* All of the VIEs’ assets can be used
to settle obligations of their primary beneficiary. Liabilities recognized as a result of consolidating these VIEs do not represent
additional claims on the Company’s general assets (Note 1).
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
ORGANIZATION AND PRINCIPAL ACTITIVIES
|
China Commercial Credit, Inc. (“CCC”
or “the Company”) is a holding company that was incorporated under the laws of the State of Delaware on December 19,
2011.
Wujiang Luxiang Rural Microcredit Co., Ltd
(“Wujiang Luxiang”) is a company established under the laws of the PRC on October 21, 2008 and its shareholders consist
of 11 companies established under the laws of the People's Republic of China (“PRC”) and 1 PRC individual, Mr. Qin
Huichun, the Company's former CEO (collectively, the "Wujiang Luxiang Shareholders"). The Company is a microcredit company
primarily engaged in providing direct loans and financial guarantee services to small-to-medium sized enterprises (“SMEs”),
farmers and individuals in Wujiang City, Jiangsu Province, PRC.
On August 7, 2012, CCC entered into certain
share exchange agreements with 16 PRC individuals, each of whom is the sole shareholder of a British Virgin Island company (collectively
“16 BVI entities”) and the 16 BVI entities. These 16 PRC individuals represent the ultimate owners of the Wujiang Luxiang
Shareholders.
Upon completion of the share exchange, the
16 PRC individuals, through their respective BVI entities, acquired 7,270,920 shares of Common Stock, par value $0.001 per share
(the "Common Stock") of CCC in exchange for their agreement to cause the Wujiang Luxiang Shareholders to enter into the
Variable Interest Entity (the “VIE”) Agreements. As a result of the share exchange, the 16 BVI entities became CCC
shareholders, who collectively owned approximately 90% of CCC’s total issued and outstanding shares of Common Stock at the
time of the share exchange.
Since at the time of the share exchange neither
CCC nor the 16 BVI entities had any operations and only a minor amount of net assets, the share exchange shall be considered as
a capital transaction in substance, rather than a business combination.
The share exchange is recorded as a “reverse
recapitalization” equivalent to the issuance of stocks to the 16 BVI entities for the net monetary assets of CCC. The accounting
for the transaction is identical to a reverse acquisition, except that no goodwill is recorded.
Management of the Company looked through the
16 BVI entities and treated the share exchange as a reverse merger between CCC and Wujiang Luxiang for accounting purposes, even
though the share exchange was between CCC and the 16 BVI entities, because of the following reasons: (i) neither CCC nor the 16
BVI entities had any operations and only a minor amount of net assets; (ii) the 16 PRC individual, who are the owners of the 16
BVI entities, are the ultimate owners of Wujiang Luxiang, and (iii) the sole purpose of the share exchange was to issue approximately
90% of pre-public offering CCC shares to the ultimate owners of Wujiang Luxiang Shareholders.
VIE AGREEMENTS WITH WUJIANG LUXIANG
Subsequent to the share exchange, on September
26, 2012, the Company through its indirectly wholly owned subsidiary, Wujiang Luxiang Information Technology Consulting Co. Ltd.
(“WFOE”), entered into a series of VIE Agreements with Wujiang Luxiang and the Wujiang Luxiang Shareholders. The purpose
of the VIE Agreements is solely to give WFOE the exclusive control over Wujiang Luxiang’s management and operations.
The significant terms of the VIE Agreements
are summarized below:
Exclusive Business Cooperation Agreement
Pursuant to the Exclusive Business Cooperation
Agreement between Wujiang Luxiang and WFOE, WFOE provides Wujiang Luxiang with technical support, consulting services and other
management services relating to its day-to-day business operations and management, on an exclusive basis, utilizing its advantages
in technology, human resources, and information. Additionally, Wujiang Luxiang grants an irrevocable and exclusive option to WFOE
to purchase from Wujiang Luxiang any or all of its assets at the lowest purchase price permitted under PRC laws. For services rendered
to Wujiang Luxiang by WFOE under the Agreement, the service fee Wujiang Luxiang is obligated to pay shall be calculated based on
the time of services rendered multiplied by the corresponding rate, which is approximately equal to the net income of Wujiang Luxiang.
The Exclusive Business Cooperation Agreement
shall remain in effect for ten years unless it is terminated by WFOE with 30-day prior notice. Wujiang Luxiang does not have the
right to terminate the agreement unilaterally. WFOE may unilaterally extend the term of this agreement with prior written notice.
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
ORGANIZATION AND PRINCIPAL ACTITIVIES (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, 2016, PFL
had two finance lease transactions.
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
ORGANIZATION AND PRINCIPAL ACTITIVIES (CONTINUED)
|
VIE AGREEMENTS WITH PRIDE INFORMATION
On February 19, 2014, WFOE entered into certain
contractual arrangements with Mr. Huichun Qin and Pride Information Technology Co. Ltd. (“Pride Information”), a domestic
entity established on February 19, 2014 and 100% owned by Mr. Qin. Pursuant to these contractual arrangements, WFOE shall have
the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Pride
Information, including absolute control rights and the rights to the assets, property and revenue of Pride Information and as a
result, approximately 100% of the net income of Pride Information will be paid as a service fee to WFOE.
The contractual arrangements between WFOE,
Pride Information and its sole shareholder, Mr. Huichun Qin, have substantially the same terms as those between WFOE, Wujiang Luxiang
and its shareholders.
On April 11, 2015, WFOE delivered a notice
of termination to Pride Information. As a result, the contractual arrangements between WFOE, Pride Information and Mr. Qin were
terminated effective on May 11, 2015 and WFOE no longer controls Pride Information.
Completion of the Internal Review
Based on the Chief Financial Officer’s
review of the books and records of the Company, the Company has made a preliminary determination that following the close of the
fiscal quarter ended June 30, 2014, RMB 7 million (approximately $1.1 million) was transferred (the “Transfer at Issue”)
from the bank account of WFOE, without authorization to the personal account of a former executive officer of the Company,
who was still an executive officer at the time of the transfer. The funds were supposed to be used for the purpose of increasing
the registered capital account of Wujiang Luxiang. The Company has sought return of the funds but to date has not recovered them.
The Company’s Board of Directors explored all means, including legal avenues, to recover the funds and had formed a Special
Committee to undertake an internal review of the circumstances surrounding the transfer.
On January 26, 2015, the Special Committee
notified the Board of Directors that the internal review surrounding the Transfer at Issue was completed. The internal review confirmed
that Mr. Qin transferred RMB 7 million (approximately $1.1 million) from WFOE’s bank account to his personal bank account.
The internal review team was unable to interview Mr. Qin. The missing funds have not yet been recovered and the Company has engaged
local PRC counsel to assist in the matter.
During the internal review, the independent
counsel examined whether other transfers had occurred that were similar to the Transfer at Issue, in that the Company’s funds
were transferred to a related party in a manner that was not consistent with the Company’s corporate governance and internal
control procedures. The independent counsel identified four transfers made by Mr. Qin that were not consistent with the Company’s
corporate governance and internal control procedures. With respect to the first three transfers, all funds were either returned
to the Company or applied to the Company’s business. With respect to the fourth transfer, the funds were used to increase
the registered capital of Wujiang Luxiang, a variable interest entity the Company controls via a series of contractual arrangements,
as intended and reflected in an application made to the PRC government for such increase of registered capital.
The internal review indicated that the Company’s
control deficiencies contributed to the Transfer at Issue. The internal review also found that, since the discovery of the Transfer
at Issue, the Company has taken various steps to improve its internal controls and procedures, including implementing a new fund
transfer approval policy and procedures and new standards of credit risk assessment which are carried out by the newly formed Loan
Review Committee. The internal review conducted by independent counsel engaged by the Special Committee of the Board of Directors
observed that such new controls and procedures appear to be much more thorough and comprehensive.
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
(a) Basis of presentation
and principle of consolidation
The unaudited interim
consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the
United States (“U.S. GAAP”).
The interim financial
information as of March 31, 2016 and for the three months ended March 31, 2016 and 2015 have been prepared without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and pursuant to Regulation S-X.
Certain information and footnote disclosures, which are normally included in annual financial statements prepared in accordance
with U.S. GAAP, have been omitted pursuant to those rules and regulations. The unaudited interim financial information should be
read in conjunction with the audited financial statements and the notes thereto, included in the Form 10-K for the fiscal year
ended December 31, 2015 filed with the SEC on April 14, 2016.
In the opinion of
management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s
financial position as of March 31, 2016, its results of operations for the three months ended March 31, 2016 and 2015, and its
cash flows for the three months ended March 31, 2016 and 2015, as applicable, have been made. The unaudited interim results of
operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.
The unaudited interim
consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. The realization of assets and the satisfaction of liabilities
in the normal course of business are dependent on, among other things, the Company’s ability to operate profitably, to generate
cash flows from operations, and to pursue financing arrangements to support its working capital requirements.
The Company has
suffered an accumulated deficit of US$67,124,044 as of March 31, 2016. In addition, the Company had working capital (total
consolidated current assets exceeding total consolidated current liabilities) of US$2,046,339 as of March 31, 2016. As of
March 31, 2016, the Company had cash and cash equivalents of US$250,267, and total short-term borrowings of US$ nil.
These and other factors
disclosed in this quarterly report raise substantial doubt as to the Company’s ability to continue as a going concern.
Management believes that it has developed a liquidity plan, as summarized below, that, if executed successfully, will provide sufficient
liquidity to meet the Company obligations for a reasonable period of time.
|
·
|
Bank Financing and Other Financial Support
|
On October 30, 2015,
the Company entered into a borrowing agreement with Agriculture Bank of China for a one-year bank facility of Rmb 29 million (or
approximately $4 million). As of March 23, 2016, the Company has paid off all outstanding bank borrowings. The Company may use
this bank credit line in the next few months and lend new direct loans to customers if the economic condition in Wujiang area improved.
