NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES
|
China
Commercial Credit, Inc. (“CCC” or “the Company”) is a holding company that was incorporated under the
laws of the State of Delaware on December 19, 2011.
On March 22, 2018, the Company set up HC
High Summit Holding Limited (“HCHS”), a wholly owned subsidiary, in British Virgin Island (“BVI”). HCHS
is authorized to issue 50,000 shares, at par value of $1.00 per share.
VIE
AGREEMENTS WITH WUJIANG LUXIANG
On
September 26, 2012, the Company through its indirectly wholly owned subsidiary which was incorporated in China, Wujiang Luxiang
Information Technology Consulting Co. Ltd. (“WFOE” ), entered into a series of VIE Agreements with Wujiang Luxiang
Rural Microcredit Co., Ltd (“Wujiang Luxiang”) 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
FOR
THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES (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 March 31, 2018, PFL had no continuous financial lease transactions.
The
accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. The realization of assets and the satisfaction
of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to operate profitably,
to generate cash flows from operations, and to pursue financing arrangements to support its working capital requirements.
The
following includes conditions give rise to substantial doubt about the Company’s ability to continue as a going concern
within one year from the financial statements issuance date and management’s plans to mitigate these adverse conditions:
1)
|
Limited
funds necessary to maintain operations
|
The
Company had an accumulated deficit of US$81,920,294 as of March 31, 2018. In addition, the Company had a negative net asset of
US$4,450,241 as of March 31, 2018. As of March 31, 2018, the Company had cash of US$2,265,145 and total liabilities other
than accrual for financial guarantee services of $1,875,894. 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 financial statement issuance date.
The
Company is actively seeking other strategic partners with experience in lending business.
2)
|
Recurring
operating loss
|
During
the three months ended March 31, 2018, the Company incurred operating loss of US$385,898. Affected by the reduction of lending
business and guarantee business, the management was in the opinion that recurring operating losses would be made continue within
one year from the financial statements issuance date.
The
Company continues to use its best effort to improve collection of loan receivable and interest receivable. Management engaged
one PRC law firm to represent the Company in the legal proceedings against the borrowers and their counter guarantors.
3)
|
Negative
operating cash flow
|
During
the three months ended March 31, 2018, the Company incurred negative operating cash flow of US$608,646. 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 financial statements issuance date.
Since
January 1, 2018, the Company is making efforts to introduce new businesses to improve the operating cash flow of the Company.
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.
The
Company is actively seeking other strategic partners with experience in lending business.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017
2.
|
GOING
CONCERN (CONTINUED)
|
The Company has been actively seeking
strategic investors with experience in lending business as well as financial investors. Management had invested in the Company
during the year ended December 31, 2017 and will continue to invest in the Company during the year ended December 31, 2018, if
necessary.
The Company plans to continue to seek financial
as well as strategic investors for additional financing.
On
April 11, 2018, the Company closed a private placement to two individual investors in China for a gross proceeds of US$500,000
at a per share price of US$0.77. The net proceeds of the sale of the shares shall be used by the Company for working capital
and general corporate purpose.
●
|
Plan
to acquire new business or assets
|
Although
we have continued to use our best effort to improve our collection of loan receivable and interest receivable by engaging local
law firms in China, it has been very difficult for us to collect from the borrowers. As such, the Company has been actively seeking
strategic acquisition of business or assets to improve our liquidity. Since the termination of the Exchange Agreement with Sorghum
in last December, we have evaluated a few potential acquisition targets. As of now, the Company plans to acquire certain second-hand
luxury cars dealership business assets or other appropriate business deemed to be appropriate by the board of directors.
On April 28, 2018, the Company entered
into certain securities purchase agreements (the “Initial SPAs”) with certain “non-U.S. Persons” (the
“Purchasers”) as defined in Regulation S of the Securities Act of 1933, as amended (the “Securities Act”)
pursuant to which the Company agreed to sell 1,336,314 shares of its common stock (“Common Stock”), par value $0.001
per share, at a per share purchase price of $0.78. The net proceeds to the Company from the Initial SPAs Offering will be approximately
$1,042,324. The Initial SPAs are part of the subscription the Company received in a private placement offering (the “Offering”)
of its Common Stock at a per share purchase price of $0.78 up to an aggregate gross proceeds of three million dollars ($3,000,000)
to “non-U.S. Persons” as defined in Regulation S. The Offering shall be on a rolling basis until June 30, 2018 unless
the Company extends for an additional 30 days at its sole discretion. The net proceeds of the Offering shall be used by the Company
in connection with the Company’s planned operation (the “Planned Business”) of certain used luxurious car leasing
or other related business as approved by the board of directors of the Company. On May 10, 2018, the Company issued the
1,336,314 shares of Common Stock to the Purchasers since all the closing conditions of the Initial SPAs have been satisfied when
the Company obtained required license to carry out the used luscious car leasing business.
Though
management had plans to mitigate the conditions or events that raise substantial doubt, there is substantial doubt about the Company’s
ability to continue as a going concern within one year from the financial statements issuance date, as there is no assurance that
the liquidity plan will be successfully implemented. Failure to successfully implement the plan will have a material adverse effect
on the Company’s business, results of operations and financial position, and may materially adversely affect its ability
to continue as a going concern.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
(a)
|
Basis
of presentation and principle of consolidation
|
The
unaudited condensed interim consolidated financial statements are prepared and presented in accordance with accounting principles
generally accepted in the United States (“U.S. GAAP”).
The
unaudited condensed interim financial information as of March 31, 2018 and for the three months ended March 31, 2018 and 2017
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, 2017 filed with the SEC on April 16, 2018.
In
the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement
of the Company’s unaudited condensed financial position as of March 31, 2018, its unaudited condensed results of operations
for the three months ended March 31, 2018 and 2017, and its unaudited condensed cash flows for the three months ended March 31,
2018 and 2017, as applicable, have been made. The unaudited interim results of operations are not necessarily indicative of the
operating results for the full fiscal year or any future periods.
All
significant inter-company accounts and transactions have been eliminated in consolidation.
(b)
|
Recently adopted accounting standards
|
Adoption of
ASC Topic 606, “Revenue from Contracts with Customers” (“Topic 606”)
Effective January 1, 2018, the Company
adopted Topic 606 using modified retrospective approach applied its contracts which were not completed as of January 1, 2018. Results
for reporting periods beginning after January 1, 2018 are accounted for and presented under Topic 606, while prior period amounts
are not adjusted and continue to be reported in accordance with ASC Topic 605 “Revenue Recognition”.
We recognize revenue when control of the
promised services is transferred to our traders and offering agents. Revenue is measured at the transaction price which is based
on the amount of consideration that the Company expects to receive in exchange for transferring the promised services to our loan
customers. During the three months ended March 31, 2018, the Company did not generate service fees from direct loan customers.
Pursuant to ASC606-10-15-2, the interest
income generated by the Company which is in industry of national commercial bank and commission generated from financial guarantee
services are scoped out of ASC606.
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.
During
the three months ended March 31, 2018 and 2017, no interest was reversed as interests on aged loan receivables were reversed before
the presented periods.
