UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q/A

(Amendment No. 1)

 

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

 

For the quarterly period ended June 30, 2014

 

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

 

For the transition period from ____________ to ____________

 

Commission file number:  001-36055

 

China Commercial Credit, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware		45-4077653
(State or other jurisdiction of  incorporation or organization)		(I.R.S. Employer  Identification No.)

 

No. 1688, Yunli Road, Tongli

Wujiang

Jiangsu Province

People’s Republic of China

(Address of principal executive offices)

 

(86-0512) 6396-0022

 (Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ☐ No ☒

 

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

 

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

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒

 

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

 

As of February 12, 2015, 12,255,062 shares of the Company’s Common Stock, $0.001 par value per share, were issued and outstanding.

 

 

 

CHINA COMMERCIAL CREDIT, INC.

FORM 10-Q/A

 

INDEX

 

		Page Number
NOTE REGARDING FORWARD-LOOKING STATEMENTS		2
PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 4.	Controls and Procedures	51
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings	52
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	72
Item 3.	Defaults Upon Senior Securities	72
Item 4.	Mine Safety Disclosures	72
Item 5.	Other Information	72
Item 6.	Exhibits	72
SIGNATURES		73

 

 

EXPLANATORY NOTE

 

As disclosed in our Current Report on Form 8-K filed with the Securities and Exchange Commission (the “Commission”) on March 12, 2015, the purpose of this Amendment No. 1 (“Amendment No. 1”) to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014 (the “Original 10-Q”), which we filed with the Commission on February 17, 2015, is to restate our company’s unaudited financial statements and related disclosures (including, without limitation, those contained under Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations) contained in the Original 10-Q to reflect the changes made to the provision for loan losses and provision for financial guarantee services.

 

On March 9, 2015, the Audit Committee of the Board of Directors of China Commercial Credit, Inc. (the “Company”), determined that the interim financial statements at and for the three and six months ended June 30, 2014 included in the Original 10-Q should no longer be relied upon as a result of changes made in such financial statements related to the provision for loan losses and provision on financial guarantee services. We are therefore filing this Amendment No. 1 to correct such errors.

 

As several parts of the Original 10-Q are amended and/or restated by this Amendment No. 1, for convenience, we have repeated the entire text of the Original 10-Q, as amended and/or restated by this Amendment No. 1. Readers should therefore read and rely on this Amendment No. 1 in lieu of the Original 10-Q.

 

This Amendment No. 1 also contains currently dated officer certifications as Exhibits 31.1, 31.2, 32.1 and 32.2.

 

Except as amended and/or restated by this Amendment No. 1, no other changes have been made to the Original 10-Q.  This Amendment No. 1 speaks as of the filing date of the Original 10-Q and does not reflect events that may have occurred subsequent to such filing date.

 

Note Regarding Forward-Looking Statements

 

The information contained in this Quarterly Report on Form 10-Q includes some statements that are not purely historical and that are “forward-looking statements.” Such forward-looking statements include, but are not limited to, statements regarding our company and our management’s expectations, hopes, beliefs, intentions or strategies regarding the future, including our financial condition and results of operations. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “possible,” “potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would” and similar expressions, or the negatives of such terms, may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.

 

The forward-looking statements contained herein are based on current expectations and beliefs concerning future developments and the potential effects on us. Future developments actually affecting us may not be those anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. Examples are statements regarding future developments with respect to the following:

 

	●	Our ability to satisfy the inquiry from NASDAQ in order to have our common stock resume trading;
	●	Our ability to improve internal controls and procedures;

 

	●	Our ability to develop and market our microcredit lending and guarantee business in the future;
	●	Our ability to effectively control the lending risk and collect from default borrowers;
	●	Our ability to make timely adjustment to ensure adequate loan loss provisions;
	●	Inflation and fluctuations in foreign currency exchange rates;
	●	Our on-going ability to obtain all mandatory and voluntary government and other industry certifications, approvals, and/or licenses to conduct our business;
	●	Development of a liquid trading market for our securities; and
	●	The costs we may incur in the future from complying with current and future governmental regulations and the impact of any changes in the regulations on our operations.

 

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assume responsibility for the accuracy and completeness of the forward-looking statements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations.

 

You should review the factors described in the section entitled “Risk Factors” herein and other documents we file from time to time with the SEC. We qualify all of our forward-looking statements by these cautionary statements.

 

 

CHINA COMMERCIAL CREDIT, INC.

CONSOLIDATED BALANCE SHEETS

 

		June 30, 2014 (As Restated-Note 2(v))				December 31, 2013
		(Unaudited)
ASSETS
Cash		$	7,399,767			$	9,405,865
Restricted cash			3,988,679				10,784,960
Notes receivable			194,916				-
Loans receivable, net of allowance for loan losses $15,161,985 and $1,375,948 for June 30, 2014 and December 31, 2013, respectively,			74,586,329				88,827,465
Due from related parties			1,137,010				-
Due from a non-controlling shareholder			8,122				-
Interest receivable			1,455,685				1,124,734
Tax receivable, net			1,741,858				820,526
Property and equipment, net			197,204				254,795
Guarantee paid on behalf  of guarantee service customers			8,841,659				1,082,486
Other assets			1,616,498				702,617
Total Assets		$	101,167,727			$	113,003,448
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Short-term bank loans		$	16,242,995			$	16,360,721
Deposits payable			5,183,843				9,659,362
Unearned income from financial guarantee services			170,657				482,029
Accrual for financial guarantee services			4,213,237				588,740
Other current liabilities			142,441				629,073
Deferred tax liability			342,281				333,617
Total Liabilities			26,295,454				28,053,542
Shareholders' Equity
Series A Preferred Stock (par value $0.001 per share, 1,000,000 shares authorized at June 30, 2014 and December 31, 2013, respectively; nil and nil shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively)		$	-			$	-
Series B Preferred Stock (par value $0.001 per share, 5,000,000 shares authorized at June 30, 2014 and December 31, 2013, respectively; nil and nil shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively)			-				-
Common stock (par value $0.001 per share, 100,000,000 shares authorized; 12,246,812 and 10,430,657 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively)			12,247				10,431
Subscription receivable			(1,062	)			(1,062	)
Additional paid-in capital			59,394,175				52,704,107
Statutory reserve			5,442,150				5,442,150
Retained earnings			4,201,940				20,300,689
Accumulated other comprehensive income			5,822,823				6,493,591
Total Shareholders’ Equity			74,872,273				84,949,906
Total Liabilities and Shareholders’ Equity		$	101,167,727			$	113,003,448

 

* All of the VIEs’ assets can be used to settle obligations of their primary beneficiary. Liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets (Note 1).

 

See notes to the consolidated financial statements

 

CHINA COMMERCIAL CREDIT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

 

		For the Three Months Ended June 30,								For the Six Months Ended June 30,
		2014 (As Restated-Note 2(v)) (Unaudited)				2013 (Unaudited)				2014 (As Restated-Note 2(v)) (Unaudited)				2013 (Unaudited)
Interest income
Interests and fees on loans		$	1,673,559			$	3,275,026			$	4,530,033			$	6,187,104
Interests on deposits with banks			9,093				21,327				51,541				118,494
Total interest and fees income			1,682,652				3,296,353				4,581,574				6,305,598
Interest expense
Interest expense on short-term bank loans			(247,935	)			(316,697	)			(493,125	)			(622,852	)
Net interest income			1,434,717				2,979,656				4,088,449				5,682,746
Provision for loan losses			(14,759,397	)			(352,872	)			(15,347,577	)			(841,088	)
Net interest (loss)/ income after provision for loan losses			(13,324,680	)			2,626,784				(11,259,128	)			4,841,658
Commissions and fees on financial guarantee services			90,050				361,867				388,360				773,076
(Under)/Over provision on financial guarantee services			(3,327,506	)			104,530				(3,637,359	)			148,700
Commission and fees on guarantee services, net			(3,237,456	)			466,397				(3,248,999	)			921,776
Revenue after loan expenses			(16,562,136	)			3,093,181				(14,508,127	)			5,763,434
Non-interest income
Government incentive			81,408				-				81,408				25,775
Other non-interest income			48,369				-				169,329				-
Total non-interest income			129,777				-				250,737				25,775
Non-interest expense
Salaries and employee surcharge			(222,268	)			(146,931	)			(408,403	)			(344,875	)
Rental expenses			(65,232	)			(64,810	)			(130,982	)			(128,847	)
Business taxes and surcharge			(45,776	)			(143,142	)			(158,388	)			(257,589	)
Other operating expenses			(600,380	)			(419,506	)			(1,132,494	)			(870,370	)
Total non-interest expense			(933,656	)			(774,389	)			(1,830,267	)			(1,601,681	)
(Loss)/Income Before Taxes			(17,366,015	)			2,318,792				(16,087,657	)			4,187,528
Income tax expense			173,633				(354,969	)			(11,092	)			(653,837	)
Net (Loss)/ Income			(17,192,382	)		$	1,963,823			$	(16,098,749	)		$	3,533,691
(Loss)/ Earnings per Share- Basic and Diluted		$	(1.52	)		$	0.22			$	(1.47	)		$	0.39
Weighted Average Shares Outstanding-Basic and Diluted			11,315,900				9,000,000				10,935,530				9,000,000
Net (Loss)/Income		$	(17,192,382	)		$	1,963,823			$	(16,098,749	)		$	3,533,691
Other comprehensive income
Foreign currency translation adjustment			136,859				1,056,705				(670,768	)			1,428,066
Comprehensive (Loss)/Income		$	(17,055,523	)		$	3,020,528			$	(16,769,517	)		$	4,961,757

 

See notes to the consolidated financial statements

 

 

CHINA COMMERCIAL CREDIT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		For The Six Months Ended June 30,
		2014 (As Restated-Note 2(v)) (Unaudited)				2013 (Unaudited)
Cash Flows from Operating Activities:
Net (loss)/income		$	(16,098,749	)		$	3,533,691
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			55,890				55,279
Provision for loan losses			15,347,577				841,088
Provision on financial guarantee services			3,637,359				(148,700	)
Deferred tax expense			11,092				3,649
Changes in operating assets and liabilities:
Interest receivable			(339,850	)			219,611
Tax receivable			(929,440	)			(363,381	)
Other assets			(8,169	)			240,965
Unearned income from guarantee services			(308,635	)			(137,701	)
Other current liabilities			(392,592	)			(120,035	)
Net Cash Provided by Operating Activities			974,483				4,124,466
Cash Flows from Investing Activities:
Originated loans disbursement  to third parties			(32,304,906	)			(138,596,425	)
Originated loans disbursement to related parties			(1,139,712	)			-
Loans collection from third parties			30,355,559				134,476,939
Payment of loans on behalf of guarantees			(11,053,637	)			-
Collection from guarantees for loan paid on behalf of guarantees			1,841,450				-
Deposit released from banks for financial guarantee services			8,660,612				4,629,533
Deposit paid to banks for financial guarantee services			(4,890,133	)			(1,836,509	)
Purchases of property and equipment			(15,191	)			(58,758	)
Net Cash Used in Investing Activities			(8,545,958	)			(1,385,220	)
Cash Flows From Financing Activities:
Issuance of Series A Preferred stocks			-				50,000
Issuance of Series B Preferred Stocks			-				70,000
Issuance cost of Series A and Series B Preferred Stocks			-				(12,744	)
Proceeds from second public offering			6,601,544				-
Proceeds from exercise of underwriter over-allotment			25,000				-
Second public offering cost			(912,830	)			(80,019	)
Capital contribution from a shareholder			11,571				-
Cash disbursed to a non- controlling shareholder			(1,150,820	)			-
Cash repaid from a non- controlling shareholder			1,135,940				-
Cash collected from a founder shareholder, net			-				41,000
Net Cash Provided by Financing Activities			5,710,405				68,237
Effect of Exchange Rate Changes on Cash and Cash Equivalents			(145,028	)			45,650
Net (Decrease) Increase In Cash and Cash Equivalents			(2,006,098	)			2,853,133
Cash and Cash Equivalents at Beginning of Period			9,405,865				1,588,061
Cash and Cash Equivalents at End of Period		$	7,399,767			$	4,441,194
Supplemental Cash Flow Information
Cash paid for interest expense		$	425,556			$	622,852
Cash paid for income tax		$	930,437			$	1,016,497

 

See notes to the consolidated financial statements

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

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.

 

Wujiang Luxiang Rural Microcredit Co., Ltd (“Wujiang Luxiang”) is a company established under the laws of the PRC on October 21, 2008 and its shareholders consists of 11 companies established under the laws of the People's Republic of China (“PRC”) and 1 PRC individual, Mr. Qin Huichun, the Company's former CEO (collectively, the "Wujiang Luxiang Shareholders"). The Company is a microcredit company primarily engaged in providing direct loans and financial guarantee services to small-to-medium sized enterprises (“SMEs”), farmers and individuals in Wujiang City, Jiangsu Province, PRC.

 

On August 7, 2012, CCC entered into certain share exchange agreements with 16 PRC individuals, each of whom is the sole shareholder of a British Virgin Island company (collectively “16 BVI entities”), and the 16 BVI entities. These 16 PRC individuals represent the ultimate owners of the Wujiang Luxiang Shareholders.

 

Upon completion of the share exchange, the 16 PRC individuals, through their respective BVI entities, acquired 7,270,920  shares of Common Stock, par value $0.001 per share (the "Common Stock") of CCC in exchange for their agreement to cause the Wujiang Luxiang Shareholders to enter into the VIE Agreements. As a result of the share exchange, the 16 BVI entities became CCC shareholders, who collectively owned approximately 90% of CCC’s total issued and outstanding shares of Common Stock at the time of the share exchange.

 

Since at the time of the share exchange neither CCC nor the 16 BVI entities had any operations and only a minor amount of net assets, the share exchange shall be considered as a capital transaction in substance, rather than a business combination.

 

The share exchange is recorded as a “reverse recapitalization”, equivalent to the issuance of stock to the 16 BVI entities for the net monetary assets of CCC. The accounting for the transaction is identical to a reverse acquisition, except that no goodwill is recorded.

 

Management of the Company looked through the 16 BVI entities and treated the share exchange as a reverse merger between CCC and Wujiang Luxiang for accounting purposes, even though the share exchange was between CCC and the 16 BVI entities, because of the following reasons: (i) neither CCC nor the 16 BVI entities had any operations and only a minor amount of net assets; (ii) the 16 PRC individual, who are the owners of the 16 BVI entities, are the ultimate owners of Wujiang Luxiang, and (iii) the sole purpose of the share exchange was to issue approximately 90%  of pre-public offering CCC shares to the ultimate owners of the Wujiang Luxiang Shareholders.

 

VIE AGREEMENTS WITH WUJIANG LUXIANG

 

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

 

The significant terms of the VIE Agreements are summarized below:

 

Exclusive Business Cooperation Agreement

 

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

 

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

 

  

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

1.

ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)

 

Share Pledge Agreement

 

Under the Share Pledge Agreement between the Wujiang Luxiang Shareholders and WFOE, the 12 Wujiang Luxiang Shareholders pledged all of their equity interests in Wujiang Luxiang to WFOE to guarantee the performance of Wujiang Luxiang’s obligations under the Exclusive Business Cooperation Agreement. Under the terms of the agreement, in the event that Wujiang Luxiang or its shareholders breach their respective contractual obligations under the Exclusive Business Cooperation Agreement, WFOE, as pledgee, shall 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 agreed not to dispose of the pledged equity interests or take any actions that would prejudice WFOE’s interest.

 

Exclusive Option Agreement

 

Under the Exclusive Option Agreement, the Wujiang Luxiang Shareholders irrevocably granted WFOE (or its designee) an exclusive option to purchase, to the extent permitted under PRC law, once or at multiple times, at any time, part or all of their equity interests in Wujiang Luxiang. The option price is equal to the capital paid in by the Wujiang Luxiang Shareholders subject to any appraisal or restrictions required by applicable PRC laws and regulations.

 

Power of Attorney

 

Under the Power of Attorney, the Wujiang Luxiang Shareholders authorize WFOE to act on their behalf as their exclusive agent and attorney with respect to all rights as shareholders, including but not limited to:  (a) attending shareholders' meetings; (b) exercising all the shareholder's rights, including voting, that shareholders are entitled to under the laws of China and the Articles of Association, including but not limited to the sale or transfer or pledge or disposition of shares in part or in whole; and (c) designating and appointing on behalf of shareholders the legal representative, the executive director, supervisor, the chief executive officer and other senior management members of Wujiang Luxiang. The Power of Attorney is coupled with an interest and shall be irrevocable and continuously valid from the date of execution, so long as the Wujiang Shareholder is a shareholder of the Company.

 

Timely Reporting Agreement

 

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

 

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

 

INCORPORATION OF PFL

 

On September 5, 2013, CCC HK established Pride Financial Leasing (Suzhou) Co. Ltd. (“PFL”) 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, 2014, PFL did not have any significant operations except for initial organizational activities.

 

VIE AGREEMENTS WITH PRIDE INFORMATION

 

On February 19, 2014, WFOE entered into certain contractual arrangements with Mr. Huichun Qin and Pride Information Technology Co. Ltd. (“Pride Information”), a domestic entity established on February 19, 2014 and 100% owned by Mr. Qin. Pursuant to these contractual arrangements, WFOE shall have the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Pride Information, including absolute control rights and the rights to the assets, property and revenue of Pride Information and as a result, approximately 100% of the net income of Pride Information shall be paid as a service fee to WFOE.