The credit line is guaranteed by Wujiang Luxiang Shareholders and can be renewed with a prior written application to Agriculture
Bank of China.
Meanwhile, 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.
|
·
|
Improvement in Working Capital Management
|
In order to meet the
capital needs for our continued operations, we continue to use our best effort to improve our collection of loan receivable and
interest receivable. We engaged four law firms, Jiangsu Zhenyuzhen Law Firm, Jiangsu Tianbian Law Firm, Jiangsu Mingren Law Firm
and He-Partners Law Firm to represent us in the legal proceedings against the borrowers and their counter guarantors. Among them,
He-Partners Law Firm, is one of the largest law firms in Suzhou City.
While management believes
that the measures in the liquidity plan will be adequate to satisfy its liquidity and cash flow requirements for the twelve months
ending March 31, 2017, there is no assurance that the liquidity plan will be successfully implemented. Failure to successfully
implement the liquidity plan will have a material adverse effect on the Company’s business, results of operations and financial
position, and may materially adversely affect its ability to continue as a going concern.
All significant inter-company
accounts and transactions have been eliminated in consolidation.
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
(b) Operating segments
ASC 280, Segment Reporting requires companies
to report financial and descriptive information about their reportable operating segments, including segment profit or loss, certain
specific revenue and expense items, and segment assets. The Company has no reportable segments. All of the Company's activities
are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others.
For example, lending is dependent upon the ability of the Company to fund itself with registered capital and other borrowings and
manage interest rate and credit risk.
The Company has only one reportable segment,
which is to provide financial services in the PRC domestic market, primarily in Wujiang City, Jiangsu Province. The Company’s
chief operating decision-maker (“CODM”) has been identified as the Chief Executive Officer, who reviews operating results
to make decisions about allocating resources and assessing performance for both the direct lending and guarantee business and the
anticipated financial leasing business. The Company’s net revenues are all generated from customers in the PRC. Hence, the
Company operates and manages its business without segments. For the three months ended March 31, 2016 and 2015, there was no one
customer that accounted for more than 10% of the Company's revenue.
(c)
Cash
Cash consists of bank deposits with original
maturities of three months or less, which are unrestricted as to withdrawal and use The Company maintains accounts at banks and
has not experienced any losses from such concentrations.
(d) Restricted cash
Restricted cash represents cash pledged with
banks as guarantor deposit for the guarantee business customers. The banks providing loans to the Company’s guarantee service
customers generally require the Company, as the guarantor of the loans, to pledge a cash deposit of 10% to 20% of the guaranteed
amount to an escrow account and is restricted from use. The deposits are released after the guaranteed bank loans are paid off
and the Company’s guarantee obligation expires which is usually within 12 months.
(e)
Loans receivable, net
Loans receivable primarily represent loan amount
due from customers. The management has the intent and ability to hold such receivable for the foreseeable future or until maturity
or payoff. Loans receivable are recorded at unpaid principal balances, net of allowance for loan losses that reflects the Company’s
best estimate of the amounts that will not be collected. Loan origination and commitment fees and certain direct loan origination
costs collected from customers are directly recorded in current year interests and fees on loans. The loans receivable portfolio
consists of corporate loans and personal loans (Note 6). The Company does not charge loan origination and commitment fees.
(f) Allowance for loan losses
The allowance for loan losses is increased
by charges to income and decreased by charge offs (net of recoveries). Recoveries represent subsequent collection of amounts previously
charged-off. The increase in allowance for loan losses is the netting effect of “reversal” and “provision”
for both business and personal loans. If the ending balance of the allowance for loan losses after any charge offs (net of recoveries)
is less than the beginning balance, it will be recorded as a “reversal”; if it is larger, it will be recorded as a
“provision” in the allowance for loan loss. The netting amount of the “reversal” and the “provision”
is presented in the consolidated statements of operations and comprehensive income (loss).
The Company recognizes a charge-off when management
determines that full repayment of a loan is not probable. The primary factor in making that determination is the potential outcome
of a lawsuit against the delinquent debtor. The Company will recognize a charge-off when the Company loses contact with the delinquent
borrower for more than six months or when the court rules against the Company to seize the collateral asset of the delinquent debt
from either the guarantor or borrower.
The allowance for loan losses is maintained
at a level believed to be reasonable by management to absorb probable losses inherent in the portfolio as of each balance sheet
date. The allowance is based on factors such as the size and current risk characteristics of the portfolio, an assessment of individual
loan and actual loss, delinquency, and/or risk rating record within the portfolio (Note 7). The Company evaluates its allowance
for loan losses on a quarterly basis or more often as necessary.
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
(g)
Interest receivable
Interest on loans receivable is accrued and
credited to income as earned. The Company determines a loan past due status by the number of days that have elapsed since a borrower
has failed to make a contractual loan payment. Accrual of interest is generally discontinued when either (i) reasonable doubt exists
as to the full, timely collection of interest or principal or (ii) when a loan becomes past due by more than 90 days. Additionally,
any previously accrued but uncollected interest is reversed. Subsequent recognition of income occurs only to the extent payment
is received, subject to management’s assessment of the collectability of the remaining interest and principal. Loans are
generally restored to an accrual status when it is no longer delinquent and collectability of interest and principal is no longer
in doubt and past due interest is recognized at that time.
The interest reversed due to the above reason
was $3,727,830 and $2,593,611 as of March 31, 2016 and December 31, 2015, respectively.
(h)
Property and equipment
The property and equipment are stated at cost
less accumulated depreciation. The depreciation is computed on a straight-line method over the estimated useful lives of the assets
with 5% salvage value. Estimated useful lives of property and equipment are stated in Note 12.
The Company eliminates the cost and related
accumulated depreciation of assets sold or otherwise retired from the accounts and includes any gain or loss in the statement of
income. The Company charges maintenance, repairs and minor renewals directly to expenses as incurred; major additions and betterment
to equipment are capitalized.
(i)
Impairment of long-lived assets
The Company applies the provisions of ASC No.
360 Sub topic 10, "Impairment or Disposal of Long-Lived Assets"(ASC 360- 10) issued by the Financial Accounting Standards
Board ("FASB"). ASC 360-10 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to
result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized
for the amount by which the carrying value exceeds the fair value.
The Company tests long-lived assets, including
property and equipment and finite lived intangible assets, for impairment at least annually or more frequently upon the occurrence
of an event or when circumstances indicate that the net carrying amount is greater than its fair value. Assets are grouped and
evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups
of assets. The Company considers historical performance and future estimated results in its evaluation of potential impairment
and then compares the carrying amount of the asset to the future estimated cash flows expected to result from the use of the asset.
If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount
of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally measured
by discounting expected future cash flows as the rate the Company utilizes to evaluate potential investments. The Company estimates
fair value based on the information available in making whatever estimates, judgments and projections are considered necessary.
There were no impairment losses in the three months ended March 31, 2016 and 2015.
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
(j) Fair values of financial instruments
ASC Topic 825, Financial Instruments (“Topic
825”) requires disclosure of fair value information of financial instruments, whether or not recognized in the balance sheets,
for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based
on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments.
Topic 825 excludes certain financial instruments and all nonfinancial assets and liabilities from its disclosure requirements.
Accordingly, the aggregate fair value amounts do not represent the underlying value of the Company.
Level 1
|
inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active markets.
|
|
|
Level 2
|
inputs to the valuation methodology include quoted prices
for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly
or indirectly, for substantially the full term of the financial instruments
|
|
|
Level 3
|
inputs to the valuation methodology are unobservable
and significant to the fair value.
|
As of March 31, 2016 and December 31, 2015,
financial instruments of the Company primarily comprise of cash, restricted cash, notes receivable, loan receivables, other receivable,
short-term bank loans, deposits payable and accrued expenses, which were carried at cost on the consolidated balance sheets, and
carrying amounts approximated their fair values because of their generally short maturities.
(k) Foreign currency
transaction and translation
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,
2016
|
|
|
December 31,
2015
|
|
Balance sheet items, except for equity accounts
|
|
|
6.4494
|
|
|
|
6.4917
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Items in the statements of income and comprehensive income, and statements of cash flows
|
|
|
6.5405
|
|
|
|
6.1444
|
|
|
|
|
|
|
|
|
|
|
Transactions denominated in currencies other
than the functional currency are translated into prevailing functional currency at the exchange rates prevailing at the dates of
the transactions. The resulting exchange differences are included in the consolidated statements of comprehensive loss.
(l) Use of estimates
The preparation of consolidated financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, management reviews
these estimates using the currently available information. Changes in facts and circumstances may cause the Company to revise its
estimates. Significant accounting estimates reflected in the financial statements include: (i) the allowance for doubtful debts;
(ii) estimates of losses on unexpired loan contracts and guarantee service contracts; (iii) accrual of estimated liabilities; (iv)
useful lives of long-lived assets; (v) the impairment of long-lived assets; (vi) the valuation allowance of deferred tax assets;
and (vii) contingencies and litigation.
