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 June 30, 2017, PFL had two finance lease transactions.
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$76,
249,608 as of June 30,
2017. In addition, the Company had a negative net asset of US$480,945 as of June 30, 2017. As of June 30, 2017, the Company
had cash and cash equivalents of US$1,906,585, 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 six months
ended June 30, 2017, the Company incurred operating loss of US$6,
014,952.
Affected by the reduction of lending business and guarantee business and increased loss loans, the management was in the opinion
that recurring operating losses with be made within one year from the issuance of the filing.
The
Company continues to use its best effort to improve collection of loan receivable and interest receivable. Management engaged
two PRC law firms to represent the Company in the legal proceedings against the borrowers and their counter guarantors.
|
3)
|
Negative operating
cash flow
|
During
the six months ended June 30, 2017, the Company incurred negative operating cash flow of US$678,054. 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.
The
Company is actively seeking other strategic investors with experience in lending business. If necessary, the shareholders of Wujiang
Luxiang will contribute more capital into Wujiang Luxiang.
While
management believes that the measures in the liquidity plan will be adequate to satisfy its liquidity and cash flow requirements
for the twelve months after the financial statements are available to be issued, there is no assurance that the liquidity plan
will be successfully implemented. Failure to successfully implement the liquidity plan will have a material adverse effect on
the Company’s business, results of operations and financial position, and may materially adversely affect its ability to
continue as a going concern.
|
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 June 30, 2017 and for the three and six months ended June 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 June 30, 2017, its unaudited condensed results of operations
for the three and six months ended June 30, 2017 and 2016, and its unaudited condensed cash flows for the six and three months
ended June 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$2,604,172 as of June 30, 2017 and December 31, 2016, respectively.
(c)
|
Foreign
currency translation
|
The
reporting currency of the Company is United States Dollars (“US$”), 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.
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Balance sheet items, except for equity accounts
|
|
|
6.7774
|
|
|
|
6.9448
|
|
|
|
For the six months ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Items in the statements of operations and comprehensive loss, and statements of cash flows
|
|
|
6.8752
|
|
|
|
6.5364
|
|
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)
(d)
|
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:
|
|
June 30,
2017
(Unaudited)
|
|
|
December 31,
2016
|
|
Guarantee
|
|
$
|
11,162,098
|
|
|
$
|
10,893,089
|
|
A
provision for possible loss to be absorbed by the Company for the financial guarantee it provides is recorded as an accrued liability
when the guarantees are made and recorded as “Accrual for financial guarantee services” on the condensed consolidated
balance sheets. This liability represents probable losses and is increased or decreased by accruing a “Reversal of provision/
(Provision) for financial guarantee services” against the income of commissions and fees on guarantee services.
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 52% and 55% of contract amount as of June 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:
|
|
June 30,
2017
(Unaudited)
|
|
|
December 31,
2016
|
|
Allowance for immature financial guarantee services
|
|
$
|
5,858,821
|
|
|
$
|
6,005,608
|
|
|
|
|
|
|
|
|
|
|
Allowance for repayment on behalf of guarantee service customers losses
|
|
|
11,806,866
|
|
|
|
11,543,868
|
|
Allowance for repayment on behalf of a related party losses
|
|
|
100,421
|
|
|
|
98,000
|
|
Total allowance for repayment on behalf of guarantee customers losses
|
|
$
|
11,907,287
|
|
|
$
|
11,641,868
|
|
The
Company reversed a provision of US$305,460 and made a provision of US$426,334 for the three months ended June 30, 2017 and 2016,
respectively, and reversed a provision of US$312,667 and US$985,160 for the six months ended June 30, 2017 and 2016, respectively.
As the Company collected from guarantee customers for payments on behalf of in the amount of US$21,818 and US$1,411,494,
for the six and three month ended June 30, 2017 and 2016, respectively. Among the collection, US$21,818 and US$1,411,494 were
accrued of 100% allowance as of pervious year end.