Certain
items in the financial statements of comparative period have been reclassified to conform to the financial statements for the
current period.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
The preparation of consolidated financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts
of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, management
reviews these estimates using the currently available information. Changes in facts and circumstances may cause the Company to
revise its estimates. Significant accounting estimates reflected in the financial statements include: (i) the allowance for loan
losses; (ii) estimates of losses on unexpired loan contracts and guarantee service contracts; (iii) accrued expenses; (iv) useful
lives of long-lived assets; (v) the impairment of long-lived assets; (vi) the valuation allowance of deferred tax assets; and (vii)
contingencies and litigation.
(f)
|
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, US$, 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, except for the change in accumulated deficit during
the year which is the result of the income statement translation process. Adjustments resulting from the translation are recorded
as a separate component of accumulated other comprehensive income in shareholders’ deficit.
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Balance sheet items, except for equity accounts
|
|
|
6.2807
|
|
|
|
6.5064
|
|
|
|
For the three months ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Items in the statements of operations and comprehensive loss, and statements of cash flows
|
|
|
6.3582
|
|
|
|
6.8891
|
|
Transactions
denominated in currencies other than the functional currency are translated into prevailing functional currency at the exchange
rates prevailing at the dates of the transactions. The resulting exchange differences are included in the consolidated statements
of comprehensive loss.
(g)
|
Financial
guarantee service contract
|
Financial
guarantee service contracts provide 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:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Guarantee
|
|
$
|
12,044,836
|
|
|
$
|
11,627,013
|
|
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
(g)
|
Financial
guarantee service contract (continued)
|
A
provision for possible loss to be absorbed by the Company for the financial guarantee it provides is recorded as an accrued liability
when the guarantees are made and recorded as “Accrual for financial guarantee services” on the consolidated balance
sheets. This liability represents probable losses and is increased or decreased by accruing a “(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.
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:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Allowance for immature financial guarantee services
|
|
$
|
9,884,388
|
|
|
$
|
9,270,882
|
|
|
|
|
|
|
|
|
|
|
Allowance for repayment on behalf of guarantee service customers losses
|
|
|
1,974,740
|
|
|
|
2,073,282
|
|
Total allowance for repayment on behalf of guarantee customers losses
|
|
$
|
1,974,740
|
|
|
$
|
2,073,282
|
|
The
Company recorded a provision of US$104,391 and a reversal of provision US$7,207 for the three months ended March 31, 2018 and
2017, respectively.
As
of March 31, 2018 and December 31, 2017, the management charged off specific provision for 31 and 31 customers in the amount of
US$10,815,328 and US$10,440,156, considering remote collectability from the customers.
(h)
|
Non-interest
expenses
|
Non-interest
expenses primarily consist of changes in fair value of other noncurrent liabilities, salaries and benefits for employees, traveling
cost, entertainment expenses, depreciation of equipment, office rental expenses, legal and consulting expenses, office supplies,
etc.
The
Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities
are determined based on differences between the financial statement carrying amounts of existing assets and liabilities and their
tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applicable for the differences that are expected
to affect taxable income.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
Comprehensive
loss includes net loss and other comprehensive foreign currency adjustments income. 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.
We
have various share-based awards pursuant to which the employees, consultants and directors of our company are granted share-based
compensations.
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.
The
Company accounts for share-based compensation issued to nonemployees in accordance with the provisions of ASC 505-50 “Equity-Based
Payments to Non-Employees” which codified SFAS 123 and the Emerging Issues Task Force consensus in Issue No. 9618, “Accounting
for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services”.
Measurement of share based payment transactions with non-employees shall be based on the fair value of whichever is more reliably
measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of the share based payment
transaction should be determined at the earlier of performance commitment date or performance completion date.
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.
(m)
|
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
FOR
THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017
4.
|
VARIABLE
INTEREST ENTITIES AND OTHER CONSOLIDATION MATTERS
|
As
of March 31, 2018, the Company had only one VIE.
The
following financial statement amounts and balances of the VIE were included in the audited consolidated financial statements as
of March 31, 2018 and December 31, 2017 and for the three months ended March 31, 2018 and 2017:
|
|
March 31, 2018
|
|
|
December 31,
2017
|
|
|
|
(unaudited)
|
|
|
|
|
Total assets
|
|
$
|
5,060,870
|
|
|
$
|
4,204,709
|
|
Total liabilities
|
|
$
|
11,736,515
|
|
|
$
|
10,818,223
|
|
|
|
For the three months ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue
|
|
$
|
97,020
|
|
|
$
|
69,145
|
|
Net loss
|
|
$
|
173,388
|
|
|
$
|
706,530
|
|
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
FOR
THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017
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 March 31, 2018 and December 31, 2017, the Company held cash of US$2,265,145 and US$2,498,194, respectively, that is uninsured
by the government authority.
To
limit exposure to credit risk relating to deposits, the Company primarily places cash deposits only with large financial institutions
in the PRC with acceptable credit ratings.
The
Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results
of operations may be influenced by the political, economic and legal environments in the PRC as well as by the general state of
the PRC’s economy. The business may be influenced by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
No
customer accounted for more than 10% of total loan balance as of March 31, 2018 and December 31, 2017.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017
The
interest rates on loan issued ranged between 9.6%~ 19.44% and 9.6%~ 19.44% for the three months ended March 31, 2018 and 2017,
respectively.
6.1
Loans receivable consist of the following:
|
|
March 31, 2018
|
|
|
December 31,
2017
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Business loans
|
|
$
|
22,716,745
|
|
|
$
|
21,267,838
|
|
Personal loans
|
|
|
19,795,934
|
|
|
|
19,410,476
|
|
Total Loans receivable
|
|
|
42,512,679
|
|
|
|
40,678,314
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
Collectively assessed
|
|
|
(49,676
|
)
|
|
|
(38,731
|
)
|
Individually assessed
|
|
|
(37,545,080
|
)
|
|
|
(36,574,662
|
)
|
Allowance for loan losses
|
|
|
(37,594,756
|
)
|
|
|
(36,613,393
|
)
|
Loans receivable, net
|
|
$
|
4,917,923
|
|
|
$
|
4,064,921
|
|
The
Company originates loans to customers located primarily in Wujiang City, Jiangsu Province. This geographic concentration of credit
exposes the Company to a higher degree of risk associated with this economic region.
All
loans are short-term loans that the Company has made to either business or individual customers. As of March 31, 2018 and December
31, 2017, the Company had 37 and 37 business loan customers, and 33 and 34 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. No allowance is made for loans
subsequently received.
For
the three months ended March 31, 2018 and 2017, a reversal of provision of US$330,282 and a provision of US$782,882 were
charged to the unaudited condensed consolidated statements of operation, respectively. No write-offs against allowances have occurred
for the three months ended March 31, 2018 and 2017.