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
(m) Revenue recognition
Revenue is recognized when there are probable
economic benefits to the Company and when the revenue can be measured reliably, on the following:
|
●
|
Interest income on loans. Interest on loan receivables is accrued monthly in accordance with their contractual terms and recorded in accrued interest receivable. The Company does not charge prepayment penalty from customers. Additionally, any previously accrued but uncollected interest is discontinued of accrual and reversed, when either (i) reasonable doubt exists as to the full, timely collection of interest or principal or (ii) when a loan becomes past due by more than 90 days.
|
|
|
|
|
●
|
Commission on guarantee service. The Company receives the commissions from guarantee services in full at inception and records as unearned income before amortizing it throughout the period of guarantee.
|
|
|
|
|
●
|
Income on direct financing lease. The financing agreements are classified as direct financing lease as prescribed by the Financial Accounting Standards Board ("FASB Codification"). Revenues representing the capitalized costs of the investment are recognized as income upon inception of the leases. The portion of revenues representing the difference between the gross investment in the lease (the sum of the minimum lease payments and the guaranteed residual value, if any) and the sum of the present value of the two components is recorded as unearned income and amortized over the lease term
|
|
|
|
|
|
Taxes assessed by governmental authorities that are directly imposed on revenue-producing transactions between the Company and its customers (which may include, but are not limited to, sales, use, value added and some excise taxes) are excluded from revenues.
|
|
|
|
|
|
Lessees are responsible for all taxes, insurance and maintenance costs.
|
|
|
|
|
●
|
Non-interest income. Non-interest income mainly includes rental income from the sub-leasing of certain of the Company’s leased office space to third parties and income from disposal of property and equipment
|
(n) Financial guarantee service contract
Financial guarantee service contracts provides
guarantee which protects the holder of a debt obligation against default. Pursuant to such guarantee, the Company makes payments
if the obligor responsible for making payments fails to do so as scheduled.
The contract amounts reflect the extent of
involvement the Company has in the guarantee transaction and also represent the Company’s maximum exposure to credit loss
in its guarantee business.
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
(n) Financial guarantee service contract
(continued)
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its customers. Financial instruments representing credit risk
are as follows:
|
|
March 31, 2016
(Unaudited)
|
|
|
December 31,
2015
|
|
Guarantee
|
|
$
|
11,729,864
|
|
|
$
|
11,653,342
|
|
A provision for possible loss to be absorbed
by the Company for the financial guarantee it provides is recorded as an accrued liability when the guarantees are made and recorded
as “Accrual for financial guarantee services” on the consolidated balance sheets. This liability represents probable
losses and is increased or decreased by accruing a “(Under)/over provision on financial guarantee services” against
the income of commissions and fees on guarantee services reserve.
This is done throughout the life of the guarantee,
as necessary when additional relevant information becomes available. The methodology used to estimate the liability for possible
guarantee loss considers the guarantee contract amount and a variety of factors, which include, depending on the counterparty,
latest financial position and performance of the borrowers, actual defaults, estimated future defaults, historical loss experience,
estimated value of collaterals or guarantees the customers or third parties offered, and other economic conditions such as the
economy trend of the area and the country. The estimates are based upon currently available information.
Based on the past experience and expected customer
default status of financial guarantee services, the Company estimates the probable loss for immature financial guarantee services
to be approximately 50% of contract amount as of March 31, 2016 and December 31, 2015, and made a provision of $5,728,624
and $5,691,253 as of these two reporting dates, respectively, for possible credit risk of its guarantees. In addition, the Company
accrued specific provisions for repayment on behalf of guarantee customers who defaulted on their loans, in the amount of $12,170,155
and $13,631,304 as of March 31, 2016 and December 31, 2015, respectively. As of March 31, 2016 and December 31, 2015, the management
charged off specific provision for one and one customer in the amount of $119,228 and $262,422, considering remote collectability
from the customers. The total accrual for financial guarantee services amounted to $17,898,779 and $19,322,557 as of March 31, 2016
and December 31, 2015, respectively. The Company reviews the provision on a quarterly basis.
(o)
Non-interest expenses
Non-interest expenses primarily consist of
salary and benefits for employees, traveling cost, entertainment expenses, depreciation of equipment, office rental expenses, professional
service fee, office supplies, etc.
(p)
Income tax
Current income tax expenses are provided for
in accordance with the laws of the relevant taxing authorities. As part of the process of preparing financial statements, the Company
is required to estimate its income taxes in each of the jurisdictions in which it operates. The Company accounts for income taxes
using the liability approach. Under this method, deferred income taxes are recognized for tax consequences in future years of differences
between the tax bases of assets and liabilities and their reported amounts in the financial statements at each year-end and tax
loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates applicable for the differences that
are expected to affect taxable income.
(q)
Comprehensive income
Comprehensive income includes net income and
foreign currency adjustments. Comprehensive income is reported in the statements of operations and comprehensive income.
Accumulated other comprehensive income, as
presented on the balance sheets are the cumulative foreign currency translation adjustments.
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
(r) Share-based awards
Share-based awards granted to the Company's
employees are measured at fair value on grant date and share-based compensation expense is recognized (i) immediately at the grant
date if no vesting conditions are required, or (ii) using the accelerated attribution method, net of estimated forfeitures, over
the requisite service period. The fair value of restricted shares is determined with reference to the fair value of the underlying
shares.
At each date of measurement, the Company reviews
internal and external sources of information to assist in the estimation of various attributes to determine the fair value of the
share-based awards granted by the Company, including but not limited to the fair value of the underlying shares, expected life,
expected volatility and expected forfeiture rates. The Company is required to consider many factors and make certain assumptions
during this assessment. If any of the assumptions used to determine the fair value of the share-based awards changes significantly,
share-based compensation expense may differ materially in the future from that recorded in the current reporting period.
(s)
Operating leases
The Company leases its principal office under
a lease agreement that qualifies as an operating lease. The Company records the rental under the lease agreement in the operating
expense when incurred.
(t)
Commitments and contingencies
In the normal course of business, the Company
is subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of
matters, including, among others, government investigations and tax matters. In accordance with ASC No. 450 Sub topic 20, “Loss
Contingencies”, the Company records accruals for such loss contingencies when it is probable that a liability has been incurred
and the amount of loss can be reasonably estimated.
(u) Recently issued accounting standards
In February 2016, the Financial Accounting
Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2016-02,
Leases (Topic
842)
. Under the new guidance, lessees will be required recognize the following for all leases (with the exception of short-term
leases) at the commencement date: 1) A lease liability, which is a lessee's obligation to make lease payments arising from
a lease, measured on a discounted basis; and 2) A right-of-use asset, which is an asset that represents the lessee's right
to use, or control the use of, a specified asset for the lease term. The new lease guidance simplified the accounting for sale
and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer
be provided with a source of off-balance sheet financing. The amendments in this ASU are effective for fiscal years beginning after
December 15, 2019, including interim periods within those years. The Company is evaluating this ASU and has not determined
the effect of this standard on its ongoing financial reporting.
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3.
|
VARIABLE INTEREST ENTITIES AND OTHER CONSOLIDATION MATTERS
|
On September 26, 2012, the Company, through
WFOE, entered into a series of contractual arrangements, also known as “VIE Agreements” with Wujiang Luxiang and the
Wujiang Luxiang Shareholders.
On February 19, 2014, WFOE entered into certain
contractual arrangements, having substantially the same terms as those of the VIE Agreements with Pride Information and its sole
shareholder, Mr. Huichun Qin. These VIE Agreements were terminated on May 11, 2015 and will be accounted for as a deconsolidation.
Pride Information did not have any business since its inception. (See Note 1)
As of March 31, 2016, the Company had only
one VIE.
The significant terms of the VIE Agreements
are summarized in Note 1.
VIEs are entities that have either a total
equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial
support, or whose equity investors lack the characteristics of a controlling financial interest, such as through voting rights,
right to receive the expected residual returns of the entity or obligation to absorb the expected losses of the entity. The variable
interest holder, if any, that has a controlling financial interest in a VIE is deemed to be the primary beneficiary and must consolidate
the VIE. WFOE is deemed to have a controlling financial interest and be the primary beneficiary of the entities mentioned in Note
1 above, because it has both of the following characteristics:
|
1.
|
power to direct activities of a VIE that most significantly impact the entity’s economic performance, and
|
|
2.
|
obligation to absorb losses of the entity that could potentially be significant to the VIE or right to receive benefits from the entity that could potentially be significant to the VIE.
|
In addition, as all of these contractual arrangements
are governed by PRC law and provide for the resolution of disputes through either arbitration or litigation in the PRC, they would
be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal
environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in
the PRC legal system could further limit the Company’s ability to enforce these contractual arrangements. Furthermore, these
contracts may not be enforceable in China if PRC government authorities or courts take a view that such contracts contravene PRC
laws and regulations or are otherwise not enforceable for public policy reasons. In the event the Company is unable to enforce
these contractual arrangements, it may not be able to exert effective control over Wujiang Luxiang and Pride Information and its
ability to conduct its business may be materially and adversely affected.
All of the Company’s main current operations
are conducted through Wujiang Luxiang and PFL. Current regulations in China permit Wujiang Luxiang and PFL to pay dividends to
us only out of its accumulated distributable profits, if any, determined in accordance with their articles of association and PRC
accounting standards and regulations. The ability of Wujiang Luxiang and PFL to make dividends and other payments to the Company
may be restricted by factors including changes in applicable foreign exchange and other laws and regulations.
The following financial statement amounts and
balances of the VIE were included in the unaudited consolidated financial statements as of March 31, 2016 and audited consolidated
financial statements as of December 31, 2015 and for the three months ended March 31, 2016 and 2015:
|
|
March 31, 2016
(Unaudited)
|
|
|
December 31, 2015
|
|
Total assets
|
|
$
|
19,942,142
|
|
|
$
|
22,920,730
|
|
Total liabilities
|
|
$
|
19,685,755
|
|
|
$
|
23,932,841
|
|
|
|
For the three months ended March 31,
|
|
|
|
2016
(Unaudited)
|
|
|
2015
(Unaudited)
|
|
Revenue
|
|
$
|
231,074
|
|
|
$
|
1,292,132
|
|
Net income/(loss)
|
|
$
|
(1,220,370
|
)
|
|
$
|
(209,990
|
)
|
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3.
|
VARIABLE INTEREST ENTITIES AND OTHER CONSOLIDATION MATTERS (CONTINUED)
|
All of the Company’s current revenue
is generated in RMB. Any future restrictions on currency exchanges may limit our ability to use net revenues generated in RMB to
make dividends or other payments in US$ or fund possible business activities outside China.