As
of June 30, 2017 and December 31, 2016, the management charged off specific provision for two and two customers in the amount
of US$146,497 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)
(e)
|
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.
(j)
|
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 CONSOLIDATED FINANCIAL STATEMENTS
4
.
|
VARIABLE
INTEREST ENTITIES AND OTHER CONSOLIDATION MATTERS
|
As
of June 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 June 30, 2017 and December 31, 2016 and for the three and six months ended June 30, 2017 and 2016:
|
|
June 30,
2017
(Unaudited)
|
|
|
December 31,
2016
|
|
Total assets
|
|
$
|
4,164,532
|
|
|
$
|
7,968,077
|
|
Total liabilities
|
|
$
|
6,879,340
|
|
|
$
|
8,012,892
|
|
|
|
For the three months ended
June 30,
|
|
|
For the six months ended
June 30,
|
|
|
|
2017
(Unaudited)
|
|
|
2016
(Unaudited)
|
|
|
2017
(Unaudited)
|
|
|
2016
(Unaudited)
|
|
Revenue
|
|
$
|
50,027
|
|
|
$
|
247,588
|
|
|
$
|
119,172
|
|
|
$
|
478,662
|
|
Net (loss)/income
|
|
$
|
(1,924,394
|
)
|
|
$
|
(313,037
|
)
|
|
$
|
(2,630,924
|
)
|
|
$
|
907,333
|
|
Credit
risk is one of the most significant risks for the Company’s business. Credit risk exposures arise principally in lending
activities, finance lease and financial guarantee activities which is an off-balance sheet financial instrument.
Credit
risk is controlled by the application of credit approvals, limits and monitoring procedures. The Company manages credit risk through
in-house research and analysis of the Chinese economy and the underlying obligors and transaction structures. To minimize credit
risk, the Company requires collateral in the form of rights to cash, securities or property and equipment.
The
Company identifies credit risk collectively based on industry, geography and customer type. This information is monitored regularly
by management.
1.1
Lending activities
In
measuring the credit risk of lending loans to corporate customers, the Company mainly reflects the “probability of default”
by the customer on its contractual obligations and considers the current financial position of the customer and the exposures
to the customer and its likely future development. For individual customers, the Company uses standard approval procedures to
manage credit risk for personal loans.
In
addition, the Company calculates the provision amount as below:
|
1.
|
General Reserve - is based on total loan receivable
balance and to be used to cover unidentified probable loan loss. According to management assessment, the General Reserve is
required to be no less than 1% of total loan receivable balance.
|
|
2.
|
Special Reserve - is fund set aside covering
losses due to risks related to a particular country, region, industry, company or type of loans. The reserve rate could be
decided based on management estimate of loan collectability. The Loan portfolio did not include any loans outside of the PRC.
|
|
3.
|
Specific Reserve – is based on a loan
by loan basis covering losses due to risks related to the ability and intension of repayment of each customer. The reserve
rate was individually assessed based on management estimate of loan collectability.
|
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.2
Guarantee activities
The
off-balance sheet commitments arising from guarantee activities carry similar credit risk to loans and the Company takes a similar
approach on risk management.
Off-balance
sheet commitments with credit exposures are also assessed and categorized with reference to the Guideline and include additional
amounts on a specific basis.
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 June 30, 2017 and December 31, 2016, the Company held cash of US$1,906,585 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 June 30, 2017 and December 31, 2016.
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6
.
|
LOANS
RECEIVABLE, NET
|
The
interest rates on loan issued ranged between 9.6%~ 19.44% and 9.6%~ 19.44% % for the six months ended June 30, 2017 and 2016,
respectively.
