UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2017

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to ____________

 

Commission file number:  001-36055

 

China Commercial Credit, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   45-4077653

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

No.1 Zhongying Commercial Plaza,

Zhong Ying Road,

Wujiang, Suzhou,

Jiangsu Province, China

(Address of principal executive offices)

 

+86-512 6396-0022

 (Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

 

As of November 10, 2017, 19,030,915 shares of the Company’s Common Stock, $0.001 par value per share, were issued and outstanding.

 

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

CHINA COMMERCIAL CREDIT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    September 30,      
   

2017

(Unaudited)

    December 31, 2016  
             
ASSETS                
Cash and cash equivalent   $ 3,030,468     $ 768,501  
Restricted cash     9,596       9,163  
Notes receivable     279,493       107,995  
Loans receivable, net of allowance for loan losses of $54,821,187 and $51,708,062 for September 30, 2017 and December 31, 2016, respectively     3,445,533       6,814,919  
Investment in direct financing lease, net of allowance for direct financing lease losses of $2,615,635 and $2,441,663 for September 30, 2017 and December 31, 2016, respectively     450,795       871,159  
Interest receivable     77,329       11,408  
Due from a related party           469,418  
Property and equipment, net     15,727       19,969  
Guarantee paid on behalf of guarantee service customers, net of allowance for repayment on behalf of guarantee service customers losses of $12,089,724 and $11,543,868 for September 30, 2017 and December 31, 2016, respectively     54       98,887  
Guarantee paid on behalf of a related party, net of allowance for repayment on behalf of a related party losses of $102,270 and $98,000 for September 30, 2017 and December 31, 2016, respectively     102,270       98,000  
Other assets     302,748       301,324  
Total Assets   $ 7,714,013     $ 9,570,743  
                 
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) /EQUITY                
Liabilities                
Deposits payable   $ 781,379     $ 748,765  
Unearned income from financial guarantee services and finance lease services     1,878       20,819  
Accrual for financial guarantee services     7,058,187       6,005,608  
Other current liabilities     324,180       273,447  
Income tax payable     240,739       169,226  
Deferred tax liability     81,901       139,947  
Total Liabilities     8,488,26 4       7,357,812  
                 
Shareholders' (Deficit)/ Equity                
Series A Preferred Stock (par value $0.001 per share, 1,000,000 shares authorized at September 30, 2017 and December 31, 2016, respectively; nil and nil shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively)   $     $  
Series B Preferred Stock (par value $0.001 per share, 5,000,000 shares authorized at September 30, 2017 and December 31, 2016, respectively; nil and nil shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively)            
Common stock (par value $0.001 per share, 100,000,000 shares authorized; 19,030,915 and 16,637,679 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively)     19,030       16,638  
Subscription receivable     (1,062 )     (1,062 )
Additional paid-in capital     68,664,627       63,124,040  
Statutory reserve     5,442,150       5,442,150  
Due from a non-controlling shareholder     (1,051,857 )     (1,007,953 )
Accumulated deficit     (78,7 64,900 )     (70,234,656 )
Accumulated other comprehensive income     4,917,761       4,873,774  
Total Shareholders’ (Deficit)/ Equity     (7 74,251 )     2,212,931  
Total Liabilities and Shareholders’ (Deficit)/Equity   $ 7,714,013     $ 9,570,743  

 

* 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).

 

See notes to the unaudited condensed consolidated financial statements

 

  1  

 

 
CHINA COMMERCIAL CREDIT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

   

For the Three Months

Ended

September 30,

 

For the Nine Months

Ended

September 30,

   

2017

(Unaudited)

 

2016

(Unaudited)

 

2017

(Unaudited)

 

2016

(Unaudited)

Interest income                                
Interests and fees on loans and direct financing lease   $ 128,460     $ 722,117     $ 290,566     $ 1,203,663  
Interests on deposits with banks     4,042       263       4,728       3,526  
Total interest and fee income     132,502       722,380       295,294       1,207,189  
                                 
Interest expense                                
Interest expense on short-term bank loans     -       -       -       (30,057 )
Net interest income     132,502       722,380       295,294       1,177,132  
                                 
Reversal of provision/(Provision) for loan losses     452,786       226,694       (2,420,698 )     133,177  
(Provision)/Reversal of provision for direct financing lease losses     (18,616 )     242,180       (66,113 )     242,180  
Net interest income/(loss) after provision for loan losses and financing lease losses     566,672       1,191,254       (2,191,517 )     1,552,489  
                                 
Commissions and fees on financial guarantee services     -       9,117       2,843       26,308  
 (Provision)/Reversal of provision for financial guarantee services     (1,142,807 )     (599,808 )     (830,140 )     385,352  
Commission and fee (loss)/income on guarantee services, net     (1,142,807 )     (590,691 )     (827,297 )     411,660  
                                 
Net (Loss)/Revenue     (576,135 )     600,563       (3,018,814 )     1,964,149  
                                 
Non-interest income                                
Other non-interest income     -       -       -       48,945  
Total  non-interest income     -       -       -       48,945  
                                 
Non-interest expense                                
Salaries and employee surcharge     (180,461 )     (120,130 )     (707,012 )     (548,978 )
Rental expenses     (13,975 )     (28,132 )     (41,242 )     (64,850 )
Business taxes and surcharge     (1,376 )     9,617       (3,221 )     (21,798 )
Transaction costs relating to acquisition     (1,356,285 )     -       (2,136,285 )     -  
Litigation and settlement cost for the shareholders’ lawsuit     -       -       (1,838,500 )     (690,000 )
Other operating expenses     (387,003 )     (1,086,092 )     (784,815 )     (1,893,027 )
Total non-interest expense     (1,939,100 )     (1,224,737 )     (5,511,075 )     (3,218,653 )
                                 
Foreign exchange loss     (57 )     (271 )     (355 )     (557 )
                                 
Loss Before Income Taxes     (2,515,292 )     (624,445 )     (8,530,244 )     (1,206,116 )
Income tax expense     -       -       -       -  
Net Loss   $ (2,515,292 )   $ (624,445 )   $ (8,530,244 )   $ (1,206,116 )
                                 
Loss per Share- Basic and Diluted     (0.139 )     (0.039 )     (0.491 )     (0.086 )
                                 
Weighted Average Shares Outstanding-Basic and Diluted     18,092,369       15,889,853       17,371,183       14,026,815  
                                 
Net Loss     (2,515,292 )     (624,445 )     (8,530,244 )     (1,206,116 )
Other comprehensive income                                
Foreign currency translation adjustment     14,699       260,803       43,987       205,546  
Comprehensive Loss   $ (2,500,593 )   $ (363,642 )   $ (8,486,257 )   $ (1,000,570 )

 

See notes to the unaudited condensed consolidated financial statements

 

  2  

 

 

CHINA COMMERCIAL CREDIT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   

For The Nine Months Ended

September 30,

 
   

2017

(Unaudited)

   

2016

(Unaudited)

 
Cash Flows from Operating Activities:            
Net loss   $ (8,5 30,244 )   $ (1,206,116 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     4,999       46,455  
Provision/(Reversal of provision) for loan losses     2,420,698       (133,177 )
Provision/(Reversal of provision) for direct financing lease losses     66,113       (242,180 )
Provision/(Reversal of provision) of provision for financial guarantee services     830,140       (385,352 )
Deferred tax credit     -       (40,364 )
Income from disposal of property and equipment     -       (48,945 )
Shares issued to executive officers and professional services     2,159,480       1,354,424  
Provision for settlement expenses against legal proceedings     1,843,500       465,000  
Changes in operating assets and liabilities:                
Restricted cash     (34 )     -  
Interest receivable     (63,967 )     -  
Other assets     11,439       8,060  
Unearned income from guarantee services and finance lease services     (19,406 )     (23,572 )
Other current liabilities     28,653     118,255  
Income tax payable     -       39,641  
Net Cash Used in Operating Activities     (1,248,629 )     (47,871 )
                 
Cash Flows from Investing Activities:                
Loans collection from third parties     1,155,055       2,147,593  
Payment of loans on behalf of guarantees     -       (127,886 )
Collection from guarantees for loan paid on behalf of customers     44,075       1,825,730  
Collection of principal of finance lease, in installments     227,723       484,361  
Deposit released from banks for financial guarantee services     -       801,530  
Deposit paid to banks for financial guarantee services     -       (694,403 )
Purchases of property and equipment and intangible asset     -       (48,342 )
Disposal of property and equipment     -       56,557  
Short-term loan paid to a related party     -       (1,945,224 )
Short-term loan collected from a related party     478,954       -  
Net Cash Provided by Investing Activities     1,905,807       2,499,916  
                 
Cash Flows From Financing Activities:                
Cash raised in private placement     1,560,000       1,000,000  
Repayment of short-term bank borrowings     -       (2,600,832 )
Net Cash Provided by/ (Used in) Financing Activities     1,560,000       (1,600,832 )
                 
Effect of Exchange Rate Changes on Cash and Cash Equivalents     44,789       9,747  
                 
Net Increase In Cash and Cash Equivalents     2,261,967       860,960  
Cash and Cash Equivalents at Beginning of Period     768,501       306,401  
Cash and Cash Equivalents at End of Period   $ 3,030,468     $ 1,167,361  
                 
Supplemental Cash Flow Information                
Cash paid for interest expense   $ -     $ 30,057  
Cash paid for income tax   $ -     $ -  

 

See notes to the unaudited condensed consolidated financial statements

 

  3  

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED 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.

 

VIE AGREEMENTS WITH WUJIANG LUXIANG

 

On September 26, 2012, the Company through its indirectly wholly owned subsidiary, Wujiang Luxiang Information Technology Consulting Co. Ltd. (“WFOE”), entered into a series of VIE Agreements with Wujiang Luxiang and the Wujiang Luxiang Shareholders. The purpose of the VIE Agreements is solely to give WFOE the exclusive control over Wujiang Luxiang’s management and operations.

 

The significant terms of the VIE Agreements are summarized below:

 

Exclusive Business Cooperation Agreement

 

Pursuant to the Exclusive Business Cooperation Agreement between Wujiang Luxiang and WFOE, WFOE provides Wujiang Luxiang with technical support, consulting services and other management services relating to its day-to-day business operations and management, on an exclusive basis, utilizing its advantages in technology, human resources, and information. Additionally, Wujiang Luxiang grants an irrevocable and exclusive option to WFOE to purchase from Wujiang Luxiang any or all of its assets at the lowest purchase price permitted under PRC laws. For services rendered to Wujiang Luxiang by WFOE under the Agreement, the service fee Wujiang Luxiang is obligated to pay shall be calculated based on the time of services rendered multiplied by the corresponding rate, which is approximately equal to the net income of Wujiang Luxiang.

 

The Exclusive Business Cooperation Agreement shall remain in effect for ten years unless it is terminated by WFOE with 30-day prior notice. Wujiang Luxiang does not have the right to terminate the agreement unilaterally. WFOE may unilaterally extend the term of this agreement with prior written notice.

 

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.

 

  4  

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. ORGANIZATION AND PRINCIPAL ACTITIVIES (CONTINUED)

 

Timely Reporting Agreement

 

To ensure Wujiang Luxiang promptly provides all of the information that WFOE and the Company need to file various reports with the SEC, a Timely Reporting Agreement was entered between Wujiang Luxiang and the Company.

 

Under the Timely Reporting Agreement, Wujiang Luxiang agrees that it is obligated to make its officers and directors available to the Company and promptly provide all information required by the Company so that the Company can file all necessary SEC and other regulatory reports as required.

 

INCORPORATION OF PFL

 

On September 5, 2013, our wholly owned subsidiary, CCC International Investment Holding Ltd. (“CCC HK”), established Pride Financial Leasing (Suzhou) Co. Ltd. (“PFL”) in Jiangsu Province, China. PFL was expected to offer financial leasing of machinery and equipment, transportation vehicles, and medical devices to municipal government agencies, hospitals and SMEs in Jiangsu Province and beyond. As of September 30, 2017, PFL had one finance lease transaction.

 

  2. GOING CONCERN

 

The unaudited condensed interim consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to operate profitably, to generate cash flows from operations, and to pursue financing arrangements to support its working capital requirements. The conditions described below raises substantial doubt about the Company’s ability to continue as a going concern within one year from the date of this filing.

 

1) Limited funds necessary to maintain operations

 

The Company had an accumulated deficit of US$78,764,900 as of September 30, 2017. In addition, the Company had a negative net asset of US$774,251 as of September 30, 2017.  As of September 30, 2017, the Company had cash and cash equivalents of US$3,030,468, and total short-term borrowings of nil. Caused by the limited funds, the management assessed that the Company was not able to keep the size of lending business within one year from the filing of Form 10-Q.

 

The Company is actively seeking other strategic investors with experience in lending business. If necessary, the shareholders of Wujiang Luxiang will contribute more capital into Wujiang Luxiang.

 

2) Recurring operating loss

 

During the nine months ended September 30, 2017, the Company incurred operating loss of US$8,530,244. Affected by the reduction of lending business and guarantee business and increased loss loans, the management was in the opinion that recurring operating losses would be made within one year from the issuance of the filing.

 

The Company continues to use its best effort to improve collection of loan receivable and interest receivable. Management engaged two PRC law firms to represent the Company in the legal proceedings against the borrowers and their counter guarantors.

 

3) Negative operating cash flow

 

During the nine months ended September 30, 2017, the Company incurred negative operating cash flow of US$1,248,629. Affected by significant balance of charged-off interest receivable, the management assessed the Company would continue to have negative operating cash flow within one year from the issuance of the filing.

 

The Company continues to reduce the redundant headcount and entered into a new office lease with lower rent commitment since January 1, 2017 to improve operating cash flow.

 

  5  

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. GOING CONCERN (CONTINUED)

 

4) Downward industry

 

Most loan customers are from textile industry which has been facing downward pressure. Additionally adversely affected by emergence of internet finance entities, the Company was facing fierce competition. Considering the high risks from both customers and competitors, management assessed the Company would further reduced the loan business without strong financial support.