Foreign currency exchange regulation in China
is primarily governed by the following rules:
|
●
|
Foreign Exchange Administration Rules (1996), as amended in August 2008, or the Exchange Rules;
|
|
●
|
Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.
|
Under the Administration Rules, RMB is freely
convertible for current account items, including the distribution of dividends, interest payments, trade and service related foreign
exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments and investments
in securities outside of China, unless the prior approval of the State Administration of Foreign Exchange (“SAFE”)
is obtained and prior registration with the SAFE is made. Foreign-invested enterprises like WFOE that need foreign currency for
the distribution of profits to their shareholders may validate payment from their foreign currency accounts or purchase and pay
foreign currencies at the designated foreign exchange banks to their foreign shareholders by producing board resolutions for such
profit distribution. Based on their needs, foreign invested enterprises are permitted to open foreign currency settlement accounts
for current account receipts and payments of foreign exchange along with specialized accounts for capital account receipts and
payments of foreign currency at certain designated foreign exchange banks.
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(a) Credit risk
Credit risk is one of the most significant
risks for the Company’s business. Credit risk exposures arise principally in lending activities, finance lease and financial
guarantee activities which is an off-balance sheet financial instrument.
Credit risk is controlled by the application
of credit approvals, limits and monitoring procedures. The Company manages credit risk through in-house research and analysis of
the Chinese economy and the underlying obligors and transaction structures. To minimize credit risk, the Company requires collateral
in the form of rights to cash, securities or property and equipment.
The Company identifies credit risk collectively
based on industry, geography and customer type. This information is monitored regularly by management.
1.1 Lending activities
In measuring the credit risk of lending loans
to corporate customers, the Company mainly reflects the “probability of default” by the customer on its contractual
obligations and considers the current financial position of the customer and the exposures to the customer and its likely future
development. For individual customers, the Company uses standard approval procedures to manage credit risk for personal loans.
In addition, the Company calculates the provision
amount as below:
|
1.
|
General Reserve - is based on total loan receivable balance and to be used to cover unidentified probable loan loss. According to management assessment, the General Reserve is required to be no less than 1% of total loan receivable balance.
|
|
2.
|
Special Reserve - is fund set aside covering losses due to risks related to a particular country, region, industry, company or type of loans. The reserve rate could be decided based on management estimate of loan collectability. The Loan portfolio did not include any loans outside of the PRC.
|
|
3.
|
Specific Reserve – is based on a loan by loan basis covering losses due to risks related to the ability and intension of repayment of each customer. The reserve rate was individually assessed based on management estimate of loan collectability.
|
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.2 Guarantee activities
The off-balance sheet commitments arising from
guarantee activities carry similar credit risk to loans and the Company takes a similar approach on risk management.
Off-balance sheet commitments with credit exposures
are also assessed and categorized with reference to the Guideline and include additional amounts on a specific basis.
(b) Liquidity risk
The Company is also exposed to liquidity risk
which is risk that it is unable to provide sufficient capital resources and liquidity to meet its commitments and business needs.
Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When necessary, the Company
will turn to other financial institutions and the owners to obtain short-term funding to meet the liquidity shortage.
(c) Foreign currency risk
A majority of the Company’s operating
activities and a significant portion of the Company’s assets and liabilities are denominated in RMB, which is not freely
convertible into foreign currencies. All foreign exchange transactions take place either through the Peoples’ Bank of China
(“PBOC”) or other authorized financial institutions at exchange rates quoted by PBOC. Approval of foreign currency
payments by the PBOC or other regulatory institutions requires submitting a payment application form together with suppliers' invoices
and signed contracts. The value of RMB is subject to changes in central government policies and to international economic and political
developments affecting supply and demand in the China Foreign Exchange Trading System market.
(d) Concentration risk
As of March 31, 2016 and December 31, 2015,
the Company held cash of $250,267 and $306,401, respectively, that is uninsured by the government authority.
To limit exposure to credit risk relating to
deposits, the Company primarily places cash deposits only with large financial institutions in the PRC with acceptable credit ratings.
The Company’s operations are carried
out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC as well as by the general state of the PRC’s economy. The business
may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other things.
No customer accounted for more than 10% of
total loan balance as of March 31, 2016 and December 31, 2015.
Restricted cash represents cash pledged with
banks as guarantor deposit for the Company's guarantee service customers, amounting to $0.4 million and $0.4 million as of March
31, 2016 and December 31, 2015, respectively. The banks providing loans to the Company’s guarantee service customers generally
require the Company, as the guarantor of the loans, to pledge a cash deposit usually in the range of 10% to 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.
At the same time, the Company requires the
guarantee service customers to make a deposit to the Company of the same amount as the deposit the Company pledged to the banks
for their loans. The Company recorded the deposit received as “deposits payable” on the unaudited consolidated balance
sheet. The deposit is returned to the customer after the customer repays the bank loan and the Company’s guarantee obligation
expires.
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The interest rates on loan issued ranged between
9.6%~ 19.44% and 9.6%~ 19.44% % for the three months ended March 31, 2016 and 2015, respectively.
6.1 Loans receivable consist of the following:
|
|
March 31, 2016
(Unaudited)
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Business loans
|
|
$
|
39,524,627
|
|
|
$
|
40,498,813
|
|
Personal loans
|
|
|
22,637,785
|
|
|
|
22,577,907
|
|
Total Loans receivable
|
|
|
62,162,412
|
|
|
|
63,076,720
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
Collectively assessed
|
|
|
(56,144,821
|
)
|
|
|
(55,595,653
|
)
|
Individually assessed
|
|
|
-
|
|
|
|
-
|
|
Allowance for loan losses
|
|
|
(56,144,821
|
)
|
|
|
(55,595,653
|
)
|
Loans receivable, net
|
|
$
|
6,017,591
|
|
|
$
|
7,481,067
|
|
The Company originates loans to customers located
primarily in Wujiang City, Jiangsu Province. This geographic concentration of credit exposes the Company to a higher degree of
risk associated with this economic region.
All loans are short-term loans that the Company
has made to either business or individual customers. As of March 31, 2016 and December 31, 2015, the Company had 66 and 68 business
loan customers, and 44 and 47 personal loan customers, respectively. Most loans are either guaranteed by a third party whose financial
strength is assessed by the Company to be sufficient or secured by collateral. Allowance on loan losses are estimated loan by loan
on a quarterly basis based on an assessment of specific evidence indicating doubtful collection, historical experience, loan balance
aging and prevailing economic conditions.
For the three months ended March 31, 2016 and
2015, a provision of $102,632 and $213,103 were charged to the consolidated statement of income, respectively. No Write-offs against
allowances have occurred for the three months ended March 31, 2016 and 2015, respectively.
Interest on loans receivable is accrued and
credited to income as earned. The Company determines a loan's past due status by the number of days that have elapsed since a borrower
has failed to make a contractual loan payment. Accrual of interest is generally discontinued when either (i) reasonable doubt exists
as to the full, timely collection of interest or principal or (ii) when a loan becomes past due by more than 90 days.
The following table presents nonaccrual loans
with aging over 90 days by classes of loan portfolio as of March 31, 2016 and December 31, 2015, respectively:
|
|
March 31, 2016
(Unaudited)
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Business loans
|
|
$
|
21,317,858
|
|
|
$
|
21,907,409
|
|
Personal loans
|
|
|
11,139,107
|
|
|
|
10,211,501
|
|
|
|
$
|
32,456,965
|
|
|
$
|
32,118,910
|
|
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6.
|
LOANS RECEIVABLE, NET (CONTINUED)
|
The following table represents the aging of loans as of March 31,
2016 by type of loan:
|
|
1-89 Days
Past Due
(Unaudited)
|
|
|
90 - 179 Days Past Due
(Unaudited)
|
|
|
180 - 365 Days Past Due
(Unaudited)
|
|
|
Over 1 year Past Due
(Unaudited)
|
|
|
Total Past Due
(Unaudited)
|
|
|
Current
(Unaudited)
|
|
|
Total Loans
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business loans
|
|
$
|
361,277
|
|
|
$
|
62,022
|
|
|
$
|
8,848,998
|
|
|
|
12,406,838
|
|
|
$
|
21,679,135
|
|
|
$
|
17,845,492
|
|
|
$
|
39,524,627
|
|
Personal loans
|
|
|
458,806
|
|
|
|
930,326
|
|
|
|
5,611,418
|
|
|
|
4,597,363
|
|
|
|
11,597,913
|
|
|
|
11,039,872
|
|
|
|
22,637,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
820,083
|
|
|
$
|
992,348
|
|
|
$
|
14,460,416
|
|
|
|
17,004,201
|
|
|
$
|
33,277,048
|
|
|
$
|
28,885,364
|
|
|
$
|
62,162,412
|
|
The following table represents the aging of loans as of December
31, 2015 by type of loan:
|
|
1-89 Days
Past Due
|
|
|
90 - 179 Days Past Due
|
|
|
180 - 365 Days Past Due
|
|
|
Over 1 year Past Due
|
|
|
Total Past Due
|
|
|
Current
|
|
|
Total Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business loans
|
|
$
|
77,021
|
|
|
$
|
4,313,200
|
|
|
$
|
7,555,846
|
|
|
|
10,038,363
|
|
|
$
|
21,984,430
|
|
|
$
|
18,514,383
|
|
|
$
|
40,498,813
|
|
Personal loans
|
|
|
924,257
|
|
|
|
1,848,514
|
|
|
|
3,749,403
|
|
|
|
4,613,583
|
|
|
|
11,135,758
|
|
|
|
11,442,149
|
|
|
|
22,577,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,001,278
|
|
|
$
|
6,161,714
|
|
|
$
|
11,305,249
|
|
|
|
14,651,947
|
|
|
$
|
33,120,188
|
|
|
$
|
29,956,532
|
|
|
$
|
63,076,720
|
|
6.2 Analysis of loans by credit quality
indicator
The following table summarizes the Company’s
loan portfolio by credit quality indicator as of March 31, 2016 and December 31, 2015, respectively:
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6.