6.1
Loans receivable consist of the following:
|
|
June 30,
2017
(Unaudited)
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Business loans
|
|
$
|
38,164,644
|
|
|
$
|
37,786,657
|
|
Personal loans
|
|
|
21,213,002
|
|
|
|
20,736,324
|
|
Total Loans receivable
|
|
|
59,377,646
|
|
|
|
58,522,981
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
Collectively assessed
|
|
|
(19,476
|
)
|
|
|
(50,481,240
|
)
|
Individually assessed
|
|
|
(55,880,482
|
)
|
|
|
(1,226,822
|
)
|
Allowance for loan losses
|
|
|
(55,899,958
|
)
|
|
|
(51,708,062
|
)
|
Loans receivable, net
|
|
$
|
3,477,688
|
|
|
$
|
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 June 30, 2017 and December
31, 2016, the Company had 69 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 June 30, 2017 and 2016, a provision of US$2,090,602 was charged, and a reversal of provision of US$9,115
were charged to the condensed consolidated statements of operation, respectively. For the six months ended June 30, 2017 and 2016,
a provision of US$2,873,484 and US$93,517 were charged to the condensed consolidated statements of operation, respectively. No
write-offs against allowances have occurred for the three and six months ended June 30, 2017 and 2016, respectively.
The
following table presents nonaccrual loans with aging over 90 days by classes of loan portfolio as of June 30, 2017 and December
31, 2016, respectively:
|
|
June 30,
2017
(Unaudited)
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Business loans
|
|
$
|
36,216,994
|
|
|
$
|
35,885,947
|
|
Personal loans
|
|
|
21,213,002
|
|
|
|
20,693,126
|
|
|
|
$
|
57,429,996
|
|
|
$
|
56,579,073
|
|
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6.
|
LOANS RECEIVABLE, NET (CONTINUED)
|
The
following table represents the aging of loans as of June 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
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,230,563
|
|
|
$
|
24,986,431
|
|
|
$
|
36,216,994
|
|
|
$
|
1,947,650
|
|
|
$
|
38,164,644
|
|
Personal
loans
|
|
|
-
|
|
|
|
-
|
|
|
|
6,433,146
|
|
|
|
14,779,856
|
|
|
|
21,213,002
|
|
|
|
-
|
|
|
|
21,213,002
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
17,663,709
|
|
|
$
|
39,766,287
|
|
|
$
|
57,429,996
|
|
|
$
|
1,947,650
|
|
|
$
|
59,377,646
|
|
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 CONSOLIDATED FINANCIAL STATEMENTS
6.2
Analysis of loans by credit quality indicator
The
following table summarizes the Company’s loan portfolio by credit quality indicator as of June 30, 2017 and December 31,
2016, respectively:
6.
|
LOANS RECEIVABLE, NET (CONTINUED)
|
Five Categories
|
|
June 30,
2017
(Unaudited)
|
|
|
%
|
|
|
December 31, 2016
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
1,947,650
|
|
|
|
3.3
|
%
|
|
$
|
1,900,710
|
|
|
|
3.2
|
%
|
Special mention
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Substandard
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Doubtful
|
|
|
2,889,510
|
|
|
|
4.9
|
%
|
|
|
9,866,430
|
|
|
|
16.9
|
%
|
Loss
|
|
|
54,540,486
|
|
|
|
91.8
|
%
|
|
|
46,755,841
|
|
|
|
79.9
|
%
|
Total
|
|
$
|
59,377,646
|
|
|
|
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 June 30, 2017:
|
|
June
30, 2017
(Unaudited)
|
|
|
|
|
|
|
Business
Loans
|
|
|
Personal
Loans
|
|
|
Total
|
|
Guarantee backed loans
|
|
$
|
36,102,025
|
|
|
$
|
20,395,579
|
|
|
$
|
56,497,604
|
|
Collateral backed loans
|
|
|
2,062,619
|
|
|
|
817,423
|
|
|
|
2,880,042
|
|
|
|
$
|
38,164,644
|
|
|
$
|
21,213,002
|
|
|
$
|
59,377,646
|
|
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 June 30,
2017 and December 31, 2016, guaranteed loans make up 95.1% 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 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 June 30, 2017
