loans
with modified terms are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is
deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally
involve a temporary below market rate reduction in interest rate or an extension of a loan’s stated maturity date. Non-accrual
troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are
current for six consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired.
Even
though the Company allows a one-time loan extension with a period up to the original loan period, which is usually twelve months.
Such extension is not considered to be a troubled debt restructuring because the Company does not grant a concession to borrowers.
The principal of the loan remains the same and the interest rate is fixed at the current interest rate at the time of extension.
Therefore, there were no troubled debt restructurings during the three months ended March 31, 2017 and 2016, respectively.
CHINA
COMMERCIAL CREDIT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
10.
GUARANTEE PAID ON BEHALF OF GUARANTEE CUSTOMERS
|
|
March 31, 2017
|
|
|
December 31,
2016
|
|
|
|
(unaudited)
|
|
|
|
|
Guarantee paid on behalf of guarantee service customers
|
|
$
|
11,726,082
|
|
|
$
|
11,642,755
|
|
Guarantee paid on behalf of a related party
|
|
|
197,526
|
|
|
|
196,001
|
|
Total
|
|
$
|
11,823,608
|
|
|
$
|
11,838,756
|
|
As
of March 31, 2017 and December 31, 2016, guarantee paid on behalf of guarantee service customers represents payment made by the
Company to banks on behalf of thirty-two 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 March 31, 2017 and December 31, 2016, the Company accrued allowance on the
balance in “accrual for financial guarantee services” in the value of US$17,777,574 and US$17,647,477
,
respectively, $11,725,241 and $11,641,869 of which related to accrued allowance on payment on behalf of guarantee customers.
11.
OTHER ASSETS
Other
assets as of March 31, 2017 and December 31, 2016 consisted of:
|
|
March 31, 2017
|
|
|
December 31,
2016
|
|
|
|
(unaudited)
|
|
|
|
|
Other prepaid expense
|
|
|
45,347
|
|
|
|
20,456
|
|
Deposit for court filing fees and legal fees
|
|
|
233,235
|
|
|
|
235,871
|
|
Other receivables
|
|
|
13,817
|
|
|
|
44,997
|
|
|
|
$
|
292,399
|
|
|
$
|
301,324
|
|
Deposit
for court filing fees and legal fees will be claimed from default customers.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED 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:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
|
(unaudited)
|
|
|
|
|
Within 1 year
|
|
$
|
3,555,282
|
|
|
$
|
3,599,831
|
|
2 years
|
|
|
-
|
|
|
|
-
|
|
3 years
|
|
|
-
|
|
|
|
-
|
|
Total minimum lease receipts
|
|
|
3,555,282
|
|
|
|
3,599,831
|
|
Less: amount representing interest
|
|
|
(289,242
|
)
|
|
|
(287,009
|
)
|
Present value of minimum lease receipts
|
|
$
|
3,266,040
|
|
|
$
|
3,312,822
|
|
Following
is a summary of the components of the Company’s net investment in direct financing leases as of March 31, 2017 and December
31, 2016:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
|
(unaudited)
|
|
|
|
|
Total minimum lease payments to be received
|
|
$
|
3,555,282
|
|
|
$
|
3,599,831
|
|
Less: Amounts representing estimated executory costs
|
|
|
-
|
|
|
|
-
|
|
Minimum lease payments receivable
|
|
|
3,555,282
|
|
|
|
3,599,831
|
|
Less Allowance for uncollectible
|
|
|
(2,424,381
|
)
|
|
|
(2,441,663
|
)
|
Net minimum lease payments receivable
|
|
|
1,130,901
|
|
|
|
1,158,168
|
|
Estimated residual value of leased property
|
|
|
|
|
|
|
-
|
|
Less: Unearned income
|
|
|
(289,242
|
)
|
|
|
(287,009
|
)
|
Net investment in direct financing lease
|
|
$
|
841,659
|
|
|
$
|
871,159
|
|
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED 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)
|
|
March 31, 2017
|
|
|
December 31,
2016
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
Furniture and fixtures
|
|
5
|
|
$
|
20,970
|
|
|
$
|
20,808
|
|
Electronic equipment
|
|
3
|
|
|
132,335
|
|
|
|
131,314
|
|
Leasehold improvement
|
|
3
|
|
|
160,904
|
|
|
|
159,662
|
|
Less: accumulated depreciation
|
|
|
|
|
(295,730
|
)
|
|
|
(291,815
|
)
|
Property and equipment, net
|
|
|
|
$
|
18,479
|
|
|
$
|
19,969
|
|
Depreciation
expense totaled US$1,646 and $19,006 for the three months ended March 31, 2017 and 2016, respectively.