 

The contractual arrangements between WFOE, Pride Information and its sole shareholder, Mr. Huichun Qin, have substantially the same terms as those between WFOE, Wujiang Luxiang and its shareholders.

 

Pride Information operates an online portal (www. pridelendingclub.com) to match prospective borrowers with lenders. As of June 30, 2014, Pride Information is in the beginning stage of operation and has generated minimum revenue.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

(a) Basis of presentation and principle of consolidation

 

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

 

The interim financial information as of June 30, 2014 and for the three months and six months ended June 30, 2014 and 2013 have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) pursuant to Regulation S-X. Certain information and footnote disclosures, which are normally included in annual financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. The unaudited interim financial information should be read in conjunction with the audited financial statements and the notes thereto, included in the Form 10-K for the fiscal year ended December 31, 2013 filed with the SEC on March 31, 2014.

 

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s financial position as of June 30, 2014, its results of operations for the three months and six months ended June 30, 2014 and 2013, and its cash flows for the six months ended June 30, 2014 and 2013, 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.

 

(b) Operating segments

 

ASC 280, Segment Reporting requires companies to report financial and descriptive information about their reportable operating segments, including segment profit or loss, certain specific revenue and expense items, and segment assets. The Company has no reportable segments. All of the Company's activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, lending is dependent upon the ability of the Company to fund itself with registered capital and other borrowings and manage interest rate and credit risk.

 

The Company has only one reportable segment, which is to provide financial services in the PRC domestic market, primarily in Wujiang City, Jiangsu Province. The Company’s chief operating decision-maker (“CODM”) has been identified as the Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for both the direct lending and guarantee business and the anticipated financial leasing business. The Company’s net revenues are all generated from customers in the PRC. Hence, the Company operates and manages its business without segments. For the three months and six months ended June 30, 2014 and 2013, there was no one customer that accounted for more than 10% of the Company's revenue.

 

(c) Reclassifications

 

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

 

(d) Cash

 

Cash consists of bank deposits with original maturities of three months or less, which are unrestricted as to withdrawal and use. The Company maintains accounts at banks and has not experienced any losses from such concentrations.

 

(e) Restricted cash

 

Restricted cash represents cash pledged with banks as guarantor deposit for the guarantee business customers. The banks providing loans to the Company’s guarantee service customers generally require the Company, as the guarantor of the loans, to pledge a cash deposit of 10% to 20% of the guaranteed amount to an escrow account and is restricted from use. The deposits are released after the guaranteed bank loans are paid off and the Company’s guarantee obligation expires which is usually within 12 months.

 

(f) Loans receivable, net

 

Loans receivable primarily represent loan amount due from customers. The management has the intent and ability to hold such receivable for the foreseeable future or until maturity or payoff. Loans receivable are recorded at unpaid principal balances, net of unearned income and allowance that reflects the Company’s best estimate of the amounts that will not be collected. Loan origination and commitment fees and certain direct loan origination costs collected from customers are directly recorded in current year interests and fees on loans. The loans receivable portfolio consists of corporate loans and personal loans (Note 6). The Company does not charge loan origination and commitment fees.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(g) Allowance for loan losses

 

The allowance for loan losses is increased by charges to income and decreased by charge offs (net of recoveries). Recoveries represent subsequent collection of amounts previously charged-off. The increase in allowance for loan losses is the netting effect of “reversal” and “provision” for both business and personal loans. If the ending balance of the allowance for loan losses after any charge offs (net of recoveries) is less than the beginning balance, it will be recorded as a “reversal”; if it is larger, it will be recorded as a “provision” in the allowance for loan loss. The netting amount of the “reversal” and the “provision” is presented in the consolidated statements of income and comprehensive income.

 

The Company recognizes a charge-off when management determines that full repayment of a loan is not probable. The primary factor in making that determination is the potential outcome of a lawsuit against the delinquent debtor. The Company will recognize a charge-off when the Company loses contact with the delinquent borrower for more than six months or when the court rules against the Company to seize the collateral asset of the delinquent debt from either the guarantor or borrower.

 

The allowance for loan losses is maintained at a level believed to be reasonable by management to absorb probable losses inherent in the portfolio as of each balance sheet date. The allowance is based on factors such as the size and current risk characteristics of the portfolio, an assessment of individual loan and actual loss, delinquency, and/or risk rating record within the portfolio (Note 7). The Company evaluates its allowance for loan losses on a quarterly basis or more often as necessary.

 

(h) Interest receivable

 

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

 

The interest reversed due to the above reason was $624,777 and $210,136  as of June 30, 2014 and December 31, 2013, respectively.

 

(i) Property and equipment

 

The property and equipment are stated at cost less accumulated depreciation. The depreciation is computed on a straight-line method over the estimated useful lives of the assets with 5% salvage value. Estimated useful lives of property and equipment are stated in Note 11.

 

The Company eliminates the cost and related accumulated depreciation of assets sold or otherwise retired from the accounts and includes any gain or loss in the statement of income. The Company charges maintenance, repairs and minor renewals directly to expenses as incurred; major additions and betterment to equipment are capitalized.

 

(j) Impairment of long-lived assets

 

The Company applies the provisions of ASC No. 360 Sub topic 10, "Impairment or Disposal of Long-Lived Assets"(ASC 360-10) issued by the Financial Accounting Standards Board ("FASB"). ASC 360-10 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.

 

The Company tests long-lived assets, including property and equipment and finite lived intangible assets, for impairment at least annually or more frequently upon the occurrence of an event or when circumstances indicate that the net carrying amount is greater than its fair value. Assets are grouped and evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the future estimated cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally measured by discounting expected future cash flows as the rate the Company utilizes to evaluate potential investments. The Company estimates fair value based on the information available in making whatever estimates, judgments and projections are considered necessary. There were no impairment losses in the three months and six months ended June 30, 2014 and 2013.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

  

(k) Fair values of financial instruments

 

ASC Topic 825, Financial Instruments (“Topic 825”) requires disclosure of fair value information of financial instruments, whether or not recognized in the balance sheets, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Topic 825 excludes certain financial instruments and all nonfinancial assets and liabilities from its disclosure requirements. Accordingly, the aggregate fair value amounts do not represent the underlying value of the Company.

 

Level 1	inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2	inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.

Level 3

inputs to the valuation methodology are unobservable and significant to the fair value.

 

As of June 30, 2014 and December 31, 2013, financial instruments of the Company primarily comprise of cash, restricted cash, accrued interest receivable, other receivable, short-term bank loans, deposits payable and accrued expenses, which were carried at cost on the consolidated balance sheets, and carrying amounts approximated their fair values because of their generally short maturities.

 

(l) Foreign currency translation

 

The reporting currency of the Company is United States Dollars (“US$” or “U.S. dollars”), which is also the Company’s functional currency. The PRC subsidiaries 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, 2014				December 31, 2013
Balance sheet items, except for equity accounts			6.1565				6.1122

 

		For the six months ended June 30,
		2014				2013
Items in the statements of income and comprehensive income, and statements of cash flows			6.1419				6.2437

 

(m) Use of estimates

 

The preparation of consolidated financial statements in conformity with U.S.GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, management reviews these estimates using the currently available information. Changes in facts and circumstances may cause the Company to revise its estimates. Significant accounting estimates reflected in the financial statements include: (i) the allowance for doubtful debts; (ii) estimates of losses on unexpired loan contracts and guarantee service contracts (iii) accrual of estimated liabilities; and (iv) contingencies and litigation.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

  

(n) Revenue recognition

 

Revenue is recognized when there are probable economic benefits to the Company and when the revenue can be measured reliably, on the following:

 

●

Interest income on loans. Interest on loan receivables is accrued monthly in accordance with their contractual terms and recorded in accrued interest receivable. The Company does not charge prepayment penalty from customers.

 

●

Commission on guarantee service. The Company receives the commissions from guarantee services in full at inception and records as unearned income before amortizing it throughout the period of guarantee.

 

●

Non-interest income. Non-interest income mainly includes government incentive and rental income from the sub-leasing of certain of the Company’s leased office space to third parties. Government incentive is provided by Jiangsu Provincial government on a yearly basis to promote the development of micro credit agencies in Jiangsu Province.

 

(o) Financial guarantee service contracts

 

Financial guarantee contracts provide guarantees which protect the holder of a debt obligation against non-payment when due. Pursuant to such guarantee, the Company makes payments if the obligor responsible for making payments fails to do so when scheduled.

 

The contract amounts reflect the extent of involvement the Company has in the guarantee transactions 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, 2014 (Unaudited)				December 31, 2013
	Guarantee			$	29,139,933			$	59,692,091

 

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 sheet. This liability represents probable losses and is increased or decreased by accruing an “(Under)/over provision on financial guarantee services” against the income of commissions and fees on guarantee services reserve.

 

This is done throughout the life of the guarantee, as necessary when additional relevant information becomes available. The methodology used to estimate the liability for possible guarantee loss considers the guarantee contract amount and a variety of factors, which include, depending on the counterparty, latest financial position and performance of the borrowers, actual defaults, estimated future defaults, historical loss experience, estimated value of collaterals or guarantees the costumers 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, the Company estimates the probable loss for immature financial guarantee services as of this report date to be 1 % of contract amount and made a provision of $32,486 (as restated) as of June 30, 2014 for possible credit risk of its guarantees. Besides the Company accrued specific provisions for repayment on behalf of guarantee customers who defaulted on their loans, in the amount of $4,180,751 (as restated). The total accrual for financial guarantee services amounted to $4,213,237 (as restated) and $588,740 as of June 30, 2014 and December 31, 2013, respectively. The Company reviews the provision on a quarterly basis.

 

(p) 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 supply, etc.

 

 

  

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

  

(q) Income tax

 

Current income taxes 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 method. 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.

 

(r) Comprehensive income

 

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

 

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

 

(s) Operating leases

 

The Company leases its principal office under a lease agreement that qualifies as an operating lease. The Company records the rental under the lease agreement in the operating expense when incurred.

 

(t) Commitments and contingencies

 

In the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters, including, among others, government investigations and tax matters. In accordance with ASC No. 450 Sub topic 20, “Loss Contingencies”, the Company records accruals for such loss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated.

 

(u) Recently issued accounting standards

 

The FASB issued ASU No. 2014-05, Service Concession Arrangements. A service concession agreement is an arrangement between a public-sector entity and an operating entity under which the operating entity operates the grantor's infrastructure. This ASU specifies that an operating entity should not account for a service concession arrangement within the scope of this ASU as a lease in accordance with ASC 840 - Leases. An operating entity should refer to other ASUs as applicable to account for various aspects of a service concession arrangement. The amendments also specify that the infrastructure used in a service concession agreement should not be recognized as property, plant and equipment of the operating entity. The amendments in this ASU are effective using a modified retrospective approach for annual reporting periods beginning after December 15, 2014 and interim periods within those annual periods. The adoption of this standard is not expected to have a material impact on the Company’s (consolidated) financial position and results of operations.

 

The FASB has issued ASU No. 2014-07, Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. Under current U.S. GAAP, a company is required to consolidate an entity in which it has a controlling financial interest. The new guidance allows a private company to elect (when certain conditions exist) not to apply the variable interest entity guidance to a lessor under common control. Instead, the private company would make certain disclosures about the lessor and the leasing arrangement. If elected, the accounting alternative should be applied to all leasing arrangements meeting the conditions in this ASU. The alternative should be applied retrospectively to all periods presented, and is effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. Early application is permitted for all financial statements that have not yet been made available for issuance. The adoption of this standard is not expected to have a material impact on the Company’s (consolidated) financial position and results of operations.

 

  

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

The FASB has issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective on January 1, 2017 and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. For all other entities (nonpublic entities), the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. A nonpublic entity may elect to apply this guidance earlier, however, only as prescribed in this ASU. The adoption of this standard is not expected to have a material impact on the Company’s (consolidated) financial position and results of operations.

 

The FASB has issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered.. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

 

(V) Restatement of the condensed consolidated Financial Statements  

 

In February and March 2015, the Company revisited the classification of its loan and guarantee portfolio within its rating system and decided to test the adequacy of the allowances calculated thereby to reclassify certain loans into different categories. The Company reviewed each of the customers’ profile and loan documents. For customers with several loans with different due dates, if one loan was past due, we decided to reclassify all of this customer's loans as past due (even the other loans that are not mature yet). For extended loans, we re-evaluated the customer's repayment ability in a more cautions manner and reclassified the loans of customers without very strong financial condition into the past due category. The Company also determined that accrual for the guarantee services should also be revised in the same manner as the loan accrual.

 

The Company assessed the customers’ financial conditions and other information in relation to the loan receivables and guarantee services in making determinations with respect to accounting adjustments reflected in the restated consolidated financial statements contained in this Form 10-Q/A.

 

These changes had the following impact for the six months ended June 30, 2014: the provision for loan losses increased by approximately $10.2 million, the provision for financial guarantee services increased by approximately $1.7 million and net loss increased by approximately $11.9 million. The following table sets forth the significant adjustments to the Company’s financial position and results of operations compared to the previously reported consolidated financial statements.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

The effects of the restatement on the Company’s consolidated statements of operations and comprehensive income (loss) as of June 30, 2014 are as follows:

 

		For the Three Months Ended								For the Six Months Ended
		June 30, 2014								June 30, 2014
		As Previously reported				As Restated				As Previously Reported				As Restated
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Provision for loan losses		$	(4,607,866	)		$	(14,759,397	)		$	(5,196,046	)		$	(15,347,577	)
Net interest loss after provision for loan losses			(3,173,149	)			(13,324,680	)			(1,107,597	)			(11,259,128	)
Under provision on financial guarantee services			(1,567,355	)			(3,327,506	)			(1,877,208	)			(3,637,359	)
Commission and fees on guarantee services, net			(1,477,305	)			(3,327,456	)			(1,488,848	)			(3,248,999	)
Revenue after loan expenses			(4,650,454	)			(16,562,136	)			(2,596,445	)			(14,508,127	)
Loss Before Taxes			(5,454,333	)			(17,366,015	)			(4,175,975	)			(16,087,657	)
Net Loss			(5,280,700	)			(17,192,382	)			(4,187,067	)			(16,098,749	)
Loss per Share- Basic and Diluted			(0.47	)			(1.52	)			(0.38	)			(1.47	)
Foreign currency translation adjustment			108,611				136,859				(699,016	)			(670,768	)
Comprehensive Loss			(5,172,089	)			(17,055,523	)			(4,886,083	)			(16,769,517	)

 

The effects of the restatement on the Company’s consolidated balance sheet as of June 30, 2014 are as follows:

 

		As of June 30, 2014
		As Previously Reported (Unaudited)				As Restated (Unaudited)
Loans receivable, net of allowance for loan losses		$	84,713,786			$	74,586,329
Total Assets			111,295,184				101,167,727
Accrual for financial guarantee services			2,457,260				4,213,237
Total Liabilities			24,539,477				26,295,454
Retained earnings			16,113,622				4,201,940
Accumulated other comprehensive income			5,794,575				5,822,823
Total Shareholders’ Equity			86,755,707				74,872,273
Total Liabilities and Shareholders’ Equity			111,295,184				101,167,727

 

The effects of the restatement on the Company’s consolidated statements of cash flows as of June 30, 2014 are as follows:

 

		For the Six Months Ended
		June 30, 2014
		As Previously Reported				As Restated
		(Unaudited)				(Unaudited)
Net (loss)/income		$	(5,196,046	)		$	(16,098,749	)
Provision for loan losses			(5,196,046	)			(15,347,577	)
Provision on financial guarantee services			(1,877,208	)			(3,637,359	)

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

3.

VARIABLE INTEREST ENTITIES AND OTHER CONSOLIDATION MATTERS

 

On September 26, 2012, the Company, through WFOE, entered into a series of contractual arrangements, also known as “VIE Agreements” with Wujiang Luxiang and the Wujiang Luxiang Shareholders.

 

On February 19, 2014, WFOE entered into certain contractual arrangements, having substantially the same terms as those of the VIE Agreements with Pride Information and its sole shareholder, Mr. Huichun Qin.

 

The significant terms of the VIE Agreements are summarized in Note 1.

 

VIEs are entities that have either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest, such as through voting rights, right to receive the expected residual returns of the entity or obligation to absorb the expected losses of the entity. The variable interest holder, if any, that has a controlling financial interest in a VIE is deemed to be the primary beneficiary and must consolidate the VIE. WFOE is deemed to have a controlling financial interest and be the primary beneficiary of the entities mentioned in Note 1 above, because it has both of the following characteristics:

 

1.

power to direct activities of a VIE that most significantly impact the entity’s economic performance, and

 

2.

obligation to absorb losses of the entity that could potentially be significant to the VIE or right to receive benefits from the entity that could potentially be significant to the VIE.

 

In addition, as all of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through either arbitration or litigation in the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could further limit the Company’s ability to enforce these contractual arrangements. Furthermore, these contracts may not be enforceable in China if PRC government authorities or courts take a view that such contracts contravene PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event the Company is unable to enforce these contractual arrangements, it may not be able to exert effective control over Wujiang Luxiang, and its ability to conduct its business may be materially and adversely affected.