 

Considering the above factors, the Company, on August 9, 2017, entered into Certain Share Exchange Agreement (“Exchange Agreement”) with the parent company of Sorghum Investment Holdings Limited (“Sorghum”). Pursuant to the terms of the Exchange Agreement, CCCR will acquire 100% of the outstanding shares of Sorghum through issuance of 152,587,000 of its common shares. This transaction will be accounted for as a “reverse acquisition” since, immediately following completion of the transaction, the shareholders of Sorghum immediately prior to the transaction will effectuate control of the Company, through its 87.9% ownership interest in the post-merger entity.

 

While management believes that the measures in the liquidity plan will be adequate to satisfy its liquidity and cash flow requirements for the twelve months after the financial statements are available to be issued, there is no assurance that the liquidity plan will be successfully implemented. Failure to successfully implement the liquidity plan will have a material adverse effect on the Company’s business, results of operations and financial position, and may materially adversely affect its ability to continue as a going concern.

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

(a) Basis of presentation and principle of consolidation

 

The unaudited condensed interim consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).

 

The unaudited condensed interim financial information as of September 30, 2017 and for the three and nine months ended September 30, 2017 and 2016 have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and pursuant to Regulation S-X. Certain information and footnote disclosures, which are normally included in annual financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. The unaudited condensed interim financial information should be read in conjunction with the audited financial statements and the notes thereto, included in the Form 10-K for the fiscal year ended December 31, 2016 filed with the SEC on April 6, 2017.

 

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s unaudited condensed financial position as of September 30, 2017, its unaudited condensed results of operations for the three and nine months ended September 30 and 2016, and its unaudited condensed cash flows for the nine months ended September 30, 2017 and 2016, as applicable, have been made. The unaudited interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

 

All significant inter-company accounts and transactions have been eliminated in consolidation.

 

  6  

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(b) Interest receivable

 

Interest on loans receivable is accrued and credited to income as earned. The Company determines a loan past due status by the number of days that have elapsed since a borrower has failed to make a contractual loan payment. Accrual of interest is generally discontinued when either (i) reasonable doubt exists as to the full, timely collection of interest or principal or (ii) when a loan becomes past due by more than 90 days. Additionally, any previously accrued but uncollected interest is reversed. Subsequent recognition of income occurs only to the extent payment is received, subject to management’s assessment of the collectability of the remaining interest and principal. Loans are generally restored to an accrual status when it is no longer delinquent and collectability of interest and principal is no longer in doubt and past due interest is recognized at that time.

 

The interest reversed due to the above reason was US$2,604,172 and US$2,604,172 as of September 30, 2017 and December 31, 2016, respectively.

 

(c) Reclassifications

 

Certain items in the financial statements of comparative period have been reclassified to conform to the financial statements for the current period.

 

(d) Foreign currency 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.

 

    September 30,
2017
    December 31,
2016
 
Balance sheet items, except for equity accounts     6.6549       6.9448  

 

    For the nine months ended
September 30,
 
    2017     2016  
Items in the statements of operations and comprehensive loss, and statements of cash flows     6.8065       6.5802  

 

Transactions denominated in currencies other than the functional currency are translated into prevailing functional currency at the exchange rates prevailing at the dates of the transactions. The resulting exchange differences are included in the condensed consolidated statements of comprehensive loss.

 

  7  

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(e) 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.

 

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. Financial instruments representing credit risk are as follows:

 

    September 30,
2017
(Unaudited)
    December 31,
2016
 
Guarantee   $ 11,367,564     $ 10,893,089  

 

A provision for possible loss to be absorbed by the Company for the financial guarantee it provides is recorded as an accrued liability when the guarantees are made and recorded as “Accrual for financial guarantee services” on the condensed consolidated balance sheets. This liability represents probable losses and is increased or decreased by accruing a “(Provision)/ Reversal of provision for financial guarantee services” against the income of commissions and fees on guarantee services.

 

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 62% and 55% of contract amount as of September 30, 2017 and December 31, 2016, 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. The Company reviews the provision on a quarterly basis. The allowance are detailed in following table:

 

    September 30,
2017
(Unaudited)
    December 31,
2016
 
Allowance for immature financial guarantee services   $ 7,058,187     $ 6,005,608  
                 
Allowance for repayment on behalf of guarantee service customers losses     12,089,724       11,543,868  
Allowance for repayment on behalf of a related party losses     102,270       98,000  
Total allowance for repayment on behalf of guarantee customers losses   $ 12,191,994     $ 11,641,868  

 

The Company recorded a provision of US$1,142,807 and US$599,808 for the three months ended September 30, 2017 and 2016, respectively, and recorded a provision of US$830,140 and reversed a provision of US$385,352 for the nine months ended September 30, 2017 and 2016, respectively. As the Company collected from guarantee customers for payments on behalf of in the amount of US$44,075 and US$1,825,730, for the nine month ended September 30, 2017 and 2016, respectively. Among the collection, US$44,075 and US$1,825,730 were accrued of 100% allowance as of pervious year end.

 

As of September 30, 2017 and December 31, 2016, the management charged off specific provision for three and two customers in the amount of US$164,220 and US$142,966, considering remote collectability from the customers.

 

  8  

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(f) 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.

 

(g) 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.

 

(h) Comprehensive loss

 

Comprehensive loss includes net loss and foreign currency adjustments. Comprehensive loss is reported in the statements of operations and comprehensive loss.

 

Accumulated other comprehensive income, as presented on the balance sheets are the cumulative foreign currency translation adjustments.

 

(i) 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.

 

(j) 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.

 

(k) 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.

 

  9  

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

4. VARIABLE INTEREST ENTITIES AND OTHER CONSOLIDATION MATTERS

 

As of September 30, 2017, the Company had only one VIE.

 

The following financial statement amounts and balances of the VIE were included in the unaudited condensed interim consolidated financial statements as of September 30, 2017 and December 31, 2016 and for the three and nine months ended September 30, 2017, 2017 and 2016:

 

    September 30,
2017
(Unaudited)
    December 31,
2016
 
Total assets   $ 4,332,304     $ 7,968,077  
Total liabilities   $ 7,725,585     $ 8,012,892  

 

    For the three months
ended
September 30,
    For the nine months
ended
September 30,
 
    2017
(Unaudited)
    2016
(Unaudited)
    2017
(Unaudited)
    2016
(Unaudited)
 
Revenue   $ 120,030     $ 672,646     $ 239,202     $ 1,151,308  
Net (loss)/income   $ (641,053 )   $ 2,807     $ (3,271,977 )   $ 910,203  

  

5. RISKS

 

(a) Credit risk

 

Credit risk is one of the most significant risks for the Company’s business. Credit risk exposures arise principally in lending activities, finance lease and financial guarantee activities which is an off-balance sheet financial instrument.

 

Credit risk is controlled by the application of credit approvals, limits and monitoring procedures. The Company manages credit risk through in-house research and analysis of the Chinese economy and the underlying obligors and transaction structures. To minimize credit risk, the Company requires collateral in the form of rights to cash, securities or property and equipment.

 

The Company identifies credit risk collectively based on industry, geography and customer type. This information is monitored regularly by management.

 

1.1 Lending activities

 

In measuring the credit risk of lending loans to corporate customers, the Company mainly reflects the “probability of default” by the customer on its contractual obligations and considers the current financial position of the customer and the exposures to the customer and its likely future development. For individual customers, the Company uses standard approval procedures to manage credit risk for personal loans.

 

In addition, the Company calculates the provision amount as below:

 

  1. General Reserve - is based on total loan receivable balance and to be used to cover unidentified probable loan loss. According to management assessment, the General Reserve is required to be no less than 1% of total loan receivable balance.

 

  2. Special Reserve - is fund set aside covering losses due to risks related to a particular country, region, industry, company or type of loans. The reserve rate could be decided based on management estimate of loan collectability. The Loan portfolio did not include any loans outside of the PRC.

 

  3. Specific Reserve – is based on a loan by loan basis covering losses due to risks related to the ability and intension of repayment of each customer. The reserve rate was individually assessed based on management estimate of loan collectability

 

  10  

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

5. RISKS (CONTINUED)

 

1.2 Guarantee activities

 

The off-balance sheet commitments arising from guarantee activities carry similar credit risk to loans and the Company takes a similar approach on risk management.

 

Off-balance sheet commitments with credit exposures are also assessed and categorized with reference to the Guideline and include additional amounts on a specific basis.

 

(b) Liquidity risk

 

The Company is also exposed to liquidity risk which is risk that it is unable to provide sufficient capital resources and liquidity to meet its commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When necessary, the Company will turn to other financial institutions and the owners to obtain short-term funding to meet the liquidity shortage.

 

(c) Foreign currency risk

 

A majority of the Company’s operating activities and a significant portion of the Company’s assets and liabilities are denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the Peoples’ Bank of China (“PBOC”) or other authorized financial institutions at exchange rates quoted by PBOC. Approval of foreign currency payments by the PBOC or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices and signed contracts. The value of RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market.

 

(d) Concentration risk

 

As of September 30, 2017 and December 31, 2016, the Company held cash and cash equivalent of US$3,030,468 and US$768,501, respectively, that is uninsured by the government authority.

 

To limit exposure to credit risk relating to deposits, the Company primarily places cash deposits only with large financial institutions in the PRC with acceptable credit ratings.

 

The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC as well as by the general state of the PRC’s economy. The business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

 

No customer accounted for more than 10% of total loan balance as of September 30, 2017 and December 31, 2016.

 

  11  

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

6. LOANS RECEIVABLE, NET

 

The interest rates on loan issued ranged between 9.6%~ 19.44% and 9.6%~ 19.44% % for the nine months ended September 30, 2017 and 2016, respectively.

 

6.1 Loans receivable consist of the following:

 

    September 30,
2017
(Unaudited)
    December 31,
2016
 
             
Business loans   $ 36,783,453     $ 37,786,657  
Personal loans     21,483,267       20,736,324  
Total Loans receivable     58,266,720       58,522,981  
Allowance for loan losses                
Collectively assessed     (19,835 )     (50,481,240 )
Individually assessed     (54,801,352 )     (1,226,822 )
Allowance for loan losses     (54,821,187 )     (51,708,062 )
Loans receivable, net   $ 3,445,533     $ 6,814,919  

 

The Company originates loans to customers located primarily in Wujiang City, Jiangsu Province. This geographic concentration of credit exposes the Company to a higher degree of risk associated with this economic region.

 

All loans are short-term loans that the Company has made to either business or individual customers. As of September 30, 2017 and December 31, 2016, the Company had 67 and 70 business loan customers, and 40 and 41 personal loan customers, respectively. Most loans are either guaranteed by a third party whose financial strength is assessed by the Company to be sufficient or secured by collateral. Allowance on loan losses are estimated loan by loan on a quarterly basis based on an assessment of specific evidence indicating doubtful collection, historical experience, loan balance aging and prevailing economic conditions.

 

For the three months ended September 30, 2017 and 2016, a reversal of provision of US$452,786 and US$226,694 were charged to the condensed consolidated statements of operation, respectively. For the nine months ended September 30, 2017 and 2016, a provision of US$2,420,698 and a reversal of provision of US$133,177 were charged to the condensed consolidated statements of operation, respectively. Write-offs of $1,579,009 against allowances have occurred for the three and nine months ended September 30, 2017. No write-offs against allowances have occurred for the three and nine months ended September 30, 2016, respectively.

 

The following table presents nonaccrual loans with aging over 90 days by classes of loan portfolio as of September 30, 2017 and December 31, 2016, respectively:

 

    September 30,
2017
(Unaudited)
    December 31,
2016
 
             
Business loans   $ 34,799,952     $ 35,885,947  
Personal loans     21,483,267       20,693,126  
    $ 56,283,219     $ 56,579,073  

 

  12  

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

6. LOANS RECEIVABLE, NET (CONTINUED)

 

The following table represents the aging of loans as of September 30, 2017 by type of loan:

 

    1-89 Days
Past Due
    90 - 179 Days Past Due     180 - 365 Days Past Due     Over 1 year Past Due     Total Past Due     Current     Total Loans  
                                           
Business loans   $     -     $     -     $ 11,437,290     $ 23,362,662     $ 34,799,952     $ 1,983,501     $ 36,783,453  
Personal loans     -       -       6,544,051       14,939,216       21,483,267       -       21,483,267  
    $ -     $ -     $ 17,981,341     $ 38,301,878     $ 56,283,219     $ 1,983,501     $ 58,266,720  

 

The following table represents the aging of loans as of December 31, 2016 by type of loan:

 

    1-89 Days
Past Due
    90 - 179 Days Past Due     180 - 365 Days Past Due     Over 1 year Past Due     Total Past Due     Current     Total Loans  
                                           
Business loans   $ -     $ 10,992,518     $ 5,585,728     $ 19,307,701     $ 35,885,947     $ 1,900,710     $ 37,786,657  
Personal loans     43,198       6,234,908       428,956       14,029,262       20,736,324       -       20,736,324  
    $ 43,198     $ 17,227,426     $ 6,014,684     $ 33,336,963     $ 56,622,271     $ 1,900,710     $ 58,522,981  

 

  13  

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

6. LOANS RECEIVABLE, NET (CONTINUED)

 

6.2 Analysis of loans by credit quality indicator

 

The following table summarizes the Company’s loan portfolio by credit quality indicator as of September 30, 2017 and December 31, 2016, respectively:

 

Five Categories   September 30, 2017
(Unaudited)
    %     December 31, 2016     %  
                         
Pass   $ 1,983,501       3.4 %   $ 1,900,710       3.2 %
Special mention     -       -       -       -  
Substandard     -       -       -       -  
Doubtful     2,750,359       4.7 %     9,866,430       16.9 %
Loss     53,532,860       91.9 %     46,755,841       79.9 %
Total   $ 58,266,720       100 %   $ 58,522,981       100 %

 

6.3 Analysis of loans by collateral

 

The following table summarizes the Company’s loan portfolio by collateral as of September 30, 2017:

 

    September 30, 2017
(Unaudited)
       
    Business Loans     Personal Loans     Total  
Guarantee backed loans   $ 34,682,867     $ 20,650,801     $ 55,333,668  
Collateral backed loans     2,100,586       832,466       2,933,052  
    $ 36,783,453     $ 21,483,267     $ 58,266,720  

  

The following table summarizes the Company’s loan portfolio by collateral as of December 31, 2016:

 

    December 31, 2016        
    Business Loans     Personal Loans     Total  
Guarantee backed loans   $ 35,557,758     $ 19,904,043     $ 55,461,801  
Collateral backed loans     2,228,899       832,281       3,061,180  
    $ 37,786,657     $ 20,736,324     $ 58,522,981  

 

Guarantee Backed Loans

 

A guaranteed loan is a loan guaranteed by a third party who is usually a corporation or high net worth individual. As of September 30, 2017 and December 31, 2016, guaranteed loans make up 95.0% and 94.8% of our direct loan portfolio, respectively.