|
LOANS RECEIVABLE, NET (CONTINUED)
|
Five Categories
|
|
March 31, 2016
(Unaudited)
|
|
|
%
|
|
|
December 31, 2015
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Special mention
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Substandard
|
|
|
77,527
|
|
|
|
0.1
|
%
|
|
|
2,695,750
|
|
|
|
4.3
|
%
|
Doubtful
|
|
|
12,112,708
|
|
|
|
19.5
|
%
|
|
|
9,841,658
|
|
|
|
15.6
|
%
|
Loss
|
|
|
49,972,177
|
|
|
|
80.4
|
%
|
|
|
50,539,312
|
|
|
|
80.1
|
%
|
Total
|
|
$
|
62,162,412
|
|
|
|
100
|
%
|
|
$
|
63,076,720
|
|
|
|
100
|
%
|
6.3 Analysis of loans by collateral
The following table summarizes the Company’s
loan portfolio by collateral as of March 31, 2016:
|
|
March 31, 2016
(Unaudited)
|
|
|
|
|
|
|
Business Loans
|
|
|
Personal Loans
|
|
|
Total
|
|
Guarantee backed loans
|
|
$
|
37,124,510
|
|
|
$
|
21,602,022
|
|
|
$
|
58,726,532
|
|
Pledged assets backed loans
|
|
|
2,400,117
|
|
|
|
1,035,763
|
|
|
|
3,435,880
|
|
Collateral backed loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
39,524,627
|
|
|
$
|
22,637,785
|
|
|
$
|
62,162,412
|
|
The following table summarizes the Company’s loan portfolio
by collateral as of December 31, 2015:
|
|
December 31, 2015
|
|
|
|
|
|
|
Business Loans
|
|
|
Personal Loans
|
|
|
Total
|
|
Guarantee backed loans
|
|
$
|
37,498,183
|
|
|
$
|
21,510,390
|
|
|
$
|
59,008,573
|
|
Pledged assets backed loans
|
|
|
3,000,630
|
|
|
|
1,067,517
|
|
|
|
4,068,147
|
|
Collateral backed loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
40,498,813
|
|
|
$
|
22,577,907
|
|
|
$
|
63,076,720
|
|
Collateral Backed Loans
A collateral backed loan is a loan in which
the borrower puts up an asset under their ownership, possession or control, as collateral for the loan. An asset usually is land
use rights, inventory, equipment or buildings. The loan is secured against the collateral and we do not take physical possession
of the collateral at the time the loan is made. We will verify ownership of the collateral and then register the collateral with
the appropriate government agencies to complete the secured transaction. In the event that the borrower defaults, we can then take
possession of the collateral asset and sell it to recover the outstanding balance owed. If the sale proceed of the collateral asset
is not sufficient to pay off the debt, we will file a lawsuit against the borrower and seek payment for the remaining balance.
Pledged Asset Backed Loans
Pledged loans are loans with pledged assets.
The pledged assets are usually certificates of deposit. Lenders take physical possession of the pledged assets at the time the
loan is made and do not need to register them with government agencies to secure the loan. If the borrower defaults, we can sell
the assets to recover the outstanding balance owed.
Both collateral loans and pledged loans are
considered secured loans. The amount of a loan that lenders provide depends on the value of the collateral pledged. Beginning 2011,
the Company does not provide unsecured loans.
Guarantee Backed Loans
A guaranteed loan is a loan guaranteed by a third party who is usually
a corporation or high net worth individual. As of March 31, 2016 and December 31, 2015, guaranteed loans make up 94.5% and 93.6%
of our direct loan portfolio, respectively.
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
7.
|
ALLOWANCE FOR LOAN LOSSES
|
The allowance for loan losses is maintained
at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation
of the adequacy of the allowance. The allowance is based on the Company’s past loan loss history, known and inherent risks
in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying
collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently
subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.
The allowance is calculated at portfolio-level
since our loans portfolio is typically of smaller balance homogenous loans and is collectively evaluated for impairment. Additionally,
the management also reviewed the portfolio on a loan by loan basis and individually evaluated for impairment if any..
For the purpose of calculating portfolio-level
reserves, we have grouped our loans into two portfolio segments: Corporate and Personal. The allowance consists of the combination
of a quantitative assessment component based on statistical models, a retrospective evaluation of actual loss information to loss
forecasts, value of collaterals and could include a qualitative component based on management judgment.
In estimating the probable loss of the loan
portfolio, the Company also considers qualitative factors such as current economic conditions and/or events in specific industries
and geographical areas, including unemployment levels, trends in real estate values, peer comparisons, and other pertinent factors
such as regulatory guidance. Finally, as appropriate, the Company also considers individual borrower circumstances and the condition
and fair value of the loan collateral, if any.
In addition, the Company calculates the provision
amount as below:
|
1.
|
General Reserve - is based on total loan receivable balance and to be used to cover unidentified probable loan loss. The management assessed the General Reserve is required to be no less than 1% of total loan receivable balance.
|
|
2.
|
Special Reserve - is fund set aside covering losses due to risks related to a particular country, region, industry, company or type of loans. The reserve rate could be decided based on management estimate of loan collectability. The Loan portfolio did not include any loans outside of the PRC.
|
While management uses the best information
available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and
other conditions or changes in accounting guidance.
The following tables present the activity in
the allowance for loan losses and related recorded investment in loans receivable by classes of the loans individually and collectively
evaluated for impairment as of and for the three months ended March 31, 2016 and 2015:
|
|
Business Loans
(Unaudited)
|
|
|
Personal Loans
(Unaudited)
|
|
|
Total
(Unaudited)
|
|
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
|
|
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
7.
|
ALLOWANCE FOR LOAN LOSSES (CONTINUED)
|
|
|
Business Loans
(Unaudited)
|
|
|
Personal Loans
(Unaudited)
|
|
|
Total
(Unaudited)
|
|
For the three months ended March 31, 2015
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
14,836,650
|
|
|
$
|
9,654,071
|
|
|
$
|
24,490,721
|
|
Charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Recoveries
|
|
|
-
|
|
|
|
(695,456
|
)
|
|
|
(695,456
|
)
|
Provisions
|
|
|
989,156
|
|
|
|
-
|
|
|
|
989,156
|
|
Ending balance
|
|
|
15,825,806
|
|
|
|
8,958,615
|
|
|
|
24,784,421
|
|
Ending balance: individually evaluated for impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
15,825,806
|
|
|
$
|
8,958,615
|
|
|
$
|
24,784,421
|
|
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, 2016:
|
|
Pass
(Unaudited)
|
|
|
Special Mention
(Unaudited)
|
|
|
Substandard
(Unaudited)
|
|
|
Doubtful
(Unaudited)
|
|
|
Loss
(Unaudited)
|
|
|
Total
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,050,438
|
|
|
$
|
31,474,189
|
|
|
$
|
39,524,627
|
|
Personal loans
|
|
|
-
|
|
|
|
-
|
|
|
|
77,527
|
|
|
|
4,062,270
|
|
|
|
18,497,988
|
|
|
|
22,637,785
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
77,527
|
|
|
$
|
12,112,708
|
|
|
$
|
49,972,177
|
|
|
$
|
62,162,412
|
|
The following table presents the classes of
the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard, doubtful
and loss within the Company's internal risk rating system as of December 31, 2015:
|
|
Pass
|
|
|
Special Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,618,729
|
|
|
$
|
6,103,192
|
|
|
$
|
31,776,892
|
|
|
$
|
40,498,813
|
|
Personal loans
|
|
|
-
|
|
|
|
-
|
|
|
|
77,021
|
|
|
|
3,738,466
|
|
|
|
18,762,420
|
|
|
|
22,577,907
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,695,750
|
|
|
$
|
9,841,658
|
|
|
$
|
50,539,312
|
|
|
$
|
63,076,720
|
|
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
A loan is considered impaired when, based on
current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s
prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on
a loan by loan basis for corporate and personal loans by either the present value of expected future cash flows discounted at the
loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.
An allowance for loan losses is established
for an impaired loan if its carrying value exceeds its estimated fair value. Currently, estimated fair values of substantially
all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral which approximates
to the carrying value due to the short term nature of the loans.
Loans with modified terms are classified as
troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing
financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary below market rate reduction
in interest rate or an extension of a loan’s stated maturity date. Non-accrual troubled debt restructurings are restored
to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification.
Loans classified as troubled debt restructurings are designated as impaired.
Even though the Company allows a one-time loan
extension with a period up to the original loan period, which is usually twelve months. Such extension is not considered to be
a troubled debt restructuring because the Company does not grant a concession to borrowers. The principal of the loan remains the
same and the interest rate is fixed at the current interest rate at the time of extension. Therefore, there were no troubled debt
restructurings during the three months ended March 31, 2016 and 2015, respectively.
|
9.
|
GUARANTEE PAID ON BEHALF OF GUARANTEE CUSTOMERS
|
|
|
March 31, 2016
(Unaudited)
|
|
|
December 31, 2015
|
|
Guarantee paid on behalf of guarantee service customers
|
|
$
|
12,573,082
|
|
|
$
|
14,031,603
|
|
Guarantee paid on behalf of a related party
|
|
|
626,897
|
|
|
|
622,807
|
|
Total
|
|
$
|
13,199,979
|
|
|
$
|
14,654,410
|
|
As of March 31, 2016 and December 31, 2015,
guarantee paid on behalf of guarantee service customers represents payment made by the Company to banks on behalf of thirty-one
and thirty-two of its guarantee service customers who defaulted on their loan repayments to the banks. Management performs an evaluation
of the adequacy of the allowance. The allowance is based on the Company’s past loan loss history, known and inherent risks
in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying
collateral, composition of the loan portfolio, current economic conditions and other relevant factors. As of March 31, 2016 and
December 31, 2015, the Company accrued allowance on the balance in “accrual for financial guarantee services” in the
value of $17,898,779 and $19,322,557, respectively.