 

All of the Company’s main current operations are conducted through Wujiang Luxiang. Current regulations in China permit Wujiang Luxiang to pay dividends to us only out of its accumulated distributable profits, if any, determined in accordance with their articles of association and PRC accounting standards and regulations. The ability of Wujiang Luxiang to make dividends and other payments to the Company may be restricted by factors that include changes in applicable foreign exchange and other laws and regulations.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

3.

VARIABLE INTEREST ENTITIES AND OTHER CONSOLIDATION MATTERS (CONTINUED)

 

The following financial statement amounts and balances of the VIEs were included in the accompanying consolidated financial statements as of June 30, 2014 and December 31, 2013 and for the three and six months ended June 30, 2014 and 2013:

 

		June 30, 2014 (As Restated) (Unaudited)				December 31, 2013
Total assets		$	93,039,357			$	105,477,241
Total liabilities			26,321,125				28,053,542

 

		For The Three Months Ended June 30,								For The Six Months Ended June 30,
		2014 (As Restated) (Unaudited)				2013 (Unaudited)				2014 (As Restated) (Unaudited)				2013 (Unaudited)
Revenue		$	1,770,784			$	3,658,220			$	4,963,736			$	7,078,674
Net (loss)/income			(16,791,587	)			2,060,629				(15,553,551	)			3,699,857

 

All of the Company’s current revenue is generated in RMB. Any future restrictions on currency exchanges may limit our ability to use net revenues generated in RMB to make dividends or other payments in US$ or fund possible business activities outside China.

 

Foreign currency exchange regulation in China is primarily governed by the following rules:

 

·

Foreign Exchange Administration Rules (1996), as amended in August 2008, or the Exchange Rules; and

 

·

Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.

 

Under the Administration Rules, RMB is freely convertible for current account items, including the distribution of dividends, interest payments, trade and service related foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments and investments in securities outside of China, unless the prior approval of the State Administration of Foreign Exchange (“SAFE”) is obtained and prior registration with the SAFE is made. Foreign-invested enterprises like WFOE that need foreign exchange for the distribution of profits to their shareholders may affect payment from their foreign exchange accounts or purchase and pay foreign exchange rates at the designated foreign exchange banks to their foreign shareholders by producing board resolutions for such profit distribution. Based on their needs, foreign invested enterprises are permitted to open foreign exchange settlement accounts for current account receipts and payments of foreign exchange along with specialized accounts for capital account receipts and payments of foreign exchange at certain designated foreign exchange banks.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

  

4.

RISKS

 

(a) Credit risk

 

Credit risk is one of the most significant risks for the Company’s business. Credit risk exposures arise principally in lending activities 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.

 

The Company measures and manages the credit quality of loans to corporate and personal customers based on the “Guideline for Loan Credit Risk Classification” (the “Guideline”) issued by the China Banking Regulatory Commission, which requires commercial banks and micro-credit institutions to classify their corporate and personal loans into five categories: (1) pass, (2) special-mention, (3) substandard, (4) doubtful and (5) loss, among which loans classified in the substandard, doubtful and loss categories are regarded as non-performing loans. The Guideline also determines the percentage of each category of non-performing loans as allowances, which are 2% on special-mention loan, 25% on substandard loans, 50% on doubtful loans and 100% on loss loans.

 

The five categories are defined as follows:

 

(1)

Pass: loans for which borrowers can honor the terms of the contracts, and there is no reason to doubt their ability to repay principal and interest of loans in full and on a timely basis.

 

(2)

Special-mention: loans for which borrowers are still able to service the loans currently, although the repayment of loans might be adversely affected by some factors.

 

(3)

Substandard: loans for which borrowers’ ability to service loans is apparently in question and borrowers cannot depend on their normal business revenues to pay back the principal and interest of loans. Certain losses might be incurred by the Company even when guarantees are executed.

 

(4)

Doubtful: loans for which borrowers cannot pay back principal and interest of loans in full and significant losses will be incurred by the Company even when guarantees are executed.

 

(5)

Loss: principal and interest of loans cannot be recovered or only a small portion can be recovered after taking all possible measures and resorting to necessary legal procedures.

 

Five-category loan classifications are re-examined on a quarterly basis. Adjustments are made to these classifications as necessary according to customers’ operational and financial position.

 

The Guideline stipulates that micro-credit companies, which are limited to provide short-term loans and financial guarantee services to only small to medium size businesses, should choose a reasonable methodology to provide allowance for the probable loss from the credit risk, and the allowance should not be less than the allowance amount derived from the five-category analysis. The Company continuously performs the analysis and believes that the allowance amount it provided is consistently more than the allowance amount derived from the five-category analysis.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

  

4.

RISKS (CONTINUED)

 

1.2 Guarantee activities

 

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

 

Off-balance sheet commitments with credit exposures are also assessed and categorized with reference to the Guideline .

 

(b) Liquidity risk

 

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

 

(c) Foreign currency risk

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

 

5.

RESTRICTED CASH

 

Restricted cash represents cash pledged with banks as guarantor deposit for the Company's guarantee service customers, amounting to $4.0 and $10.8 million as of June 30, 2014 and December 31, 2013, respectively. The banks providing loans to the Company’s guarantee service customers generally require the Company, as the guarantor of the loans, to pledge a cash deposit usually in the range of 10% to 20% of the guaranteed amount. The deposits are released after the guaranteed bank loans are paid off and the Company’s guarantee obligation expires which is usually within 12 months.

 

At the same time, the Company requires the guarantee service customers to make a deposit to the Company of the same amount as the deposit the Company pledged to the banks for their loans . The Company recorded the deposit received as “deposits payable” on the unaudited consolidated balance sheet. The deposit is returned to the customer after the customer repays the bank loan and the Company’s guarantee obligation expires.

 

6.

LOANS RECEIVABLE, NET

 

The interest rates on loan issued ranged between 9.6%~18.0% and 9.6% ~ 21.6% for the six months ended June 30, 2014 and 2013, respectively.

 

6.1 Loans receivable consist of the following:

 

		June 30, 2014 (As Restated)				December 31, 2013
		(Unaudited)
Business loans		$	55,350,523			$	56,620,893
Personal loans			34,397,791				33,582,520
Total Loans receivable			89,748,314				90,203,413
Allowance for impairment losses
Collectively assessed			(15,161,985	)			(1,375,948	)
Individually assessed			-				-
Allowance for loan losses			(15,161,985	)			(1,375,948	)
Loans receivable, net		$	74,586,329			$	88,827,465

  

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

  

6.     LOANS RECEIVABLE, NET (CONTINUED)

 

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, 2014 and December 31, 2013, the Company had 101 and 105 business loan customers, and 104 and 112 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 on quarterly basis in accordance with “The Guidance on Provision for Loan Losses” published by PBOC (Note 7).

 

For the three months ended June 30, 2014 and 2013, a provision of $14,759,397 (as restated) and $352,872 were charged to the consolidated statement of income, respectively. For the six months ended June 30, 2014 and 2013, a provision of $15,347,577 (as restated) and $841,088 were charged to the consolidated statement of income, respectively. No write-offs against allowances have occurred for these periods.

 

Interest on loans receivable is accrued and credited to income as earned. The Company determines a loan's past due status by the number of days that have elapsed since a borrower has failed to make a contractual loan payment. Accrual of interest is generally discontinued when either (i) reasonable doubt exists as to the full, timely collection of interest or principal or (ii) when a loan becomes past due by more than 90 days.

 

The following table presents nonaccrual loans with aging over 90 days by classes of loan portfolio as of June 30, 2014 and December 31, 2013, respectively:

 

		June 30, 2014 (As Restated)				December 31, 2013
		(Unaudited)
Business loans		$	11,791,033			$	1,866,436
Personal loans			6,961,748				948,922
		$	18,752,781			$	2,815,358

 

The following table represents the aging of loans as of June 30, 2014 by type of loan:

 

		1-89 Days Past Due				Greater Than 90 Days Past Due				Total Past Due				Current				Total Loans (As Restated)
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Business loans		$	7,965,140			$	3,825,893			$	11,791,033			$	43,599,490			$	55,350,523
Personal loans			5,650,938				1,310,810				6,961,748				27,436,043				34,397,791
		$	13,616,078			$	5,136,703			$	18,752,781			$	70,995,533			$	89,748,314

 

The following table represents the aging of loans as of December 31, 2013 by type of loan:

 

		1-89 Days Past Due				Greater Than 90 Days Past Due				Total Past Due				Current				Total Loans
Business loans		$	2,039,559			$	1,866,436			$	3,905,995			$	52,714,898			$	56,620,893
Personal loans			312,993				948,922				1,261,915				32,320,605				33,582,520
		$	2,352,552			$	2,815,358			$	5,167,910			$	85,035,503			$	90,203,413

  

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

6.     LOANS RECEIVABLE, NET (CONTINUED)

 

6.2 Analysis of loans by credit quality indicator

 

The following table summarizes the Company’s loan portfolio by credit quality indicator as of June 30, 2014 and December 31, 2013, respectively:

 

Five Categories		June 30, 2014 (As Restated)				% (As Restated)				December 31, 2013				%
		(Unaudited)
Pass		$	61,626,574				68.7	%		$	85,035,503				94.2	%
Special mention			-				0	%			2,207,565				2.4	%
Substandard			609,112				0.7	%			867,118				1.0	%
Doubtful			27,463,899				30.6	%			1,948,240				2.2	%
Loss			48,729				0.1	%			144,987				0.2	%
Total		$	89,748,314				100	%		$	90,203,413				100	%

 

6.3 Analysis of loans by collateral

 

The following table summarizes the Company’s loan portfolio by collateral as of June 30, 2014:

 

		June 30, 2014
		Business Loans				Personal Loans				Total (As Restated)
		(Unaudited)				(Unaudited)				(Unaudited)
Guarantee backed loans		$	50,717,451			$	31,870,381			$	82,587,832
Pledged assets backed loans			3,252,417				2,527,410				5,779,827
Collateral backed loans			1,380,655				-				1,380,655
		$	55,350,523			$	34,397,791			$	89,748,314

  

The following table summarizes the Company’s loan portfolio by collateral as of December 31, 2013:

 

		December 31, 2013
		Business Loans				Personal Loans				Total
Guarantee backed loans		$	51,909,006			$	29,576,912			$	81,485,918
Pledged assets backed loans			3,321,226				4,005,608				7,326,834
Collateral backed loans			1,390,661				-				1,390,661
		$	56,620,893			$	33,582,520			$	90,203,413

 

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 entities 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 proceeds of the collateral asset is not sufficient to pay off the debt, we will file a lawsuit against the borrower and seek judgment for the remaining balance. 

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

6.     LOANS RECEIVABLE, NET (CONTINUED)

 

Pledged Asset Backed Loans

 

Pledged asset backed loans are loans with pledged assets. The pledged assets are usually certificates of deposit. Lenders take physical possession of the pledged assets at the time the loan is made and do not need to register them with government entities to secure the loan. If the borrower defaults, we can sell the assets to recover the outstanding balance owed.

 

Both collateral loans and pledged loans are considered secured loans. The amount of a loan that lenders provide depends on the value of the collateral pledged. Beginning 2011, the Company does not provide unsecured loans.

 

Guarantee Backed Loans

 

A guaranteed backed loan is a loan guaranteed by a third party who is usually a corporation or high net worth individual. As of June 30, 2014 and December 31, 2013, guaranteed loans make up 91.6% (as restated) and 90.3% of our direct loan portfolio, respectively.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

7.

ALLOWANCE FOR LOAN LOSSES

 

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss history, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

 

The allowance is calculated at portfolio-level since our loans portfolio is typically of smaller balance homogenous loans and is collectively evaluated for impairment.

 

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 also calculates the provision amount in accordance with PRC regulation “The Guidance for Loan Losses” (“The Provision Guidance”) issued by PBOC and is applied to all financial institutes as below:

 

1.

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

 

2.

Specific Reserve - is based on the level of loss of each loan after categorizing the loan according to their risk. According to the so-called “Five-Tier Principle” set forth in the Provision Guidance, the loans are categorized as “pass”, “special-mention”, “substandard”, “doubtful” or “loss”. Normally, the provision rate is 2% for “special-mention”, 25% for “substandard”, 50% for “doubtful” and 100% for “loss”.

 

3.

Special Reserve - is fund set aside covering losses due to risks related to a particular country, region, industry or type of loans. The reserve rate could be decided based on management estimate of loan collectability.

 

To the extent the general loan loss reserve rate of 1% as required by PBOC differs from management’s estimates, the management elects to use the higher rate. As of June 30, 2014, the Company utilized Specific Reserve in estimating the loan loss as it is higher than the amount calculated based on the General Reserve.

 

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.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

7.

ALLOWANCE FOR LOAN LOSS (CONTINUED)

 

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, 2014 and 2013: 

 

		Business Loans				Personal Loans				Total (As Restated)
For the three months ended June 30, 2014		(Unaudited)				(Unaudited)				(Unaudited)
Beginning balance		$	1,438,275			$	510,125			$	1,948,400
Charge-offs			(784,308	)			(730,935	)			(1,515,243	)
Recoveries			-				-				-
Provisions			9,475,422				5,253,406				14,728,828
Ending balance			10,129,389				5,032,596				15,161,985
Ending balance: individually evaluated for impairment			-				-				-
Ending balance: collectively evaluated for impairment		$	10,129,389			$	5,032,596			$	15,161,985

  

		Business Loans				Personal Loans				Total
For the three months ended June 30, 2013		(Unaudited)				(Unaudited)				(Unaudited)
Beginning balance		$	1,177,410			$	173,904			$	1,351,314
Charge-offs			-				-				-
Recoveries			-				-				-
Provisions			35,400				338,512				373,912
Ending balance			1,212,810				512,416				1,725,226
Ending balance: individually evaluated for impairment			-				-				-
Ending balance: collectively evaluated for impairment		$	1,212,810			$	512,416			$	1,725,226

  

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, 2014 and 2013:

 

		Business Loans				Personal Loans				Total (As Restated)
For the six months ended June 30, 2014		(Unaudited)				(Unaudited)				(Unaudited)
Beginning balance		$	1,049,836			$	326,112			$	1,375,948
Charge-offs			(784,308	)			(730,935	)			(1,515,243	)
Recoveries			-				-				-
Provisions			9,863,861				5,437,419				15,301,280
Ending balance			10,129,389				5,032,596				15,161,985
Ending balance: individually evaluated for impairment			-				-				-
Ending balance: collectively evaluated for impairment		$	10,129,389			$	5,032,596			$	15,161,985

 

		Business Loans				Personal Loans				Total
For the six months ended June 30, 2013		(Unaudited)				(Unaudited)				(Unaudited)
Beginning balance		$	638,471			$	219,342			$	857,813
Charge-offs			-				-				-
Recoveries			-				-				-
Provisions			574,339				293,074				867,413
Ending balance			1,212,810				512,416				1,725,226
Ending balance: individually evaluated for impairment			-				-				-
Ending balance: collectively evaluated for impairment		$	1,212,810			$	512,416			$	1,725,226

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

7.     ALLOWANCE FOR LOAN LOSS (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 and doubtful within the Company's internal risk rating system as of June 30, 2014: 

 

		Pass				Special Mention				Substandard				Doubtful				Loss				Total (As Restated) (Unaudited)
Business loans		$	36,518,152			$	-			$	487,290			$	18,345,081			$	-			$	55,350,523
Personal loans			25,108,422				-				121,822				9,118,818				48,729				34,397,791
		$	61,626,574			$	-			$	609,112			$	27,463,899			$	48,729			$	89,748,314

  

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of December 31, 2013:

 

		Pass				Special Mention				Substandard				Doubtful				Loss				Total
Business loans		$	52,714,898			$	1,894,572			$	130,886			$	1,735,550			$	144,987			$	56,620,893
Personal loans			32,320,605				312,993				736,232				212,690				-				33,582,520
		$	85,035,503			$	2,207,565			$	867,118			$	1,948,240			$	144,987			$	90,203,413

  

8.

LOAN IMPAIRMENT

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for corporate and personal loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

 

An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. Currently, estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral which approximates to the carrying value due to the short term nature of the loans.

 

Loans with modified terms are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary below market rate reduction in interest rate or an extension of a loan’s stated maturity date. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired.

 

Even though the Company allows a one-time loan extension with a period up to the original loan period, which is usually twelve months, such extension is not considered to be a troubled debt restructuring because the Company does not grant a concession to borrowers. The principal of the loan remains the same and the interest rate is fixed at the current interest rate at the time of extension. Therefore, there were no troubled debt restructurings during the three months and six months ended June 30, 2014 and 2013, respectively.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

  

9.

GUARANTEE PAID ON BEHALF OF GUARANTEE CUSTOMERS

 

		June 30, 2014 (Unaudited)				December 31, 2013
Guarantee paid on behalf of guarantee service customers		$	8,841,659			$	1,082,486

  

Payments on behalf of guarantee service customers represents payment made by the Company to banks on behalf of eleven of its guarantee service customers who defaulted on their loan repayments to the banks. Management performs an evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss history, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. As of June 30, 2014 and December 31, 2013, the Company accrued allowance on the balance in “accrual for financial guarantee services” in the value of $2,457,260  and $588,740, respectively. 

 

10.