 

Collateral Backed Loans

 

A collateral backed loan is a loan in which the borrower puts up an asset under their ownership, possession or control, as collateral for the loan. An asset usually is land use rights, inventory, equipment or buildings. The loan is secured against the collateral and we do not take physical possession of the collateral at the time the loan is made. We will verify ownership of the collateral and then register the collateral with the appropriate government agencies to complete the secured transaction. In the event that the borrower defaults, we can then take possession of the collateral asset and sell it to recover the outstanding balance owed. If the sale proceed of the collateral asset is not sufficient to pay off the debt, we will file a lawsuit against the borrower and seek payment for the remaining balance.

 

  14  

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

7. ALLOWANCE FOR LOAN LOSSES

 

The following tables present the activity in the allowance for loan losses and related recorded investment in loans receivable by classes of the loans individually and collectively evaluated for impairment as of and for the three months ended September 30, 2017 and 2016:

 

    Business Loans
(Unaudited)
    Personal Loans
(Unaudited)
    Total
(Unaudited)
 
For the three months ended September 30, 2017                  
Beginning balance   $ 35,315,516     $ 20,584,442     $ 55,899,958  
Charged off     (1,579,009 )     -       (1,579,009 )
Recoveries     (367,925 )     (113,862 )     (481,787 )
Provisions     -       -       -  
Foreign exchange loss     605,711       376,314       982,025  
Ending balance     33,974,293       20,846,894       54,821,187  
Ending balance: individually evaluated for impairment     33,954,458       20,846,894       54,801,352  
Ending balance: collectively evaluated for impairment   $ 19,835     $ -     $ 19,835  

 

    Business Loans
(Unaudited)
    Personal Loans
(Unaudited)
    Total
(Unaudited)
 
For the three months ended September 30, 2016                        
Beginning balance   $ 34,326,727     $ 20,161,476     $ 54,488,203  
Recoveries     (50,612 )     (121,435 )     (172,047 )
Provisions     (360 )     -         (360 )
Foreign exchange gain     (133,237 )     (78,256 )     (211,493 )
Ending balance     34,142,518       19,961,785       54,104,303  
Ending balance: individually evaluated for impairment     -         -         -    
Ending balance: collectively evaluated for impairment   $ 34,142,518     $ 19,961,785     $ 54,104,303  

 

The following tables present the activity in the allowance for loan losses and related recorded investment in loans receivable by classes of the loans individually and collectively evaluated for impairment as of and for the nine months ended September 30, 2017 and 2016:

 

    Business Loans
(Unaudited)
    Personal Loans
(Unaudited)
    Total
(Unaudited)
 
For the nine months ended September 30, 2017                  
Beginning balance   $ 32,356,953     $ 19,351,109     $ 51,708,062  
Charged off     (1,579,009 )     -       (1,579,009 )
Recoveries     (634,227 )     (149,122 )     (783,349 )
Provisions     2,416,558       787,479       3,204,037  
Foreign exchange loss     1,414,018       857,428       2,271,446  
Ending balance     33,974,293       20,846,894       54,821,187  
Ending balance: individually evaluated for impairment     33,954,458       20,846,894       54,801,352  
Ending balance: collectively evaluated for impairment   $ 19,835     $ -     $ 19,835  

 

  15  

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

7. ALLOWANCE FOR LOAN LOSSES (CONTINUED)

 

    Business Loans
(Unaudited)
    Personal Loans
(Unaudited)
    Total
(Unaudited)
 
For the nine months ended September 30, 2016                  
Beginning balance   $ 35,083,738     $ 20,511,915     $ 55,595,653  
Recoveries     (127,977 )     (1,155 )     (129,132 )
Provisions     125,729       -       125,729  
Foreign exchange gain     (938,972 )     (548,975 )     (1,487,947 )
Ending balance     34,142,518       19,961,785       54,104,303  
Ending balance: individually evaluated for impairment     -       -       -  
Ending balance: collectively evaluated for impairment   $ 34,142,518     $ 19,961,785     $ 54,104,303  

 

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard, doubtful and loss within the Company’s internal risk rating system as of September 30, 2017:

 

    Pass
(Unaudited)
    Special Mention
(Unaudited)
    Substandard
(Unaudited)
    Doubtful
(Unaudited)
    Loss
(Unaudited)
    Total
(Unaudited)
 
                                     
Business loans   $ 1,983,501     $       -     $      -     $ 1,669,953     $ 33,129,999     $ 36,783,453  
Personal loans     -       -       -       1,080,406       20,402,861       21,483,267  
    $ 1,983,501     $ -     $ -     $ 2,750,359     $ 53,532,860     $ 58,266,720  

 

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard, doubtful and loss within the Company’s internal risk rating system as of December 31, 2016:

 

    Pass
(Unaudited)
    Special Mention
(Unaudited)
    Substandard
(Unaudited)
    Doubtful
(Unaudited)
    Loss
(Unaudited)
    Total
(Unaudited)
 
                                     
Business loans   $ 1,900,710     $     -     $     -     $ 7,096,000     $ 28,789,947     $ 37,786,657  
Personal loans     -       -       -       2,770,430       17,965,894       20,736,324  
    $ 1,900,710     $ -     $ -     $ 9,866,430     $ 46,755,841     $ 58,522,981  

 

  16  

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

8. GUARANTEE PAID ON BEHALF OF GUARANTEE CUSTOMERS, NET

 

    September 30,
2017
(Unaudited)
    December 31,
2016
 
Guarantee paid on behalf of guarantee service customers   $ 12,089,778     $ 11,642,755  
Allowance for repayment on behalf of guarantee service customers losses     (12,089,724 )     (11,543,868 )
Guarantee paid on behalf of guarantee service customers, net   $ 54     $ 98,887  
Guarantee paid on behalf of a related party     204,540       196,000  
Allowance for repayment on behalf of a related party losses     (102,270 )     (98,000 )
Total   $ 102,270     $ 98,000  

   

As of September 30, 2017, 2017 and December 31, 2016, guarantee paid on behalf of guarantee service customers represents payment made by the Company to banks on behalf of thirty-two of its third-party guarantee service customers who defaulted on their loan repayments to the banks. Guarantee paid on behalf of a related party represents payment made by the Company to banks on behalf of one and one of its related party customers. 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.

 

9. NET INVESTMENT IN DIRECT FINANCING LEASE

 

On September 25, 2014, PFL entered into a finance lease agreement for the leasing of manufacturing equipment with a total lease receivable of US$2.73 million, with a lease term of 2 years. The lease bears an interest rate of 10.36% per annum. As of September 30, 2017, the fiancé lease agreement expired with an outstanding investment in finance lease of $976,724. The Company recorded an allowance of $751,326 on the outstanding investment.

 

On October 13, 2014, PFL entered into another finance lease agreement for the leasing of manufacturing equipment with a total lease receivable of US$2.88 million, with a lease term of 3 years. The lease bears an interest rate of 11.11% per annum. On October 13, 2017, the fiancé lease agreement expired with an outstanding investment in finance lease of $2,089,706. The Company recorded an allowance of $1,864,309 on the outstanding investment.

 

  17  

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9. NET INVESTMENT IN DIRECT FINANCING LEASE (CONTINUED)

 

Following is a summary of the components of the Company’s net investment in direct financing leases as of September 30, 2017 and December 31, 2016:

 

    September 30,
2017
(Unaudited)
    December 31,
2016
 
             
Total minimum lease payments to be received   $ 3,365,941     $ 3,599,831  
Less: Amounts representing estimated executory costs     -       -  
Minimum lease payments receivable     3,365,941       3,599,831  
Less Allowance for uncollectible     (2,615,635 )     (2,441,663 )
Net minimum lease payments receivable     750,306       1,158,168  
Estimated residual value of leased property             -  
Less: Unearned income     (299,511 )     (287,009 )
Net investment in direct financing lease   $ 450,795     $ 871,159  

 

  18  

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

10. PROPERTY AND EQUIPMENT

 

The Company’s property and equipment used to conduct day-to-day business are recorded at cost less accumulated depreciation. Depreciation expenses are calculated using straight-line method over the estimated useful life with 5% salvage value below:

 

Property and equipment consist of the following:

 

    Useful Life
(years)
  September 30, 2017
(Unaudited)
    December 31, 2016  
Furniture and fixtures   5   $ 21,715     $ 20,808  
Electronic equipment   3     137,033       131,314  
Leasehold improvement   3     166,617       159,662  
Less: accumulated depreciation         (309,638 )     (291,815 )
Property and equipment, net       $ 15,727     $ 19,969  

 

Depreciation expense totaled US$1,700 and US$11,053 for the three months ended September 30, 2017 and 2016, respectively. Depreciation expense totaled US$4,999 and US$43,062 for the nine months ended September 30, 2017 and 2016, respectively.

 

11. OTHER CURRENT LIABILITIES

 

Other current liabilities as of September 30, 2017 and December 31, 2016 consisted of:

 

   

September 30,

2017
(Unaudited)

   

December 31,

2016

 
Accrued payroll   $ 40,470     $ 37,575  
Accrued office rental expenses     28,550       34,558  
Other tax recoverable     (43,353 )     (44,007 )
Accrued provision for cash settlement against legal proceedings     245,000       225,000  
Other payable     53,513       20,321  
    $ 324,180     $ 273,447  

 

On November 22, 2016, we filed a stipulation and agreement of settlement (“Stipulation”) with all persons and entities that purchased or otherwise acquired CCCR shares between August 14, 2013 and July 25, 2014 (collectively “Led Defendants”). On June 1, 2017, following a final fairness hearing on May 30, 2017 regarding the proposed settlement, the Court entered a final judgment and order that: (i) dismisses with prejudice the claims asserted in the Securities Class Action against all named defendants in connection with the Securities Class Action, including the Company, and releases any claims that were or could have been asserted that arise from or relate to the facts alleged in the Securities Class Action, such that every member of the settlement class will be barred from asserting such claims in the future; and (ii) approves the payment of $220,000 in cash and the issuance of 950,000 shares of its common stock (the “Settlement Shares”) to members of the settlement class. In addition, the Company would incur a payment of $25,000 in cash to class administrator.

 

The Company accounted for the cash payment aggregating $245,000 as an accrued liability and the share settlement of 950,000 shares in the amount of US$2,308,500 (at market value of $2.43 per share on June 1, 2017) as an additional paid-in capital. Accordingly the Company recorded expenses of $1,838,500 and $690,000 for the nine months ended September 30, 2017 and 2016, respectively, under the account of “Litigation and settlement cost for the shareholders’ lawsuit”. The $245,000 cash portion of the settlement has been paid in October subsequently.

 

  19  

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

12. OTHER OPERATING EXPENSES

 

Other operating expenses for the three and nine months ended September 30, 2017 and 2016 consisted of:

 

    For the three months ended
September 30,
    For the nine months ended
September 30,
 
    2017
(Unaudited)
    2016
(Unaudited)
    2017
(Unaudited)
    2016
(Unaudited)
 
Depreciation and amortization   $ 1,700     $ 12,168     $ 4,999     $ 46,455  
Travel expenses     14,633       9,647       29,617       13,134  
Entertainment expenses     6,148       42       10,623       11,970  
Legal and consulting expenses     220,291       1,002,804       380,003       1,642,316  
Car expenses     2,878       3,726       11,489       21,541  
Bank charges     707       540       2,313       2,256  
Audit-related expense     78,458       31,382       175,944       100,955  
Other expenses     62,188       25,783       169,827       54,400  
Total   $ 387,003     $ 1,086,092     $ 784,815     $ 1,893,027  

 

13. CAPITAL TRANSACTION

 

Common Stock

 

The Company is authorized to issue up to 100,000,000 shares of Common Stock.

 

On March 2, 2017, the Company issued 92,875 and 92,875 unrestricted shares to Long Yi, the Company’s Chief Financial Officer and Yang Jie, the Company’s VP of Finance, respectively. The shares were issued at a market value of US$1.04 per share, in the total amount of US$193,180, for the services provided.

 

On April 20, 2017, the Company issued 500,000 unregistered shares to four individuals, all of whom are citizens of P.R.C, for their services in seeking financial support for the Company. The Company compensates each of the individuals with 125,000 shares of common stock of the Company as incentive. The transaction was at arm’s length. The shares were issued at a market value of US$1.44 per share, in the total amount of US$720,000, for the services provided.

 

  20  

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

13. CAPITAL TRANSACTION (CONTINUED)

 

On May 11, 2017 and June 21, 2017, the Company closed two private placements to two third party individual investors to issue 60,000 and 625,000 common shares, respectively, at a per share price of US$1.0 and US$0.8, in the total amount of US$60,000 and US$500,000, respectively. These transactions were at arm’s length. The shares shall be authorized for listing on the NASDAQ capital market before closing, and the net proceeds of the sale of the shares shall be used by the Company for working capital and general corporate purpose.

 

On September 29, 2017, the Company closed two private placements to two individual investors to issue 452,486 and 100,000 common shares, respectively, at a per share price of US$1.81, in the total amount of US$1,000,000. Among the two individuals, one of them is the Vice President of Finance of the Company (Note 16(2)). These transactions were at arm’s length. The net proceeds of the sale of the shares shall be used by the Company for working capital and general corporate purpose, payment of the transactional expenses related to the acquisition of all the outstanding issued shares of Sorghum Investment Holding Limited (“Sorghum”) from certain shareholders of Sorghum, and payments related to the securities class action and derivative action disclosed in Note 17(3).