The
following table presents nonaccrual loans with aging over 90 days by classes of loan portfolio as of March 31, 2018 and December
31, 2017, respectively:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Business loans
|
|
$
|
17,749,146
|
|
|
$
|
17,394,729
|
|
Personal loans
|
|
|
19,795,934
|
|
|
|
19,410,476
|
|
|
|
$
|
37,545,080
|
|
|
$
|
36,805,205
|
|
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017
6.
|
LOANS
RECEIVABLE, NET (CONTINUED)
|
The
following table represents the aging of loans as of March 31, 2018 by type of loan:
|
|
1-89 Days
Past Due
|
|
|
90 - 179 Days
Past Due
|
|
|
180 - 365 Days
Past Due
|
|
|
Over 1 year
Past Due
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total Loans
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
17,749,146
|
|
|
$
|
17,749,146
|
|
|
$
|
4,967,599
|
|
|
$
|
22,716,745
|
|
Personal loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,795,934
|
|
|
|
19,795,934
|
|
|
|
-
|
|
|
|
19,795,934
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
37,545,080
|
|
|
$
|
37,545,080
|
|
|
$
|
4,967,599
|
|
|
$
|
42,512,679
|
|
The
following table represents the aging of loans as of December 31, 2017 by type of loan:
|
|
1-89 Days
Past Due
|
|
|
90 - 179 Days
Past Due
|
|
|
180 - 365 Days
Past Due
|
|
|
Over 1 year
Past Due
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business loans
|
|
$
|
676,257
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
17,394,729
|
|
|
$
|
18,070,986
|
|
|
$
|
3,196,852
|
|
|
$
|
21,267,838
|
|
Personal loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,410,476
|
|
|
|
19,410,476
|
|
|
|
-
|
|
|
|
19,410,476
|
|
|
|
$
|
676,257
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
36,805,205
|
|
|
$
|
37,481,462
|
|
|
$
|
3,196,852
|
|
|
$
|
40,678,314
|
|
6.2
Analysis of loans by credit quality indicator
The
following table summarizes the Company’s loan portfolio by credit quality indicator as of March 31, 2018 and December 31,
2017, respectively:
Five Categories
|
|
March 31, 2018
|
|
|
%
|
|
|
December 31, 2017
|
|
|
%
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
4,967,599
|
|
|
|
11.7
|
%
|
|
$
|
3,873,110
|
|
|
|
9.5
|
%
|
Special mention
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Substandard
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
%
|
Loss
|
|
|
37,545,080
|
|
|
|
88.3
|
%
|
|
|
36,805,204
|
|
|
|
90.5
|
%
|
Total
|
|
$
|
42,512,679
|
|
|
|
100
|
%
|
|
$
|
40,678,314
|
|
|
|
100
|
%
|
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017
6.
|
LOANS
RECEIVABLE, NET (CONTINUED)
|
6.3
Analysis of loans by collateral
The
following table summarizes the Company’s loan portfolio by collateral as of March 31, 2018:
|
|
March 31, 2018
|
|
|
|
|
|
|
Business Loans
|
|
|
Personal Loans
|
|
|
Total
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Guarantee backed loans
|
|
$
|
22,716,745
|
|
|
$
|
18,953,671
|
|
|
$
|
41,670,416
|
|
Collateral backed loans
|
|
|
-
|
|
|
|
842,263
|
|
|
|
842,263
|
|
|
|
$
|
22,716,745
|
|
|
$
|
19,795,934
|
|
|
$
|
42,512,679
|
|
The
following table summarizes the Company’s loan portfolio by collateral as of December 31, 2017:
|
|
December 31, 2017
|
|
|
|
|
|
|
Business Loans
|
|
|
Personal Loans
|
|
|
Total
|
|
Guarantee backed loans
|
|
$
|
21,267,838
|
|
|
$
|
18,559,007
|
|
|
$
|
39,826,845
|
|
Collateral backed loans
|
|
|
-
|
|
|
|
851,469
|
|
|
|
851,469
|
|
|
|
$
|
21,267,838
|
|
|
$
|
19,410,476
|
|
|
$
|
40,678,314
|
|
Guarantee
Backed Loans
A
guaranteed loan is a loan guaranteed by a third party who is usually a corporation or high net worth individual. As of March 31,
2018 and December 31, 2017, guaranteed loans make up 98.0% and 97.9% 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
FOR THE THREE
MONTHS ENDED MARCH 31, 2018 AND 2017
7.
|
ALLOWANCE FOR LOAN
LOSSES
|
The allowance for loan losses is maintained
at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation
of the adequacy of the allowance. The allowance is based on the Company’s past loan loss history, known and inherent risks
in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying
collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently
subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.
The allowance is calculated at portfolio-level
since our loans portfolio is typically of smaller balance homogenous loans and is collectively evaluated for impairment. Additionally,
the management also reviewed the portfolio on a loan by loan basis and individually evaluated for impairment if any.
For the purpose of calculating portfolio-level
reserves, we have grouped our loans into two portfolio segments: Corporate and Personal. The allowance consists of the combination
of a quantitative assessment component based on statistical models, a retrospective evaluation of actual loss information to loss
forecasts, value of collaterals and could include a qualitative component based on management judgment.
In estimating the probable loss of the
loan portfolio, the Company also considers qualitative factors such as current economic conditions and/or events in specific industries
and geographical areas, including unemployment levels, trends in real estate values, peer comparisons, and other pertinent factors
such as regulatory guidance. Finally, as appropriate, the Company also considers individual borrower circumstances and the condition
and fair value of the loan collateral, if any.
In addition, the Company calculates the
provision amount as below:
|
1.
|
General
Reserve - is based on total loan receivable balance and to be used to cover unidentified probable loan loss. The management
assessed the General Reserve is required to be no less than 1% of total loan receivable balance.
|
|
2.
|
Special
Reserve - is fund set aside covering losses due to risks related to a particular country, region, industry, company or type
of loans. The reserve rate could be decided based on management estimate of loan collectability. The Loan portfolio did not
include any loans outside of the PRC.
|
While management uses the best information
available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic
and other conditions or changes in accounting guidance.
The following tables present the activity
in the allowance for loan losses and related recorded investment in loans receivable by classes of the loans individually and
collectively evaluated for impairment as of and for the three months ended March 31, 2018 and 2017:
|
|
Business Loans
|
|
|
Personal Loans
|
|
|
Total
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
For the three months ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
17,433,460
|
|
|
$
|
19,179,933
|
|
|
$
|
36,613,393
|
|
Charged off
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Recoveries
|
|
|
(267,371
|
)
|
|
|
(72,348
|
)
|
|
|
(339,719
|
)
|
Provisions
|
|
|
9,437
|
|
|
|
-
|
|
|
|
9,437
|
|
Foreign exchange loss
|
|
|
623,296
|
|
|
|
688,349
|
|
|
|
1,311,645
|
|
Ending balance
|
|
|
17,798,822
|
|
|
|
19,795,934
|
|
|
|
37,594,756
|
|
Ending balance: individually evaluated for impairment
|
|
|
17,749,146
|
|
|
|
19,795,934
|
|
|
|
37,545,080
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
49,676
|
|
|
$
|
-
|
|
|
$
|
49,676
|
|
|
|
Business Loans
|
|
|
Personal Loans
|
|
|
Total
|
|
For the three months ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
32,356,953
|
|
|
$
|
19,351,109
|
|
|
$
|
51,708,062
|
|
Charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Recoveries
|
|
|
(57,337
|
)
|
|
|
-
|
|
|
|
(57,337
|
)
|
Provisions
|
|
|
143,468
|
|
|
|
696,751
|
|
|
|
840,219
|
|
Foreign exchange loss
|
|
|
251,720
|
|
|
|
150,351
|
|
|
|
402,071
|
|
Ending balance
|
|
|
32,694,804
|
|
|
|
20,198,211
|
|
|
|
52,893,015
|
|
Ending balance: individually evaluated for impairment
|
|
|
1,120,277
|
|
|
|
1,969,191
|
|
|
|
3,089,468
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
31,574,527
|
|
|
$
|
18,229,020
|
|
|
$
|
49,803,547
|
|
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2018 AND 2017
|
7.