14.
DEPOSITS PAYABLE
Deposits
payable are security deposits required from customers in order to obtain guarantees and finance leases from the Company. The deposits
are refundable to the customers when the customers fulfill their obligations under guarantee and finance lease contracts.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
15.
UNEARNED INCOME FROM GUARANTEE SERVICES AND FINANCING LEASE SERVICES
The
Company receives guarantee commissions in full at the inception and records unearned income before amortizing it throughout the
guarantee service life. Unearned income from guarantee services was US$nil and US$2,820 as of March 31, 2017 and December 31,
2016, 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$12,697 and US$17,999 as of March 31, 2017
and December 31, 2016, respectively.
16.
OTHER CURRENT LIABILITIES
Other
current liabilities as of March 31, 2017 and December 31, 2016 consisted of:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
|
(unaudited)
|
|
|
|
|
Accrued payroll
|
|
$
|
39,082
|
|
|
$
|
37,575
|
|
Accrued office rental expenses
|
|
|
34,827
|
|
|
|
34,558
|
|
Other tax recoverable
|
|
|
(40,338
|
)
|
|
|
(44,007
|
)
|
Accrued provision for cash settlement against legal proceedings
|
|
|
225,000
|
|
|
|
225,000
|
|
Other payable
|
|
|
20,480
|
|
|
|
20,321
|
|
|
|
$
|
279,051
|
|
|
$
|
273,447
|
|
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) $245,000 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 950,000 shares of freely tradable 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.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
17.
OTHER OPERATING EXPENSE
Other
operating expense for the three months ended March 31, 2017 and 2016 consisted of:
|
|
For the three months ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Depreciation and amortization
|
|
$
|
1,646
|
|
|
$
|
20,144
|
|
Travel expenses
|
|
|
11
|
|
|
|
144
|
|
Entertainment expenses
|
|
|
1,941
|
|
|
|
6,758
|
|
Legal and consulting expenses
|
|
|
117,477
|
|
|
|
167,191
|
|
Car expenses
|
|
|
4,456
|
|
|
|
10,215
|
|
Bank charges
|
|
|
990
|
|
|
|
953
|
|
Audit-related expense
|
|
|
71,781
|
|
|
|
30,746
|
|
Other expenses
|
|
|
61,504
|
|
|
|
17,221
|
|
Total
|
|
$
|
259,806
|
|
|
$
|
253,372
|
|
18.
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$2,985 and US$11,999
for the three months ended March 31, 2017 and 2016, respectively.
|
19.
|
DISTRIBUTION
OF PROFIT
|
The
Company did not distribute any dividend to its shareholders for the three months ended March 31, 2017 and 2016, respectively.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
20.
CAPITAL TRANSACTION
Common
Stock
The
Company is authorized to issue up to 100,000,000 shares of Common Stock.
On
March 2, 2017, the Company issued 92,875 and 92,875 unregistered shares to Long Yi, the Company’s Chief Financial Officer
and Yang Jie, the Company’s VP of Finance, respectively. The shares were issued at a market value of US$1.04 per share,
in the total amount of US$193,180, for the services provided.
As
of March 31, 2017, there were 16,823,429 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.
As
of March 31, 2017, the Company had outstanding warrants to purchase 1,123,400 shares.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
20.
CAPITAL TRANSACTION (CONTINUED)
Preferred
Stock
The
Company is authorized to issue up to 10,000,000 shares of preferred stock, of which 1,000,000 shares are designated as Series
A Convertible Preferred Stock (the “Series A Stock”) and 5,000,000 shares are designated as Series B Convertible Preferred
Stock (the “Series B Stock”).