 

During the three months ended September 30, 2017, the Company issued an aggregation of 470,000 unregistered shares to eight professional service providers for legal and consulting services provided to the Company. The common shares were issued as compensations for the services provided to the Company. The transaction was at arm’s length. The fair value of the services provided was in in the total amount of US$1,226,300 , at a per share price at the market price of the issuance dates.

 

As of September 30, 2017, there were 19,030,915 shares of Common Stock issued and outstanding.

 

Warrants

 

As of December 31, 2016, the Company had outstanding warrants to purchase 1,123,400 shares.

 

During the nine months ended September 30, 2017, the outstanding warrants to purchase 1,123,400 shares expired.

 

On September 29, 2017, the Company issued warrants to purchase 158,370 and 35,000 shares to two investors, respectively, as part of the private placements mentioned above. The warrant has an exercise price of $2.26 per share and is exercisable on the date of issuance and expire five years from the date of issuance. The fair value of the warrants aggregated $186,268, estimated by using the Black-Scholes valuation model.

 

As of September 30, 2017, the Company had outstanding warrants to purchase 193,370 shares.

 

  21  

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

14. LOSS PER COMMON SHARE

 

The following table sets forth the computation of basic and diluted earnings per common share for the three and nine months ended September 30, 2017 and 2016, respectively:

 

    For the Three Months Ended
September 30,
  For the Nine Months Ended
September 30,
    2017
(Unaudited)
  2016
(Unaudited)
  2017
(Unaudited)
  2016
(Unaudited)
                 
 Net loss attributable to the common shareholders   $ (2,515,292 )   $ (624,445 )   $ (8,530,244 )   $ (1,206,116 )
                                 
Basic weighted-average common shares outstanding     18,092,369       15,889,853       17,371,183       14,026,815  
Effect of dilutive securities     -       -       -       -  
Diluted weighted-average common shares outstanding     18,092,369       15,889,853       17,371,183       14,026,815  
                                 
Loss per share:                                
Basic   $ (0.139 )   $ (0.039 )   $ (0.491 )   $ (0.086 )
Diluted   $ (0.139 )   $ (0.039 )   $ (0.491 )   $ (0.086 )

  

Basic loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share is the same as basic loss per share due to the lack of dilutive items in the Company for the three and nine months ended September 30, 2017 and 2016. The number of warrants is omitted from the computation as the anti-dilutive effect.

 

  22  

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

15. INCOME TAXES

 

Effective January 1, 2008, the New Taxation Law of PRC stipulates that domestically owned enterprises and foreign invested enterprises (the “FIEs”) are subject to a uniform tax rate of 25%. While the New Tax Law equalizes the tax rates for FIEs and domestically owned enterprises, preferential tax treatment may continue to be given to companies in certain encouraged sectors and to entities classified as high-technology companies, regardless of whether these are domestically-owned enterprises or FIEs. In November 2009, the Jiangsu Province Government issued Su Zheng Ban Fa [2009] No. 132 which stipulates that micro-credit companies in Jiangsu Province is subject to preferential tax rate of 12.5%. As a result, the Company is subject to the preferential tax rate of 12.5% for its loan business for the periods presented. The taxation practice implemented by the tax authority governing the Company is that the Company pays enterprise income taxes at rate of 25% on a quarterly basis, and upon annual tax settlement done by the Company and the tax authority in five (5) months after December 31 the tax authority will refund the Company the excess enterprise income taxes it paid beyond the rate of 12.5%. However since 2015, the excess enterprise income taxes paid will not be refunded but can be used to offset the future income tax payable arising from taxable income.

 

The Company evaluates the level of authority for each uncertain tax position (including the potential application of interest and penalties) based on the technical merits, and measures the unrecognized benefits associated with the tax positions. For the three and nine months ended September 30, 2017 and 2016, the Company had no unrecognized tax benefits. For the nine months ended September 30, 2017, the Company made net tax operating loss from its PRC subsidiaries and its consolidated VIE of US$3,073,360. As of September 30, 2017, the Company has carry-forward tax operating losses from its PRC subsidiaries and its condensed consolidated VIE of US$64,500,641, which will expire from the year ending December 31, 2019 to 2022. The Company recognized deferred income tax assets of US$12,099,165 as of September 30, 2017. However, the Company estimates there will be no sufficient net income before income tax from years ending December 31, 2017 to 2022 to realize the deferred income tax assets. The Company provided valuation allowance for deferred income tax assets of US$12,099,165 as of September 30, 2017. As such, the effective tax rates for the three and nine months ended September 30, 2017 and 2016 are 0% and 0%, respectively.

 

The Company does not anticipate any significant increase to its liability for unrecognized tax benefit within the next 12 months. The Company will classify interest and penalties related to income tax matters, if any, in income tax expense.

 

Deferred tax liability arises from government incentive for the purpose of covering the Company’s actual loan losses and ruled that the income tax will be imposed on the subsidy if the purpose is not fulfilled within 5 years after the Company receives the subsidy. As of September 30, 2017 and December 31, 2016, subsidy of US$1,715,510 and US$1,353,810 did not fulfill the purpose within due date and the related deferred tax liability was transferred to income tax payable. As of September 30, 2017 and December 31, 2016, the deferred tax liability amounted to US$81,901 and US$139,947, respectively.

 

  23  

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

16. RELATED PARTY TRANSACTIONS AND BALANCES

 

1) Nature of relationships with related parties

 

Name   Relationship with the Company
Wujiang Chunjia Textile Trading Co., Ltd (“Chunjia Textile”)   Controlled by Huichun Qin
Suzhou Rongshengda Investment Holding Co., Ltd.   Controlled by shareholders of Wujiang Luxiang
Yang Jie   Vice President of Finance
Huichun Qin   Non-controlling shareholder and former CEO and chairman of board of directors

 

2) Related party transactions

 

During the year ended December 31, 2016, the Company made a loan of US$1,945,224 to Suzhou Rongshengda Investment Holding Co., Ltd., a company controlled by shareholders of Wujiang Luxiang. Due to the short-term borrowing, the Company did not charge any interest or fees. By September 30, 2017, the balance was collected. 

 

On September 29, 2017, the Company closed a private placements to Mr. Yang Jie to issue 452,486 common shares, respectively, at a per share price of US$1.81, in the total amount of US$819,000. These transactions were at arm’s length. The net proceeds of the sale of the shares shall be used by the Company for working capital and general corporate purpose, payment of the transactional expenses related to the acquisition of all the outstanding issued shares of Sorghum Investment Holding Limited (“Sorghum”) from certain shareholders of Sorghum, and payments related to the securities class action and derivative action disclosed in Note 17(3).

 

3) Related party balances

 

Amount due from related parties were as follows:

 

   

September 30,

2017

(Unaudited)

   

December 31,

2016

 
             
Suzhou Rongshengda Investment Holding Co., Ltd.   $ -     $ 469,418  
Chunjia Textile     204,540       196,001  
Huichun Qin   $ 1,051,857     $ 1,007,953  

  

As of September 30, 2017, the Company provided financial guarantee service for Chunjia Textile to guarantee loans of US$204,540. The Company accrued provision of US$102,270 on the outstanding balance as of September 30, 2017.

 

Huichun Qin transferred $1,098,197(equivalent of RMB 7 million) to his personal account without proper authorization on July 2, 2014. As of September 30, 2017, Huichun Qin has not repaid the balance. The amount was recorded as a deduction of the Company’s equity as of September 30, 2017 and December 31, 2016, respectively.

 

  24  

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

17. COMMITMENTS AND CONTINGENCIES

 

1) Lease Commitments

 

During the year ended December 31, 2016, the Company leased its new office under a lease agreement from January 1, 2017 to December 31, 2019. As a result, in January 2017, the Company terminated the lease agreement for its former principal office which agreement was to expire on May 31, 2021. No default penalty was paid for the earlier termination. The following table sets forth the Company’s contractual obligations as of September 30, 2017 in future periods:

 

   

Rental payments

(Unaudited)

 
       
Year ending September 30, 2018     30,643  
Year ending September 30, 2019     25,202  
Year ending September 30, 2020     6,392  
Total   $ 62,237  

 

2) Guarantee Commitments

 

The guarantees will terminate upon payment and/or cancellation of the obligation; however, payments by the Company would be triggered by failure of the guaranteed party to fulfill its obligation covered by the guarantee. Generally, the average guarantee expiration terms ranged within 12 to 24 months and the average percentage of the guarantee amount as security deposit is 10% ~ 20%. As of September 30, 2017 and December 31, 2016, the loan amount guaranteed by the Company was US$11,367,564 and US$10,893,089, respectively, for its financial guarantee service customers.

 

  25  

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

17. COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

3) Contingencies

 

The Company is involved in various legal actions arising in the ordinary course of its business. As of September 30, 2017, the Company was involved in 109 lawsuits, among which 76 were related to its loan business and 32 were related to guarantee business and 1 was related to financial lease. The Company initiated legal proceedings to collect delinquent balances from borrowers and guarantees. 84 of these cases with an aggregated claim of US$41.16 million have been adjudicated by the Court in favor of the Company and these cases are settled or in the process of enforcement. The remaining 25 cases with an aggregated claim of US$18.17 million have not been adjudicated by the Court as of September 30, 2017.

 

On August 6, 2014, a purported shareholder Andrew Dennison filed a putative class action complaint in the United States District Court District of New Jersey (the “N.J. district court”) relating to a July 25, 2014 press release about the Company’s progress in recovering a significant portion of the $5.4 million the Company paid in the first quarter of 2014 on behalf of loan guarantee customers. The action, Andrew Dennison v. China Commercial Credit, Inc., et al., Case No. 2:2014-cv-04956, alleges that the Company and its current and former officers and directors Huichun Qin, Long Yi, Jianming Yin, Jinggen Ling, Xiangdong Xiao, and John F. Levy violated the federal securities laws by misrepresenting in prior public filings certain material facts about the risks associated with its loan guarantee business. On October 2, 2014, purported shareholders Zhang Yun and Sanjiv Mehrotra (the “Yun Group”) asserted substantially similar claims against the same defendants in a putative class action captioned Zhang Yun v. China Commercial Credit, Inc., et al., Case No. 2:14-cv-06136 (D. N.J.). Neither complaint states the amount of damages sought.

 

On or about October 6, 2014, Dennison, the Yun Group and another purported shareholder, Jason Stark, filed motions to consolidate the cases, be appointed as lead plaintiff and to have their respective counsel appointed as lead counsel. On October 31, 2014, the N.J. district court entered an order consolidating the cases under the caption “ In re China Commercial Credit Inc. Securities Litigation ” and appointing the Yun Group as lead plaintiff (“Class Plaintiff”) and the Yun Group’s counsel as lead counsel.

 

On November 18, 2014, the Yun Group and the Company, which at that point was the only defendant served, entered into a stipulation to transfer of the case to the Southern District of New York. On December 18, 2014, Mr. Levy, who had by then been served, joined in the stipulation. On December 29, 2014, the N.J. district court entered an order transferring the action. The transfer was effected on January 22, 2015, and assigned docket number 1:15-cv-00557-ALC (S.D.N.Y.). (the “Securities Class Action”)

 

  26  

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

17. COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

Under the schedule stipulated by the parties, the Yun Group was to file an amended complaint within 60 days of the date that the transfer was effected, and the defendants’ date to answer or move was within 60 days of that filing. On April 7, 2015, the Class Plaintiff filed a Second Amended Class Action Complaint (the “CAC”). The CAC also asserts securities law claims against defendants Axiom Capital Management, Inc., Burnham Securities Inc. and ViewTrade Securities, Inc. (collectively, the “Underwriter Defendants”). The CAC alleges that the Company engaged in a fraudulent scheme by engaging in undisclosed and improper lending practices and made misleading representations regarding its underwriting policies, the loan portfolio quality, the loan loss allowance, compliance with U.S. GAAP and its internal control systems.

 

In accordance with the Court’s procedures, the Company and Mr. Levy and the Underwriter Defendants requested a Pre-Motion Conference in anticipation of filing a motion to dismiss the CAC, which was held on June 25, 2015. At the conference, the Court adjourned the date to answer or move in order to provide the Class Plaintiff with time to serve certain overseas defendants. After the conference, the Class Plaintiff voluntarily dismissed Jianming Yin, Jinggen Ling and Xiangdong Xiao from the action, and Long Yi agreed to waive service, which left Huichun Qin as the sole remaining defendant to serve.

 

On November 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. On June 1, 2017, following a final fairness hearing on May 30, 2017 regarding the proposed settlement, the Court entered a final judgment and order that (i) dismisses with prejudice the claims asserted in the Securities Class Action against all named defendants in connection with the Securities Class Action, including the Company, and releases any claims that were or could have been asserted that arise from or relate to the facts alleged in the Securities Class Action, such that every member of the settlement class will be barred from asserting such claims in the future; and (ii) approves the payment of $220,000 in cash and the issuance of 950,000 shares of its common stock (the “Settlement Shares”) to members of the settlement class. In addition, the Company would incur a payment of $25,000 in cash to class administrator. At present, the Company is waiting for the Court to approve the disbursement of the Settlement Shares. Plaintiff is filing a motion to obtain such approval. The $245,000 cash portion of the settlement has been paid in full. The Company accrued settlement cost aggregating US$1,863,500 and US$690,000 during the nine months ended September, 2017 and 2016, respectively.

 

On July 28, 2017, the Court entered a clarifying order to specify the allocation of attorneys’ fees in accordance with the Stipulation.

 

The Settlement Shares are exempt from registration under Section 3(a)(10) of the Securities Act of 1933, as amended. The settlement does not constitute any admission of fault or wrongdoing by the Company or any of the individual defendants.

 

  27  

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

17. COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

3) Contingencies (continued)

 

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.