Other assets as of March 31, 2016 and December
31, 2015 consisted of:
|
|
March 31, 2016
(Unaudited)
|
|
|
December 31, 2015
|
|
Other prepaid expense
|
|
|
12,404
|
|
|
|
30,809
|
|
Deposit for court filing fees and legal fees
|
|
|
186,338
|
|
|
|
222,934
|
|
Other receivables
|
|
|
48,792
|
|
|
|
39,457
|
|
|
|
$
|
247,534
|
|
|
$
|
293,200
|
|
Deposit for court filing fees and legal fees
will be claimed from default customers.
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
11.
|
NET INVESTMENT IN DIRECT FINANCING LEASE
|
On September 25, 2014, PFL entered into a finance
lease agreement for the leasing of manufacturing equipment with a total lease receivable of $2.73 million. 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 $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,
2016
(Unaudited)
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
$
|
3,887,213
|
|
|
$
|
3,635,411
|
|
2 years
|
|
|
531,837
|
|
|
|
754,810
|
|
3 years
|
|
|
-
|
|
|
|
-
|
|
Total minimum lease receipts
|
|
|
4,419,050
|
|
|
|
4,390,221
|
|
Less: amount representing interest
|
|
|
(357,558
|
)
|
|
|
(464,100
|
)
|
Present value of minimum lease receipts
|
|
$
|
4,061,492
|
|
|
$
|
3,926,121
|
|
Following is a summary of the components of
the Company’s net investment in direct financing leases as of March 31, 2016 and December 31, 2015:
|
|
March 31,
2016
(Unaudited)
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Total minimum lease payments to be received
|
|
$
|
4,419,050
|
|
|
$
|
4,390,221
|
|
Less: Amounts representing estimated executory costs
|
|
|
-
|
|
|
|
-
|
|
Minimum lease payments receivable
|
|
|
4,419,050
|
|
|
|
4,390,221
|
|
Less Allowance for uncollectible
|
|
|
(2,876,319
|
)
|
|
|
(2,857,554
|
)
|
Net minimum lease payments receivable
|
|
|
1,542,731
|
|
|
|
1,532,667
|
|
Estimated residual value of leased property
|
|
|
-
|
|
|
|
-
|
|
Less: Unearned income
|
|
|
(357,558
|
)
|
|
|
(355,255
|
)
|
Net investment in direct financing lease
|
|
$
|
1,185,173
|
|
|
$
|
1,177,442
|
|
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
12.
|
PROPERTY AND EQUIPMENT
|
The Company’s property and equipment
used to conduct day-to-day business are recorded at cost less accumulated depreciation. Depreciation expenses are calculated using
straight-line method over the estimated useful life with 5% salvage value below:
Property and equipment consist of the following:
|
|
Useful Life
(years)
|
|
March 31, 2016
(Unaudited)
|
|
|
December 31, 2015
|
|
Furniture and fixtures
|
|
5
|
|
$
|
22,407
|
|
|
$
|
22,260
|
|
Vehicles
|
|
4
|
|
|
154,295
|
|
|
|
153,288
|
|
Electronic equipment
|
|
3
|
|
|
140,920
|
|
|
|
140,001
|
|
Leasehold improvement
|
|
3
|
|
|
307,755
|
|
|
|
86,418
|
|
Less: accumulated depreciation
|
|
|
|
|
(468,861
|
)
|
|
|
(275,847
|
)
|
Property and equipment, net
|
|
|
|
$
|
156,516
|
|
|
$
|
126,120
|
|
During the three months ended March 31, 2016,
the Company did not dispose of any property or equipment. During the three months ended March 31, 2015, the Company disposed of
two vehicles with net book value of $4,160 (original cost of $81,230, accumulated depreciation of $77,170). The Company generated
non-interest income of $14,585 from the disposal.
Depreciation expense totaled $19,006 and $27,159
for the three months ended March 31, 2016 and 2015, respectively.
Intangible asset represents the software used for P2P platform,
the useful life is estimated at 3 years.
|
|
Useful Life
(years)
|
|
March 31, 2016
(Unaudited)
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
3
|
|
$
|
3,310
|
|
|
$
|
4,435
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense totaled $1,138 and $ 6,214 for the three months
ended March 31, 2016 and 2015, respectively.
|
14.
|
SHORT-TERM BANK LOANS
|
Bank Name
|
|
Interest rate
|
|
Term
|
|
March 31, 2016
(Unaudited)
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural Bank Of China
|
|
Fixed annual rate of 6.31%
|
|
From October 30, 2015 to October 30, 2016
|
|
|
-
|
|
|
|
2,618,729
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
2,618,729
|
|
During the three months ended March 31, 2016,
the Company repaid the all outstanding bank borrowings. As of March 31, 2016, the Company did not have bank loans.
As of December 31, 2015, the short-term bank
loans have maturity terms within 1 year. These loans were guaranteed by the Wujiang Luxiang Shareholders.
Interest expense incurred on short-term loans
for the three months ended March 31, 2016 and 2015 were $30,057 and $ 173,166, respectively.
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Deposits payable are security deposits required from customers
in order to obtain loans and guarantees from the Company. The deposits are refundable to the customers when the customers fulfill
their obligations under loan and guarantee contracts.
|
16.
|
UNEARNED INCOME FROM GUARANTEE SERVICES AND FINANCING LEASE SERVICES
|
The
Company receives guarantee commissions in full at the inception and records unearned income before amortizing it throughout the
guarantee service life. Unearned income from guarantee services was $31,296 and $1,610 as of March 31, 2016 and December 31, 2015,
respectively.
The Company receives financing leasing service
commissions at the inception and records unearned income before amortizing it throughout the guarantee service life. Unearned income
from financing leasing services was $48,454 and $59,692 as of March 31, 2016 and December 31, 2015, respectively.
|
17.
|
OTHER CURRENT LIABILITIES
|
Other current liabilities as of March 31, 2016
and December 31, 2015 consisted of:
|
|
March 31, 2016
(Unaudited)
|
|
|
December 31, 2015
|
|
Accrued payroll
|
|
$
|
32,339
|
|
|
$
|
85,144
|
|
Accrued office rental expenses
|
|
|
62,022
|
|
|
|
61,617
|
|
Other tax (recoverable)/payable
|
|
|
(44,501
|
)
|
|
|
14,187
|
|
Other payable
|
|
|
31,620
|
|
|
|
21,294
|
|
|
|
$
|
81,480
|
|
|
$
|
182,242
|
|
|
18.
|
OTHER OPERATING EXPENSE
|
Other operating expense for the three months ended March 31, 2016
and 2015 consisted of:
|
|
For the three months ended
|
|
|
|
March 31,
|
|
|
|
2016
(Unaudited)
|
|
|
2015
(Unaudited)
|
|
Depreciation
|
|
$
|
20,144
|
|
|
$
|
33,373
|
|
Travel expenses
|
|
|
144
|
|
|
|
966
|
|
Entertainment expenses
|
|
|
6,758
|
|
|
|
9,130
|
|
Promotion expenses
|
|
|
-
|
|
|
|
260
|
|
Car expenses
|
|
|
10,215
|
|
|
|
17,181
|
|
Legal and consulting expenses
|
|
|
167,191
|
|
|
|
594,552
|
|
Bank charges
|
|
|
953
|
|
|
|
11,477
|
|
Audit-related expense
|
|
|
30,746
|
|
|
|
97,778
|
|
Other expenses
|
|
|
17,221
|
|
|
|
63,613
|
|
Total
|
|
$
|
253,372
|
|
|
$
|
828,330
|
|
|
19.
|
EMPLOYEE RETIREMENT BENEFIT
|
The Company has made employee benefit contribution
in accordance with relevant Chinese regulations, including retirement insurance, unemployment insurance, medical insurance, housing
fund, work injury insurance and maternity insurance. The Company recorded the contribution in the salary and employee charges when
incurred. The contributions made by the Company were $11,999 and $16,605 for the three months ended March 31, 2016 and 2015, respectively.
|
20.
|
DISTRIBUTION OF PROFIT
|
The
Company did not distribute any dividend to its shareholders for the three months ended March 31, 2016 and 2015, respectively.
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Initial Public Offering
On August 16, 2013, the Company closed an initial
public offering (“IPO”) of 1,370,000 shares of Common Stock. On August 26, 2013, the Company sold additional 45,657
shares of Common Stock from the exercise of the overallotment option of shares granted to the underwriters. The public offering
price of the shares sold in the IPO was $6.50 per share. The total gross proceeds from the offering were $9.2 million. After deducting
underwriting discounts and commissions and offering expenses payable by the Company, the aggregate net proceeds received by the
Company totaled approximately $7.6 million.
Upon the consummation of the Company’s
IPO on August 16, 2013, the Series A Stock and the Series B Stock (defined below) were automatically converted into shares of Common
Stock.
Secondary Public Offering
On May 13, 2014, the Company closed its second
public offering (“Follow-on Offering”) of 1,750,000 shares of Common Stock and 1,750,000 warrants to purchase an additional
875,000 shares of Common Stock. The public offering price of the shares was $3.99 per share and the offering pricing for the warrants
was $0.01 per warrant. 1,650,386 shares of Common Stock were newly issued by the Company and 99,614 shares of Common Stock were
sold by certain selling stockholders. On June 12, 2014, the representative in the Follow-on Offering exercised its over-allotment
option to purchase 252,000 warrants to purchase 126,250 shares of Common Stock. The total gross proceeds in the Follow-on Offering
and the over-allotment were $6.6 million. After deducting underwriting discounts and commissions and offering expenses payable
by the Company and the proceeds to the selling stockholders, the aggregate net proceeds received by the Company totaled approximately
$5.7 million.