The
Series A Stock ranked (i) prior to the Common Stock and to all other classes and series of equity securities of the Company which
by their terms do not rank senior to the Series A Stock, and (ii) junior to any class or series of equity securities which by
its terms ranked senior to the Series A Stock. The Series A 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.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
21.
STATUTORY RESERVE
In
accordance with the PRC Regulations on Enterprises with Foreign Investment and the articles of association of the Company’s
PRC subsidiaries, a foreign-invested enterprise established in the PRC is required to provide statutory reserve, which is appropriated
from net profit as reported in the enterprise’s PRC statutory accounts. A foreign-invested enterprise is required to allocate
at least 10% of its annual after-tax profit to the general reserve until such reserve has reached 50% of its respective registered
capital based on the enterprise’s PRC statutory accounts. The Company allocates 15% of its annual after-tax profit to the
statutory reserve. The statutory reserve can only be used for specific purposes and are not distributable as cash dividends. WFOE
was established as a foreign-invested enterprise and, therefore, is subject to the above mandated restrictions on distributable
profits. For the three months ended March 31, 2017 and 2016, the Company did not accrue the statutory reserve due to accumulated
deficit.
22.
(LOSS)/INCOME PER COMMON SHARE
The
following table sets forth the computation of basic and diluted earnings per common share for the three months ended March 31,
2017 and 2016, respectively:
|
|
For the Three Months Ended
|
|
|
|
March
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Net (loss)/income
attributable to the common shareholders
|
|
$
|
(1,285,077
|
)
|
|
$
|
1,130,476
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
|
16,697,532
|
|
|
|
12,395,205
|
|
Effect of dilutive securities
|
|
|
-
|
|
|
|
-
|
|
Diluted weighted-average common
shares outstanding
|
|
|
16,697,532
|
|
|
|
12,395,205
|
|
|
|
|
|
|
|
|
|
|
(Loss)/Income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.077
|
)
|
|
$
|
0.091
|
|
Diluted
|
|
$
|
(0.077
|
)
|
|
$
|
0.091
|
|
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 three months
ended March 31, 2017 and 2016. The number of warrants is omitted from the computation as the anti-dilutive effect.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
23.
INCOME TAXES
Effective
January 1, 2008, the New Taxation Law of PRC stipulates that domestically owned enterprises and foreign invested enterprises (the
“FIEs”) are subject to a uniform tax rate of 25%. While the New Tax Law equalizes the tax rates for FIEs and domestically
owned enterprises, preferential tax treatment may continue to be given to companies in certain encouraged sectors and to entities
classified as high-technology companies, regardless of whether these are domestically-owned enterprises or FIEs. In November 2009,
the Jiangsu Province Government issued Su Zheng Ban Fa [2009] No. 132 which stipulates that micro-credit companies in Jiangsu
Province is subject to preferential tax rate of 12.5%. As a result, the Company is subject to the preferential tax rate of 12.5%
for its loan business for the periods presented. The taxation practice implemented by the tax authority governing the Company
is that the Company pays enterprise income taxes at rate of 25% on a quarterly basis, and upon annual tax settlement done by the
Company and the tax authority in five (5) months after December 31 the tax authority will refund the Company the excess enterprise
income taxes it paid beyond the rate of 12.5%. However since 2015, the excess enterprise income taxes paid will not be refunded
but can be used to offset the future income tax payable arising from taxable income.
The Company evaluates the level of authority
for each uncertain tax position (including the potential application of interest and penalties) based on the technical merits,
and measures the unrecognized benefits associated with the tax positions. For the three months ended March 31, 2017 and 2016,
the Company had no unrecognized tax benefits. For the three months ended March 31, 2017, the Company made net tax operating profit
from its PRC subsidiaries and its condensed consolidated VIE of US$1,084,871. As of March 31, 2017, the Company has carry-forward
tax operating losses from its PRC subsidiaries and its condensed consolidated VIE of US$62,511,752, which will expire from the
year ending December 31, 2019 to 2022. The Company recognized deferred income tax assets of US$11,465,935 as of March 31, 2017.