 

On February 3, 2015, a purported shareholder KiramKodali filed a putative shareholder derivative complaint in the United States District Court for the Southern District of New York, captioned KiranKodali v. Huichun Qin, et al., Case No. 15-cv-806. The action alleges that the Company and its current and former officers and directors Huichun Qin, Long Yi, Jianming Yin, Jinggen Ling, Chunfang Shen, John F. Levy, Xiaofang Shen and Chunjiang Yu violated their fiduciary duties, grossly mismanaged the Company and were unjustly enriched based upon the transfer that was the subject of the Internal Review and other grounds substantially similar to those asserted in the class action complaints. Kodali did not serve a demand upon the Company and alleges that demand is excused. The Company and Mr. Levy have been served. An amended derivative complaint was filed on April 20, 2015. On May 29, 2015, the Court “so ordered” a stipulation among Kodali, the Company and Mr. Levy staying all proceedings in the derivative case except for service of process on individual defendants until the earlier of thirty days of termination of the stipulation, dismissal of the class action with prejudice or the date any of the defendants in the class action file an answer to the CAC. The Company believes that this lawsuit is without merit and intends to vigorously defend against it. At this stage of the proceedings, the Company is not able to estimate the probability of success or loss.

 

On May 18, 2015, WFOE filed a civil complaint against Huichun Qin with the Wujiang Region Suzhou City People’s Court claiming Mr. Qin’s misappropriation of RMB 7 million in July 2014. The complaint was rejected due to a procedural issue. The Company has since learned that Mr. Qin has been convicted and sentenced to a term of incarceration of approximately five years. In view of this information, the Company is evaluating its strategic options. 

 

The Company and its directors were parties to a lawsuit filed on September 1, 2017, by Juan C. Rojas (“Plaintiff”), on behalf of himself and all other similarly situated stockholders of China Commercial Credit, Inc., in the Chancery Court of the State of Delaware (the “Delaware Chancery Court”) (Case No. 2017-0633-JTL) (the “Action”), which sought injunctive relief, costs, and attorney’s fees. Plaintiff’s Verified Class Action Complaint (“Complaint”) alleged that the Company’s directors breached their fiduciary duties to the Company’s stockholders by failing to disclose all necessary material information relating to the Company’s entry into an Exchange Agreement (“Exchange Agreement”) with Sorghum Investment Holdings Limited (“Sorghum”) on August 9, 2017, and preventing the Company’s stockholders from casting a fully informed vote on the Company’s acquisition of Sorghum, and other proposals contained in the Company’s preliminary proxy statement, dated August 14, 2017 (“Preliminary Proxy Statement). Plaintiff filed a Motion to Expedite the Proceeding (“Motion to Expedite”) seeking to expedited consideration of Plaintiff’s Motion for Preliminary Injunction, which was filed simultaneously with Plaintiff’s Complaint. The Company opposed the Motion to Expedite on September 20, 2017, and the Delaware Chancery Court held a hearing on the Motion to Expedite on September 22, 2017, wherein it denied Plaintiff’s Motion to Expedite without prejudice. On September 28, 2017, the Company filed a motion to dismiss Plaintiff’s Complaint (“Motion to Dismiss”). Plaintiff has not responded to the Company’s Motion to Dismiss.

 

On October 10, 2017, the Company filed Amendment No. 1 to its Preliminary Proxy Statement (the “Amended Preliminary Proxy”) with the U.S. Securities and Exchange Commission (the “Commission”) in response to the Commission’s September 8, 2017 comment letter (“Comment Letter”). After reviewing the Amended Preliminary Proxy, Plaintiff determined that the Company’s Amended Preliminary Proxy rendered the claims asserted in Plaintiff’s Complaint moot and/or otherwise unsuitable for further pursuit. On October 19, 2017, the Company and Plaintiff entered into a stipulation (“Stipulation”) wherein Plaintiff agreed to voluntarily dismiss his claims against the Company, and its directors, with prejudice. The Delaware Chancery Court granted the Stipulation on October 20, 2017, and entered an Order dismissing the Action with prejudice. In accordance with the Order, the Company will advise the Delaware Chancery Court within fifteen (15) days of the earlier of (a) the stockholder vote on the Exchange Agreement relating to the proposals, or (b) the termination of the Exchange Agreement, and whether the parties to the Action have reached an agreement with respect to Plaintiff’s anticipated request for fees and expenses. Currently, no compensation in any form has passed from the Company, or its directors, to Plaintiff or Plaintiff’s attorneys in the Action, and the Company has not made a promise to give any such compensation. On November 6, 2017, the Company filed Amendment No. 2 to its Preliminary Proxy Statement with the Commission in further response to comments from the Commission

 

18. SHARE EXCHANGE AGREEMENT

 

On August 9, 2017, China Commercial Credit, Inc. (“the Company” or “CCCR”), has entered into Certain Share Exchange Agreement (“Exchange Agreement”) with the parent company of Sorghum Investment Holdings Limited (“Sorghum”). Pursuant to the terms of the Exchange Agreement, CCCR will acquire 100% of the outstanding shares of Sorghum through issuance of 152,587 of its common shares. This transaction will be accounted for as a “reverse acquisition” since, immediately following completion of the transaction, the shareholders of Sorghum immediately prior to the transaction will effectuate control of the Company, through its 87.9% ownership interest in the post-merger entity. For accounting purpose, Sorghum will be deemed to be the accounting acquirer and CCCR will be deemed to be the accounting acquiree in the transaction. As of the date of this filing, the transaction is still in progress.

 

  28  

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF   FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

We are a financial services firm operating in China. Our current operations are mainly conducted through Wujiang Luxiang, a fully licensed microcredit company which we control through our subsidiaries and certain contractual arrangements, and consist of providing short-term direct loans and loan guarantees to small and medium enterprises (“SME”s) located in Wujiang City, Jiangsu Province of China. As of September 30, 2017, we have built a US$58.3 million portfolio of direct loans to 107 borrowers and a total of US$11.4 million in loan guarantees for 14 borrowers. We were established under the 2008 Guidance on the Small Loan Company Pilot of the China Banking Regulatory Commission and the People's Bank of China (“PBOC”) (No.23) (“Circular No. 23”) to extend short term loans and loan guarantees to SMEs, a class of borrowers that we believe have been underserved in the Chinese lending market. The loans that we provide bridge the gap between Chinese-state run banks that have not traditionally served the capital needs of SMEs and high interest rate “underground” lenders, and our loans provide capital at more favorable terms and sustainable interest rates.

 

As the rate of fees and commissions generated from the guarantee business has been decreasing, the Company has decided that the revenue does not justify the default risks involved, and therefore expects to further reduce the traditional guarantee business and hold off on pursuing the guarantee business to be provided via the Kaixindai Financing Services Jiangsu Co. Ltd (“Kaixindai”) platform as previously planned. Management may actively resume the guarantee business if economic conditions improve in the future.

 

On September 5, 2013, our wholly owned subsidiary, CCC International Investment Holding Ltd. (“CCC HK”), established Pride Financial Leasing (Suzhou) Co. Ltd. (“PFL”) in Jiangsu Province, China. PFL was expected to offer financial leasing of machinery and equipment, transportation vehicles, and medical devices to municipal government agencies, hospitals and SMEs in Jiangsu Province and beyond. During the period from its inception to the date of this quarterly report, PFL entered into two financial leasing agreements for an aggregate lease receivable of US$5.61 million. We do not currently have further funds to deploy in the financial leasing business. As of the date of this quarterly report, both financial leasing agreements expired.

 

Key Factors Affecting Our Results of Operation

 

Our business and operating results are affected by China’s overall economic growth, local, economic condition, market interest rate and the borrowers’ repayment ability. Unfavorable changes could affect the demand for the services that we provide and could materially and adversely affect our results of operations. Our results of operations are also affected by the regulations and industry policies related to the microcredit industry in the PRC.

 

Our results of operations are also affected by the provision for loan losses and provision for financial guarantee loss which are noncash items and represent an assessment of the risk of future loan losses. Increases in the allowance for loan losses are achieved through provision for loan losses that are charged against net interest income.

 

Although we have generally benefited from China’s economic growth and the policies to encourage lending to farmers and SMEs, we are also affected by the complexity, uncertainties and changes in the PRC regulations governing the micro lending industry. Due to PRC legal restrictions on foreign equity ownership of and investment in the micro lending sector in China, we rely on contractual arrangements with Wujiang Luxiang, and its shareholders to conduct most of our current business in China. We face risks associated with our control over our variable interest entity, as our control is based upon contractual arrangements rather than equity ownership.

 

  29  

 

 

Results of Operations

 

Three Months Ended September 30, 2017 as Compared to Three Months Ended September 30, 2016

 

   

For the Three Months Ended

September 30,

  Change
    2017   2016   Amount   %
Interest income                                
Interests and fees on loans and direct financing lease   $ 128,460     $ 722,117     $ (593,657 )     -82 %
Interests on deposits with banks     4,042       263       3,779       1437 %
Total interest and fee income     132,502       722,380       (589,878 )     -82 %
                                 
Net interest income     132,502       722,380       (589,878 )     -82 %
                                 
Reversal of provision for loan losses     452,786       226,694       226,092       100 %
(Provision)/Reversal of provision for direct financing lease losses     (18,616 )     242,180       (260,796 )     -108 %
Net interest income after provision for loan losses and financing lease losses     566,672       1,191,254       (624,582 )     -52 %
                                 
Commissions and fees on financial guarantee services     -       9,117       (9,117 )     -100 %
Provision for financial guarantee services     (1,142,807 )     (599,808 )     (542,999 )     91 %
Commission and fee loss on guarantee services, net     (1,142,807 )     (590,691 )     (552,116 )     93 %
                                 
Net (Loss)/Revenue     (576,135 )     600,563       (1,176,698 )     -196 %
                                 
Non-interest expense                                
Salaries and employee surcharge     (180,461 )     (120,130 )     (60,331 )     50 %
Rental expenses     (13,975 )     (28,132 )     14,157       -50 %
Business taxes and surcharge     (1,376 )     9,617       (10,993 )     -114 %
Transaction costs relating to acquisition     (1,356,285 )     -       (1,356,285 )     >100 %
Other operating expenses     (387,003 )     (1,086,092 )     699,089       -181 %
Total non-interest expense     (1,939,100 )     (1,224,737 )     (714,363 )     58 %
                                 
Foreign exchange loss     (57 )     (271 )     214       -79 %
                                 
Loss Before Income Taxes     (2,515,292 )     (624,445 )     (1,890,847 )     303 %
Income tax expense     -       -       -       0 %
Net Loss     (2,515,292 )   $ (624,445 )     (1,890,847 )     303 %
                                 
Loss per Share- Basic and Diluted     (0.139 )     (0.039 )     (0.100 )     256 %
                                 
Weighted Average Shares Outstanding-Basic and Diluted     18,092,369       15,889,853       2,202,516       14 %
                                 
Net Loss     (2,515,292 )     (624,445 )     (1,890,847 )     303 %
Other comprehensive income                                
Foreign currency translation adjustment     14,699       260,803       (246,104 )     -94 %
Comprehensive Loss   $ (2,500,593 )   $ (363,642 )   $ (2,136,951 )     588 %

   

The Company’s net loss for the three months ended September 30, 2017 was US$2,515,292, representing an increase of US$1,890,847 , or 303%, from net loss of US$624,445 for the three months ended September 30, 2016. The change in net loss for the three months ended September 30, 2017 was the net effect of the changes in the following components:

 

a decrease in net interest income of US$589,878;
an increase in reversal of provision for loan losses of US$226,092;
an increase in provision for financial guarantee services of US$542,999; and

an increase in total non-interest expense of US$ 714,363

 

The following paragraphs discuss changes in the components of net loss in greater details during the three months ended September 30, 2017, as compared to the three months ended September 30, 2016.

 

  30  

 

 

Net Interest Income

 

Net interest income is equal to interest income we generated less interest expenses on short-term bank loans. During the three months ended September 30, 2017 and 2016, the Company did not record any interest expenses on short-term bank loans. As a result, the Company’s net interest income and the interests and fees on loans, direct financing leases and deposits with banks decreased by US$589,878, or 82% to US$132,502 during the three months ended September 30, 2017, as compared to net interest income of US$722,380 during the three months ended September 30, 2016. The decrease is the combined effect of: (2) the decrease in the amount of monthly interest received from long-aged loans resulting from the existing customers’ deteriorating loan quality; and (2) No new loans or renewal of loans during the three months ended September 30, 2017, leading to a significant decrease in interest income. 

 

As a traditional industry, the textile industry, which is the pillar industry in Wujiang area, as well as other industries, has been facing downward pressure. Additionally, the bank lenders usually require an old loan be paid in full upon maturity before they approve a new loan to the same borrower. Some SMEs have to borrow from so-called “underground” lenders, or shadow banks to repay the loans due to the banks. Additionally, the banks denied to extend new loans to some SMEs even after they made the full repayment for the loans due and satisfied other conditions. Management is concerned that the borrowers may use the proceeds from the loans we grant to them as a means of repayment to the other banks or even to the underground lenders, instead of using them in operations. Therefore, management decided to grant new loans in a more cautious manner. During the three months ended September 30, 2017, we did not grant new loans or renew existing loans. As of September 30, 2017, we had 107 loans with an average loan size of US$544,549. The loan balance of $54,821,187 was accrued of an allowance for uncollectibilty which was equal to the loan balance.

 

Due to the long-term nature of our restricted deposits with third party banks, we utilized these deposits as term deposits which in turn generated interest income on deposits with banks of US$4,042 during the three months ended September 30, 2017 as compared to US$263 during the three months ended September 30, 2016. Caused by the contraction of our traditional guarantee business with banks, we have closed several restricted deposit accounts with banks through which we provided guarantee services to our customers. As a result, the interest income on deposits with bank was insignificant during the three months ended September 30, 2017 and 2016, respectively.

 

Provision for Loan Losses

 

The Company reversed provision for loan losses of US$452,786 and US$226,694 for the three months ended September 30, 2017 and 2016, respectively. The provision for loan losses was determined by comparing the beginning and ending balance of allowance for loan losses for business and personal loans. If the ending balance of the allowance of loan losses after any charge offs (net of recoveries) is less than the beginning balance, it will be recorded as a “reversal”; if it is larger, it will be recorded as a “provision” in the allowance for loan loss. The netting amount of “reversal” and “provision” is presented in the condensed consolidated statements of operations and comprehensive loss and the components of the provision for loan losses were disclosed in Note 6 of financial statements.