Common Stock
The Company is authorized to issue up to 100,000,000
shares of Common Stock.
As of December 31, 2015, there were 12,390,062
shares of Common Stock issued and outstanding.
On January 13, 2016, the Company issued 6,000
unregistered shares to John Levy, the Company’s Chairman of Audit Committee, at a market value of $0.32 per share, in the
total amount of $1,920, for his services provided.
As of March 31, 2016, there were 12,396,062
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.
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
21.
|
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.
Between January 1, 2012 and April 1, 2013,
the Company issued a total of 745 shares of Series A Stock to an aggregate of 11 investors pursuant to certain subscription agreements.
We received gross proceeds of $372,500 and incurred costs associated with this private placement of $93,125.
Between October 12, 2012 and May 8, 2013, the
Company issued a total of 760 shares of Series B Stock to an aggregate of 44 investors pursuant to certain subscription agreements.
We received gross proceeds of $380,000 and incurred costs associated with this private placement of $95,000.
On August 16, 2013 when the Company closed
its IPO, all outstanding shares of the Series A Stock and Series B Stock were converted into an aggregate of 348,462 shares of
already issued and outstanding Common Stock beneficially owned by a consultant who received our shares on December 19, 2011, automatically
and without any action on the part of the holder thereof. The per share conversion price of Series A Stock and Series B Stock was
equal to $3.25 and $1.63, respectively.
The discount on the Series A and B Stock was
accounted for as a beneficial conversion feature upon conversion. The total amount of discount was $752,500, which was accounted
for as a reduction to retained earnings and an offsetting increase to additional paid in capital in the Company's financial statements.
In accordance with the PRC Regulations on Enterprises
with Foreign Investment and the articles of association of the Company’s PRC subsidiaries, a foreign-invested enterprise
established in the PRC is required to provide statutory reserve, which is appropriated from net profit as reported in the enterprise’s
PRC statutory accounts. A foreign-invested enterprise is required to allocate at least 10% of its annual after-tax profit to the
general reserve until such reserve has reached 50% of its respective registered capital based on the enterprise’s PRC statutory
accounts. The Company allocates 15% of its annual after-tax profit to the statutory reserve. The statutory reserve can only be
used for specific purposes and are not distributable as cash dividends. WFOE was established as a foreign-invested enterprise and,
therefore, is subject to the above mandated restrictions on distributable profits. For the three months ended March 31, 2016 and
2015, the Company did not accrue the statutory reserve due to net loss.
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
23.
|
LOSS PER COMMON SHARE
|
The following table sets forth the computation
of basic and diluted earnings per common share for the three months ended March 31, 2016 and 2015, respectively:
|
|
For The Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2016
(Unaudited)
|
|
|
2015
(Unaudited)
|
|
|
|
|
|
|
|
|
Net income/(loss) attributable to the common shareholders
|
|
$
|
1,130,476
|
|
|
$
|
(1,157,031
|
)
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
|
12,395,205
|
|
|
|
12,255,062
|
|
Effect of dilutive securities
|
|
|
-
|
|
|
|
-
|
|
Diluted weighted-average common shares outstanding
|
|
|
12,395,205
|
|
|
|
12,255,062
|
|
|
|
|
|
|
|
|
|
|
Earnings/(Loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.091
|
|
|
$
|
(0.094
|
)
|
Diluted
|
|
$
|
0.091
|
|
|
$
|
(0.094
|
)
|
Basic earnings/(loss) per share are computed
by dividing the net income or loss by the weighted average number of common shares outstanding during the period. Diluted earnings/(loss)
per share were the same as basic earnings/(loss) per share due to the lack of dilutive items in the Company for the three months
ended March 31, 2016 and 2015. The number of warrants is omitted from the computation as the anti-dilutive effect.
|
24.
|
INCOME TAXES AND TAX RECEIVABLE
|
Effective January 1, 2008, the New Taxation
Law of PRC stipulates that domestically owned enterprises and foreign invested enterprises (the “FIEs”) are subject
to a uniform tax rate of 25%. While the New Tax Law equalizes the tax rates for FIEs and domestically owned enterprises, preferential
tax treatment may continue to be given to companies in certain encouraged sectors and to entities classified as high-technology
companies, regardless of whether these are domestically-owned enterprises or FIEs. In November 2009, the Jiangsu Province Government
issued Su Zheng Ban Fa [2009] No. 132 which stipulates that micro-credit companies in Jiangsu Province is subject to preferential
tax rate of 12.5%. As a result, the Company is subject to the preferential tax rate of 12.5% for its loan business for the periods
presented. The taxation practice implemented by the tax authority governing the Company is that the Company pays enterprise income
taxes at rate of 25% on a quarterly basis, and upon annual tax settlement done by the Company and the tax authority in five (5)
months after December 31 the tax authority will refund the Company the excess enterprise income taxes it paid beyond the rate of
12.5%. However since 2015, the excess enterprise income taxes paid will not be refunded but can be used to offset the future income
tax payable arising from taxable income.
The Company evaluates the level of authority
for each uncertain tax position (including the potential application of interest and penalties) based on the technical merits,
and measures the unrecognized benefits associated with the tax positions. For the three months ended March 31, 2016 and 2015, the
Company had no unrecognized tax benefits. For the three months ended March 31, 2016, the Company made net tax operating loss from
its PRC subsidiaries and its consolidated VIE of $347,574 which will expire in the year ending December 31, 2021. As of March 31,
2016, the Company has carry-forward tax operating losses from its PRC subsidiaries and its consolidated VIE of $62,253,948, which
will expire from the year ending December 31, 2019 to 2021. The Company recognized deferred income tax assets of $12,437,607 as
of March 31, 2016. However, the Company estimates there will be no sufficient net income before income tax from years ending December
31, 2016 to 2021 to realize the deferred income tax assets. The Company provided valuation allowance for deferred income tax assets
of $12,437,607 as of March 31, 2016.
The Company does not anticipate any significant
increase to its liability for unrecognized tax benefit within the next 12 months. The Company will classify interest and penalties
related to income tax matters, if any, in income tax expense.
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
24.
|
INCOME TAXES AND TAX RECEIVABLE (CONTINUED)
|
Income tax payable is comprised of:
|
|
March 31, 2016
(Unaudited)
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Income tax payable
|
|
$
|
141,043
|
|
|
$
|
126,485
|
|
Income tax expense for the three months ended
March 31, 2016 and 2015 is comprised of:
|
|
For The Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Current income tax
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred income tax
|
|
|
-
|
|
|
|
134,761
|
|
Total provision for income taxes
|
|
$
|
-
|
|
|
$
|
134,761
|
|
|
|
|
|
|
|
|
|
|
The effective tax rates for the three months
ended March 31, 2016 and 2015 are 0% and -27.74%, respectively.
Deferred tax liability arises from government
incentive for the purpose of covering the Company’s actual loan losses and ruled that the income tax will be imposed on the
subsidy if the purpose is not fulfilled within 5 years after the Company receives the subsidy. As of March 31, 2016 and December
31, 2015, subsidy of $1,121,698 and $1,011,877 did not fulfill the purpose within due date and the related deferred tax liability
was transferred to income tax payable. As of March 31, 2016 and December 31, 2015, the deferred tax liability amounted to $191,880
and $204,266, respectively.
As of March 31, 2016 and December 31, 2015,
the Company intends to permanently reinvest the undistributed earnings from its foreign subsidiaries to fund future operations.
The amount of unrecognized deferred tax liabilities for temporary differences related to investments in foreign subsidiaries is
not determined because such a determination is not practicable.
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
25.
|
RELATED PARTY TRANSACTIONS AND BALANCES
|
|
1)
|
Nature of relationships with related parties
|
Name
|
|
Relationship with the Company
|
Wujiang Chunjia Textile Trading Co., Ltd (“Chunjia Textile”)
|
|
Controlled by Huichun Qin
|
Suzhou Dingli Real Estate Co., Ltd.
|
|
Controlled by Chief Executive Ofiicer
|
Huichun Qin
|
|
Non-controlling shareholder and former CEO and chairman of board of directors
|
|
2)
|
Related party transactions
|
During the three months ended March 31, 2016,
Suzhou Dingli Real Estate Co., Ltd., a company controlled by Mr. Jingen Ling, the Chief Executive Officer was involved to provide
guarantee services for the bank borrowings. No commissions or fees are required from the Company. As of March 31, 2016, all outstanding
bank borrowings have been repaid.
|
3)
|
Related party balances
|
Amount due from related parties were as follows:
|
|
March 31, 2016
(Unaudited)
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Chunjia Textile
|
|
$
|
626,897
|
|
|
$
|
622,807
|
|
Huichun Qin
|
|
$
|
1,085,381
|
|
|
$
|
1,078,300
|
|
As of March 31, 2016, the Company provided
financial guarantee service for Chunjia Textile to guarantee loans of $626,897. The Company accrued provision of $313,448 on the
outstanding balance as of March 31, 2016.
Huichun Qin transferred $1,098,197(equivalent
of RMB 7 million) to his personal account without proper authorization on July 2, 2014. As of March 31, 2016, Huichun Qin has not
repaid the balance. The amount was recorded as a deduction of the Company’s equity as of March 31, 2016 and December 31,
2015, respectively.
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
26.
|
COMMITMENTS AND CONTINGENCIES
|
During the year ended December 31,
2015, the Company leased its new office under a lease agreement from June 1, 2015 to May 31, 2021. As a result, in October 2015,
the Company terminated the lease agreement for its former principal office which agreement was to expire on September 30, 2018.