and 2016:
|
|
Business Loans
(Unaudited)
|
|
|
Personal Loans
(Unaudited)
|
|
|
Total
(Unaudited)
|
|
For the three months ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
32,613,541
|
|
|
$
|
20,279,474
|
|
|
$
|
52,893,015
|
|
Recoveries
|
|
|
(226,552
|
)
|
|
|
(34,908
|
)
|
|
|
(261,460
|
)
|
Provisions
|
|
|
2,350,477
|
|
|
|
-
|
|
|
|
2,350,477
|
|
Foreign exchange loss
|
|
|
578,050
|
|
|
|
339,876
|
|
|
|
917,926
|
|
Ending balance
|
|
|
35,315,516
|
|
|
|
20,584,442
|
|
|
|
55,899,958
|
|
Ending balance: individually evaluated for impairment
|
|
|
35,296,040
|
|
|
|
20,584,442
|
|
|
|
55,880,482
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
19,476
|
|
|
$
|
-
|
|
|
$
|
19,476
|
|
|
|
Business Loans
(Unaudited)
|
|
|
Personal Loans
(Unaudited)
|
|
|
Total
(Unaudited)
|
|
For the three months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
35,499,407
|
|
|
$
|
20,645,414
|
|
|
$
|
56,144,821
|
|
Recoveries
|
|
|
(130,940
|
)
|
|
|
-
|
|
|
|
(130,940
|
)
|
Provisions
|
|
|
-
|
|
|
|
121,908
|
|
|
|
121,908
|
|
Foreign exchange gain
|
|
|
(1,041,740
|
)
|
|
|
(605,846
|
)
|
|
|
(1,647,586
|
)
|
Ending balance
|
|
|
34,326,727
|
|
|
|
20,161,476
|
|
|
|
54,488,203
|
|
Ending balance: individually evaluated for impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
34,326,727
|
|
|
$
|
20,161,476
|
|
|
$
|
54,488,203
|
|
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 six months ended June 30, 2017 and
2016:
|
|
Business Loans
(Unaudited)
|
|
|
Personal Loans
(Unaudited)
|
|
|
Total
(Unaudited)
|
|
For the six months ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
32,356,953
|
|
|
$
|
19,351,109
|
|
|
$
|
51,708,062
|
|
Recoveries
|
|
|
(284,005
|
)
|
|
|
(34,909
|
)
|
|
|
(318,914
|
)
|
Provisions
|
|
|
2,412,783
|
|
|
|
779,614
|
|
|
|
3,192,397
|
|
Foreign exchange loss
|
|
|
829,785
|
|
|
|
488,628
|
|
|
|
1,318,413
|
|
Ending balance
|
|
|
35,315,516
|
|
|
|
20,584,442
|
|
|
|
55,899,958
|
|
Ending balance: individually evaluated for impairment
|
|
|
35,296,040
|
|
|
|
20,584,442
|
|
|
|
55,880,482
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
19,476
|
|
|
$
|
-
|
|
|
$
|
19,476
|
|
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
7.
|
ALLOWANCE
FOR LOAN LOSSES (CONTINUED)
|
|
|
Business Loans
(Unaudited)
|
|
|
Personal Loans
(Unaudited)
|
|
|
Total
(Unaudited)
|
|
For the six months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
35,083,738
|
|
|
$
|
20,511,915
|
|
|
$
|
55,595,653
|
|
Recoveries
|
|
|
(77,666
|
)
|
|
|
-
|
|
|
|
(77,666
|
)
|
Provisions
|
|
|
126,580
|
|
|
|
120,750
|
|
|
|
247,330
|
|
Foreign exchange gain
|
|
|
(805,925
|
)
|
|
|
(471,189
|
)
|
|
|
(1,277,114
|
)
|
Ending balance
|
|
|
34,326,727
|
|
|
|
20,161,476
|
|
|
|
54,488,203
|
|
Ending balance: individually evaluated for impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
34,326,727
|
|
|
$
|
20,161,476
|
|
|
$
|
54,488,203
|
|
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 June 30, 2017:
|
|
Pass
(Unaudited)
|
|
|
Special Mention
(Unaudited)
|
|
|
Substandard
(Unaudited)
|
|
|
Doubtful
(Unaudited)
|
|
|
Loss
(Unaudited)
|
|
|
Total
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business loans
|
|
$
|
1,947,650
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,821,254
|
|
|
$
|
34,395,740
|
|
|
$
|
38,164,644
|
|
Personal loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,068,256
|
|
|
|
20,144,746
|
|
|
|
21,213,002
|
|
|
|
$
|
1,947,650
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,889,510
|
|
|
$
|
54,540,486
|
|
|
$
|
59,377,646
|
|
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 CONSOLIDATED FINANCIAL STATEMENTS
8.