OTHER ASSETS

 

Other assets as of June 30, 2014 and December 31, 2013 consisted of:

 

		June 30, 2014 (Unaudited)				December 31, 2013
Prepaid bank service charges		$	58,511			$	181,641
Prepaid interest expense to bank			12,566				80,554
Prepaid issuance cost			59,062				-
Prepaid expenses to investor relationship service providers (Note 19 )			888,131				-
Other prepaid expense			149,546				283,800
Other receivables			448,682				156,622
		$	1,616,498			$	702,617

 

Prepaid interest expense to banks represents prepaid borrowing costs for its short-term bank borrowings. The balance is amortized over the period of the bank borrowings which is within 12 months.

 

Other receivables mainly represents the court filing fees and legal fees which will be claimed from default customers.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

11.

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 below:

 

Property and equipment consist of the following:

 

		Useful Life (years)				June 30, 2014 (Unaudited)				December 31, 2013
Furniture and fixtures			5			$	23,034			$	23,201
Vehicles			4				242,462				244,220
Electronic equipment			3				125,119				126,026
Leasehold improvement			3				180,106				181,410
Less: accumulated depreciation							(373,517	)			(320,062	)
Property and equipment, net						$	197,204			$	254,795

 

Depreciation expense totaled $27,939 and $28,785 for the three months ended June 30, 2014 and 2013, respectively. For the six months ended June 30, 2014 and 2013, depreciation expense totaled $55,890 and $55,279 respectively.

 

 

12.

SHORT-TERM BANK LOANS

 

Bank Name		Interest rate		Term				June 30, 2014 (Unaudited)				December 31, 2013
Agricultural Bank Of China		Fixed annual rate of 6.00%		From September 26, 2013 to September 25, 2014					4,872,899				4,908,216
Agricultural Bank Of China		Fixed annual rate of 6.00%,		From October 15, 2013 to October 14, 2014					4,872,899				4,908,216
Agricultural Bank Of China		Fixed annual rate of 6.00%,		From October 18, 2013 to October 17, 2014					6,497,197				6,544,289
								$	16,242,995			$	16,360,721

 

As of June 30, 2014 and December 31, 2013, the short-term bank loans have maturity terms within 1 year. These loans were guaranteed by the Wujiang Luxiang shareholders.

 

Interest expense incurred on short-term loans for the three months ended June 30, 2014 and 2013 was $247,935 and $316,697, respectively, and $493,125 and $622,852 for the six months ended June 30, 2014 and 2013, respectively.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

13.

DEPOSITS PAYABLE

 

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.

 

14.

UNEARNED INCOME FROM GUARANTEE SERVICES

 

The Company receives guarantee commissions in full at the inception and records unearned income before amortizing it throughout the guarantee service life. Unearned income from guarantee services was $170,657 and $482,029 as of June 30, 2014 and December 31, 2013, respectively.

 

15.

OTHER CURRENT LIABILITIES

 

Other current liabilities as of June 30, 2014 and December 31, 2013 consisted of:

 

		June 30, 2014 (Unaudited)				December 31, 2013
Accrued payroll		$	15,380			$	459,623
Other tax payable			115,204				157,507
Other payable			11,857				11,943
		$	142,441			$	629,073

 

16.

OTHER OPERATING EXPENSE

 

Other operating expense for the three and six months ended June 30, 2014 and 2013 consisted of:

 

		For The Three Months Ended June 30,								For The Six Months Ended June 30,
		2014 (Unaudited)				2013 (Unaudited)				2014 (Unaudited)				2013 (Unaudited)
Depreciation		$	27,939			$	28,785			$	55,890			$	55,279
Travel expenses			13,591				44,346				28,331				52,142
Entertainment expenses			7,432				12,023				32,911				31,727
Promotion expenses			-				41,892				7,111				83,284
Legal and consulting expenses			358,492				49,033				494,613				179,278
Car expenses			18,882				18,938				43,317				43,343
Bank charges			74,950				100,701				138,946				199,435
Audit-related expense			13,808				81,395				133,280				154,306
Insurance expense			70,875				-				141,750				-
Other expenses			14,411				42,393				56,345				71,576
Total			600,380				419,506				1,132,494				870,370

 

17.

EMPLOYEE RETIREMENT BENEFIT

 

The Company has made employee benefit contributions in accordance with relevant Chinese regulations, including retirement insurance, unemployment insurance, medical insurance, housing fund, work injury insurance and birth insurance. The Company recorded the contribution in the salary and employee charges when incurred. The contributions made by the Company were $20,580 and $21,403 for the three months ended June 30, 2014 and 2013, respectively, and $42,936 and $43,882 for the six months ended June 30, 2014 and 2013, respectively

 

18.

DISTRIBUTION OF PROFIT

 

The Company did not distribute any dividend to its shareholders for the three months and six months ended June 30, 2014 and 2013, respectively.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

19.

CAPITAL TRANSACTION

 

Initial Public Offering

 

On August 16, 2013, the Company closed an initial public offering (“IPO”) of 1,370,000 shares of Common Stock. On August 26, 2013, the Company sold additional 45,657 shares of Common Stock from the exercise of the overallotment option of shares granted to the underwriters. The public offering price of the shares sold in the IPO was $6.50 per share. The total gross proceeds from the offering were $9.2 million. After deducting underwriting discounts and commissions and offering expenses payable by the Company, the aggregate net proceeds received by the Company totaled approximately $7.6 million.

 

Upon the consummation of the Company’s IPO on August 16, 2013, the Series A Stock and the Series B Stock (defined below) were automatically converted into shares of Common Stock.

 

Follow-on Public Offering

 

On May 13, 2014, the Company closed its second public offering (“Follow-on Offering”) of 1,750,000 shares of Common Stock and 1,750,000 warrants to purchase an additional 875,000 shares of Common Stock. The public offering price of the shares was $3.99 per share and the offering pricing for the warrants was $0.01 per warrant. 1,650,386 shares of Common Stock were newly issued by the Company and 99,614 shares of Common Stock were sold by certain selling stockholders. On June 12, 2014, the representative in the Follow-on Offering exercised its over-allotment option to purchase 252,000 warrants to purchase 126,250 shares of Common Stock. The total gross proceeds in the Follow-on Offering and the over-allotment were $6.6 million. After deducting underwriting discounts and commissions and offering expenses payable by the Company and the proceeds to the selling stockholders, the aggregate net proceeds received by the Company totaled approximately $5.7 million.

 

Common Stock

 

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

 

As of December 31, 2013, there were 10,430,657 shares of Common Stock issued and outstanding.

 

On March 7, 2014, the Company issued an aggregate of 15,769 shares of Common Stock to a certain investor relations  services provider to the Company, at a par value of $0.001 per share and recorded it as a deferred expense and amortized over service term. (Note 10)

 

On April 9 and April 24, 2014, the Company issued an aggregate of 20,000 and 130,000 shares of Common Stock, respectively, to one consulting firm in consideration of certain investor relations services to be rendered by such firm, at a par value of $0.001 per share  and recorded it as a deferred expense and amortized over service term. (Note 10)

 

On May 13, 2014, the Company closed the Follow-on Offering of 1,750,000 shares of Common Stock and 1,750,000 warrants to purchase 875,000 shares of Common Stock. Among the 1,750,000 shares of Common Stock, 1,650,386 shares were newly issued by the Company and 99,614 shares were offered by certain selling stockholders.

 

As of June 30, 2014, there were 12,246,812 shares of Common Stock issued and outstanding.

 

Warrants

 

The IPO underwriters’ and their affiliates’ received warrants to purchase an aggregate of 95,900 shares of Common Stock, which are exercisable at any time, and from time to time, in whole or in part, during the three-year period from February 10, 2014. The warrants are initially exercisable at a per share price of $6.50.

 

Warrants to purchase an aggregate of 875,000 shares of Common Stock were issued in the Follow-on Offering on May 13, 2014. The issuance price was $0.01 per warrant, and are exercisable at any time, and from time to time, in whole or in part, during the three-year period from May 13, 2014. The warrants are initially exercisable  at a per share price of $5.60 .

 

Warrants to purchase 252,500 shares of Common Stock were issued to the underwriters in the Follow-on Offering. The warrants have a cashless exercise provision and are exercisable at any time, and from time to time, in whole or in part, during the three-year period from May 13, 2014. The warrants are initially exercisable  at a per share price of $4.80.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

19.

CAPITAL TRANSACTION (CONTINUED)

 

Preferred Stock

 

The Company is authorized to issue up to 10,000,000 shares of preferred stock, of which 1,000,000 shares are designated as Series A Convertible Preferred Stock (the “Series A Stock”) and 5,000,000 shares are designated as Series B Convertible Preferred Stock (the “Series B Stock”).

 

The Series A Stock ranked (i) prior to the Common Stock and to all other classes and series of equity securities of the Company which by their terms do not rank senior to the Series A Stock, and (ii) junior to any class or series of equity securities which by its terms ranked senior to the Series A Stock. The Series A Stock was subordinate to and ranked junior to all indebtedness of the Company. Each share of the Series A Stock was on the day on which the Company consummated its IPO, automatically and without any action on the part of the holder thereof converted into issued and outstanding shares of Common Stock beneficially owned by a consultant who received the shares on December 19, 2011. The number of shares of Common Stock issued upon conversion of the Series A Stock was equal to the purchase price of the Series A Stock divided by a per share conversion price of 50% of the price of a share of Common Stock in the IPO. No new shares were issued by the Company at the conversion. In addition, the holders were not permitted to convert their preferred stock prior to consummation of the IPO.

 

The Series B Preferred Stock ranked (i) prior to the Common Stock and to all other classes and series of equity securities of the Company which by their terms do not rank senior to the Series B Preferred Stock and (ii) junior to any class or series of equity securities which by its terms ranked senior to the Series B Preferred Stock. The Series B Stock was subordinate to and ranked junior to all indebtedness of the Company. Each share of the Series B Stock was on the day on which the Company consummated its IPO, automatically and without any action on the part of the holder thereof converted into issued and outstanding shares of Common Stock beneficially owned by a consultant who received the shares on December 19, 2011. The number of shares of Common Stock issued upon conversion of the Series B Stock was equal to the purchase price of the Series B Stock divided by a per share conversion price of 25% of the price of a share of Common Stock in the IPO. No new shares were issued by the Company at the conversion. In addition, the holders were not permitted to convert their preferred stock prior to consummation of the IPO.

 

Between January 1, 2012 and April 1, 2013, the Company issued a total of 745 shares of Series A Stock to an aggregate of 11 investors pursuant to certain subscription agreements. We received gross proceeds of $372,500 and incurred costs associated with this private placement of $93,125.

 

Between October 12, 2012 and May 8, 2013, the Company issued a total of 760 shares of Series B Stock to an aggregate of 44 investors pursuant to certain subscription agreements. We received gross proceeds of $380,000 and incurred costs associated with this private placement of $95,000.

 

On August 16, 2013 when the Company closed its IPO, all outstanding shares of the Series A Stock and Series B Stock were converted into an aggregate of 348,462 shares of already issued and outstanding Common Stock beneficially owned by a consultant who received our shares on December 19, 2011, automatically and without any action on the part of the holder thereof. The per share conversion price of Series A Stock and Series B Stock was equal to $3.25 and $1.63, respectively.

 

The discount on the Series A and B Stock was accounted for as a beneficial conversion feature upon conversion. The total amount of discount was $752,500, which was accounted for as a reduction to retained earnings and an offsetting increase to additional paid in capital in the Company's financial statements.

 

20.

STATUTORY RESERVE

 

In accordance with the PRC Regulations on Enterprises with Foreign Investment and the articles of association of the Company’s PRC subsidiaries, a foreign-invested enterprise established in the PRC is required to provide statutory reserve, which is appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A foreign-invested enterprise is required to allocate at least 10% of its annual after-tax profit to the general reserve until such reserve has reached 50% of its respective registered capital based on the enterprise’s PRC statutory accounts. The Company allocates 15% of its annual after-tax profit to the statutory reserve. The statutory reserve can only be used for specific purposes and are not distributable as cash dividends. WFOE was established as a foreign-invested enterprise and, therefore, is subject to the above mandated restrictions on distributable profits. For the six months ended June 30, 2014, the Company did not accrue the statutory reserve for the current loss position.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

21.

(LOSS) EARNINGS PER COMMON SHARE

 

The following table sets forth the computation of basic and diluted (loss) earnings per common share for the three months and six months ended June 30, 2014 and 2013, respectively:

 

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2014 (As Restated) (Unaudited)				2013 (Unaudited)				2014 (As Restated) (Unaudited)				2013 (Unaudited)
Net (loss) income attributable to the common shareholders		$	(17,192,382	)		$	1,963,823			$	(16,098,749	)		$	3,533,691
Basic weighted-average common shares outstanding			11,315,900				9,000,000				10,935,530				9,000,000
Effect of dilutive securities			-				-				-				-
Diluted weighted-average common shares outstanding			11,315,900				9,000,000				10,935,530				9,000,000
(Loss)earnings per share:
Basic		$	(1.52	)		$	0.22			$	(1.47	)		$	0.39
Diluted		$	(1.52	)		$	0.22			$	(1.47	)		$	0.39

 

As of June 30, 2014 and December 31, 2013, the Company did not have dilutive securities outstanding.

 

22.

INCOME TAXES AND TAX RECEIVABLE

 

Effective January 1, 2008, the New Taxation Law of PRC stipulates that domestically owned enterprises and foreign invested enterprises (the “FIEs”) are subject to a uniform tax rate of 25%. While the New Tax Law equalizes the tax rates for FIEs and domestically owned enterprises, preferential tax treatment may continue to be given to companies in certain encouraged sectors and to entities classified as high-technology companies, regardless of whether these are domestically-owned enterprises or FIEs. In November 2009, the Jiangsu Province Government issued Su Zheng Ban Fa [2009] No. 132 which  stipulates that Micro-credit companies in Jiangsu Province is subject to preferential tax rate of 12.5%. As a result, the Company is subject to the preferential tax rate of 12.5% for 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%.

 

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 months ended June 30, 2014 and 2013, the Company had no unrecognized tax benefits.

 

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.

 

Income tax receivable/ (payable) is comprised of:

 

		June 30, 2014 (Unaudited)				December 31, 2013
Income tax payable		$	-			$	(164,806	)
Income tax receivable			1,741,858				985,332
Total income tax receivable, net		$	1,741,858			$	820,526

 

Income tax payable represented enterprise income tax at a rate of 25% that the Company accrued but had not paid as of June 30, 2014 and December 31, 2013, respectively. Income tax receivable represented the income tax refund the Company will receive from the tax authority in the annual income tax settlement.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

22.

INCOME TAXES AND TAX RECEIVABLE (CONTINUED)

 

Income tax expense is comprised of: 

 

		For The Six Months Ended
		June 30,
		2014 (Unaudited)				2013 (Unaudited)
Current income tax		$	-			$	650,187
Deferred income tax			11,092				3,650
Total provision for income taxes		$	11,092			$	653,837

 

The effective tax rate for the six months ended June 30, 2014 and 2013 was negative 0.27% and 15.02%, respectively the significant change in effective tax rate was due to the large provision for loans accrued during the period.

 

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, 2014 and December 31, 2013, the deferred tax liability amounted to $342,282 and $333,617, respectively.

 

As of June 30, 2014 and December 31, 2013, the Company intends to permanently reinvest the undistributed earnings from its foreign subsidiaries to fund future operations. The amount of unrecognized deferred tax liabilities for temporary differences related to investments in foreign subsidiaries is not determined because such a determination is not practicable.

 

23.

RELATED PARTY TRANSACTIONS AND BALANCES

 

1)

Nature of relationships with related parties

 

	Name		Relationships with the Company
	Wujiang Chunjia Textile Trading Co., Ltd (“Chunjia Textile”)		Controlled by major shareholders

  

2)

Related party transactions

 

Loans to related party consisted of the following:

 

		For The Six Months Ended
		June 30,
		2014 (Unaudited)				2013
Chunjia Textile		$	1,137,010			$	-

 

3)

Related party balances

 

Amount due from related party represents loan balances as follows: 

 

			June 30, 2014 (Unaudited)				December 31, 2013
Chunjia Textile		$	1,137,010			$	-

 

The related party loan is subject to an annual interest rate of 14.4%. The amount was fully repaid in July 2014.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

  

24.

CONCENTRATION AND CREDIT RISKS

 

As of June 30, 2014 and December 31, 2013, the Company held cash of $7,399,767 and $9,405,865, 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, 2014 and December 31, 2013.

 

25.

COMMITMENTS AND CONTINGENCIES

 

1)

Lease Commitments

 

The Company extended its lease agreement of its principal office for a 5-year period from October 1, 2013 to September 30, 2018. The following table sets forth the Company’s contractual obligations as of June 30, 2014 in future periods:

 

		Rental payments (Unaudited)
Within 1 year		$	196,007
Within 1-2 years			261,343
Within 2-3 years			261,343
More than 3 years			326,679
Total		$	1,045,372

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

25.

COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

2)

Guarantee Commitments

 

The guarantees will terminate upon payment and/or cancellation of the obligation; however, payments by the Company would be triggered by failure of the guaranteed party to fulfill its obligation covered by the guarantee. Generally, the average guarantee expiration terms ranged within 6 to 12 months and the average percentage of the guarantee amount as security deposit is 10% ~ 20%.

