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.
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.
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.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
|
2.
|
GOING CONCERN (CONTINUED)
|
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.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
3.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
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$2,604,172 as of September 30, 2017 and December 31, 2016, respectively.
Certain items in the financial statements of
comparative period have been reclassified to conform to the financial statements for the current period.
(d)
|
Foreign currency translation
|
The reporting currency of the Company is United
States Dollars (“US$”), 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.
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.
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.
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.
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.
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.
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.
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
|
|
Credit risk is one of the most significant
risks for the Company’s business. Credit risk exposures arise principally in lending activities, finance lease and financial
guarantee activities which is an off-balance sheet financial instrument.
Credit risk is controlled by the application
of credit approvals, limits and monitoring procedures. The Company manages credit risk through in-house research and analysis of
the Chinese economy and the underlying obligors and transaction structures. To minimize credit risk, the Company requires collateral
in the form of rights to cash, securities or property and equipment.
The Company identifies credit risk collectively
based on industry, geography and customer type. This information is monitored regularly by management.
1.1 Lending activities
In measuring the credit risk of lending loans to corporate customers,
the Company mainly reflects the “probability of default” by the customer on its contractual obligations and considers
the current financial position of the customer and the exposures to the customer and its likely future development. For individual
customers, the Company uses standard approval procedures to manage credit risk for personal loans.
In addition, the Company calculates the provision amount as below:
|
1.
|
General Reserve - is based on total loan receivable balance and to be used to cover unidentified probable loan loss. According to management assessment, the General Reserve is required to be no less than 1% of total loan receivable balance.
|
|
2.
|
Special Reserve - is fund set aside covering losses due to risks related to a particular country, region, industry, company or type of loans. The reserve rate could be decided based on management estimate of loan collectability. The Loan portfolio did not include any loans outside of the PRC.
|
|
3.
|
Specific Reserve – is based on a loan by loan basis covering losses due to risks related to the ability and intension of repayment of each customer. The reserve rate was individually assessed based on management estimate of loan collectability
|
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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.
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.
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.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The interest rates on loan issued ranged between
9.6%~ 19.44% and 9.6%~ 19.44% % for the nine months ended September 30, 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
|
|
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
|
|
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.
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
|
|
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
|
|
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.
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
|
|
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.
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
|
|
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.
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.
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.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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.
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.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
|
17.
|
COMMITMENTS AND CONTINGENCIES
|
During the year ended December 31, 2016, the
Company leased its new office under a lease agreement from January 1, 2017 to December 31, 2019. As a result, in January 2017,
the Company terminated the lease agreement for its former principal office which agreement was to expire on May 31, 2021. No default
penalty was paid for the earlier termination. The following table sets forth the Company’s contractual obligations as of
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
|
|
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.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
|
17.
|
COMMITMENTS AND CONTINGENCIES (CONTINUED)
|
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”)
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.
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
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18.
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SHARE EXCHANGE AGREEMENT
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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.