|
GUARANTEE
PAID ON BEHALF OF GUARANTEE CUSTOMERS, NET
|
|
|
June
30,
2017 (Unaudited)
|
|
|
December 31,
2016
|
|
Guarantee
paid on behalf of guarantee service customers
|
|
$
|
11,908,143
|
|
|
$
|
11,642,755
|
|
Allowance
for repayment on behalf of guarantee service customers losses
|
|
|
(11,806,866
|
)
|
|
|
(11,543,868
|
)
|
Guarantee
paid on behalf of guarantee service customers, net
|
|
$
|
101,277
|
|
|
$
|
98,887
|
|
|
|
|
|
|
|
|
|
|
Guarantee
paid on behalf of a related party
|
|
|
200,842
|
|
|
|
196,000
|
|
Allowance
for repayment on behalf of a related party losses
|
|
|
(100,421
|
)
|
|
|
(98,000
|
)
|
Total
|
|
$
|
100,421
|
|
|
$
|
98,000
|
|
As
of June 30, 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.
On
October 13, 2014, PFL entered into another finance lease agreement for the leasing of manufacturing equipment with a total lease
receivable of US$2.88 million. The lease bears an interest rate of 11.11% per annum.
Future
minimum lease receipts under non-cancellable finance lease arrangements are as follows:
|
|
June 30,
2017
(Unaudited)
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
$
|
3,437,897
|
|
|
$
|
3,599,831
|
|
2 years
|
|
|
-
|
|
|
|
-
|
|
3 years
|
|
|
-
|
|
|
|
-
|
|
Total minimum lease receipts
|
|
|
3,437,897
|
|
|
|
3,599,831
|
|
Less: amount representing interest
|
|
|
(294, 098)
|
|
|
|
(287,009
|
)
|
Present value of minimum lease receipts
|
|
$
|
3,143,799
|
|
|
$
|
3,312,822
|
|
Following
is a summary of the components of the Company’s net investment in direct financing leases as of June 30, 2017 and December
31, 2016:
|
|
June
30,
2017
(Unaudited)
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Total
minimum lease payments to be received
|
|
$
|
3,437,
897
|
|
|
$
|
3,599,831
|
|
Less:
Amounts representing estimated executory costs
|
|
|
-
|
|
|
|
-
|
|
Minimum
lease payments receivable
|
|
|
3,437,
897
|
|
|
|
3,599,831
|
|
Less
Allowance for uncollectible
|
|
|
(2,550,143
|
)
|
|
|
(2,441,663
|
)
|
Net
minimum lease payments receivable
|
|
|
887,754
|
|
|
|
1,158,168
|
|
Estimated
residual value of leased property
|
|
|
|
|
|
|
-
|
|
Less:
Unearned income
|
|
|
(294,098
|
)
|
|
|
(287,009
|
)
|
Net
investment in direct financing lease
|
|
$
|
593,656
|
|
|
$
|
871,159
|
|
CHINA COMMERCIAL CREDIT, INC.