 

3)

Contingencies

 

The Company is involved in various legal actions arising in the ordinary course of its business. During six month ended June 30, 2014, the Company was involved in 36 lawsuits, among which 24 were related to its loan business and 12 were related to guarantee business. The Company initiated legal proceedings to collect delinquent balances from borrowers. 27 of these cases with an aggregated claim of $10.17 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 9 cases with an aggregated claim of $8.64 million have not been adjudicated by the Court as of June 30, 2014.

 

26.

SUBSEQUENT EVENTS

 

Contingencies

 

During the period from July 1, 2014 to the date of this report, the Company was involved in 41 new lawsuits, 31 of which are related to its loan business and 10 are related to its guarantee business. The Company initiated legal proceedings to collect delinquent loan balance from borrowers. Cases with a total claim of $1.15 million have been adjudicated by the court and cases with a total claim of $19.56 million are still at the initial stage of the litigation.

Departure and Appointment of Executive Officers

 

On August 21, 2014, Mr. Huichun Qin notified the Company of his resignation from the board of directors of the Company (the “Board”) and as the Chief Executive Officer of the Company effective immediately.  

 

Simultaneously with above resignations, Mr. Huichun Qin also resigned from all positions he held with the Company’s subsidiaries and affiliated entities, including from the board of directors and as Chief Executive Officer and General Manager of Wujiang Luxiang, from the board of directors and as General Manager of WFOE and from the board of directors and as Chief Executive Officer of Pride Financial Leasing (Suzhou) Co. Ltd. (“PFL”). Both WFOE and PFL are indirectly owned subsidiaries of the Company and WFOE controls Wujiang Luxiang and PFL through a series of contractual arrangements. Effective August 21, 2014, the Board appointed Mr. Long Yi, the Company’s Chief Financial Officer, to serve as the interim Chief Executive Officer while the Company actively searched for a permanent Chief Executive Officer as well as replacements for the other vacancies created by Mr. Qin’s resignation. Effective August 21, 2014, the Board appointed Mr. Xinhua Sun as a director and the Chief Executive Officer and General Manager of Wujiang Luxiang. On December 29, 2014, the Board of Directors appointed Mr. Jingen Ling as the Chief Executive Officer and President of the Company and simultaneously Mr. Long Yi, the Chief Financial Officer of the Company, ceased to be the Interim Chief Executive Officer of the Company. 

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

  

26.

SUBSEQUENT EVENTS (CONTINUED)

 

Completion of the Internal Review

 

Based on the Chief Financial Officer’s review of the books and records of the Company, the Company has made a preliminary determination that following the close of the fiscal quarter ended June 30, 2014, RMB 7 million (approximately $1.1 million) was transferred (the “Transfer at Issue”) from the bank account of WFOE, without authorization to the personal account of a former executive officer of the Company, who was still an executive officer at the time of the transfer. The funds were supposed to be used for the purpose of increasing the registered capital account of Wujiang Luxiang. The Company has sought return of the funds but to date has not recovered them. The Company’s Board of Directors explored all means, including legal avenues, to recover the funds and has formed a Special Committee to undertake an internal review of the circumstances surrounding the transfer

 

On January 26, 2014, the Special Committee notified the Board of Directors that the internal review surrounding the Transfer at Issue was completed. The internal review confirmed that Mr. Qin transferred RMB 7 million (approximately $1.1 million) from WFOE’s bank account to his personal bank account. The internal review team was unable to interview Mr. Qin. The missing funds have not yet been recovered and the Company has engaged local PRC counsel to assist in the matter.

 

During the internal review, the independent counsel examined whether other transfers had occurred that were similar to the Transfer at Issue, in that the Company’s funds were transferred to a related party in a manner that was not consistent with the Company’s corporate governance and internal control procedures. The independent counsel identified four transfers made by Mr. Qin that were not consistent with the Company’s corporate governance and internal control procedures. With respect to the first three transfers, all funds were either returned to the Company or applied to the Company’s business. With respect to the fourth transfer, the funds were used to increase the registered capital of Wujiang Luxiang, a variable interest entity the Company controls via a series of contractual arrangements, as intended and reflected in an application made to the PRC government for such increase of registered capital.

 

The internal review indicated that the Company’s control deficiencies contributed to the Transfer at Issue. The internal review also found that, since the discovery of the Transfer at Issue, the Company had taken various steps to improve its internal controls and procedures that apply to fund transfers. The internal review observed that such new controls and procedures appear to be much more thorough and comprehensive.

 

Legal Proceedings

 

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 is captioned Andrew Dennison v. China Commercial Credit, Inc., et al., Case No. 2:2014-cv-04956. The action 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, two 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 and the Yun Group’s counsel as lead counsel.

 

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

 

Under the schedule stipulated by the parties, the Yun Group is to file an amended complaint within 60 days of the date that the transfer was effected, and the defendants’ date to answer or move is within 60 days of that filing. The Company and Mr. Levy anticipate that they will file a motion to dismiss the amended complaint. The Company believes that this lawsuit is without merit and intends to vigorously defend against it. At this early stage of the proceedings, the Company is not able to estimate the probability of success or loss.

 

 

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

 

The following discussion and analysis of our financial condition and results of operations for the six and three months  ended June 30, 2014 should be read in conjunction with the Financial Statements and corresponding notes included in this Quarterly Report on Form 10-Q. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors and Notes Regarding Forward-Looking Statements in this report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” “target”, “forecast” and similar expressions to identify forward-looking statements.

 

Overview

We are a financial services firm operating in China. Our current operations are mainly conducted through Wujiang Luxiang, a fully licensed microcredit company which we control through our subsidiaries and certain contractual arrangement, and consist of providing short-term direct loans and loan guarantees to SMEs located in Wujiang City, Jiangsu Province of China. As of June 30, 2014, we have built a $92.4 million portfolio of direct loans to 209 borrowers and a total of $29.1 million in loan guarantees for 31 borrowers. We were established under the 2008 Guidance on the Small Loan Company Pilot of the China Banking Regulatory Commission and the People's Bank of China (“PBOC”) (No.23) (“Circular No. 23”) to extend short term loans and loan guarantees to SMEs, a class of borrowers that we believe have been underserved in the Chinese lending market. The loans that we provide bridge the gap between Chinese-state run banks that have not traditionally served the capital needs of SMEs and high interest rate “underground” lenders, and our loans provide capital at more favorable terms and sustainable interest rates.

 

Due to substantial increase in the amount of default loans in the loan guarantees business, the amount of underlying loans we guaranteed has been reduced by 51.2% as of June 30, 2014 compared to as of December 31, 2013. As the rate of fees and commissions generated from the guarantee business has been decreasing, the Company has declined that the revenue does not justify the default risks involved, and therefore expects to further reduce the traditional guarantee business and hold off on pursuing the guarantee business to be provided via the Kaixindai Financing Services Jiangsu Co. Ltd (“Kaixindai”) platform as previously planned. Management may actively resume the guarantee business if economic conditions improve in the future.

 

On September 5, 2013, our wholly owned subsidiary, CCC International Investment Holding Ltd. (“CCC HK”), established Pride Financial Leasing (Suzhou) Co. Ltd. (“PFL”) in Jiangsu Province, China. PFL was expected to offer financial leasing of machinery and equipment, transportation vehicles, and medical devices to municipal government agencies, hospitals and SMEs in Jiangsu Province and beyond. During the six months ended June 30, 2014, PFL did not have any operations except for initial organizational activities. As of the date of this quarterly report, PFL entered into two financial leasing agreements for an aggregate of $5.0 million (one with a monthly principle and interest income of $81,300 and the other with a quarterly principle and interest income of $341,463. We do not currently have further funds to deploy in the financial leasing business.

 

On February 19, 2014, WFOE entered into certain contractual arrangements with Mr. Huichun Qin and Suzhou Pride Information Technology Co. Ltd. (“Pride Online”), a domestic entity established on February 19, 2014 and 100% owned by Mr. Qin. Pursuant to these contractual arrangements, WFOE shall have the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Pride Online, including absolute control rights and the rights to the assets, property and revenue of Pride Online and as a result, approximately 100% of the net income of Pride Online will be paid as a service fee to WFOE. Pride Online operates an online platform (www. pridelendingclub.com) to match prospective borrowers with lenders. As of the date of this quarterly report, Pride Online did not generate any income and management expect to terminate the contractual arrangements with Pride Online. The registered capital contributed to Pride Online by WFOE, after deduction of certain organizational costs and certain start-up operational expenses, will be returned to WFOE.

 

 

Key Factors Affecting Our Results of Operation

 

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

 

Due to changes in the applicable microcredit lending regulations in Jiangsu Province, starting August 2012 we elected to charge no more than three times the PBOC Benchmark Rate. Prior to August 2012, we were allowed to charge up to four times the PBOC Benchmark Rate. The decrease in the PBOC Benchmark Rate and the revised restriction on the allowable points above PBOC Benchmark Rate have slowed our growth in net interest income. 

 

Our results of operations are also affected by the provision for loan losses which is a noncash item and represents an assessment of the risk of future loan losses. Increases in the allowance for loan losses are achieved through provision for loan losses that are charged against net interest income.

 

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

 

 

Results of Operations

 

Three Months Ended June 30, 2014 as Compared to Three Months Ended June 30, 2013

 

CHINA COMMERCIAL CREDIT, INC

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

   

		For the three Months Ended
		June 30,
		2014 (As Restated)				2013				Amount				Change %
Interest income
Interests and fees on loans		$	1,673,559			$	3,275,026			$	(1,601,467	)			(49	)%
Interests on deposits with banks			9,093				21,327				(12,234	)			(57	)%
Total interest and fees income			1,682,652				3,296,353				(1,613,701	)			(49	)%
Interest expense
Interest expense on short-term bank loans			(247,935	)			(316,697	)			68,762				(22	)%
Net interest income			1,434,717				2,979,656				(1,544,939	)			(52	)%
Provision for loan losses			(14,759,397	)			(352,872	)			(14,406,525	)			(4083	)%
Net interest (loss)/income after provision for loan losses			(13,324,680	)			2,626,784				(15,951,464	)			(607	)%
Commissions and fees on financial guarantee services			90,050				361,867				(271,817	)			(75	)%
(Under)/Over provision on financial guarantee services			(3,327,506	)			104,530				(3,432,036	)			(3283	)%
Commission and fees on guarantee services, net			(3,237,456	)			466,397				(3,793,853	)			(813	)%
Revenue after loan expenses			(16,562,136	)			3,093,181				(19,655,317	)			(635	)%
Non-interest income
Government incentive			81,408				-				81,408				100	%
Other non-interest income			48,369				-				48,369				100	%
Total non-interest income			129,777				-				129,777				100	%
Non-interest expense
Salaries and employee surcharge			(222,268	)			(146,931	)			(75,337	)			51	%
Rental expenses			(65,232	)			(64,810	)			(422	)			1	%
Business taxes and surcharge			(45,776	)			(143,142	)			97,366				(68	)%
Other operating expenses			(600,380	)			(419,506	)			(180,874	)			43	%
Total non-interest expense			(933,656	)			(774,389	)			(159,267	)			21	%
(Loss)/Income Before Taxes			(17,366,015	)			2,318,792				(19,684,807	)			(849	)%
Income tax expense			173,633				(354,969	)			528,602				(149	)%
Net (Loss)/Income		$	(17,192,382	)		$	1,963,823			$	(19,156,205	)			(975	)%
(Loss)/Earnings per Share- Basic and Diluted		$	(1.52	)		$	0.22			$	(1.74	)			(797	)%
Weighted Average Shares Outstanding-Basic and Diluted			11,315,900				9,000,000				2,315,900				26	%
Net (Loss)/Income			(17,192,382	)			1,963,823				(19,156,205	)			(975	)%
Other comprehensive income
Foreign currency translation adjustment			136,859				1,056,705				(919,846	)			(87	)%
Comprehensive (Loss)/Income		$	(17,055,523	)		$	3,020,528			$	(20,076,051	)			(665	)%

 

 

The Company’s net loss for the three months ended June 30, 2014 was $17,192,382 representing a decrease of $19,156,205, or 975 %, from net income of $1,963,823 for the three months ended June 30, 2013. The net loss for the three months ended June 30, 2014 was the net effect of the changes in the following components:

 

●       a decrease in net interest income of $1,544,939;

●       an increase in the provision for loan losses of $14,406,525

●       a decrease in commission and fees from our guarantee business of $271,817;

●       an increase of provision on financial guarantee services of $3,432,036

●       an increase in other non-interest expense of $159,267; and

●       an increase in enterprise income tax of $528,602

 

The following paragraphs discuss changes in the components of net (loss)/income in greater details during the three months ended June 30, 2014, as compared to the three months ended June 30, 2013.

 

Net Interest income

 

Net interest income is equal to interest income we generated less interest expenses we incurred. The Company’s net interest income decreased by $1,544,939 or 52%, to $1,434,717 during the three month ended June 30, 2014, as compared to net interest income of $2,979,656 for the three months ended June 30, 2013.

 

The decrease is due to the combined effect of: (1) decrease in effective weighted average loan interest rate from 14.57% for the loan portfolio as of June 30, 2013 to 14.36% as of June 30, 2014 due to the mandatory requirement promulgated by Jiangsu Finance Bureau in June of 2013 that effective from October 1, 2013 the maximum interest rate a microcredit company in Jiangsu province is permitted to charge shall be fifteen percent compared to eighteen percent previously permitted; (2) reversal of interest income of $371,605 due from some long-aging customers according to interest waive agreement between Wujiang Luxiang and these customers; and (3) the decrease in the amount of monthly interest received. Compared to the same period last year, a substantial amount of borrowers chose to repay the principal and the interest due at the maturity of the loan term instead of making monthly interest payments. Both payments are permissible under the agreements we have with the borrowers. When a borrower chooses to repay the principal and the interest due at the maturity of the loan term, the interest payments are only recognized as revenue when they are paid at the maturity of the loan.

 

Since the beginning of 2014, People’s Bank of China continued to withdraw a significant amount of liquidity from the market, which has made it even harder for SMEs to gain access to capital. The bank lenders usually require an old loan be paid in full upon maturity before they approve a new loan to the same borrower. Some SMEs have to borrow from so-called “underground” lenders, or shadow banks to repay the loans due to the banks. During the three months ended June 30, 2014, the banks denied to extend new loans to some SMEs even after they made the full repayment for the loans due and satisfied other conditions. Management is concerned that the borrowers may use the proceeds from the loans we grant to them as a means of repayment to the other banks or even to the underground lenders, instead of using them in operations. Therefore, management decided to grant new loans in a more cautious manner. The number of new loans/renewed loans reduced from 326 as of June 30, 2013 to 92 as of June 30 2014 and as a result, the interest income declined.

 

 

Due to the long-term nature of our restricted deposits with third party banks, we utilized these deposits as term deposits during the three months ended June 30, 2014 which in turn generated interest income on deposits with banks of $9,093 as compared to $21,327 during the three months ended June 30, 2013. The decrease was mainly due to the reduction of our traditional guarantee business with banks, and we have closed several restricted deposit accounts with banks through which we provided guarantee services to our customers. As of June 30, 2014, the balance of restricted cash was $3,988,679, a decrease of 66.9% from $12,040,245 as of June 30, 2013.

 

Interest expense represents interest incurred on short-term bank loans. The interest incurred on short term bank loans decreased by $68,762, or 22%. This was mainly caused by a decrease of the total bank borrowing balance of $4.8 million, from $21.0 million as of June 30, 2013 to $16.2 million as of June 30, 2014. The aggregate amount of credit available to us under the line of credit we have with the Agriculture Bank of China remains unchanged as RMB100 million (approximately $16 million) as of June 30, 2014 and as of the date of this report.

 

Provision for Loan Losses

 

In February and March 2015, the Company revisited the classification of its loan and guarantee portfolio within its rating system and decided to test the adequacy of the allowances calculated thereby to reclassify certain loans into different categories. The Company reviewed each of the customers’ profile and loan documents. For customers with several loans with different due dates, if one loan was past due, we decided to reclassify all of this customer's loans as past due (even the other loans that are not mature yet). For extended loans, we re-evaluated the customer's repayment ability in a more cautions manner and reclassified the loans of customers without very strong financial condition into the past due category. The Company also determined that accrual for the guarantee services should also be revised in the same manner as the loan accrual. The above mentioned method to revise the five tier classification will be applied in the future.

 

The Company’s provision for loan losses were $14,759,397 (as restated) and $352,872 for the three months ended June 30, 2014 and 2013, respectively. The provision for loan losses was determined by comparing the beginning and ending balance of allowance for loan losses for business and personal loans. If the ending balance of the allowance of loan losses after any charge offs (net of recoveries) is less than the beginning balance, it will be recorded as a “reversal”; if it is larger, it will be recorded as a “provision” in the allowance for loan loss. The netting amount of “reversal” and “provision” is presented in the consolidated statements of income and comprehensive income and the components of the provision for loan losses were disclosed in Note 7.