  

Reversal of provision for loan losses increased by $226,092 for the three months ended September 30, 2017, as compared to the same period last year. This is mainly due that less “doubtful” loans rolled to “loss” loans during the three months ended September 30, 2017 as compared to that during the three months ended September 30, 2016. As of September 30, 2017 and December 31, 2016, the “loss” loans accounted for 91.9% and 79.9% of total loan amount, respectively. The fact leads to more reversal of provision on loan losses during the three months ended September 30, 2017 as compared to the same period of 2016.

 

From October 1, 2017 to the date of the report, the Company assessed the charged-off loan balances recorded as of September 30, 2017 and was of the opinion that these balances were uncollectible.

 

  31  

 

 

Net Commission and Fees on Guarantee Business

 

The Company also generated net income by charging fees for financial guarantee services provided to our customers to help them obtain loans from other banks. We generally charge a one-time fee of 1.8% - 3.6% multiplied by the amount of loans being guaranteed, based on the nature of the guarantee and whether the customer is new or existing.

 

As of September 30, 2017, the off-balance-sheet financial guarantee amounted to US$11.4 million. The commissions and fees generated from our financial guarantee services decreased from US$9,117 for the three months ended September 30, 2016 to US$nil for the three months ended September 30, 2017. The reduction was due to the fact that the Company did not increase any financial guarantee business since March 31, 2016 as management reduced the guarantee portfolio to control the default risk.

 

As of September 30, 2017, we have provided guarantees for a total of US$11.4 million underlying loans to approximately 14 financial guarantee service customers, as compared to a total of US$10.9 million as of December 31, 2016.

 

Provision on Financial Guarantee Services

 

The Company provided a provision for financial guarantee services of US$1,142,807 for the three months ended September 30, 2017, as compared to US$599,808 for the three months ended September 30, 2017, representing a change of $542,999. The increase was mainly attributable to the increased allowance on guarantee paid on behalf of financial guarantee customers who were classified as “loss customers” as of September 30, 2017.

 

The methodology the Company used to estimate the liability for probable guarantee loss considers the guarantee contract amount and a variety of factors, which include, dependence on the counterparty, latest financial position and performance of the customers, actual defaults, estimated future defaults, historical loss experience, estimated value of collaterals or guarantees the costumers or third parties offered, and other economic conditions such as the economic trend of the area and the country. The estimates are based upon currently available information. Based on the recent lawsuit results and repayment status by defaulted customers, the Company estimated approximately 50% of off-balance-sheet financial guarantee services may be subject to default and their repayment may be “not likely”. As of September 30, 2017 and December 31, 2016, the Company accrued approximately 62% and 55% of contract amount, respectively.

 

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.

 

Since the beginning of 2016, People’s Bank of China injected a significant amount of liquidity to the market to encourage the development of emerging industries such as online-game, filming and virtual reality, which has made it easier than previous two years for entities in such emerging industries to gain access to capital. However, the bank lenders are still cautious with SMEs in traditional industries. The bank lenders usually require an old loan be paid in full upon maturity before they approve a new loan to the same borrower. Since the end of the year ended December 31, 2014, the banks denied to extend new loans to many SMEs even after they made the full repayment for the loans due and satisfied other conditions. As a result, some of the SME borrowers for which we provided the guarantees decided to default on the bank loans. Therefore the amount of repayment we made to the bank lenders substantially increased since the year ended December 31, 2014. We have brought collection actions against both the borrowers and their counter-guarantors. However, management was advised by counsel in the collection action that the chance of collection is remote given the large scale bad debt prevalent in Wujiang region. As of September 30, 2017 and December 31, 2016, the management charged off specific provision for three and two customers in the amount of US$164,220 and US$142,966, respectively.

 

Non-interest Expenses

 

Non-interest expenses increased from US$1,224,737 for the three months ended September 30, 2016 to US$1,939,100 for the three months ended September 30, 2017, representing an increase of US$714,363 or 58%. Non-interest expenses primarily consisted of salary and employee surcharge, office rental expense, business tax and surcharge, depreciation of equipment, travel expenses, entertainment expenses, professional service fees, and other office supplies. The increase was mainly attributable to net effects of an increase of salaries and employee surcharge by US$60,331 or 50% and an increase in transaction cost relating to acquisition of $1,356,285 netting off against a decrease of other operating expenses by US$699,089, or 181%. The increase of salaries and employee surcharge was mainly caused by increased salary compensations made to management for the efforts in the acquisition of Sorghum Investment Holdings Limited (“Sorghum”). The increase of transaction cost relating to acquisition is primarily attributable to issuance of unregistered shares to the professional service providers for their services in the acquisition of Sorghum. The decrease of other operating expenses is mainly due to a decrease of US$782,513 in legal and consulting expenses as during the three months ended September 30, 2016, the Company issued 300,000 restricted shares at a fair value of $771,000, to a financial service provider who was involved to assist the Company to find out a new business model and increase profitability.

 

  32  

 

 

Results of Operations

 

Nine Months Ended September 30, 2017 as Compared to Nine Months Ended September 30, 2016

 

   

For the Nine Months Ended

September 30,

  Change
    2017   2016   Amount   %  
Interest income                                
Interests and fees on loans and direct financing lease   $ 290,566     $ 1,203,663     $ (913,097 )     -76 %
Interests on deposits with banks     4,728       3,526       1,202       34 %
Total interest and fee income     295,294       1,207,189       (911,895 )     -76 %
                                 
Interest expense                                
Interest expense on short-term bank loans     -       (30,057 )     30,057       -100 %
Net interest income     295,294       1,177,132       (881,838 )     -75 %
                                 
(Provision)/Reversal of provision for loan losses     (2,420,698 )     133,177       (2,553,875 )     -1918 %
(Provision)/Reversal of provision for direct financing lease losses     (66,113 )     242,180       (308,293 )     -127 %
Net interest (loss)/income after provision for loan losses and financing lease losses     (2,191,517 )     1,552,489       (3,744,006 )     -241 %
                                 
Commissions and fees on financial guarantee services     2,843       26,308       (23,465 )     -89 %
(Provision)/Reversal of provision for financial guarantee services     (830,140 )     385,352       (1,215,492 )     -315 %
Commission and fee (loss)/income on guarantee services, net     (827,297 )     411,660       (1,238,957 )     -301 %
                                 
Net (Loss)/Revenue     (3,018,814 )     1,964,149       (4,982,963 )     -254 %
                                 
Non-interest income                                
Other non-interest income     -       48,945       (48,945 )     -100 %
Total  non-interest income     -       48,945       (48,945 )     -100 %
                                 
Non-interest expense                                
Salaries and employee surcharge     (707,012 )     (548,978 )     (158,034 )     29 %
Rental expenses     (41,242 )     (64,850 )     23,608       -36 %
Business taxes and surcharge     (3,221 )     (21,798 )     18,577       -85 %
Transaction costs relating to acquisition     (2,136,285 )     -       (2,136,285 )     >100 %
Litigation and settlement cost for the shareholders’ lawsuit     (1,838,500 )     (690,000 )     (1,148,500 )     166 %
Other operating expenses     (784,815 )     (1,893,027 )     1,108,212       -58 %
Total non-interest expense     (5,511,075 )     (3,218,653 )     (2,292,422 )     71 %
                                 
Foreign exchange loss     (355 )     (557 )     202       -36 %
                                 
Loss Before Income Taxes     (8,530,244 )     (1,206,116 )     (7,324,128 )     607 %
Income tax expense     -       -       -       0 %
Net Loss     (8,530,244 )     (1,206,116 )     (7,324,128 )     607 %
                                 
Loss per Share-Basic and Diluted     (0.491 )     (0.086 )     (0.405 )     471 %
                                 
Weighted Average Shares Outstanding-Basic and Diluted     17,371,183       14,026,815       3,344,368       24 %
                                 
Net Loss     (8,530,244 )     (1,206,116 )     (7,324,128 )     607 %
Other comprehensive income                                
Foreign currency translation adjustment     43,987       205,546       (161,559 )     -79 %
Comprehensive Loss   $ (8,486,257 )   $ (1,000,570 )   $ (7,455,702 )     748 %

  

The Company’s net loss for the nine months ended September 30, 2017 was US$8,530,244, representing an increase of US$7,324,128, or 607%, from net loss of US$1,206,116 for the nine months ended September 30, 2016. The change in net income for the nine months ended September 30, 2017 was the net effect of the changes in the following components:

 

a decrease in net interest income of US$881,838;
an change of US$2,553,875 from a reversal of provision of loan losses to a provision for loan losses;
an change of US$1,215,492 from a reversal of provision for financial guarantee services to a provision for financial guarantee services; and

an increase in total non-interest expense of US$2,2 92,422.

 

  33  

 

 

The following paragraphs discuss changes in the components of net loss in greater details during the nine months ended September 30, 2017 as compared to the nine months ended September 30. 2016.

 

Net Interest Income

 

Net interest income is equal to interest income we generated less interest expenses on short-term bank loans. The Company’s net interest income decreased by US$881,838 or 75% to US$295,294 during the nine months ended September 30, 2017, as compared to net interest income of US$1,177,132 during the nine months ended September 30, 2016.

 

The interests and fees on loans, direct financing leases and deposits with banks decreased by US$911,895, or 76% to US$295,294 during the nine months ended September 30, 2017, as compared to net interest income of US$1,207,189 during the nine months ended September 30, 2016. The decrease is the combined effect of: (1) the decrease in the amount of monthly interest received from long-aged loans resulting from the existing customers’ deteriorating loan quality; and (2) No new loans or renewal of loans during the nine months ended September 30, 2017, leading to a significant decrease in interest income.

 

As a traditional industry, the textile industry, which is the pillar industry in Wujiang area, as well as other industries, has been facing downward pressure. Additionally, the bank lenders usually require an old loan be paid in full upon maturity before they approve a new loan to the same borrower. Some SMEs have to borrow from so-called “underground” lenders, or shadow banks to repay the loans due to the banks. Additionally, the banks denied to extend new loans to some SMEs even after they made the full repayment for the loans due and satisfied other conditions. Management is concerned that the borrowers may use the proceeds from the loans we grant to them as a means of repayment to the other banks or even to the underground lenders, instead of using them in operations. Therefore, management decided to grant new loans in a more cautious manner. During the nine months ended September 30, 2017, we did not grant new loans or renew existing loans. As of September 30, 2017, we had 107 loans with an average loan size of US$544,549. The loan balance of $54,821,187 was accrued of an allowance for uncollectibilty which was equal to the loan balance.

 

Due to the long-term nature of our restricted deposits with third party banks, we utilized these deposits as term deposits which in turn generated interest income on deposits with banks of US$4,728 during the nine months ended September 30, 2017 as compared to US$3,526 during the nine months ended September 30, 2016. Caused by the contraction of our traditional guarantee business with banks, we have closed several restricted deposit accounts with banks through which we provided guarantee services to our customers. As a result, the interest income on deposits with bank was insignificant during the nine months ended September 30, 2017 and 2016, respectively.

 

Provision for Loan Losses

 

The Company provided a provision for loan losses of US$2,420,698 and reversed a provision for loan losses of US$133,177 for the nine months ended September 30, 2017 and 2016, respectively. The provision for loan losses was determined by comparing the beginning and ending balance of allowance for loan losses for business and personal loans. If the ending balance of the allowance of loan losses after any charge offs (net of recoveries) is less than the beginning balance, it will be recorded as a “reversal”; if it is larger, it will be recorded as a “provision” in the allowance for loan loss. The netting amount of “reversal” and “provision” is presented in the condensed consolidated statements of operations and comprehensive loss and the components of the provision for loan losses were disclosed in Note 8 of financial statements.

  

Provision for loan losses increased by $2,553,875 for the nine months ended September 30, 2017, as compared to the same period last year. Based on the management assessment over each individual loan in terms the customers’ payment ability and payment intention, more “doubtful” loans rolled to “loss” loans during the nine months ended September 30, 2017 as compared to that during the nine months ended September 30, 2016. The fact leads to more accrual of provision on loan losses during the nine months ended September 30, 2017 as compared to the same period of 2016.

 

From October 1, 2017 to the date of the report, the Company assessed the charged-off loan balances recorded as of September 30, 2017 and was of the opinion that these balances were uncollectible.

 

  34  

 

 

Net Commission and Fees on Guarantee Business

 

The Company also generated net income by charging fees for financial guarantee services provided to our customers to help them obtain loans from other banks. We generally charge a one-time fee of 1.8% - 3.6% multiplied by the amount of loans being guaranteed, based on the nature of the guarantee and whether the customer is new or existing.

 

As of September 30, 2017, the off-balance-sheet financial guarantee amounted to US$11.4 million. The commissions and fees generated from our financial guarantee services decreased from US$26,308 for the nine months ended September 30, 2016 to US$2,843 for the nine months ended September 30, 2017. The reduction was due to the fact that the Company did not increase any financial guarantee business since March 31, 2016 as management reduced the guarantee portfolio to control the default risk.

 

As of September 30, 2017, we have provided guarantees for a total of US$11.4 million underlying loans to approximately 14 financial guarantee service customers, as compared to a total of US$10.9 million as of December 31, 2016.

 

Provision on Financial Guarantee Services

 

The Company provided a provision for financial guarantee services of US$830,140 for the nine months ended September 30, 2017, as compared to a reversal of provision of US$385,352 for the nine months ended September 30, 2016, representing a change of $1,215,492. The change was mainly attributable to the decrease of repayment from several financial guarantee customers who were classified as “loss customers” as of September 30, 2017.