|
ALLOWANCE FOR LOAN LOSSES (CONTINUED)
|
The following table presents the classes
of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard, doubtful
and loss within the Company’s internal risk rating system as of March 31, 2018:
|
|
Pass
|
|
|
Special Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Total
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business loans
|
|
$
|
4,967,599
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
17,749,146
|
|
|
$
|
22,716,745
|
|
Personal loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,795,934
|
|
|
|
19,795,934
|
|
|
|
$
|
4,967,599
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
37,545,080
|
|
|
$
|
42,512,679
|
|
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, 2017:
|
|
Pass
|
|
|
Special Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business loans
|
|
$
|
3,873,110
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
17,394,728
|
|
|
$
|
21,267,838
|
|
Personal loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,410,476
|
|
|
|
19,410,476
|
|
|
|
$
|
3,873,110
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
36,805,204
|
|
|
$
|
40,678,314
|
|
8.
|
GUARANTEE PAID ON BEHALF OF GUARANTEE CUSTOMERS,
NET
|
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
|
(unaudited)
|
|
|
|
|
Guarantee paid on behalf of guarantee service customers
|
|
$
|
1,974,740
|
|
|
$
|
2,073,282
|
|
Allowance for repayment on behalf of guarantee service customers losses
|
|
|
(1,974,740
|
)
|
|
|
(2,073,282
|
)
|
Guarantee paid on behalf of guarantee service customers, net
|
|
$
|
-
|
|
|
$
|
-
|
|
As of March 31, 2018 and December 31,
2017, guarantee paid on behalf of guarantee service customers represents payment made by the Company to banks on behalf of six
of its third-party guarantee service customers who defaulted on their loan repayments to the banks. Management performs an evaluation
of the adequacy of the allowance. The allowance is based on the Company’s past loan loss history, known and inherent risks
in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying
collateral, composition of the loan portfolio, current economic conditions and other relevant factors.
As of March 31, 2018 and December 31,
2017, the Company charged off allowance for repayment on behalf of customers for 31 and 31 customers in the amount of US$10,815,328
and US$10,440,156, considering remote collectability from the customers. The guarantee paid on behalf of customers were impaired
when, based on current information and events, it is probable that the Company would be unable to collect the outstanding balance
when due according to the contractual terms of guarantee agreements. Factors considered by management in determining impairment
include impairment status, payment ability and intention of counter-guarantee and the probability of collecting scheduled principal
and interest payments.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2018 AND 2017
|
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.
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.
Future minimum lease receipts under non-cancellable
finance lease arrangements are as follows:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
$
|
2,945,532
|
|
|
$
|
2,843,355
|
|
2 years
|
|
|
-
|
|
|
|
-
|
|
3 years
|
|
|
-
|
|
|
|
-
|
|
Total minimum lease receipts
|
|
|
2,945,532
|
|
|
|
2,843,355
|
|
Less: amount representing interest
|
|
|
(317,355
|
)
|
|
|
(306,347
|
)
|
Present value of minimum lease receipts
|
|
$
|
2,628,177
|
|
|
$
|
2,537,008
|
|
Following is a summary of the components
of the Company’s net investment in direct financing leases as of March 31, 2018 and December 31, 2017:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments to be received
|
|
$
|
2,945,532
|
|
|
$
|
2,843,355
|
|
Less: Amounts representing estimated executory costs
|
|
|
-
|
|
|
|
-
|
|
Minimum lease payments receivable
|
|
|
2,945,532
|
|
|
|
2,843,355
|
|
Less Allowance for uncollectible
|
|
|
(2,628,177
|
)
|
|
|
(2,537,008
|
)
|
Net minimum lease payments receivable
|
|
|
317,355
|
|
|
|
306,347
|
|
Estimated residual value of leased property
|
|
|
-
|
|
|
|
-
|
|
Less: Unearned income
|
|
|
(317,355
|
)
|
|
|
(306,347
|
)
|
Net investment in direct financing lease
|
|
$
|
-
|
|
|
$
|
-
|
|
|
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)
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
Furniture and fixtures
|
|
5
|
|
$
|
23,009
|
|
|
$
|
22,210
|
|
Electronic equipment
|
|
3
|
|
|
146,964
|
|
|
|
141,866
|
|
Less: accumulated depreciation
|
|
|
|
|
(155,261
|
)
|
|
|
(148,030
|
)
|
Property and equipment, net
|
|
|
|
$
|
14,712
|
|
|
$
|
16,046
|
|
Depreciation expense totaled US$1,889
and US$1,646 for the three months ended March 31, 2018 and 2017, respectively.
Deposits payable are security deposits
required from customers in order to obtain loans and guarantees from the Company. The deposits are refundable to the customers
when the customers fulfill their obligations under loan and guarantee contracts.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2018 AND 2017
|
12.
|
OTHER CURRENT LIABILITIES
|
Other current liabilities as of March
31, 2018 and December 31, 2017 consisted of:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
|
(unaudited)
|
|
|
|
|
Accrued payroll
|
|
$
|
65,927
|
|
|
$
|
64,402
|
|
Accrued office rental expenses
|
|
|
28,659
|
|
|
|
36,887
|
|
Other tax recoverable
|
|
|
(41,808
|
)
|
|
|
(35,760
|
)
|
Other payable
|
|
|
41,947
|
|
|
|
100,911
|
|
|
|
$
|
94,725
|
|
|
$
|
166,440
|
|
13.
|
OTHER NONCURRENT LIABILITIES
|
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
|
(unaudited)
|
|
|
|
|
Accrued provision for share settlement against legal proceedings
|
|
$
|
261,540
|
|
|
$
|
1,311,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
261,540
|
|
|
$
|
1,311,000
|
|
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. The Stipulation
resolved the claims asserted against the Company and certain of its current and former officers and directors in the Securities
Class Action without any admission or concession of wrongdoing or liability by the Company or the other defendants. The Stipulation
also provides, among other things, a settlement payment by the Company of $245,000 in cash and the issuance of 950,000 shares
of its common stock (the “Settlement Shares”) to the plaintiff’s counsel and class members. The terms of the
Stipulation were subject to approval by the Court following notice to all class members. The issuance of the Settlement Shares
are exempt from registration pursuant to Section 3(a)(10) of the Securities Act of 1933, as amended. A fairness hearing was held
on May 30, 2017, and the Court approved the settlement.
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 $245,000 in cash and the issuance of 950,000 shares of its common stock
to members of the settlement class.
On July 28, 2017, the Court amended the
order that 1) Attorney’s Fees, Litigation Expenses, and Incentive Awards be paid out of the Settlement Fund; and 2) Levi
& Korsinsky be awarded attorney’s fees in the amount of $55,000 in cash and 237,500 shares (Plaintiff Attorney Fee Shares).