 

Increase in provision for loan losses reflects the increase in the allowance for loan losses for the reporting period as our loan receivable balance increased and hence higher risk was assessed. In accordance with the aging schedule, during the three months ended June 30, 2014, more “special mention” or “pass” loans were moved down to the “substandard” and “doubtful” category subject to the higher provision ratio of 25% and 50%, respectively. We have initiated several legal proceedings against long-aging customers and it may take a long time to collect the outstanding balance from these customers. In order to speed up the collection of past due loans, we engaged He-Partners Law Firm, one of the largest law firm in Suzhou City to represent us in these lawsuits. 

 

Since the beginning of 2014, the economic conditions in the eastern part of China, especially the Yangtze River Delta region, has been challenging due to the downturn of the general economic situation in China. Wujiang, which is in the heart of this region, has been significantly affected. The textile industry, which is the pillar industry in Wujiang area, as well as other industries, have been facing downward pressure. As the local SMEs’ profitability and repayment ability deteriorates, “special mentioned”, “substandard” and “doubtful’ bank loans drastically increased. As such, our provision for loan losses substantially increased during this quarter.

 

Commission and Fees from Our Guarantee Business

 

The Company also generated net income by charging fees for financial guarantee services provided to our customers to help them obtain loans from other banks. We generally charge a one-time fee of 1.62% multiplied by the amount of loans being guaranteed based on the nature of the guarantee and whether the customer is new or existing. The commissions and fees generated from our financial guarantee services decreased from $361,867 for the three months ended June 30, 2013, to $90,050 for the three months ended June 30, 2014, representing a decrease of $271,817 or 75%.

 

As of June 30, 2014, we have provided guarantees for a total of $29.1 million underlying loans to approximately 31 borrowers, a reduction of 51.2%  as compared to December 31, 2013. We expect to further reduce our traditional guarantee services and gradually get out from this business, as the rate of fees and commissions generated from this service has been decreasing and the revenue does not justify the default risks involved.

 

Provision on Financial Guarantee Services

 

The provision on financial guarantee services increased from an over provision of $104,530 for the three months ended June 30, 2013, to an under provision of $3,327,506 (as restated) for the three months ended June 30, 2014, representing an increase of $3,432,036.

 

The methodology the Company used to estimate the liability for probable guarantee loss considers the guarantee contract amount and a variety of factors, which include, dependence on the counterparty, latest financial position and performance of the customers, actual defaults, estimated future defaults, historical loss experience, estimated value of collaterals or guarantees the costumers or third parties offered, and other economic conditions such as the economic trend of the area and the country. The estimates are based upon currently available information.

 

 

Based on the past experience, we estimates the probable loss for immature financial guarantee services to be 1% of contract amount and made a provision for possible credit risk of its guarantee. Additionally we accrued allowance on matured but defaulted financial guarantee services. During the three months ended June 30, 2014, a number of our financial guarantee customers defaulted on their loans and we repaid for the underlying loans. As of June 30, 2014, the outstanding repayment balance amounted to $8.8 million.

 

As explained above, since the beginning of 2014, People’s Bank of China continued to withdraw a significant amount of liquidity from the market, which has made it even harder for SMEs to gain access to capital. The bank lenders usually require an old loan be paid in full upon maturity before they approve a new loan to the same borrower. During the first six months of 2014, the banks denied to extend new loans to many SMEs even after they made the full repayment for the loans due and satisfied other conditions. As a result, some of the SME borrowers for which we provided the guarantees decided to default on the bank loans. Therefore the amount of repayment we made to the bank lenders substantially increased during the three months ended June 30, 2014.

 

We are in the process of negotiating and possibly litigating against both the borrowers and their counter-guarantors. Due to the uncertainty of the outcome, we increased our provision for the guarantee services significantly from an over provision of $104,530 for the three months ended June 30, 2013, to an under provision of $3,327,506 for the three months ended June 30, 2014, representing an increase of $3,432,036. We engaged He-Partners Law Firm, the largest law firm in Suzhou City, to represent us in the legal proceedings against the borrowers and their counter guarantors, and expect to collect part of the outstanding balance in a period ranging from six months to one year upon adjudication by the Court in favor of the Company. The timing of collection and ultimate amount of funds we can recover depend on a few factors, including the repayment ability of the borrower and their counter-guarantors, the execution time of the court, other obligations the borrowers have and the priority over the claim for the Company.

 

We accrued specific provision on the balance of repayment on behalf of defaulted customers according to “Five-Tier” principal. The Specific Reserve is based on the level of loss of each repayment after categorizing the repayment according to their risk. According to the “Five-Tier Principle” set forth in the Provision Guidance, the guarantees are categorized as “pass”, “special-mention”, “substandard”, “doubtful” or “loss”. Normally, the provision rate is 2% for “special-mention”, 25% for “substandard”, 50% for “doubtful” and 100% for “loss”.

 

Non-interest expenses

 

Non-interest expenses increased from $774,389 for the three months ended June 30, 2013 to $933,656 for the three months ended June 30, 2014, representing an increase of $159,267 or 21%. Non-interest expenses primarily consisted of salary and benefits for employees, business tax and surcharge, traveling cost, entertainment expenses, depreciation of equipment, office rental expenses, professional service fees, and office supplies. The increase was mainly attributable to (1) salaries and employee surcharge, which increased by $75,337, and (2) an increase in other operating expenses of $180,874. Other operating expenses were higher during the three months ended June 30, 2014 as compared to the same period of 2013, primarily due to an increase in D&O insurance premium of $70,875 and an increase in legal and consulting expense of $309,459, netting off against a decrease in bank charges of $25,751, a decrease in promotion expense of $41,892 and a decrease in audit-related expenses of $67,587.

 

Income tax

 

Income taxes decreased from an income tax expense of $354,969 for the three months ended June 30, 2013 to an income tax credit  of $173,633 for the three months ended June 30, 2014, representing a decrease of $528,602. The decrease in income tax is mainly due to the decrease of pre-tax income for the three months ended June 30, 2014.

 

 

Six Months Ended June 30, 2014 as Compared to Six Months ended June 30, 2013 

 

CHINA COMMERCIAL CREDIT, INC

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

 

		For the Six Months Ended
		June 30,
		2014 (As Restated)				2013				Amount				Change %
Interest income
Interests and fees on loans		$	4,530,033			$	6,187,104			$	(1,657,071	)			(27	)%
Interests on deposits with banks			51,541				118,494				(66,953	)			(57	)%
Total interest and fees income			4,581,574				6,305,598				(1,724,024	)			(27	)%
Interest expense
Interest expense on short-term bank loans			(493,125	)			(622,852	)			129,727				(21	)%
Net interest income			4,088,449				5,682,746				(1,594,297	)			(28	)%
Provision for loan losses			(15,347,577	)			(841,088	)			(14,506,489	)			(1725	)%
Net interest (loss)/income after provision for loan losses			(11,259,128	)			4,841,658				(16,100,786	)			(333	)%
Commissions and fees on financial guarantee services			388,360				773,076				(384,716	)			(50	)%
(Under) Over provision on financial guarantee services			(3,637,359	)			148,700				(3,786,059	)			(2546	)%
Commission and fees on guarantee services, net			(3,248,999	)			921,776				(4,170,775	)			(452	)%
Revenue after loan expenses			(14,508,127	)			5,763,434				(20,271,561	)			(352	)%
Non-interest income
Government incentive			81,408				25,775				55,633				216	%
Other non-interest income			169,329				-				169,329				100	%
Total non-interest income			250,737				25,775				224,962				873	%
Non-interest expense
Salaries and employee surcharge			(408,403	)			(344,875	)			(63,528	)			18	%
Rental expenses			(130,982	)			(128,847	)			(2,135	)			2	%
Business taxes and surcharge			(158,388	)			(257,589	)			99,201				(39	)%
Other operating expenses			(1,132,494	)			(870,370	)			(262,124	)			30	%
Total non-interest expense			(1,830,267	)			(1,601,681	)			(228,586	)			14	%
(Loss)/Income Before Taxes			(16,087,657	)			4,187,528				(20,275,185	)			(484	)%
Income tax expense			(11,092	)			(653,837	)			642,745				(98	)%
Net (Loss)/Income		$	(16,098,749	)		$	3,533,691			$	(19,632,440	)			(556	)%
(Loss)/Earnings per Share- Basic and Diluted		$	(1.48	)		$	0.39			$	(1.87	)			(475	)%
Weighted Average Shares Outstanding-Basic and Diluted			10,935,530				9,000,000				1,935,530				22	%
Net (Loss)/Income			(16,098,749	)			3,533,691				(19,632,440	)			(556	)%
Other comprehensive income
Foreign currency translation adjustment			(670,768	)			1,428,066				(2,098,834	)			(147	)%
Comprehensive (Loss)/Income		$	(16,769,517	)		$	4,961,757			$	(21,731,274	)			(438	)%

 

 

The Company’s net loss for the six months ended June 30, 2014 was $16,098,749 (as restated), representing a decrease of $19,632,440 or 556%, from net income of $3,533,691 for the six months ended June 30, 2013. The decrease in net income for the six months ended June 30, 2014 was the net effect of the changes in the following components:

 

·

a decrease in net interest income of $1,594,297;

·

an increase in the provision for loan losses of $14,506,489;

·

a decrease in commission and fees on guarantee services of $384,716;

·

an increase of provision on financial guarantee services of $3,786,059;

·

an increase in total non-interest expense of $228,586; and

·

a decrease in enterprise income tax of $642,745;

 

The following paragraphs discuss changes in the components of net (loss)/income in greater details during the six months ended June 30, 2014, as compared to the six months ended June 30, 2013.

 

Net Interest Income

Net interest income is equal to interest income we generated less interest expenses we incurred. The Company’s net interest income decreased by $1,594,297, or 28% to $4,088,449 during the six months ended June 30, 2014, as compared to net interest income of $5,682,746 for the six months ended June 30, 2013.

 

The interest and fees on loans decreased by $1,657,071, or 27% from $6,187,104 for the six months ended June 30, 2013 to $4,530,033 for the six months ended June 30, 2014. The decrease is the combined effect of: (1) decrease in effective weighted average loan interest rate from 14.57% for the loan portfolio as of June 30, 2013 to 14.36% as of June 30, 2014 due to the mandatory requirement promulgated by Jiangsu Finance Bureau in June of 2013 that effective from October 1, 2013 the maximum interest rate a microcredit company in Jiangsu province is permitted to charge shall be fifteen percent compared to eighteen percent previously permitted; (2) reversal of interest income of $371,605 due from some long-aging customers according to interest waive agreement between Wujiang Luxiang and these customers: and (3) the decrease in the amount of monthly interest received. Compared to the same period last year, a substantial amount of borrowers chooses to repay the principal and the interest due at the maturity of the loan term instead of making monthly interest payments. Both payments are permissible under the agreements we have with the borrowers. When a borrower chose to repay the principal and the interest due at the maturity of the loan term, the interest payments are only recognized as revenue when they are paid at the maturity of the loan.

 

Since the beginning of 2014, People’s Bank of China continued to withdraw a significant amount of liquidity from the market, which has made it even harder for SMEs to gain access to capital. The bank lenders usually require an old loan be paid in full upon maturity before they approve a new loan to the same borrower. Some SMEs have to borrow from so-called “underground” lenders, or shadow banks to repay the loans due to the banks. During the three months ended June 30, 2014, the banks denied to extend new loans to some SMEs even after they made the full repayment for the loans due and satisfied other conditions. Management is concerned that the borrowers may use the proceeds from the loans we grant to them as a means of repayment to the other banks or even to the underground lenders, instead of using them in operations. Therefore, management decided to grant new loans in a more cautious manner.

 

During the six months ended June 30, 2014, we granted 92 loans and the average loan size was approximately $361,000, as compared to 326 loans with an average loan size of $429,000 during the six months ended June 30, 2013.

 

Due to the long-term nature of our restricted deposits with third party banks, we utilized these deposits as term deposits which in turn generated interest income on deposits with banks of $51,541 during the six months ended June 30, 2014 as compared to $118,494 during the six months ended June 30, 2013. The decrease was mainly due to the reduction of our traditional guarantee business with banks, and we have closed several restricted deposit accounts with banks through which we provided guarantee services to our customers. As of June 30, 2014, the balance of restricted cash was $3,988,679, a decrease of 66.9% from $12,040,245 as of June 30, 2013.

 

 

Interest expense represents interest incurred on short-term bank loans. The interest incurred on short term bank loans decreased by $129,727, or 21%. This was mainly caused by a decrease of total bank borrowing balance by $4.8 million from $21.0 million as of June 30, 2013 to $16.2 million as of June 30, 2014. During both six months ended June 30, 2014 and 2013, there was no interest expense related to the loans from related parties, as a result of our effort to reduce related party transactions.

 

Provision for Loan Losses

 

In February and March 2015, the Company revisited the classification of its loan and guarantee portfolio within its rating system and decided to test the adequacy of the allowances calculated thereby to reclassify certain loans into different categories. The Company reviewed each of the customers’ profile and loan documents. For customers with several loans with different due dates, if one loan was past due, we decided to reclassify all of this customer's loans as past due (even the other loans that are not mature yet). For extended loans, we re-evaluated the customer's repayment ability in a more cautions manner and reclassified the loans of customers without very strong financial condition into the past due category. The Company also determined that accrual for the guarantee services should also be revised in the same manner as the loan accrual. The above mentioned method to revise the five tier classification will be applied in the future.

 

The Company’s provision for loan losses was $15,347,577 and $841,088 for the six months ended June 30, 2014 and 2013, respectively. The provision for loan losses was determined by comparing the beginning and ending balance of allowance for loan losses for business and personal loans. If the ending balance of the allowance of loan losses after any charge offs (net of recoveries) is less than the beginning balance, it will be recorded as a “reversal”; if it is larger, it will be recorded as a “provision” in the allowance for loan loss. The netting amount of “reversal” and “provision” is presented in the consolidated statements of income and comprehensive income and the components of the provision for loan losses were disclosed in Note 7.

 

Increase in provision for loan losses reflects the increase in the allowance for loan losses for the reporting period as our loan receivable balance increased and hence higher risk was assessed. In accordance with the aging schedule, during the six months ended June 30, 2014, more “special mention” or “pass” loans were moved down to the “substandard” and “doubtful” category subject to the higher provision ratio of 25% and 50%, respectively. Doubtful loans increased from $1.9 million to $27.4 million during the six months ended June 30,2014 compared to December 31, 2013. We have initiated several legal proceedings against long-aging customers and it may take a long time to settle the case. In order to speed up the collection of past due loans, we, engaged He-Partners Law Firm, one of the largest law firms in Suzhou City to represent us in these lawsuits.

 

Since the beginning of 2014, the economic conditions in the eastern part of China, especially the Yangtze River Delta region, has been challenging due to the downturn of the general economic situation in China. Wujiang, which is in the heart of this region, has been significantly affected. The textile industry, which is the pillar industry in the Wujiang area, as well as other industries, have been facing downward pressure. As the local SMEs’ profitability and repayment ability deteriorates, “special mentioned”, “substandard” and “doubtful’ bank loans drastically increased. As such, our provision for loan losses substantially increased during this quarter.

 

Net Commission and Fees on Guarantee Business

The Company also generated net income by charging fees for financial guarantee services provided to our customers to help them obtain loans from other banks. We generally charge a one-time fee of 1.62%-3.60% multiplied by the amount of loans being guaranteed, based on the nature of the guarantee and whether the customer is new or existing. The commissions and fees generated from our financial guarantee services decreased from $773,076 for the six months ended June 30, 2013 to $388,360 for the six months ended June 30, 2014, representing a decrease of $384,716, or 50%.

 

As of June 30, 2014, we have provided guarantees for a total of $29.1 million underlying loans to approximately 31 borrowers, a reduction of 51.2% compared to December 31, 2013 .

 

Provision on Financial Guarantee Services

 

The provision on financial guarantee services increased from an over provision of $148,700 for the six months ended June 30, 2013, to an under provision of $3,637,359 for the six months ended June 30, 2014, representing an increase of $3,786,059.

 

The methodology the Company used to estimate the liability for probable guarantee loss considers the guarantee contract amount and a variety of factors, which include, dependence on the counterparty, latest financial position and performance of the customers, actual defaults, estimated future defaults, historical loss experience, estimated value of collaterals or guarantees the costumers or third parties offered, and other economic conditions such as the economic trend of the area and the country. The estimates are based upon currently available information.

 

As explained above, since the beginning of 2014, People’s Bank of China continued to withdraw a significant amount of liquidity from the market, which has made it even harder for SMEs to gain access to capital. The bank lenders usually require an old loan be paid in full upon maturity before they approve a new loan to the same borrower. During the first six months of 2014, the banks denied to extend new loans to many SMEs even after they made the full repayment for the loans due and satisfied other conditions. As a result, some of the SME borrowers for which we provided the guarantees decided to default on the bank loans. Therefore the amount of repayment we made to the bank lenders substantially increased during the six months ended June 30, 2014. We are in the process of negotiating and possibly litigating against both the borrowers and their counter-guarantors. Due to the uncertainty of the outcome, we increased our provision for the guarantee services significantly from an over provision of $148,700 for the six months ended June 30, 2013, to an under provision of $3,637,359 for the six months ended June 30, 2014, representing an increase of $3,786,059. We engaged He-Partners Law Firm, the largest law firm in Suzhou City, to represent us in the legal proceedings against the borrowers and their counter guarantors, and expect to collect part of the outstanding balance in a period ranging from six months to one year upon adjudication by the Court in favor of the Company. The timing of collection and ultimate amount of funds we can recover depend on a few factors, including the repayment ability of the borrower and their counter-guarantors, the execution time of the court, other obligations the borrowers have and priority over the claim for the Company.