 

The methodology the Company used to estimate the liability for probable guarantee loss considers the guarantee contract amount and a variety of factors, which include, dependence on the counterparty, latest financial position and performance of the customers, actual defaults, estimated future defaults, historical loss experience, estimated value of collaterals or guarantees the costumers or third parties offered, and other economic conditions such as the economic trend of the area and the country. The estimates are based upon currently available information. Based on the recent lawsuit results and repayment status by defaulted customers, the Company estimated approximately 50% of off-balance-sheet financial guarantee services may be subject to default and their repayment may be “not likely”. As of September 30, 2017 and December 31, 2016, the Company accrued approximately 62% and 55% of contract amount, respectively.

 

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.

 

Since the beginning of 2016, People’s Bank of China injected a significant amount of liquidity to the market to encourage the development of emerging industries such as online-game, filming and virtual reality, which has made it easier than previous two years for entities in such emerging industries to gain access to capital. However, the bank lenders are still cautious with SMEs in traditional industries. The bank lenders usually require an old loan be paid in full upon maturity before they approve a new loan to the same borrower. Since the end of the year ended December 31, 2014, the banks denied to extend new loans to many SMEs even after they made the full repayment for the loans due and satisfied other conditions. As a result, some of the SME borrowers for which we provided the guarantees decided to default on the bank loans. Therefore the amount of repayment we made to the bank lenders substantially increased since the year ended December 31, 2014. We have brought collection actions against both the borrowers and their counter-guarantors. However, management was advised by counsel in the collection action that the chance of collection is remote given the large scale bad debt prevalent in Wujiang region. As of September 30, 2017 and December 31, 2016, the management charged off specific provision for two customers in the amount of US$164,220 and US$142,966, respectively.

 

In February and March 2015, the Company revisited the classification of its guarantee portfolios within its rating system to test the adequacy of the allowances calculated thereby. As a result of such testing, the Company decided to reclassify certain guarantees into different categories. The Company reviewed the profile, financial condition and other relevant information and documents of each customer in the guarantee businesses. For customers with several guarantees with different due dates, if one guaranteed loan was past due, the Company decided to reclassify all of this customer's guaranteed loans as past due (even the other loans that were not mature yet). These reclassifications affected numerous customer accounts. We engaged He-Partners Law Firm, one of the largest law firms in Suzhou City, to represent us in the legal proceedings against the borrowers and their counter guarantors, and expect to collect part of the outstanding balance in a period ranging from six twelve months to one and a half year upon adjudication by the court in favor of the Company. The timing of collection and ultimate amount of funds we can recover depend on a few factors, including the repayment ability of the borrower and their counter-guarantors, the execution time of the court, other obligations the borrowers have and priority over the claim for the Company.

 

  35  

 

 

Non-interest Expenses

 

Non-interest expenses increased from US$3,218,653 for the nine months ended September 30, 2016 to US$5,511,075 for the nine months ended September 30, 2017, representing an increase of US$2,292,422, or 71%. Non-interest expenses primarily consisted of salary and employee surcharge, office rental expense, business tax and surcharge, depreciation of equipment, travel expenses, entertainment expenses, professional service fees, and other office supplies. The increase was mainly attributable to net effects of an increase of salaries and employee surcharge by US$158,034, or 29%, an increase of transaction cost relating to acquisition of $2,136,285 and an increase of litigation and settlement cost for the shareholders’ lawsuit of $1,148,500, or 166% netting off against a decrease of other operating expenses by US$1,108,212, or 58%. The increase of salaries and employee surcharge was mainly caused by increased issuance of restricted shares to management for the nine months ended September 30, 2017. The increase of transaction cost relating to acquisition is primarily attributable to issuance of unregistered shares to the professional service providers for their services in the acquisition of Sorghum. The increase of legal and settlement cost of shareholders’ lawsuit was attributable to accrual of expenses on the basis of a final fairness hearing on May 30, 2017 when the share price increased significantly as compared with initial estimation of the contingent expenses. The decrease of other operating expenses is mainly due to a decrease of US$1,262,313 in legal and consulting expenses as during the three months ended September 30, 2016, the Company issued 300,000 restricted shares at a fair value of $771,000, to a financial service provider who was involved to assist the Company to find out a new business model and increase profitability.

 

Loan Portfolio Quality

 

One of our key objectives is to maintain a high level of loan portfolio quality. When a borrower fails to make a scheduled payment, we attempt to cure the deficiency by personally contacting the borrower. Initial contacts typically are made seven days after the date the payment is due, and warning letters are sent by our legal counsel approximately 90 days after the default. In most cases, deficiencies are promptly resolved. If the outstanding amount cannot be collected within 180 days after the maturity date and the parties could not reach an agreement on a specific repayment program, we will initiate legal proceedings.

 

We also keep the frequency of visits to our customers and observe their daily production on site from time to time to observe their operating condition and collect their financial information. Since most of our customers are in the Jiangsu area, it is also relatively easy to obtain information about our customers.

 

On loans where the collection of principal or interest payments is doubtful, the accrual of interest income ceases and become “non-accrual” loans. Except for loans that are sufficiently secured and in the process of collection, it is our policy to discontinue accruing additional interest and reverse any interest accrued on any loan which is 90 days or more past due.

 

We account for our impaired loans in accordance with U.S. GAAP. An impaired loan generally is one for which it is probable, based on current information, that the lender will not collect all the amounts due under the contractual terms of the loan. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment history and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for business and personal loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateralized.

 

We allow a one-time loan extension with time duration up to the original loan term, which is usually within twelve months. In order to qualify, the borrower must be current with its interest payments. We do not grant concession to borrowers as the principal of the loan remains the same and interest rate is fixed at the current interest rate at the time of extension.

 

We use a comprehensive methodology to monitor credit quality and prudently manage credit concentration within our portfolio of loans. Currently our loan portfolio concentrates in the textile industry and during the nine months ended September 30, 2017, both the domestic and international demand for textile products have been decreasing. To maintain our loan portfolio quality, we have modified our loan policy to accept only textile companies with real estate as collateral or guaranteed by guarantee companies. During the nine months ended September 30, 2017, we assessed the loan portfolio quality and charged-off loan receivable balances recorded as of September 30, 2017 and were of the opinion that these balances were uncollectible.

 

In addition, we plan to minimize our risks by concentrating on smaller amount loans that are below US$451,000 (or approximately RMB 3.0 million).

 

Currently, the banking industry encourages SMEs to apply for loans as individuals with recourse so that when it is past due, both the SME and the responsible individual are both liable for the past due amount and the individual borrower carries personal liability. As of September 30, 2017, our loan balance did not significant change in both business loans and personal loans as compared to that as of December 31, 2016.

 

  36  

 

 

The following table sets forth the classification of loans receivable as of September 30, 2017 and December 31, 2016, respectively:

 

    September 30, 2017
(unaudited)
Amount
    Percent
of Total
    December 31,
2016
Amount
    Percent
of Total
 
                         
Business loans   $ 36,783,453       63.13 %   $ 37,786,657       64.57 %
Personal loans     21,483,267       36.87 %     20,736,324       35.43 %
Total Loans receivable   $ 58,266,720       100 %   $ 58,522,981       100 %

 

Nonaccrual loans totaled US$56.28 million, or 96.60% of loans receivable as of September 30, 2017, as compared with US$56.58 million, or 96.68% of loans receivable, as of December 31, 2016. The allowance for loan losses was US$54.82 million, representing 94.09% of loans receivable and 97.40% of non-accrual loans as of September 30, 2017. As of December 31, 2016, the allowance for loan losses was US$51.71 million, representing 88.36% of loans receivable and 91.39% of non-accrual loans.

 

The following table sets forth information concerning our nonaccrual loans as of September 30, 2017 and December 31, 2016, respectively:

 

    September 30, 2017
(unaudited)
    December 31,
2016
 
             
Nonaccrual loans   $ 56,283,219     $ 56,579,073  
Allowance for loan losses   $ 54,821,187     $ 51,708,062  
Loans receivable   $ 58,266,720     $ 58,522,981  
Total assets   $ 7,714,013     $ 9,570,743  
Nonaccrual loans to loans receivable     96.60 %     96.68 %
Nonperforming assets to total assets     729.62 %     591.17 %
Allowance for loan losses to loans receivable     94.09 %     88.36 %
Allowance for loan losses to non-accrual loans     97.40 %     91.39 %

 

As a traditional industry, the textile industry, which is the pillar industry in Wujiang area, as well as other industries, has been facing downward pressure. As the local SMEs’ profitability and repayment ability deteriorates, “special mentioned”, “substandard” and “doubtful’ bank loans drastically increased. As such, our provision for loan losses remained at a high level as of September 30, 2017.

 

  37  

 

 

Cash Flows and Capital Resources

 

We have financed our operations primarily through shareholder contributions, cash flow from operations, and public offerings of securities. As a result of our total cash activities, net cash increased from US$768,501 as of December 31, 2016 to US$3,030,468 as of September 30, 2017.

 

Going Concern

 

The unaudited condensed interim consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to operate profitably, to generate cash flows from operations, and to pursue financing arrangements to support its working capital requirements. The conditions described below raises substantial doubt about the Company’s ability to continue as a going concern within one year from the date of this filing.

 

1) Limited funds necessary to maintain operations

 

The Company had an accumulated deficit of US$78,734,900 as of September 30, 2017. In addition, the Company had a negative net asset of US$774,251 as of September 30, 2017.  As of September 30, 2017, the Company had cash and cash equivalents of US$3,030,468, and total short-term borrowings of nil. Caused by the limited funds, the management assessed that the Company was not able to keep the size of lending business within one year from the filing of Form 10-Q.

 

The Company is actively seeking other strategic investors with experience in lending business. If necessary, the shareholders of Wujiang Luxiang will contribute more capital into Wujiang Luxiang. 

 

  2) Recurring operating loss

 

During the nine months ended September 30, 2017, the Company incurred operating loss of US$8,530,244. Affected by the reduction of lending business and guarantee business and increased loss loans, the management was in the opinion that recurring operating losses with be made within one year from the issuance of the filing.

 

The Company continues to use its best effort to improve collection of loan receivable and interest receivable. Management engaged two PRC law firms to represent the Company in the legal proceedings against the borrowers and their counter guarantors.

 

3) Negative operating cash flow

 

During the nine months ended September 30, 2017, the Company incurred negative operating cash flow of US$1,248,629. Affected by significant balance of charged-off interest receivable, the management assessed the Company would continue to have negative operating cash flow within one year from the issuance of the filing.

 

The Company continues to reduce the redundant headcount and entered into a new office lease with lower rent commitment since January 1, 2017 to improve operating cash flow.

 

4) Downward industry

 

Most loan customers are from textile industry which has been facing downward pressure. Additionally adversely affected by emergence of internet finance entities, the Company was facing fierce competition. Considering the high risks from both customers and competitors, management assessed the Company would further reduced the loan business without strong financial support.

 

Considering the above factors, the Company, on August 9, 2017, entered into Certain Share Exchange Agreement (“Exchange Agreement”) with the parent company of Sorghum Investment Holdings Limited (“Sorghum”). Pursuant to the terms of the Exchange Agreement, CCCR will acquire 100% of the outstanding shares of Sorghum through issuance of 152,587,000 of its common shares. This transaction will be accounted for as a “reverse acquisition” since, immediately following completion of the transaction, the shareholders of Sorghum immediately prior to the transaction will effectuate control of the Company, through its 87.9% ownership interest in the post-merger entity.

 

While management believes that the measures in the liquidity plan will be adequate to satisfy its liquidity and cash flow requirements for the twelve months after the financial statements are available to be issued, there is no assurance that the liquidity plan will be successfully implemented. Failure to successfully implement the liquidity plan will have a material adverse effect on the Company’s business, results of operations and financial position, and may materially adversely affect its ability to continue as a going concern.

 

  38  

 

 

Statement of Cash Flows

 

The following table sets forth a summary of our cash flows for the nine months ended September 30, 2017 and 2016, respectively:

 

    For the nine months ended September 30,  
    2017     2016  
Net cash used in operating activities   $ (1,248,629 )   $ (47,871 )
Net cash provided by investing activities     1,905,807       2,499,916  
Net cash provided by (used in) financing activities     1,560,000       (1,600,832 )
Effects of exchange rate changes on cash     44,789       9,747  
Net cash inflow   $ 2,261,967     $ 860,960  

 

Net Cash Used in Operating Activities

 

During the nine months ended September 30, 2017, we had a cash outflow from operating activities of US$1,248,629, an increase of US$1,200,798 from a cash outflow of US$47,871 for the same period last year. We generated a net loss for the nine months ended September 30, 2017 of US$8,530,244, an increase of US$7,324,128 from the nine months ended September 30, 2016, during which we incurred a net loss of US$1,206,116. In addition to the change in profitability, the decrease in net cash used in operating activities was the result of several factors, including:

 

 

An increase of provision on loan losses of US$2,553,875. The Company provided a provision for loan losses of US$2,420,698 for the nine months ended September 30, 2017, as compared to a reversal of provision of US$133,177 provided during the nine months ended September 30, 2016. The increase of the loan provision is mainly due to the fact that more “doubtful” loans rolling to “loss” loans incurred during the nine months ended September 30, 2017 as compared to the same period ended September 30, 2016;
   

 

An increase of provision on financial guarantee services of US$1,215,492. The Company provided a provision for financial guarantee services of US$830,140 for the nine months ended September 30, 2017, as compared to a reversal of provision of US$385,352 provided during the nine months ended September 30, 2016. The change was mainly attributable to the decrease of repayment from several financial guarantee customers who were classified as “loss customers” as of September 30, 2017;
   
An increase in restricted shares issued to directors and professional service providers of US$805,056. As an incentive to the efforts made by the Company’s management and professional service providers in acquisition of Sorghum, the Company issued more restricted shares during the nine months ended September 30, 2017.
   

An increase in provision for settlement expenses against legal proceeding of US$1,378,500. As we accrued expenses for additional share settlement in the nine months ended September 30, 2017.