Thus, cash to be paid to the class shall be $190,000 (“Class Settlement Cash”) and shares to be issued to the class
shall be 712,500 (“Class Settlement Shares”).
On December 22, 2017, the Court entered
a distribution order approving the distribution of the Settlement Stock to the class plaintiffs. The settlement has been finalized,
and that thereafter there are no remaining claims outstanding as against the Company with respect to this litigation.
As of March 31, 2018, the $245,000 cash
portion of the settlement has been paid in full and 712,500 Class Settlement Shares were issued.
On April 10, 2018, the 237,500 of plaintiff
attorney fee shares were issued to plaintiff’s attorney’s broker account.
As
of March 31, 2018, the Company accounted for the unissued share settlement of 237,500 shares in the amount of US$261,540
(at market value of $1.10 per share on March 29, 2018) as noncurrent
liability. Accordingly the Company recorded expenses of $147,540 for the three months ended March 31, 2018 under the account of
“Changes in fair value of noncurrent liabilities”.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2018 AND 2017
14.
|
OTHER OPERATING EXPENSES
|
Other operating expenses for the three months ended March 31,
2018 and 2017 consisted of:
|
|
For the three months ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Depreciation and amortization
|
|
$
|
1,889
|
|
|
$
|
1,646
|
|
Travel expenses
|
|
|
31,770
|
|
|
|
11
|
|
Entertainment expenses
|
|
|
2,630
|
|
|
|
1,941
|
|
Legal and consulting expenses
|
|
|
215,430
|
|
|
|
117,477
|
|
Car expenses
|
|
|
6,917
|
|
|
|
4,456
|
|
Bank charges
|
|
|
1,068
|
|
|
|
990
|
|
Audit-related expense
|
|
|
20,600
|
|
|
|
71,781
|
|
Allowance for other receivable
|
|
|
30,157
|
|
|
|
-
|
|
Other expenses
|
|
|
81,744
|
|
|
|
61,504
|
|
Total
|
|
$
|
392,205
|
|
|
$
|
259,806
|
|
Common Stock
The Company is authorized to issue up
to 100,000,000 shares of Common Stock.
On
December 1, 2017, the Company has entered into a securities purchase agreement with Mr. Yang Jie, a significant shareholder and
Vice President of Finance of the Company and Mr. Long Yi, the Chief Financial Officer of the Company to sell 150,000 and 50,000
common shares, respectively, at a per share price of US$3.5, in the total amount of US$525,000 and US$175,000, respectively. On
February 20, 2018, the Company issued 50,000 shares of common stocks and warrants to purchase 20,000 shares of common stocks at
$4.20 to Mr. Long Yi. As of March 31, 2018, the 150,000 shares of common stocks and related warrants unissued to Mr. Yang Jie.
On January 19, 2018, the Company issued
712,500 shares common stocks as the share settlement of 950,000 shares as disclosed in Note 13.
As of March 31, 2018, there were 20,013,415 shares of Common
Stock issued and outstanding.
Warrants
As of December 31, 2017, the Company had
outstanding warrants to purchase 193,370 shares.
On
February 20, 2018, the Company issued warrants to purchase 20,000 shares to Mr. Long Yi, as part of the private placements mentioned
above. The warrant has an exercise price of $4.2 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 $11,073, estimated by using the Black-Scholes valuation model
.
As of March 31, 2018, the Company had
outstanding warrants to purchase 213,370 shares.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2018 AND 2017
|
16.
|
LOSS PER COMMON SHARE
|
The following table sets forth the computation
of basic and diluted earnings per common share for the three months ended March 31, 2018 and 2017, respectively:
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net loss attributable to the common shareholders
|
|
$
|
(385,898
|
)
|
|
$
|
(1,228,077
|
)
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
|
19,834,665
|
|
|
|
16,697,532
|
|
Effect of dilutive securities
|
|
|
-
|
|
|
|
-
|
|
Diluted weighted-average common shares outstanding
|
|
|
19,834,665
|
|
|
|
16,697,532
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.019
|
)
|
|
$
|
(0.074
|
)
|
Diluted
|
|
$
|
(0.019
|
)
|
|
$
|
(0.074
|
)
|
Basic loss per share is computed by dividing
the net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share is the same
as basic loss per share due to the lack of dilutive items in the Company for the three months ended March 31, 2018 and 2017. The
number of warrants is omitted excluded from the computation as the anti-dilutive effect.
Effective January 1, 2008, the New Taxation
Law of PRC stipulates that domestic enterprises and foreign invested enterprises (the “FIEs”) are subject to an uniform
tax rate of 25%. A preferential income tax rate of 12.5% is provided to micro-credit companies that are located in Jiangsu Province.
Thus, the Company’s loan business segment located in Jiangsu Province benefits from the preferential enterprise income tax
rate of 12.5%. Under the PRC tax law, companies are required to make quarterly estimate payments based on 25% tax rate; companies
that received preferential tax rates are also required to use a 25% tax rate for their installment tax payments. The overpayment,
however, will not be refunded and can only be used to offset future tax liabilities.
The Company evaluates the level of authority
for each uncertain tax position (including the potential application of interest and penalties) based on the technical merits,
and measures the unrecognized benefits associated with the tax positions. For the three months ended March 31, 2018 and 2017,
the Company had no unrecognized tax benefits. As of March 31, 2018, the Company has carry forward net operating losses of US$78,570,841,
which will begin to expire as of December 31, 2019. The Company recognized deferred tax assets of US$14,837,696 as of March 31,
2018. However, due to uncertainties surrounding future utilization, the Company estimates there will not be sufficient future
income to realize the deferred tax assets. The Company maintains a full valuation allowance on its net deferred tax assets as
of March 31, 2018. The Company increased its valuation allowance on deferred tax assets by $ 598,051 from $14,239,645 as of December
31, 2017 to $14,837,696 as of March 31, 2018.
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.
The principal components of the Company’s
deferred tax assets and liabilities were as follows:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for guarantees
|
|
$
|
2,639,101
|
|
|
$
|
2,543,166
|
|
Net operating loss carryforwards
|
|
|
12,198,595
|
|
|
|
11,696,479
|
|
Valuation allowance
|
|
|
(14,837,696
|
)
|
|
|
(14,239,645
|
)
|
Deferred tax assets, net
|
|
|
-
|
|
|
|
-
|
|
The Company does not have any current
and deferred tax expenses for the three months ended March 31, 2018 and 2017.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2018 AND 2017
|
17.
|
INCOME TAXES (CONTINUED)
|
The Company accounts for uncertainty in
income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the
tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that
the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step
is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. Interest and
penalties related to uncertain tax positions are recognized and recorded as necessary in the provision for income taxes. The Company
is subject to income taxes in the PRC. According to the PRC Tax Administration and Collection Law, the statute of limitations
is three years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The
statute of limitations is extended to five years under special circumstances, where the underpayment of taxes is more than RMB
100,000. In the case of transfer pricing issues, the statute of limitation is ten years. There is no statute of limitation in
the case of tax evasion. There were no uncertain tax positions as of March 31, 2018 and December 31, 2017 and the Company does
not believe that its unrecognized tax benefits will change over the next twelve months.
|
18.
|
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
|
Wujiang Xiaocun Shengda Founding Investment
Co., Ltd.
|
|
Controlled by shareholders of Wujiang Luxiang
|
Yang Jie
|
|
A significant shareholder and Vice President
of Finance of the Company
|
Long Yi
|
|
Chief Finance Officer of the Company
|
Huichun Qin
|
|
Non-controlling shareholder and former CEO and
chairman of board of directors
|
|
2)
|
Related party
transactions
|
On
December 1, 2017, the Company has entered into a securities purchase agreement with Mr. Yang Jie and Mr. Long Yi to sell 150,000
and 50,000 shares of common stocks, respectively, at a per share price of US$3.5, in the total amount of US$525,000 and US$175,000,
respectively. The total amount was received as of March 31, 2018. As of March 31, 2018, the Company has issued 50,000 shares of
common stocks to Mr. Long Yi. The shares of common stocks have not been issued to Mr. Yang Jie as of the financial statement issuance
date.