However, the Company estimates there will be no sufficient net income before income tax from years ending December 31, 2017 to
2022 to realize the deferred income tax assets. The Company provided valuation allowance for deferred income tax assets of US$11,465,935
as of March 31, 2017. As such, the effective tax rates for the three months ended March 31, 2017 and 2016 are 0% and 0%, respectively.
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.
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 March 31, 2017 and December 31, 2016, subsidy of US$1,510,520 and US$1,353,810 did not fulfill the purpose within due date
and the related deferred tax liability was transferred to income tax payable. As of March 31, 2017 and December 31, 2016, the
deferred tax liability amounted to US$120,388 and US$139,947, respectively.
As
of March 31, 2017 and December 31, 2016, 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 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
24.
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
|
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, 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. Due to the short-term borrowing, the Company did not charge any interest
or fees. By March 31, 2017, the balance was collected.
|
3)
|
Related
party balances
|
Amount
due from related parties were as follows:
|
|
March
31, 2017
|
|
|
December 31,
2016
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Suzhou Rongshengda Investment H.olding Co., Ltd.
|
|
$
|
-
|
|
|
$
|
469,418
|
|
Chunjia Textile
|
|
|
197,526
|
|
|
|
196,001
|
|
Huichun Qin
|
|
$
|
1,015,795
|
|
|
$
|
1,007,953
|
|
As
of March 31, 2017, the Company provided financial guarantee service for Chunjia Textile to guarantee loans of US$197,526. The
Company accrued provision of US$98,763 on the outstanding balance as of March 31, 2017.
Huichun
Qin transferred $1,098,197(equivalent of RMB 7 million) to his personal account without proper authorization on July 2, 2014.
As of March 31, 2017, Huichun Qin has not repaid the balance. The amount was recorded as a deduction of the Company’s equity
as of March 31, 2017 and December 31, 2016, respectively.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
25.
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 March 31, 2017 in future periods:
|
|
Rental payments
|
|
|
|
(unaudited)
|
|
Year ending March 31, 2018
|
|
|
43,826
|
|
Year ending March 31, 2019
|
|
|
24,167
|
|
Year ending March 31, 2020 and thereafter
|
|
|
18,941
|
|
Total
|
|
$
|
86,934
|
|
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
March 31, 2017 and December 31, 2016, the loan amount guaranteed by the Company was US$10,977,840 and US$10,893,089, respectively,
for its financial guarantee service customers.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
25.
COMMITMENTS AND CONTINGENCIES (CONTINUED)
The
Company is involved in various legal actions arising in the ordinary course of its business. As of March 31, 2017, the Company
was involved in 109 lawsuits, among which 76 were related to its loan business and 32 were related to guarantee business and 1
was related to financial lease. The Company initiated legal proceedings to collect delinquent balances from borrowers and guarantees.
82 of these cases with an aggregated claim of US$39.29 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 27 cases with an aggregated claim of US$19.84 million
have not been adjudicated by the Court as of March 31, 2017.
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.
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 $245,000 in
cash and issuance of 950,000 shares of its common stock (the “Settlement Shares”) to the class members. The terms
of the Stipulation are subject to approval by the Court following notice to all class members. The issuance of the Settlement
Shares is expected to be exempt from registration pursuant to Section 3(a)(10) of the Securities Act of 1933, as amended. It is
probable that the Stipulation will be approved by the Court and take effect. The Company accrued settlement cost aggregating US$
690,000 during the six months ended June 30, 2016. A fairness hearing is scheduled in the U.S. District Court for the Southern
District of New York on May 31, 2017.
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 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
25.
COMMITMENTS AND CONTINGENCIES (CONTINUED)
|
3)
|
Contingencies
(continued)
|
On February 3, 2015, a purported shareholder
KiramKodali filed a putative shareholder derivative complaint in the United States District Court for the Southern District of
New York, captioned KiranKodali 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.
During
the period from April 1, 2017 to the date of this report, the Company assessed the charged-off loan and guarantee balances recorded
as of March 31, 2017 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.
2)
|
Issuance of new shares
|
On
April 20, 2017, the Company issued 500,000 unregistered shares to four individuals, all of whom are citizens of P.R.C, for their
services provided to the Company.
The Company compensates
each of the individuals with 125,000 shares of common stock of the Company as incentive to seek financial support for the Company.