NOTES TO THE 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)
|
|
|
June 30,
2017
(Unaudited)
|
|
|
December 31, 2016
|
|
Furniture and fixtures
|
|
|
5
|
|
|
$
|
21,322
|
|
|
$
|
20,808
|
|
Electronic equipment
|
|
|
3
|
|
|
|
134,556
|
|
|
|
131,314
|
|
Leasehold improvement
|
|
|
3
|
|
|
|
163,606
|
|
|
|
159,662
|
|
Less: accumulated depreciation
|
|
|
|
|
|
|
(302,368
|
)
|
|
|
(291,815
|
)
|
Property and equipment, net
|
|
|
|
|
|
$
|
17,116
|
|
|
$
|
19,969
|
|
Depreciation
expense totaled US$1,653 and US$13,003 for the three months ended June 30, 2017 and 2016, respectively. Depreciation expense totaled
US$3,299 and US$32,009 for the six months ended June 30, 2017 and 2016, respectively.
11.
|
OTHER
CURRENT LIABILITIES
|
Other
current liabilities as of June 30, 2017 and December 31, 2016 consisted of:
|
|
June 30,
2017
(Unaudited)
|
|
|
December 31,
2016
|
|
Accrued payroll
|
|
$
|
39,738
|
|
|
$
|
37,575
|
|
Accrued office rental expenses
|
|
|
28,034
|
|
|
|
34,558
|
|
Other tax recoverable
|
|
|
(46,257
|
)
|
|
|
(44,007
|
)
|
Accrued provision for cash settlement against legal proceedings
|
|
|
245,000
|
|
|
|
225,000
|
|
Other payable
|
|
|
23,103
|
|
|
|
20,321
|
|
|
|
$
|
289,618
|
|
|
$
|
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.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
12.
|
OTHER
OPERATING EXPENSE
|
Other
operating expense for the three and six months ended June 30, 2017 and 2016 consisted of:
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
(Unaudited)
|
|
|
2016
(Unaudited)
|
|
|
2017
(Unaudited)
|
|
|
2016
(Unaudited)
|
|
Depreciation and amortization
|
|
$
|
1,653
|
|
|
$
|
14,143
|
|
|
$
|
3,299
|
|
|
$
|
34,287
|
|
Travel expenses
|
|
|
14,973
|
|
|
|
3,343
|
|
|
|
14,984
|
|
|
|
3,487
|
|
Entertainment expenses
|
|
|
2,534
|
|
|
|
5,171
|
|
|
|
4,475
|
|
|
|
11,928
|
|
Legal and consulting expenses
|
|
|
822,134
|
|
|
|
472,258
|
|
|
|
939,610
|
|
|
|
639,512
|
|
Car expenses
|
|
|
4,155
|
|
|
|
7,601
|
|
|
|
8,611
|
|
|
|
17,816
|
|
Bank charges
|
|
|
718
|
|
|
|
763
|
|
|
|
1,708
|
|
|
|
1,716
|
|
Audit-related expense
|
|
|
25,705
|
|
|
|
38,826
|
|
|
|
97,486
|
|
|
|
69,573
|
|
Litigation and settlement cost for the shareholders’ lawsuit
|
|
|
1,838,500
|
|
|
|
690,000
|
|
|
|
1,838,500
|
|
|
|
690,000
|
|
Other expenses
|
|
|
46,134
|
|
|
|
11,458
|
|
|
|
107,639
|
|
|
|
28,617
|
|
Total
|
|
$
|
2,756,506
|
|
|
$
|
1,243,563
|
|
|
$
|
3,016,312
|
|
|
$
|
1,496,935
|
|
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.
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.
As
of June 30, 2017, there were 18,008,429 shares of Common Stock issued and outstanding.
Warrants
As
of June 30, 2017, the outstanding warrants to purchase 1,123,400 shares was expired.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE 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 six months ended June
30, 2017 and 2016, respectively:
|
|
For The Three Months Ended
|
|
|
For The Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
(Unaudited)
|
|
|
2016
(Unaudited)
|
|
|
2017
(Unaudited)
|
|
|
2016
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to the common shareholders
|
|
$
|
(4,729,875
|
)
|
|
$
|
(1,712,147
|
)
|
|
$
|
(6,014,952
|
)
|
|
$
|
(581,671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
|
17,308,319
|
|
|
|
13,774,914
|
|
|
|
17,004,613
|
|
|
|
13,085,059
|
|
Effect of dilutive securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted weighted-average common shares outstanding
|
|
|
17,308,319
|
|
|
|
13,774,914
|
|
|
|
17,004,613
|
|
|
|
13,085,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.273
|
)
|
|
$
|
(0.124
|
)
|
|
$
|
(0.354
|
)
|
|
$
|
(0.044
|
)
|
Diluted
|
|
$
|
(0.273
|
)
|
|
$
|
(0.124
|
)
|
|
$
|
(0.354
|
)
|
|
$
|
(0.044
|
)
|
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 six and three
months ended June 30, 2017 and 2016. The number of warrants is omitted from the computation as the anti-dilutive effect.