3)
|
Related party balances
|
Amount due from related parties were as follows:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
|
(unaudited)
|
|
|
|
|
Huichun Qin
|
|
$
|
1,114,525
|
|
|
$
|
1,075,864
|
|
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2018 AND 2017
|
18.
|
RELATED PARTY TRANSACTIONS AND BALANCES (CONTINUED)
|
3)
|
Related party balances (continued)
|
Huichun Qin transferred $1,098,197 (equivalent
of RMB 7 million) to his personal account without proper authorization on July 2, 2014. As of March 31, 2018, Huichun Qin has
not repaid the balance. The amount was recorded as a deduction of the Company’s equity as of March 31, 2018 and December
31, 2017, respectively. The management is making efforts to collect the outstanding balance from Huichun Qin’s
family and was in the opinion that the collection is probable.
Amount due to related parties were
as follows:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
|
(unaudited)
|
|
|
|
|
Wujiang Xiaocun Shengda Founding Investment Co., Ltd.
|
|
$
|
382,123
|
|
|
$
|
398,073
|
|
Yang Jie
|
|
|
524,974
|
|
|
|
525,000
|
|
Long Yi
|
|
|
-
|
|
|
|
174,974
|
|
The balance due to Wujiang Xiaocun Shengda
Founding Investment Co., Ltd. represented operating expenses paid by this related party on behalf of the Company. The balance
was payable on demand and free of interest.
The
balances due to Mr. Yang Jie and Mr. Long Yi mainly represented the amount advanced from the management for purchase of shares
and warrants in the private placements closed in 2018. As of March 31, 2018, the Company has issued 50,000 shares of common stocks
and 20,000 shares of warrants to Mr. Long Yi. The shares of common stocks and warrants have not been issued to Mr. Yang Jie as
of the financial statement issuance date.
19.
|
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. We leased certain office space in New York, NY where we paid a monthly
rent of US$3,600 during 2018. The following table sets forth the Company’s contractual obligations as of March 31, 2018
in future periods:
|
|
Rental payments
|
|
|
|
|
|
Year ending March 31, 2019
|
|
$
|
58,916
|
|
Year ending March 31, 2020
|
|
|
20,783
|
|
Total
|
|
$
|
79,699
|
|
The guarantees will terminate upon payment
and/or cancellation of the obligation; however, payments by the Company would be triggered by failure of the guaranteed party
to fulfill its obligation covered by the guarantee. Generally, the average guarantee expiration terms ranged within 12 to 24 months
and the average percentage of the guarantee amount as security deposit is 10% ~ 20%. As of March 31, 2018 and December 31, 2017,
the loan amount guaranteed by the Company was US$12,044,836 and US$11,627,013, respectively, for its financial guarantee service
customers.
The Company is involved in various legal
actions arising from providing financial guarantee services to defaulted guarantees. As of March 31, 2018, eleven cases against
the Company was finally adjudicated by the Court, in which the Company was jointly liable, together with the defaulted customers
and other guarantees, to repayment the principal, interest and penalties of $6.91 million. Additionally, three cases against the
Company has not been adjudicated by the Court, in which the Company was jointly liable, together with the defaulted customers
and other guarantees, to repayment the principal, interest and penalties of $2.97 million.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2018 AND 2017
19.
|
COMMITMENTS AND CONTINGENCIES (CONTINUED)
|
The
Company is involved in various legal actions arising in the ordinary course of its business to collect delinquent balances from
borrowers and guarantees. As of March 31, 2018, 4 cases with an aggregated claim of US$2.3 million have not been finally adjudicated
by the Court
. At this stage of the proceedings, the Company
is not able to estimate the probability of success or loss.
a)
|
2014 Class Action
litigation
|
On August 6, 2014, a purported shareholder
Andrew Dennison filed a putative class action complaint in the United States District Court District of New Jersey (the “N.J.
district court”) relating to a July 25, 2014 press release about the Company’s progress in recovering a significant
portion of the $5.4 million the Company paid in the first quarter of 2014 on behalf of loan guarantee customers. The action, Andrew
Dennison v. China Commercial Credit, Inc., et al., Case No. 2:2014-cv-04956, alleges that the Company and its current and former
officers and directors Huichun Qin, Long Yi, Jianming Yin, Jinggen Ling, Xiangdong Xiao, and John F. Levy violated the federal
securities laws by misrepresenting in prior public filings certain material facts about the risks associated with its loan guarantee
business. On October 2, 2014, purported shareholders Zhang Yun and Sanjiv Mehrotra (the “Yun Group”) asserted substantially
similar claims against the same defendants in a putative class action captioned Zhang Yun v. China Commercial Credit, Inc.,
et al., Case No. 2:14-cv-06136 (D. N.J.). Neither complaint states the amount of damages sought.
On or about October 6, 2014, Dennison,
the Yun Group and another purported shareholder, Jason Stark, filed motions to consolidate the cases, be appointed as lead plaintiff
and to have their respective counsel appointed as lead counsel. On October 31, 2014, the N.J. district court entered an order
consolidating the cases under the caption “
In re China Commercial Credit Inc. Securities Litigation
” and appointing
the Yun Group as lead plaintiff (“Class Plaintiff”) and the Yun Group’s counsel as lead counsel.
On November 18, 2014, the Yun Group and
the Company, which at that point was the only defendant served, entered into a stipulation to transfer of the case to the Southern
District of New York. On December 18, 2014, Mr. Levy, who had by then been served, joined in the stipulation. On December 29,
2014, the N.J. district court entered an order transferring the action. The transfer was effected on January 22, 2015, and assigned
docket number 1:15-cv-00557-ALC (S.D.N.Y.). (the “Securities Class Action”)
Under the schedule stipulated by the parties,
the Yun Group was to file an amended complaint within 60 days of the date that the transfer was effected, and the defendants’
date to answer or move was within 60 days of that filing. On April 7, 2015, the Class Plaintiff filed a Second Amended Class Action
Complaint (the “CAC”). The CAC also asserts securities law claims against defendants Axiom Capital Management, Inc.,
Burnham Securities Inc. and ViewTrade Securities, Inc. (collectively, the “Underwriter Defendants”). The CAC alleges
that the Company engaged in a fraudulent scheme by engaging in undisclosed and improper lending practices and made misleading
representations regarding its underwriting policies, the loan portfolio quality, the loan loss allowance, compliance with U.S.