 

 

We accrued specific provision on the balance of repayment on behalf of defaulted customers according to “Five-Tier” principal. The Specific Reserve is based on the level of loss of each loan after categorizing the loan according to their risk. According to the “Five-Tier Principle” set forth in the Provision Guidance, the guarantees are categorized as “special-mention”, “substandard”, “doubtful” or “loss”. Normally, the provision rate is 2% for “special-mention”, 25% for “substandard”, 50% for “doubtful” and 100% for “loss”.

 

Non-interest Expenses

Non-interest expenses increased from $1,601,681 for the six months ended June 30, 2013 to $1,830,267 for the six months ended June 30, 2014, representing an increase of $228,586 or 14%. Non-interest expenses primarily consisted of salary and employee surcharge, office rental expense, business tax and surcharge, depreciation of equipment, travel expenses, entertainment expenses, professional service fees, and other office supplies. The increase was mainly attributable to an increase in salaries and employee surcharge by $63,528 and an increase of other operating expenses by $262,124, or 30%. Other operating expenses were higher during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013, primarily due to a net effect of an increase in legal and consulting fee of 315,335, an increase in D&O insurance premium of $141,750, against a decrease in bank charge of $60,489, a decrease in promotion fee of $76,173 and a decrease in travel expenses of $23,811.

 

Income Tax

Income taxes decreased from $653,837 for the six months ended June 30, 2013 to $11,092 for the six months ended June 30, 2014, representing a decrease of $642,745 or 98 %. The decrease in income tax is mainly attributable to a decrease of income before tax of $20,275,185 or 484%, from $4,187,528 for the six month ended June 30, 2013 to a loss of $16,087,657 for the six months ended June 30, 2014.

 

Loan Portfolio Quality

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

 

We also keep the frequency of visits to our customers and observe their daily production on site from time to time to observe their operating condition and collect their financial information. Since most of our customers are in the Jiangsu area, it is also relatively easy to obtain information about our customers. Due to the bad economic condition of the first six months of 2014, we increased the frequency of our visits in order to better identify the potential default risk.

 

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

 

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

 

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

 

We use a comprehensive methodology to monitor credit quality and prudently manage credit concentration within our portfolio of loans. Currently our loan portfolio concentrates in the textile industry and during the six months ended June 30, 2014, both the domestic and international demand for textile products have been decreasing. To maintain our loan portfolio quality, we have modified our loan policy to accept only textile companies with real estate as collateral or guaranteed by guarantee companies.

 

 

In addition, we plan to diversify our risks by concentrating in smaller amount loans that are below $490,000 (or approximately RMB 3.0 million). We have also eliminated related party loans and extended more loans to agriculture related business since 2012.

 

Currently, the banking industry encourages SMEs to apply for loans as individual with recourse so that when it is past due, both the SME and the responsible individual are both liable for the past due amount and the individual borrower carries personal liability. As of June 30, 2014, our business loan balance decreased by 2.2% as compared to that as of December 31, 2013 while personal loan increased by 2.4%.

 

The following table sets forth the classification of loans receivable as of June 30, 2014 and December 31, 2013, respectively:

 

		June 30, 2014 (As Restated) (Unaudited)				Percent of Total				December 31, 2014				Percent of Total
Business loans			55,350,523				61.67	%			56,620,893				62.77	%
Personal loans			34,397,791				38.33	%			33,582,520				37.23	%
Total Loans receivable			89,748,314								90,203,413

 

Nonaccrual loans totaled $18.8 million, or 37.71% of total assets as of June 30, 2014, up from $2.8 million, or 2.49% of total assets, as of December 31, 2013. The allowance for loan losses was $15.16 million, representing 16.89% of loans receivable and 36.13% of non-accrual loans as of June 30, 2014. As of December 31, 2013, the allowance for loan losses was $1.38 million, representing 1.53% of loans receivable and 48.87% of non-accrual loans.

 

The following table sets forth information concerning our nonaccrual loans as of June 30, 2014 and December 31, 2013, respectively:

 

		June 30, 2014 (As Restated)				December 31, 2013
Nonaccrual loans		$	18,752,781			$	2,815,358
Allowance for loan losses		$	15,161,985			$	1,375,948
Loans receivable		$	89,748,314			$	90,203,413
Total assets		$	101,167,727			$	113,003,448
Nonaccrual loans to loans receivable			20.89	%			3.12	%
Nonperforming assets to total assets			18.54	%			2.49	%
Allowance for loan losses to loans receivable			16.89	%			1.53	%
Allowance for loan losses to non-accrual loans			80.85	%			48.87	%

 

Since the beginning of 2014, the economic conditions in eastern part of China, especially the Yangtze River Delta region, has been challenging due to the downturn of the general economic situation in China. Wujiang, which is in the heart of this region, has been significantly affected. The textile industry, which is the pillar industry in Wujiang area, as well as other industries, have been facing downward pressure. As the local SMEs’ profitability and repayment ability deteriorates, “special mentioned”, “substandard” and “doubtful’ bank loans drastically increased. As such, our provision for loan losses substantially increased during this quarter.

 

Cash Flows and Capital Resources

We have financed our operations primarily through shareholder contributions, cash flow from operations and bank loans, and from public offerings of securities. As a result of our total cash activities, net cash decreased from $9,405,865 as of December 31, 2013 to $7,399,767 as of June 30, 2014.

 

We require cash for working capital, making loans, repayment of debt and guarantee, salaries, commissions and related benefits and other operating expenses and income taxes. We expect that without the needs of future business expansion, our current working capital is sufficient to support our routine operations for the next twelve months.

 

However, as a micro-credit company regulated by the Chinese Banking Regulatory Commission, we are prohibited from providing saving or checking services to our customers; our borrowing capacity from other financial institutions is also limited to 50% of our equity.

 

 

 

In order to meet the capital needs for our continued operations, we may take the following actions: (1) continue to improve our collection of loan receivable and interest receivable; (2) if necessary, raise additional capital through the sale of equity; and/or (3) enter into new, or refinance existing, short- and/or long term commercial loans. We cannot assure you that financing will be available in the amounts we need or on terms acceptable to us, if at all. On May 13, 2014, the Company closed its second public offering (“Follow-on Offering”) offering of 1,750,000 shares of Common Stock and 1,750,000 warrants to purchase 875,000 shares of Common Stock. The public offering price of the shares sold in the Follow-on Offering was $3.99 per share and the offering pricing for the warrants was $0.01 per warrant. 1,650,386 shares of Common Stock was newly issued by the Company and 99,614 shares of Common Stock were registered and sold by existing shareholders. The aggregate gross proceeds in the Follow-on Offering were $6.6 million. After deducting underwriting discounts and commissions and offering expenses payable by the Company and the proceeds to the selling shareholders, the aggregate net proceeds received by the Company totaled approximately $5.7  million. The sale of additional equity securities, including convertible debt securities, would dilute our current shareholders. The incurrence of debt could result in operating and financial covenants that would restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, our business, operations and prospects may be adversely affected.

 

In March 2014, approximately $5.7 million (RMB 30 million) of the net proceeds raised in our IPO was transferred and have already been contributed to Wujiang Luxiang and approved as an increase of the registered capital of Wujiang Luxiang. In October 2014, approximately $5million (RMB 30.7 million) of the net proceeds raised in our follow-on offering was transferred to PFL to fund its operation.

 

Statement of Cash Flows

The following table sets forth a summary of our cash flows for the six months ended June 30, 2014 and 2013, respectively:

 

		For the six months Ended June 30
		2014 (Unaudited)				2013 (Unaudited)
Net cash provided by operating activities		$	974,483			$	4,124,466
Net cash used in investing activities		$	(8,545,958	)		$	(1,385,220	)
Net cash provided by financing activities		$	5,710,405			$	68,237
Effects of exchange rate changes on cash		$	(145,028	)		$	45,650
Net cash (outflow)/inflow		$	(2,006,098	)		$	2,853,133

 

Net Cash Provided by Operating Activities

 

During the six months ended June 30, 2014, we had positive cash flow from operating activities of $974,483, a decrease of $3,149,983 from the six months ended June 30, 2013, during which we had cash flow from operating activities of $4,124,466. The net income for the six months ended June 30, 2014 decreased by $7,720,758 as compared to the six months ended June 30, 2013. The decrease in net cash provided by operating activities was the result of several factors, including:

 

·

An increase in cash flow due to an increase of non-cash items which was primarily due to the increase in the provision for loan losses of $14,506,489 and the increase in the provision for financial guarantee services of $3,786,059.

 

·

A decrease in cash flow due to the increase in changes in interest receivable by $559,461. The interest receivable increased by $339,850 and $219,611 as of June 30, 2014 and 2013, respectively, as compared to December 31, 2013 and 2012. This is mainly attributable to a significant increase in interest receivable overdue 90 days as of June 30, 2014.

 

·

A decrease in cash flow due to the increase in changes in net tax receivable by $566,059. The net tax receivable as of June 30, 2014 and 2013 is $1,741,858 and $820,526, respectively. The Company was required to prepay enterprise income taxes at a rate of 25% on a quarterly basis when the applicable tax rate was 12.5% to loan business and 25% to guarantee business, respectively. Within five months after fiscal year end, the Company and the tax authority resolved the difference between the taxes paid and taxes due.

 

 

Net Cash Used in Investing Activities

Net cash used in investing activities for the six months ended June 30, 2014 was $8,545,958, as compared to net cash used in investing activities of $1,385,220 for the six months ended June 30, 2013. The cash used in investing activities for the six months ended June 30, 2014 was mainly used for repayment of defaulted customers in the financial guarantee service.

 

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2014 totaled $5,710,405, as compared to net cash used in financing activities of $68,237 for the six months ended June 30, 2013. The cash provided by financing activities for the six months ended June 30, 2014 was mainly attributable the net proceeds of $5.7 million received from issuance of common stock and warrants in the Follow-on Offering closed on May 13, 2014.

 

Contractual Obligations

As of June 30, 2014, the annual amounts of future minimum payments under certain of our contractual obligations were:  

 

		Payment due by period
		Total				Less than 1 year				1-2 years				2-3 years				3-5 years				5 years and after
Contractual obligations:
Short term bank loans (1)			16,242,995				16,242,995				-				-				-
Operating lease (2)			1,045,372				196,007				261,343				261,343				326,679
			17,288,367				16,439,002				261,343				261,343				326,679

 

(1)	The bank loans bear an average annual interest rate of 6.0%.

 

(2)	Our renewed lease for our office in Wujiang commenced on October 1, 2013 and will expire on September 30, 2018. The Company has the right to extend the lease before its expiration with a one-month's prior written notice.

 

Off-Balance Sheet Arrangements

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

 

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

 

				June 30, 2014 (Unaudited)				December 31, 2013
	Guarantee			$	29,139,933			$	59,692,091

 

Critical Accounting Policies

We prepare our financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect our reported amount of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and reported amounts of revenue and expenses during the reporting periods. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates.

 

 

An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur, could materially impact the condensed financial statements. We believe that the following accounting policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our condensed financial statements and other disclosures included in this report.

 

Revenue recognition

Revenue is recognized when there are probable economic benefits to the Company and when the revenue can be measured reliably, on the following:

 

●

Interest income on loans. Interest on loan receivables is accrued monthly in accordance with their contractual terms and recorded in accrued interest receivable. The Company does not charge prepayment penalty from customers.

●

Commission on guarantee service. The Company receives the commissions from guarantee services in full at inception and records as unearned income before amortizing it throughout the period of guarantee.

●

Non-interest income. Non-interest income mainly includes government incentive and rental income from the sub-leasing of certain of the Company’s leased office space to third parties. Government incentive is provided by Jiangsu Provincial government on a yearly basis to promote the development of micro credit agencies in Jiangsu Province.

 

Loans receivable, net

Loans receivable primarily represent loan amount due from customers that the management has the intent and ability to hold for the foreseeable future or until maturity or payoff. Loans receivable are recorded at unpaid principal balances, net of unearned income and allowance that reflects the Company’s best estimate of the amounts that will not be collected. Loan origination and commitment fees and certain direct loan origination costs collected from customers are directly recorded as interests and fees on loans. The loans receivable portfolio consists of business loans and personal loans. The Company does not charge loan origination and commitment fees.

 

Allowance for loan losses and loan impairment

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.

 

For the purpose of calculating portfolio-level reserves, we have grouped our loans into two portfolio segments: Business 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 potentially a qualitative component based on management judgment.

 

The allowance for loan losses is increased by charges to income and decreased by charge offs (net of recoveries). Recoveries represent subsequent collection of amounts previously charged-off. The increase in allowance for loan losses is the netting effect of “reversal” and “provision” for both business and personal loans. If the ending balance of the allowance for loan losses after any charge offs (net of recoveries) is less than the beginning balance, it will be recorded as a “reversal”; if it is larger, it will be recorded as a “provision” in the allowance for loan loss. The netting amount of the “reversal” and the “provision” is presented in the consolidated statements of income and comprehensive income

 

The Company recognizes a charge-off when management determines that full repayment of a loan is not probable. The primary factor in making that determination is the potential outcome of a lawsuit against the delinquent debtor. The Company will recognize a charge-off when the Company loses contact with the delinquent borrower for more than six months or when the court rules against the Company to seize the collateral asset of the delinquent debt from either the guarantor or borrower. The Company has not recorded a charge-off to date.

 

 

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 also calculates the provision amount in accordance with PRC regulation “The Guidance for Loan Losses” (“The Provision Guidance”) issued by PBOC and is applied to all financial institutes as below:

 

	1.	General Reserve - is based on total loan receivable balance and to be used to cover unidentified probable loan loss. The General Reserve is required to be no less than 1% of total loan receivable balance.
	2.	Specific Reserve - is based on the level of loss of each loan after categorizing the loan according to their risk. According to the so-called “Five-Tier Principle” set forth in the Provision Guidance, the loans are categorized as “pass”, “special-mention”, “substandard”, “doubtful” or “loss”. Normally, the provision rate is 2% for “special-mention”, 25% for “substandard”, 50% for “doubtful” and 100% for “loss”.

 

3.

Special Reserve - is fund set aside covering losses due to risks related to a particular country, region, industry or type of loans. The reserve rate could be decided based on management estimate of loan collectability.

 

To the extent the mandatory loan loss reserve rate of 1% as required by PBOC differs from management’s estimates, the management elects to use the higher rate. As of June 30, 2014, the Company utilized Specific Reserve in the determination of the loan loss reserve as it is higher than the amount calculated based on the General Reserve.

 

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.

 

Income Tax

Current income taxes 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 method. 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.

 

Recently issued accounting standards 

The FASB issued ASU No. 2014-05, Service Concession Arrangements. A service concession agreement is an arrangement between a public-sector entity and an operating entity under which the operating entity operates the grantor's infrastructure. This ASU specifies that an operating entity should not account for a service concession arrangement within the scope of this ASU as a lease in accordance with ASC 840 - Leases. An operating entity should refer to other ASUs as applicable to account for various aspects of a service concession arrangement. The amendments also specify that the infrastructure used in a service concession agreement should not be recognized as property, plant and equipment of the operating entity. The amendments in this ASU are effective using a modified retrospective approach for annual reporting periods beginning after December 15, 2014 and interim periods within those annual periods. The adoption of this standard is not expected to have a material impact on the Company’s (consolidated) financial position and results of operations.

 

The FASB has issued ASU No. 2014-07, Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. Under current U.S. GAAP, a company is required to consolidate an entity in which it has a controlling financial interest. The new guidance allows a private company to elect (when certain conditions exist) not to apply the variable interest entity guidance to a lessor under common control. Instead, the private company would make certain disclosures about the lessor and the leasing arrangement. If elected, the accounting alternative should be applied to all leasing arrangements meeting the conditions in this ASU. The alternative should be applied retrospectively to all periods presented, and is effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. Early application is permitted for all financial statements that have not yet been made available for issuance. The adoption of this standard is not expected to have a material impact on the Company’s (consolidated) financial position and results of operations.

 

 

The FASB has issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective on January 1, 2017 and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. For all other entities (nonpublic entities), the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. A nonpublic entity may elect to apply this guidance earlier, however, only as prescribed in this ASU. The adoption of this standard is not expected to have a material impact on the Company’s (consolidated) financial position and results of operations.

 

The FASB has issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered.. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES 

 

Evaluation of Disclosure Controls and Procedures

 

Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were not effective as of June 30, 2014 to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission (“SEC”) rules and forms, and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

  

Inherent Limitations Over Internal Controls

 

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

 

i)

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

 

ii)

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

 

iii)

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

 

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

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the second quarter of 2014 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

As the Company’s control deficiencies contributed to the transfer (“Transfer at Issue”) of RMB7 million (approximately $1.1 million) by the Company’s former CEO from the bank account of Wujiang Luxiang to his personal bank account without proper authorization, the Company has since taken various steps to improve its internal controls and procedures, including implementing a new fund transfer approval policy and procedures and new standards of credit risk assessment which are carried out by the newly formed Loan Review Committee. The internal review conducted by independent counsel engaged by the Special Committee of the Board of Directors observed that such new controls and procedures   appear to be much more thorough and comprehensive.