No default penalty was paid for the earlier termination. The following table sets forth the Company’s contractual obligations
as of March 31, 2016 in future periods:
|
|
Rental payments
(Unaudited)
|
|
|
|
|
|
Year ending March 31, 2017
|
|
|
61,158
|
|
Year ending March 31, 2018
|
|
|
73,389
|
|
Year ending March 31, 2019
|
|
|
73,389
|
|
Year ending March 31, 2020
|
|
|
73,389
|
|
Year ending March 31, 2021
|
|
|
73,389
|
|
Year ending March 31, 2022
|
|
|
12,232
|
|
Total
|
|
$
|
366,946
|
|
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, 2016 and December 31, 2015,
the loan amount guaranteed by the Company was $11,729,864 and $11,653,342, respectively, for its financial guarantee service customers.
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
26.
|
COMMITMENTS AND CONTINGENCIES (CONTINUED)
|
The
Company is involved in various legal actions arising in the ordinary course of its business. As of March 31, 2016, the
Company was involved in 106 lawsuits, among which 69 were related to its loan business and 37 were related to guarantee
business. The Company initiated legal proceedings to collect delinquent balances from borrowers and guarantees. 84 of these
cases with an aggregated claim of USD 39.63 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 22 cases with an aggregated claim of USD 15.02 million have
not been adjudicated by the Court as of March 31, 2016.
On August 6, 2014, a purported shareholder
Andrew Dennison filed a putative class action complaint in the United States District Court District of New Jersey (the “N.J.
district court”) relating to a July 25, 2014 press release about the Company’s progress in recovering a significant
portion of the $5.4 million the Company paid in the first quarter of 2014 on behalf of loan guarantee customers. The action,
Andrew
Dennison v. China Commercial Credit, Inc.
, et al., Case No. 2:2014-cv-04956, alleges that the Company and its current and former
officers and directors Huichun Qin, Long Yi, Jianming Yin, Jinggen Ling, Xiangdong Xiao, and John F. Levy violated the federal
securities laws by misrepresenting in prior public filings certain material facts about the risks associated with its loan guarantee
business. On October 2, 2014, purported shareholders Zhang Yun and Sanjiv Mehrotra (the “Yun Group”) asserted substantially
similar claims against the same defendants in a putative class action captioned
Zhang Yun v. China Commercial Credit, Inc.,
et al.
, Case No. 2:14-cv-06136 (D. N.J.). Neither complaint states the amount of damages sought.
On or about October 6, 2014, Dennison, the
Yun Group and another purported shareholder, Jason Stark, filed motions to consolidate the cases, be appointed as lead plaintiff
and to have their respective counsel appointed as lead counsel. On October 31, 2014, the N.J. district court entered an order consolidating
the cases under the caption “
In re China Commercial Credit Inc. Securities Litigation
” and appointing the Yun
Group as lead plaintiff (“Class Plaintiff”) and the Yun Group’s counsel as lead counsel.
On November 18, 2014, the Yun Group and the
Company, which at that point was the only defendant served, entered into a stipulation to transfer of the case to the Southern
District of New York. On December 18, 2014, Mr. Levy, who had by then been served, joined in the stipulation. On December 29, 2014,
the N.J. district court entered an order transferring the action. The transfer was effected on January 22, 2015, and assigned docket
number 1:15-cv-00557-ALC (S.D.N.Y.).
Under the schedule stipulated by the parties,
the Yun Group was to file an amended complaint within 60 days of the date that the transfer was effected, and the defendants’
date to answer or move was within 60 days of that filing. On April 7, 2015, the Class Plaintiff filed a Second Amended Class Action
Complaint (the “CAC”). The CAC also asserts securities law claims against defendants Axiom Capital Management, Inc.,
Burnham Securities Inc. and ViewTrade Securities, Inc. (collectively, the “Underwriter Defendants”). The CAC alleges
that the Company engaged in a fraudulent scheme by engaging in undisclosed and improper lending practices and made misleading representations
regarding its underwriting policies, the loan portfolio quality, the loan loss allowance, compliance with U.S. GAAP and its internal
control systems.
In accordance with the Court’s procedures,
the Company and Mr. Levy and the Underwriter Defendants requested a Pre-Motion Conference in anticipation of filing a motion to
dismiss the CAC, which was held on June 25, 2015. At the conference, the Court adjourned the date to answer or move in order to
provide the Class Plaintiff with time to serve certain overseas defendants. After the conference, the Class Plaintiff voluntarily
dismissed Jianming Yin, Jinggen Ling and Xiangdong Xiao from the action, and Long Yi agreed to waive service, which left Huichun
Qin as the sole remaining defendant to serve. The case remains stayed pending service of Huichun Qin.
On April 22, 2016, the Company entered
into a Stipulation and Agreement of Settlement (the “Stipulation”) to settle the Securities Class Action. The Stipulation
resolves the claims asserted against the Company and certain of its current and former officers and directors in the Securities
Class Action without any admission or concession of wrongdoing or liability by the Company or the other defendants. The Stipulation
also provides, among other things, a settlement payment by the Company of $225,000 in cash and the issuance of 750,000 shares of
its common stock (the “Settlement Shares”) to the class members. The terms of the Stipulation are subject to approval
by the Court following notice to all class members. The issuance of the Settlement Shares is expected to be exempt from registration
pursuant to Section 3(a)(10) of the Securities Act of 1933, as amended.
Two of the Underwriter Defendants, Axiom Capital
Management, Inc., and ViewTrade Securities, Inc., have asserted their respective rights to indemnification under the Underwriting
Agreements entered into in connection with the Company’s initial public offering and secondary offering. On or about March
16, 2016, CCCR entered into an Advance Funding and Escrow Agreement, under which the CCCR agreed to deposit shares into escrow
to fund the advancement obligation, with the initial deposit to be shares valued at Two Hundred Thousand Dollars ($200,000), based
upon 80% of the 30 day volume weighted average Trading Price ("VWAP") for each of the 30 consecutive trading days prior
to the date of the Agreement.
CHINA COMMERCIAL CREDIT,
INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
26.
|
COMMITMENTS AND CONTINGENCIES (CONTINUED)
|
|
3)
|
Contingencies (continued)
|
On February 3, 2015, a purported shareholder
Kiram Kodali filed a putative shareholder derivative complaint in the United States District Court for the Southern District of
New York, captioned
Kiran Kodali v. Huichun Qin, et al
., Case No. 15-cv-806. The action alleges that the Company and its
current and former officers and directors Huichun Qin, Long Yi, Jianming Yin, Jinggen Ling, Chunfang Shen, John F. Levy, Xiaofang
Shen and Chunjiang Yu violated their fiduciary duties, grossly mismanaged the Company and were unjustly enriched based upon the
transfer that was the subject of the Internal Review and other grounds substantially similar to those asserted in the class action
complaints. Kodali did not serve a demand upon the Company and alleges that demand is excused. The Company and Mr. Levy have been
served. An amended derivative complaint was filed on April 20, 2015. On May 29, 2015, the Court “so ordered” a stipulation
among Kodali, the Company and Mr. Levy staying all proceedings in the derivative case except for service of process on individual
defendants until the earlier of thirty days of termination of the stipulation, dismissal of the class action with prejudice or
the date any of the defendants in the class action file an answer to the CAC. The Company believes that this lawsuit is without
merit and intends to vigorously defend against it. At this stage of the proceedings, the Company is not able to estimate the probability
of success or loss.
On May 18, 2015, WFOE filed a civil complaint
against Huichun Qin with the Wujiang Region Suzhou City People’s Court claiming Mr. Qin’s misappropriation of RMB 7
million in July 2014. The complaint was rejected due to a procedural issue. The Company has since learned that Mr. Qin has been
convicted and sentenced to a term of incarceration of approximately five years. In view of this information, the Company is evaluating
its strategic options.
|
1)
|
Receipt of NASDAQ Deficiency Notice
|
On April 20, 2016, the Company received a written
notice from The Nasdaq Stock Market (“Nasdaq”) stating that the Company is no longer in compliance with the minimum
stockholders’ equity requirement for continued listing on the Nasdaq Capital Market. Nasdaq Listing Rule 5550(b)(1) requires
listed companies to maintain stockholders’ equity of at least $2,500,000. In its Form 10-K for the period ended December
31, 2015, the Company reported stockholders’ equity of $860,661. Further, as of April 20, 2016, the Company did not meet
the alternative compliance standards under Nasdaq Listing Rule 5550(b) of (i) a market value of listed securities of at least $35,000,000
or (ii) net income from continuing operations of $500,000 in its last completed fiscal year or in two of the last three fiscal
years.
The notification letter has no immediate effect
on the Company’s listing on the Nasdaq Capital Market. Nasdaq has provided the Company with 45 calendar days, or until June
6, 2016, to submit a plan to regain compliance with the minimum stockholders’ equity standard. The Company intends to promptly
evaluate options available to regain compliance and to timely submit a plan to regain compliance with Nasdaq’s minimum stockholders’
equity standard. There can be no assurance that the Company’s plan will be accepted or that, if it is, the Company will be
able to regain compliance with the applicable Nasdaq listing requirements.
During the period from April 1, 2016 to the
date of this report, the Company was involved in 3 new lawsuits, which are related to loan business. The Company initiated
legal proceedings to collect delinquent balance from the borrowers. These cases, with a claim of US$2.09 million are still
at the initial stage of the litigation.
During the period from April 1, 2016 to the
date of this report, the Company assessed the charged-off loan and guarantee balances recorded as of March 31, 2016 and was of
the opinion that these balances were uncollectible. In addition, the Company assessed the remaining balances of loan receivable
and financial guarantee and was of the opinion that it
was
not necessary to charge-off these balances.