GAAP and its internal control systems.
In accordance with the Court’s procedures,
the Company and Mr. Levy and the Underwriter Defendants requested a Pre-Motion Conference in anticipation of filing a motion to
dismiss the CAC, which was held on June 25, 2015. At the conference, the Court adjourned the date to answer or move in order to
provide the Class Plaintiff with time to serve certain overseas defendants. After the conference, the Class Plaintiff voluntarily
dismissed Jianming Yin, Jinggen Ling and Xiangdong Xiao from the action, and Long Yi agreed to waive service, which left Huichun
Qin as the sole remaining defendant to serve.
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. The Stipulation
also provides, among other things, a settlement payment by the Company of $245,000 in cash and the issuance of 950,000 shares
of its common stock (the “Settlement Shares”) to the plaintiff’s counsel and class members. The terms of the
Stipulation were subject to approval by the Court following notice to all class members. The issuance of the Settlement Shares
are exempt from registration pursuant to Section 3(a)(10) of the Securities Act of 1933, as amended. A fairness hearing was held
on May 30, 2017, and the Court approved the settlement. On December 22, 2017, the Court entered a distribution order approving
the distribution of the Settlement Stock to the class plaintiffs. The $245,000 cash portion of the settlement has been paid in
full. The 712,500 Class Settlement Shares were issued on or about January 19, 2018. The settlement has been finalized, and
that thereafter there are no remaining claims outstanding as against the Company with respect to this litigation. On April 10,
2018, the 237,500 of plaintiff attorney fee shares were issued to plaintiff’s attorney’s broker account.
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 (“Advance
Funding Agreement”), under which the CCCR agreed to deposit shares into escrow to fund the advancement obligation, with
the initial deposit to be 637,592 shares which was valued at Two Hundred Thousand Dollars ($200,000), based upon 80% of the 30
day volume weighted average trading price for each of the 30 consecutive trading days prior to the date of the agreement. As of
the completion of the settlement, an aggregate of 527,078 shares are unused in the escrow account and the Underwriter Defendants
acknowledged there is no additional payment of fees and expenses owed to the Underwriter Defendants and the Advance Funding Agreement
shall be terminated. The Company has instructed the transfer agent to cancel the 527,078 shares
and
return them to authorized shares. As of the date of this Quarterly Report, the Company is working with its counsel and the escrow
agent to complete such cancelation.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2018 AND 2017
19.
|
COMMITMENTS AND
CONTINGENCIES (CONTINUED)
|
3)
|
Contingencies
(continued)
|
b)
|
2015 Derivative
action
|
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 are the only defendants
who 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 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. The Court
ordered CCCR to answer or otherwise move with respect to this action on or before November 13, 2017. Thereafter, CCCR and Mr.
Levy submitted a pre-motion letter to the Court requesting permission to move to dismiss the derivative complaint; submission
of this letter stayed the proceedings pending the Court’s review thereof. The Court held a hearing on this pre-motion letter
on January 22, 2018, denying permission to file a motion to dismiss the complaint without prejudice and setting forth a schedule
under which Kodali must serve the remaining defendants in the derivative litigation. The parties are due to file a joint status
report on May 21, 2018. On behalf of the Company and Mr. Levy, this firm is engaged in active settlement discussions with counsel
for Kodali, but the parties have not entered into a settlement agreement.
The Company and its directors were party
to a lawsuit filed on September 1, 2017, by certain a stockholder of the Company on behalf of himself and similarly situated stockholders
of the Company CCC in the Chancery Court of the State of Delaware (the “Delaware Chancery Court”) (Case No. 2017-0633-JTL)
(the “Action”), Plaintiff stockholders 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 the 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).
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 or about November 6, 2017, the Company filed Amendment No. 2 to its Preliminary
Proxy Statement with the Commission in further response to the Comment Letter. On December 29, 2017, the Company received notice
from Sorghum notifying the Company that the Exchange Agreement is terminated. The Company advised Plaintiff of the termination
of the Exchange Agreement on January 9, 2018.
d)
|
2017 Arbitration
with Sorghum
|
On December 21, 2017, the Company delivered
notice (“Notice”) to Sorghum notifying Sorghum that certain recent actions of Sorghum constituted breaches of Sorghum’s
covenants under the Exchange Agreement. Specifically, we believe that Sorghum is in breach of Section 6.9 (a) and Section 6.11
(b) of the Exchange Agreement which required Sorghum to use commercially reasonable efforts and to cooperate fully with the other
parties to consummate the transactions contemplated by the Exchange Agreement and to make its directors, officers and employees
available in connection with responding in a timely manner to SEC comments. According to the terms of the Exchange Agreement,
the Company is entitled to terminate the Exchange Agreement if the breach is not cured within twenty (20) days after the Notice
is provided to Sorghum.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2018 AND 2017
|
19.
|
COMMITMENTS AND
CONTINGENCIES (CONTINUED)
|
|
3)
|
Contingencies
(continued)
|
d)
|
2017 Arbitration
with Sorghum (continued)
|
On January 25, 2018, the Company filed
an arbitration demand (“Arbitration Demand”) with the American Arbitration Association (“AAA”) against
Sorghum in connection with Sorghum’s breach of the Exchange Agreement. On December 21, 2017, prior to filing the Arbitration
Demand, the Company provided Sorghum with formal notice of its breaches to the Exchange Agreement. The AAA has forwarded the Company’s
Arbitration Demand to Sorghum, and Sorghum’s response to the Arbitration Demand was due on or before February 14, 2018.
Sorghum did not provide a written response to the Company’s Arbitration Demand by the deadline. However, in accordance with
the Commercial Arbitration Rules of the AAA (“Rules”), Sorghum’s failure to respond is deemed as a general denial
of the Company’s claims. On March 14, 2018, the AAA initially appointed a single arbitrator to the matter subject to the
parties’ approval. On March 28, 2018, the AAA conducted an initial telephonic conference with Arbitrator Barbara Mentz,
but neither Sorghum nor its counsel appeared for the call. On March 28, 2018, after the Company’s counsel appeared for the
initial telephonic conference, Sorghum and its counsel contacted the AAA claiming that it was not in receipt of the AAA’s
correspondence although the AAA forwarded its correspondence to Sorghum’s Chief Executive Officer’s active email.
In response, the AAA scheduled another telephonic conference for April 9, 2018. All parties appeared at the April 9, 2018 conference,
and approved Arbitrator Mentz’s appointment. On April 11, 2018, pursuant to the Rules, Sorghum filed its answer and counterclaim.
The Company filed a written denial to Sorghum’s counterclaim on April 26, 2018. On May 2, 2018, the parties jointly requested
an extension of time to file their respective proposals for resolution with the AAA, and Arbitrator Mentz granted the extension.
In accordance with Arbitrator Mentz’s Order, the parties’ proposals are due May 31, 2018. The Company intends to prosecute
its claims and defend against Sorghum’s counterclaim vigorously.
e)
|
Claim Against Former CEO
|
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.