 

Net Cash Provided by Investing Activities 

 

Net cash provided by investing activities for the nine months ended September 30, 2017 was US$1,905,807 as compared to net cash provided by investing activities of US$2,499,916 for the nine months ended September 30, 2016. The cash provided by investing activities for the nine months ended September 30, 2017 was net effects of collection of principals of US$1,155,055 from third party customers of direct loan business, collection of principal of US$227,723 from direct financing lease customers, and collection of short-term loans from a related party of US$478,954. The cash provided by investing activities for the nine months ended September 30, 2016 was mainly collection of principals of $2,147,593 from third party customers of direct loan business, collection of $1,427,674 from third party customers of financial guarantee services, netting off against a short-term loan of US$1,945,224 advanced to a related party

 

Net Cash Provided/ (Used) in Financing Activities

 

Net cash provided by financing activities for the nine months ended September 30, 2017 was US$1,560,000 as compared to net cash used in financing activities of US$1,600,832 for the nine months ended September 30, 2016. The cash provided by financing activities for the nine months ended September 30, 2017 was mainly from private placement of 1,237,486 shares with four individuals. The cash used in financing activities for the nine months ended September 30, 2016 was mainly attributable the repayment of bank borrowing.

 

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Contractual Obligations

 

As of September 30, 2017, the annual amounts of future minimum payments under certain of our contractual obligations were:

 

    Payment due by period  
    Total     Less than 
1 year
    1-2 years     2-3 years     3-5 years     5 years 
and after
 
Contractual obligations:                                    
Operating lease (1) (2)     62,237       30,643       25,202       6,392       -       -  
    $ 62,237     $ 30,643     $ 25,202     $ 6,392     $ -     $ -  

 

(1) Our prior lease for our office in Wujiang commenced on June 1, 2015 and would expire on May 31, 2021. In January 2017, we terminated this office lease as we leased a new office (see note 2). No penalty was paid for early termination.

 

(2) During the year ended December 31, 2016, the Company leased its new office under a lease agreement from January 1, 2017 to December 31, 2019. The Company has the right to extend the lease before its expiration with a one-month's prior written notice.

 

Off-Balance Sheet Arrangements

 

These financial guarantee contracts consist of providing guarantees to banks on behalf of borrowers to help them obtain loans from banks. The contract amounts reflect the extent of involvement the Company has in the guarantee business and also represents the Company’s maximum exposure to credit loss.

 

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its borrowers. Financial instruments whose contract amounts represent credit risk are as follows.

 

    September 30, 2017
(unaudited)
    December 31, 2016  
Guarantee     11,367,564       10,893,089  

 

Critical Accounting Policies

 

Please refer to Note 3 of our Condensed Consolidated Financial Statements included in this Form 10Q for details of our critical accounting policies.

 

Recently issued accounting standards

 

Please refer to Note 3(u) of our Consolidated Financial Statements included in Form 10-K for details of our recently issued accounting standards. 

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES  

 

Evaluation of Disclosure Controls and Procedures

 

Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were not effective as of September 30, 2017 to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission (“SEC”) rules and forms, and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

  

  Inherent Limitations Over Internal Controls

 

The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S GAAP. The Company’s internal control over financial reporting includes those policies and procedures that:

 

i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;

 

ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and

 

iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Management, including the Company’s principal executive officer and principal financial officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2017 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

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PART II.  OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The Company is involved in various legal actions arising in the ordinary course of its business.

 

On August 6, 2014, a purported shareholder Andrew Dennison filed a putative class action complaint in the United States District Court District of New Jersey (the “N.J. district court”) relating to a July 25, 2014 press release about the Company’s progress in recovering a significant portion of the $5.4 million the Company paid in the first quarter of 2014 on behalf of loan guarantee customers. The action,  Andrew Dennison v. China Commercial Credit, Inc. , et al., Case No. 2:2014-cv-04956, alleges that the Company and its current and former officers and directors Huichun Qin, Long Yi, Jianming Yin, Jinggen Ling, Xiangdong Xiao, and John F. Levy violated the federal securities laws by misrepresenting in prior public filings certain material facts about the risks associated with its loan guarantee business. On October 2, 2014, purported shareholders Zhang Yun and SanjivMehrotra (the “Yun Group”) asserted substantially similar claims against the same defendants in a putative class action captioned  Zhang Yun v. China Commercial Credit, Inc., et al. , Case No. 2:14-cv-06136 (D. N.J.). Neither complaint states the amount of damages sought.

 

On or about October 6, 2014, Dennison, the Yun Group and another purported shareholder, Jason Stark, filed motions to consolidate the cases, be appointed as lead plaintiff and to have their respective counsel appointed as lead counsel. On October 31, 2014, the N.J. district court entered an order consolidating the cases under the caption “ In re China Commercial Credit Inc. Securities Litigation ” and appointing the Yun Group as lead plaintiff (“Class Plaintiff”) and the Yun Group’s counsel as lead counsel.

 

On November 18, 2014, the Yun Group and the Company, which at that point was the only defendant served, entered into a stipulation to transfer of the case to the Southern District of New York. On December 18, 2014, Mr. Levy, who had by then been served, joined in the stipulation. On December 29, 2014, the N.J. district court entered an order transferring the action. The transfer was effected on January 22, 2015, and assigned docket number 1:15-cv-00557-ALC (S.D.N.Y.).

 

Under the schedule stipulated by the parties, the Yun Group was to file an amended complaint within 60 days of the date that the transfer was effected, and the defendants’ date to answer or move was within 60 days of that filing. On April 7, 2015, the Class Plaintiff filed a Second Amended Class Action Complaint (the “CAC”). The CAC also asserts securities law claims against defendants Axiom Capital Management, Inc., Burnham Securities Inc. and ViewTrade Securities, Inc. (collectively, the “Underwriter Defendants”). The CAC alleges that the Company engaged in a fraudulent scheme by engaging in undisclosed and improper lending practices and made misleading representations regarding its underwriting policies, the loan portfolio quality, the loan loss allowance, compliance with U.S. GAAP and its internal control systems.

 

In accordance with the Court’s procedures, the Company and Mr. Levy and the Underwriter Defendants requested a Pre-Motion Conference in anticipation of filing a motion to dismiss the CAC, which was held on June 25, 2015. At the conference, the Court adjourned the date to answer or move in order to provide the Class Plaintiff with time to serve certain overseas defendants. After the conference, the Class Plaintiff voluntarily dismissed Jianming Yin, Jinggen Ling and Xiangdong Xiao from the action, and Long Yi agreed to waive service, which left Huichun Qin as the sole remaining defendant to serve.

 

On November 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.  On June 1, 2017, following a final fairness hearing on May 30, 2017 regarding the proposed settlement, the Court entered a final judgment and order that: (i) dismisses with prejudice the claims asserted in the Securities Class Action against all named defendants in connection with the Securities Class Action, including the Company, and releases any claims that were or could have been asserted that arise from or relate to the facts alleged in the Securities Class Action, such that every member of the settlement class will be barred from asserting such claims in the future; and (ii) approves the payment of $220,000 in cash and the issuance of 950,000 shares of its common stock (the “Settlement Shares”) to members of the settlement class. In addition, the Company would incur a payment of $25,000 in cash to class administrator. At present, the Company is waiting for the Court to approve the disbursement of the Settlement Shares. Plaintiff is filing a motion to obtain such approval. The $245,000 cash portion of the settlement has been paid in full. The Company accrued settlement cost aggregating US$1,863,500 and US$690,000 during the nine months ended September, 2017 and 2016, respectively.

 

On July 28, 2017, the Court entered a clarifying order to specify the allocation of attorneys’ fees in accordance with the Stipulation.

 

  42  

 

 

The Settlement Shares are exempt from registration under Section 3(a)(10) of the Securities Act of 1933, as amended. The settlement does not constitute any admission of fault or wrongdoing by the Company or any of the individual defendants.

 

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.

 

On February 3, 2015, a purported shareholder KiramKodali filed a putative shareholder derivative complaint in the United States District Court for the Southern District of New York, captioned KiranKodali v. Huichun Qin, et al., Case No. 15-cv-806. The action alleges that the Company and its current and former officers and directors Huichun Qin, Long Yi, Jianming Yin, Jinggen Ling, Chunfang Shen, John F. Levy, Xiaofang Shen and Chunjiang Yu violated their fiduciary duties, grossly mismanaged the Company and were unjustly enriched based upon the transfer that was the subject of the Internal Review and other grounds substantially similar to those asserted in the class action complaints. Kodali did not serve a demand upon the Company and alleges that demand is excused. The Company and Mr. Levy have been served. An amended derivative complaint was filed on April 20, 2015. On May 29, 2015, the Court “so ordered” a stipulation among Kodali, the Company and Mr. Levy staying all proceedings in the derivative case except for service of process on individual defendants until the earlier of thirty days of termination of the stipulation, dismissal of the class action with prejudice or the date any of the defendants in the class action file an answer to the CAC. The Company believes that this lawsuit is without merit and intends to vigorously defend against it. At this stage of the proceedings, the Company is not able to estimate the probability of success or loss.

 

On May 18, 2015, WFOE filed a civil complaint against Huichun Qin with the Wujiang Region Suzhou City People’s Court claiming Mr. Qin’s misappropriation of RMB 7 million in July 2014. The complaint was rejected due to a procedural issue. The Company has since learned that Mr. Qin has been convicted and sentenced to a term of incarceration of approximately five years. In view of this information, the Company is evaluating its strategic options.

 

The Company and its directors were parties to a lawsuit filed on September 1, 2017, by Juan C. Rojas (“Plaintiff”), on behalf of himself and all other similarly situated stockholders of China Commercial Credit, Inc., in the Chancery Court of the State of Delaware (the “Delaware Chancery Court”) (Case No. 2017-0633-JTL) (the “Action”), which sought injunctive relief, costs, and attorney’s fees. Plaintiff’s Verified Class Action Complaint (“Complaint”) alleged that the Company’s directors breached their fiduciary duties to the Company’s stockholders by failing to disclose all necessary material information relating to the Company’s entry into an Exchange Agreement (“Exchange Agreement”) with Sorghum Investment Holdings Limited (“Sorghum”) on August 9, 2017, and preventing the Company’s stockholders from casting a fully informed vote on the Company’s acquisition of Sorghum, and other proposals contained in the Company’s preliminary proxy statement, dated August 14, 2017 (“Preliminary Proxy Statement). Plaintiff filed a Motion to Expedite the Proceeding (“Motion to Expedite”) seeking to expedited consideration of Plaintiff’s Motion for Preliminary Injunction, which was filed simultaneously with Plaintiff’s Complaint. The Company opposed the Motion to Expedite on September 20, 2017, and the Delaware Chancery Court held a hearing on the Motion to Expedite on September 22, 2017, wherein it denied Plaintiff’s Motion to Expedite without prejudice. On September 28, 2017, the Company filed a motion to dismiss Plaintiff’s Complaint (“Motion to Dismiss”). Plaintiff has not responded to the Company’s Motion to Dismiss.

 

On October 10, 2017, the Company filed Amendment No. 1 to its Preliminary Proxy Statement (the “Amended Preliminary Proxy”) with the U.S. Securities and Exchange Commission (the “Commission”) in response to the Commission’s September 8, 2017 comment letter (“Comment Letter”). After reviewing the Amended Preliminary Proxy, Plaintiff determined that the Company’s Amended Preliminary Proxy rendered the claims asserted in Plaintiff’s Complaint moot and/or otherwise unsuitable for further pursuit. On October 19, 2017, the Company and Plaintiff entered into a stipulation (“Stipulation”) wherein Plaintiff agreed to voluntarily dismiss his claims against the Company, and its directors, with prejudice. The Delaware Chancery Court granted the Stipulation on October 20, 2017, and entered an Order dismissing the Action with prejudice. In accordance with the Order, the Company will advise the Delaware Chancery Court within fifteen (15) days of the earlier of (a) the stockholder vote on the Exchange Agreement relating to the proposals, or (b) the termination of the Exchange Agreement, and whether the parties to the Action have reached an agreement with respect to Plaintiff’s anticipated request for fees and expenses. Currently, no compensation in any form has passed from the Company, or its directors, to Plaintiff or Plaintiff’s attorneys in the Action, and the Company has not made a promise to give any such compensation. On November 6, 2017, the Company filed Amendment No. 2 to its Preliminary Proxy Statement with the Commission in further response to comments from the Commission.

 

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ITEM 1A. RISK FACTORS

 

Not applicable.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On August 10, 2017, the Company issued 4,500 and 5,500 restricted shares to Axiom Capital Management, Inc. and Michael S. Jacobs, respectively, as compensation for the issuance of a fairness opinion. All these shares are issued pursuant to Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder.

 

On September 14, 2017, the Company issued 460,000 restricted shares to certain advisors and finders as compensation for their services rendered in connection with the acquisition of Sorghum Investment Holdings Limited. All these shares are issued pursuant to Section 4(a)(2) of the Securities Act. 

 

On September 27, 2017, the Company entered into a securities purchase Agreement (the “SPA”) with certain accredited and sophisticated investors in connection with a private placement offering (the “Offering”) of 552,486 shares (“Shares”) of common stock, par value $0.001 per share, of the Company, for gross proceeds to the Company of one million dollars. The purchase price per share of the Offering is $1.81. In connection with the purchase of the Shares, the Purchasers received a warrant (the “Warrant”) to purchase up to the number of shares of the Company’s common stock equal to 193,370 of the shares of common stock purchased by the Purchasers pursuant to the SPA. The Warrant has an exercise price of $2.26 per share and is exercisable on the date of issuance and expire five years form the date of issuance. The Offering closed on September 29, 2017. The Shares issued in the Offering are exempt from the registration requirements of the Securities Act, pursuant to Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

The following exhibits are filed herewith:

 

Exhibit
No.
  Description
     
31.1*   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
31.2*   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
32.1**   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema Document
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith.

** Furnished herewith. 

 

  44  

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

November 14, 2017 CHINA COMMERCIAL CREDIT, INC.
   
  By: /s/ Mingjie Zhao
    Mingjie Zhao
    Chief Executive Officer
    (Principal Executive Officer)
     
  By: /s/ Long Yi
    Long Yi
   

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

  45  

 

 

Exhibit
No.
  Description
     
31.1*   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
31.2*   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
32.1**   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema Document
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith.

** Furnished herewith.

 

 

46

 

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