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 six
and three months ended June 30, 2017 and 2016, the Company had no unrecognized tax benefits. For the six months ended June 30,
2017, the Company made net tax operating loss from its PRC subsidiaries and its consolidated VIE of US$3,115,716. As of June 30,
2017, the Company has carry-forward tax operating losses from its PRC subsidiaries and its condensed consolidated VIE of US$64,542,597,
which will expire from the year ending December 31, 2019 to 2022. The Company recognized deferred income tax assets of US$11,878,294
as of June 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$11,878,294 as of June 30, 2017. As such, the effective tax rates for the six and three months ended June 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 June 30, 2017 and December 31, 2016, subsidy of US$1,684,503 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 June 30, 2017 and December 31, 2016, the deferred
tax liability amounted to US$101,414 and US$139,947, respectively.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE 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
|
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 June 30, 2017, the balance was collected.
|
3)
|
Related
party balances
|
Amount
due from related parties were as follows:
|
|
June 30,
2017
(Unaudited)
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Suzhou Rongshengda Investment Holding Co., Ltd.
|
|
$
|
-
|
|
|
$
|
469,418
|
|
Chunjia Textile
|
|
|
200,842
|
|
|
|
196,001
|
|
Huichun Qin
|
|
$
|
1,032,844
|
|
|
$
|
1,007,953
|
|
As
of June 30, 2017, the Company provided financial guarantee service for Chunjia Textile to guarantee loans of US$200,842. The Company
accrued provision of US$100,421 on the outstanding balance as of June 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 June 30, 2017, Huichun Qin has not repaid the balance. The amount was recorded as a deduction of the Company’s equity
as of June 30, 2017 and December 31, 2016, respectively.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE 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 June 30, 2017 in future periods:
|
|
Rental payments
(Unaudited)
|
|
|
|
|
|
Year ending June 30, 2018
|
|
|
37,283
|
|
Year ending June 30, 2019
|
|
|
24,942
|
|
Year ending June 30, 2020
|
|
|
12,840
|
|
Total
|
|
$
|
75,065
|
|
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
June 30, 2017 and December 31, 2016, the loan amount guaranteed by the Company was US$11,162,098 and US$10,893,089, respectively,
for its financial guarantee service customers.
CHINA
COMMERCIAL CREDIT, INC.
NOTES
TO THE 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 June 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.
82 of these cases with an aggregated claim of US$39.95 million have been adjudicated by the Court in favor of the Company and
these cases are settled or in the process of enforcement. The remaining 27 cases with an aggregated claim of US$20.18 million
have not been adjudicated by the Court as of June 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”)
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. The Company accrued settlement cost aggregating US$1,863,500 and US$690,000
during the six months ended June 30, 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 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.
During
the period from July 1, 2017 to the date of this report, the Company assessed the charged-off loan and guarantee balances recorded
as of June 30, 2017 and was of the opinion that these balances were uncollectible. In addition, the Company assessed the remaining
balances of loan receivable and financial guarantee and was of the opinion that it was not necessary to charge-off these balances.
On
August 9, 2017, the Company has entered into Certain Share Exchange Agreement (“Exchange Agreement”) with all the
shareholders of Sorghum Investment Holdings Limited (“Sorghum”). CCCR will acquire 100% of the outstanding shares
of Sorghum through issuance of approximately 152.6 million 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 approximate 88% 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
.