We
have been advised that the Financial Industry Regulatory Authority (“FINRA”) (formerly, the NASD) is
conducting
a review of trading in the Company surrounding the December 27, 2017 Form 8-K filing report, that on December 21, 2017, the company
notified Sorghum Investment Holdings, Ltd. that certain recent actions of Sorghum constitute a breach of Sorghum’s covenants
under the Share Exchange Agreement dated August 9, 2017 (the “corporate disclosure”). We have been responding to FINRA’s
request for information and intend to continue to cooperate in the investigation. Although we cannot, at this time, assess either
the duration or the likely outcome or consequences of this investigation, FINRA has the authority to impose sanctions on our Company
that could adversely affect its effectiveness in that capacity.
During the course of preparing the 2017
consolidated financial statements, certain errors to the previously issued unaudited condensed consolidated financial statements
appearing in the Quarterly Report on Form 10-Q for the three months ended March 31, 2017 filed with SEC on May 18, 2017, were
discovered by management. The errors related to the accounting of the settlement shares agreed upon per the Stipulation (See Note
13). These settlement shares have not been issued until January 19, 2018 and April 10, 2018, respectively. These settlement shares
should be recorded in accordance ASC 450-20,
Loss Contingencies
, and as a result the share settlement should be also accounted
for as a liability measured at market value of share price rather than accounting for contracts to be settled with the Company’s
own equity. After the errors have been quantified, the previously-issued financial statements have been evaluated to determine
whether they are materially misstated in accordance with guidance provided in SAB Topic 99 and the Company has concluded the previously-issued
2016 consolidated financial statements are not materially misstated and the errors will be corrected prospectively. As a
result, the Company made the corrections to the condensed consolidated statements of operations and comprehensive loss for the
three months ended March 31, 2017 and condensed consolidated statements of cash flows for the three months ended March 31, 2017
contained in this Form 10-Q.
The effects of the restatement on the
Company’s condensed consolidated statements of operations and comprehensive loss and earnings per share for the three months
ended March 31, 2017 are as follows:
|
|
For The Three Months Ended
March 31, 2017
|
|
|
|
As Previously Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value of other noncurrent liabilities
|
|
|
-
|
|
|
|
57,000
|
|
|
|
57,000
|
|
Total non-interest expense
|
|
|
(655,215
|
)
|
|
|
57,000
|
|
|
|
(598,215
|
)
|
Loss Before Income Taxes
|
|
|
(1,285,077
|
)
|
|
|
57,000
|
|
|
|
(1,228,077
|
)
|
Net Loss
|
|
|
(1,285,077
|
)
|
|
|
57,000
|
|
|
|
(1,228,077
|
)
|
Loss per Share- Basic and Diluted
|
|
|
(0.077
|
)
|
|
|
0.003
|
|
|
|
(0.074
|
)
|
Net Loss
|
|
|
(1,285,077
|
)
|
|
|
57,000
|
|
|
|
(1,228,077
|
)
|
Comprehensive loss
|
|
$
|
(1,263,462
|
)
|
|
$
|
57,000
|
|
|
$
|
(1,206,462
|
)
|
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2018 AND 2017
20.
|
CORRECTION OF
ERROR (CONTINUED)
|
The effects of the restatement on the
Company’s condensed consolidated statements of cash flows for the three months ended March 31, 2017 are as follows:
|
|
For The Three Months Ended
March 31, 2017
|
|
|
|
As Previously Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Net loss
|
|
$
|
(1,285,077
|
)
|
|
$
|
57,000
|
|
|
$
|
(1,228,077
|
)
|
Changes in fair value of other noncurrent liabilities
|
|
|
-
|
|
|
|
(57,000
|
)
|
|
|
(57,000
|
)
|
21.
|
RECEIPT OF NASDAQ DEFICIENCY NOTICE
|
On February 28, 2018, the company received
a letter (the ” Notification Letter “) from The NASDAQ Stock Market LLC (” Nasdaq “) notifying the Company
that it is not in compliance with the minimum Market Value of Listed Securities (MVLS) requirement set forth in Nasdaq Listing
Rule 5550(b)(2) for continued listing on the Nasdaq Capital Market. Nasdaq Listing Rule 5550(b)(2) requires listed securities
to maintain a minimum MVLS of $35 million. Nasdaq Listing Rule 5810(c)(3)(C) provides that a failure to meet a minimum MVLS exists
if the deficiency continues for a period of 30 consecutive business days. Based upon Nasdaq’s review of the Company’s
MVLS for the last 30 consecutive business days, the Company no longer meets the minimum MVLS requirement. The Nasdaq staff noted
the Company also does not meet the requirements under Listing Rules 5550(b)(1) and 5550(b)(3). The Notification Letter does not
impact the Company’s listing on the Nasdaq Capital Market at this time. In accordance with Nasdaq Listing Rule 5810(c)(3)(C),
the Company has been provided 180 calendar days, or until August 27, 2018, to regain compliance with Nasdaq Listing Rule 5550(b)(2).
The Company has been evaluating options available to regain compliance and to timely submit a plan to regain compliance. There
can be no assurance that the Company’s plan will be accepted or that, if it is, the Company will be able to regain compliance
with the applicable Nasdaq listing requirements.
During
the period from April 1, 2018 to the date of this report, the Company assessed the charged-off loan and guarantee balances recorded
as of March 31, 2018 and was of the opinion that charged off loan balance of US$22,605,017 and charged off guarantee balance of
US$10,815,328 were uncollectible
. In addition, the Company
assessed the remaining balances of loan receivable and financial guarantee and was of the opinion that it was not necessary to
charge-off these balances.
2)
|
Issuance of common stocks
|
On April 10, 2018, the Company issued
the remaining 237,500 shares of common stocks as the share settlement of 950,000 shares as disclosed in Note 13 to Levi &
Korsinsky. Besides the Company sold 649,350 shares of newly issued common stocks to certain individual investors in exchange
of $500,000.
3)
|
Entry into
Material Definitive Agreements
|
On April 28, 2018, the Company entered
into certain securities purchase agreements (the “Initial SPAs”) with certain “non-U.S. Persons” as defined
in Regulation S of the Securities Act of 1933, as amended pursuant to which the Company agreed to sell 1,336,314 shares of its
common stock, par value $0.001 per share, at a per share purchase price of $0.78. The net proceeds to the Company from the Initial
SPAs Offering will be approximately $1,042,324.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2018 AND 2017
|
22.
|
SUBSEQUENT EVENT (CONTINUED)
|
|
4)
|
Execution
of Agreements by and among WFOE, Beijing Youjiao and its shareholders
|
On May 10, 2018, the Company through the
WFOE, entered into a series of Agreements with Beijing Youjiao Technology Limited (“Beijing Youjiao”) and Aizhen Li,
the sole shareholder of Beijing Youjiao.
5)
|
Establishment of Beijing WFOE and Execution Agreements by and among Beijing WFOE, Beijing Kunlun and its shareholders
|
On April 16, 2018, HCHS set up HC High
Summit Limited (“HCHS HK”), a wholly owned subsidiary, in Hong Kong. On April 17, 2018, the Company, through its subsidiary,
established Tianxing Haoche Technology (Beijing) Co. Ltd. (“Beijing WFOE”). On May 17, 2018, Beijing WFOE entered
into a series of agreements (“Kunlun VIE Agreements”) with Beijing Tianxing Kunlun Technology Co. Ltd. (“Kunlun”)
and Shun Li and Jialin Cui, the shareholders of Beijing Kunlun.