 

 

PART II.  OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

Except as disclosed in this quarterly report, we know of no pending legal proceedings to which we are a party that are material or potentially material, either individually or in the aggregate. We are from time to time, during the normal course of our business operations, subject to various litigation claims and legal disputes. We do not believe that the ultimate disposition of any of these matters will have a material adverse effect on our financial position, results of operations or liquidity.

 

ITEM 1A. RISK FACTORS

 

An investment in our common stock involves a high degree of risks. You should carefully consider the following material risk factors and other information in this report before deciding to invest in our common stock. If any of the following risks actually occur, our business, financial condition, results of operations and prospects for growth could be seriously impacted. As a result, the trading price, if any, of our common stock could decline and you could lose part or all of your investment.

 

Risks Relating to Recent Events

 

Trading of our common stock on NASDAQ is currently suspended due to the NASDAQ’s request for additional information related to the Transfer at Issue. If we are not able to satisfy NASDAQ’s requests, then our shareholders may not have a liquid market to sell their shares.

 

On September 11, 2014, the NASDAQ Stock Market announced that trading was halted in the Company’s common stock for “additional information requested” from the Company and that trading will remain halted until the Company has fully satisfied NASDAQ’s request for additional information related to the unauthorized transfer of RMB 7 million (approximately $1.1 million) from the bank account of WFOE to the personal account of Mr. Huichun Qin, who was the Chairman of the Board and the CEO of the Company at the time of the transfer. The funds were supposed to be used for the purpose of increasing the registered capital account of Wujiang Luxiang. The Company has sought return of the funds but to date has not recovered them. The Company’s Board of Directors explored all means, including legal avenues, to recover the funds and formed a Special Committee to undertake an internal review of the circumstances surrounding the transfer and delegated and designated the necessary power, authority and resources to the Special Committee to expeditiously conduct such review, including utilizing legal counsel and other third-party experts to assist with the review. The internal review has been completed as of the date of this report and the Company has publicly disclosed the findings from the internal review. However, NASDAQ may request additional information related to the Transfer at Issue, which the Company may not be able to provide, in which case NASDAQ may not resume trading of our common stock and our stockholders may not have a liquid market in which to sell their shares.

 

We have received notices of non-compliance from NASDAQ related to our failure to timely file this report and the Form 10-Q for the quarter ended September 30, 2014. If we are not able to file these reports to the satisfaction of NASDAQ, then our shares of common stock will be delisted.

 

n November 19, 2014 the Company received a Nasdaq Staff Deficiency Letter indicating that, as a result of the Company’s failure to timely file its Quarterly Reports on Form 10-Q for the quarters ended June 30, 2014 (the “Q2 10-Q”) and ended September 30, 2014 (the “Q3 10-Q”), the Company failed to comply with the periodic filing requirements for continued listing set forth in Rule 5250(c)(1) of the Nasdaq Listing Rules. The Company submitted its plan to regain compliance to NASDAQ; in which the Company undertook to file the Q2 10-Q and Q3 10-Q by February 17, 2015. The Company was not able to file the Q3 10-Q by February 17, 2015 and as a result, the Company received a delisting notification from NASDAQ. The Company appealed such determination to a hearings panel who has granted an extended stay of the suspension until the hearing date, April 16, 2015. Failure by us to file the Q3 10-Q by April 16, 2015 and receiving NASDAQ approval may result in NASDAQ initiating delisting proceedings. If our common stock is delisted from NASDAQ and transferred to the over-the-counter market, the spreads between the bid and ask prices for our common stock may increase and the execution time for orders may be longer. The delisting of our common stock from NASDAQ may result in decreased liquidity, thereby making the trading of our common stock more difficult.

 

 

We are the subject of pending class action lawsuits, which could require us to pay substantial damages or could otherwise have a material adverse effect on us.

 

On August 6, 2014, a purported shareholder 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 alleges that the Company and its current and former officers and directors 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, two other purported shareholders (the “Yun Group”) asserted substantially similar claims against the same defendants. Neither complaint states the amount of damages sought. 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 and the Yun Group’s counsel as lead counsel. On December 29, 2014, the N.J. district court entered an order transferring the action to the Southern District of New York.  The transfer was effected on January 22, 2015. Under the schedule stipulated by the parties, the Yun Group is to file an amended complaint within 60 days of the date that the transfer was effected, and the defendants’ date to answer or move is within 60 days of that filing.  The Company and Mr. Levy anticipate that they will file a motion to dismiss the amended complaint.  The Company believes that this lawsuit is without merit and intends to vigorously defend against it.  At this early stage of the proceedings, the Company is not able to estimate the probability of success or loss. For detailed description of this law suit, see Subsequent Event footnote on page 33 of this report.

 

While we believe the claims contained in these lawsuits to be without merit and intend to defend these cases vigorously, our efforts will be both expensive and time consuming and ultimately, due to the nature of the litigation, there can be no assurance that our efforts will be successful. In addition, our bylaws and our amended articles of incorporation require us to indemnify our directors for breaches of fiduciary duties, subject to certain limited exceptions. According to such documents, we are obligated to pay for certain costs and expenses of our directors and may be liable for substantial damages, costs and expenses if the plaintiffs prevail. Such litigation could also divert the attention of our management and our resources in general from day-to-day operations.  Such diversion of assets and potential monetary damages could have a material adverse effect on our financial conditions.

 

Risks Relating to Our Lending and Guarantee Business

 

Our limited operating history makes it difficult to evaluate our business and prospects.

 

Wujiang Luxiang commenced operations in October 2008 and has a limited operating history. As of June 30, 2014, we have built a $89.7 million portfolio of direct loans to 209 borrowers and a total of $29.1 million in loan guarantees for 31 borrowers. For the years ended December 31, 2013 and 2012, we generated $12,541,075 and $12,586,724 of net revenue with $7,704,970 and $8,312,469 of net income, respectively. However our growth rate since 2008 may not be indicative of our future performance. We may not be able to achieve similar results or grow at the same rate as we did in the past. In fact, we had a net loss of $17,055,523 for the three months ended June 30, 2014, representing a decrease of $19,156,205, or 975%, from net income of $1,963,823 for the three months ended June 30, 2013.

 

It is also difficult to evaluate our prospects, as we may not have sufficient experience in addressing the risks to which companies operating in new and rapidly evolving markets such as the microcredit industry, may be exposed. We will continue to encounter risks and difficulties that companies at a similar stage of development frequently experience, including the potential failure to:

 

timely respond to the liquidity change driven by PBOC’s policy and manage the credit risk inherent to our loan and guarantee business;

 

	●	obtain sufficient working capital and increase our registered capital to support expansion of our loan and guarantee portfolios;
	●	comply with any changes in the laws and regulations of the PRC or local province that may affect our lending operations;
	●	expand our borrowers base;
	●	collect from default borrowers;
	●	maintain adequate control of default risks and expenses allowing us to realize anticipated revenue growth;
	●	implement our customer development, risk management and acquisition strategies and adapt and modify them as needed;
	●	integrate any future acquisitions; and
	●	anticipate and adapt to changing conditions in the Chinese lending industry resulting from changes in government regulations, mergers and acquisitions involving our competitors, and other significant competitive and market dynamics.

 

If we are unable to address any or all of the foregoing risks, our business may be materially and adversely affected.

 

 

PRC regulation of loans to, and direct investments in, PRC entities by offshore holding companies and the unauthorized transfer of certain funds by our former chief executive officer have prevented us from using the entire proceeds from our initial public offering to increase the registered capital of Wujiang Luxiang.

 

As an offshore holding company with PRC subsidiaries, we may transfer funds to our PRC subsidiaries or finance our operating entity by means of loans or capital contributions. Any loans to our PRC subsidiaries, which are foreign-invested enterprises, cannot exceed statutory limits based on the difference between the amount of our investments and registered capital in such subsidiaries, and shall be registered with SAFE, State Administration of Foreign Exchange, or its local counterparts. Furthermore, any capital increase contributions we make to our PRC subsidiaries, which are foreign-invested enterprises, shall be approved by MOFCOM, Ministry of Commerce, or its local counterparts. The majority of the net proceeds from our initial public offering completed in August 2013, approximately $7 million,  is intended to increase the registered capital of Wujiang Luxiang and therefore its corresponding lending and guarantee capacity. Approximately $5.6 million of the net proceeds have already been contributed to Wujiang Luxiang and approved as an increase of the registered capital of Wujiang Luxiang. An additional $1.4 million was supposed to be transferred from WFOE to Wujiang Luxiang to further increase its registered capital. $1.5 million of the proceeds was initially transferred to WFOE to be used for the registered capital requirements of WFOE. Due to the subsequent reduction of WFOE's registered capital requirement from $10 million to $100,000, $100,000 was supposed to remain at WFOE to satisfy its new registered capital requirement and the remaining $1.4 million was supposed to be used to further increase the registered capital of Wujiang Luxiang. However, as previously reported by the Company, RMB 7 million (approximately $1.1 million) was transferred from the bank account of WFOE to the personal account of Mr. Huichun Qin, the Company’s former CEO and Chairman of the Board. The Company has not been able to recover the missing funds. The delay and potential failure to use the remaining IPO proceeds to increase Wujiang Luxiang’s registered capital, currently prevents us from further expanding Wujiang Luxiang’s business.

 

Our current operations in China are geographically limited to the city of Wujiang.

 

In accordance with the PRC state and provincial laws and regulations with regard to microcredit companies, we are not allowed to make loans and provide guarantees to businesses and individuals located outside of the city of Wujiang. Our future growth opportunities depend on the growth and stability of the economy in the city of Wujiang. A downturn in the local economy or the implementation of local policies unfavorable to SMEs may cause a decrease in the demand for our loan or guarantee services and may negatively affect borrowers’ ability to repay their loans on a timely basis, both of which could have a negative impact on our profitability and business.

 

If the Jiangsu government subsidy we currently receive from the Jiangsu government for loans to farmers is not renewed, we would suffer a loss of revenues.

 

Pursuant to certain Jiangsu government policies on promotion of rural economic reform, the interest on loans to farmers is subsidized by the government. Therefore, we charge the farmers at an interest rate lower than that of loans to SME’s. A portion of the difference between the lower rate charged to farmers and the rate charged to SME’s is remitted to us annually by the Jiangsu government as a government subsidy. We also received other types of government subsidies from Jiangsu government which are, among other things, intended to incentivize microcredit companies to establish and maintain strict financial operation systems. Applicants for these subsidies are required to apply for such subsidies annually. The standards for granting this subsidy is presently flexible and the number of applicants applying for such subsidies varies from year to year. In addition, the amount of funds which will be available for the Jiangsu government to use for these government subsidies each year is uncertain and depend on the needs of microeconomic development of Jiangsu province, the government’s budget and other factors.  In the event our application for such subsidy in the future is not granted or the funds we receive are reduced, we would suffer loss of revenues.

  

Changes in the interest rates and spread could have a negative impact on our revenues and results of operations.

 

Our revenues and financial condition are primarily dependent on interest income, which is the difference between interest earned from loans we provide and interest paid to the lines of credit we obtain from other financial institutions. A narrowing interest rate spread could adversely affect our earnings and financial conditions. If we are not able to control our funding costs or adjust our lending interest rate in a timely manner, our interest margin will decline. In addition, the interest rates we charge to the borrowers in our direct loan business are linked to the PBOC benchmark interest rate (the “PBOC Benchmark Rate”). The PBOC Benchmark Rate may fluctuate significantly due to changes in the PRC government’s monetary policy. Due to the restriction that our interest rate cannot be higher than three times the PBOC Benchmark Rate pursuant to certain Jiangsu banking regulations released in October 2012, if we have to reduce the interest rate we charge the borrowers to reflect the decrease of the PBOC Benchmark Rate, our interest rate spread will be negatively affected.

 

 

As a microcredit company, our business is subject to greater credit risks than larger lenders, which could adversely affect our results of operations.

 

There are inherent risks associated with our lending and guarantee activities, including credit risk, which is the risk that borrowers may not repay the outstanding loans balances in our direct loan business or that we may not recover the full amount of the payment we made to the lender in our guarantee business. As a microcredit company, we extend credits to SMEs, farmer and individuals. These borrowers generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and may have fewer financial resources to weather a downturn in the economy. Such borrowers may expose us to greater credit risks than lenders lending to larger, better-capitalized state-owned businesses with longer operating histories. Conditions such as inflation, economic downturn, local policy change, adjustment of industrial structure and other factors beyond our control may increase our credit risk more than such events would affect larger lenders. In addition, since we are only permitted to provide financial services to borrowers located in the city of Wujiang, our ability to geographically diversify our economic risks is limited by the local markets and economies. Also, decreases in local real estate value could adversely affect the values of the real property used as collateral in our direct loan and guarantee business. Such adverse changes in the local economy may have a negative impact on the ability of borrowers to repay their loans and the value of our collateral and our results of operations and financial condition may be adversely affected.

 

Our allowance for loan losses may not be sufficient to absorb future losses or prevent a material adverse effect on our business, financial condition, or results of operations.

 

Our risk assessment procedure uses historical information to estimate any potential losses based on our experience, judgment, and expectations regarding our borrowers and the economic environment in which we and our borrowers operate. The allowance for both loan losses and guarantee services were estimated based on 1% of the quarterly outstanding loan and guarantee portfolio balances. To the extent the mandatory loan loss reserve rate of 1% as required by PBOC differs from management’s estimates, the management elects to use the higher rate. We believe we are required to establish an allowance for loan losses pursuant to “The Guidance on Provisioning for Loan Losses” (the “Provision Guidance”) issued by PBOC and “Financial Practices of Rural Microcredit Companies of Jiangsu Province Pilot” (the “Jiangsu Financial Practices”) issued by Finance Office of Jiangsu Province in 2009. However, our implementation of the measurements set forth in the Provision Guidance and the Jiangsu Financial Practices, especially the Five-Tier approach in making the specific reserve, may be deemed not in compliance with the applicable banking regulations. Our loan loss reserves may not be sufficient to absorb future loan losses or prevent a material adverse effect on our business, financial condition, or results of operations. 

 

 Increases to the provision for loan losses and provision on financial guarantee services will cause our net income to decrease.

 

Our business is subject to fluctuations based on local economic conditions. These fluctuations are neither predictable nor within our control and may have a material adverse impact on our operations and financial condition. We may decide to increase our provision for loan losses and provision on financial guarantee services in light of the borrower’s repayment ability and/or the lack of clarity in the applicable banking regulations with regard to microcredit companies. The regulatory authority may also require an increase in the provision for loan losses and provision on financial guarantee services or the recognition of further loan charge-offs, based on judgments different from those of our management. Any increase in the provision for loan losses and provision on financial guarantee services will result in a decrease in net income and may have a material adverse effect on our financial condition and results of operations.

 

We lack significant product and business diversification. Accordingly, our future revenues and earnings are more susceptible to fluctuations than a more diversified company.

 

Currently, our primary business activities include offering direct loans and providing guarantee services to our customers. If we are unable to maintain and grow the operating revenues from our business or develop additional revenue streams, our future revenues and earnings are not likely to grow and could decline. Our lack of significant product and business diversification could inhibit the opportunities for growth of our business, revenues and profits.

  

Competition in the microcredit industry is growing and could cause us to lose market share and revenues in the future.

 

We believe that the microcredit industry is an emerging market in China. We may face growing competition in the microcredit industry and we believe that the microcredit market is becoming more competitive as this industry matures and begins to consolidate. We currently compete with traditional financial institutions, other microcredit companies, and some cash-rich state-owned companies or individuals that lend to SMEs. Some of our competitors have larger and more established borrower bases and substantially greater financial, marketing and other resources than we have. As a result, we could lose market share and our revenues could decline, thereby adversely affecting our earnings and potential for growth.

 

If we fail to implement and maintain an effective system of internal controls (or fail to remediate the deficiency/material weakness in our internal control over financial reporting that has been identified), we may be unable to accurately report our results of operations or prevent misstatements, and investor confidence and the market price of our common stock may be materially and adversely affected.

 

Prior to our IPO, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our independent registered public accounting firm is not required to and has not conducted an audit or assessment of our internal control over financial reporting. The internal review related to the Transfer at Issue indicated that the Company’s control deficiencies contributed to the Transfer at Issue. Since Mr. Qin had the sole authority to approve fund transfers, there was a lack of checks and balances over transfers. The internal review also found that, since the discovery of the Transfer at Issue, the Company has taken various steps to improve its internal controls and procedures that apply to fund transfers. The internal review observed that such new controls and procedures appear to be much more thorough and comprehensive. The Special Committee is currently reviewing the recommendations from the internal review and will recommend further enhancements to the internal control procedures and other remediation measures to the Board of Directors accordingly. Despite the remedies currently in place and to be taken by the Company, we do not have internal staff with sufficient U.S. GAAP knowledge and experience in the internal controls and disclosure controls and procedures. This may be deemed a material weakness in our internal control over financial reporting which may result in our inability to accurately report our financial results or prevent material misstatements.

 

 

Our business depends on the continuing efforts of members of our management. If we lose their services, our business may be severely disrupted.

 

Our business operations depend on the continuing efforts of members of our management. If one or more of our management were unable or unwilling to continue their employment with us, we might not be able to replace them in a timely manner, or at all. We may incur additional expenses to recruit and retain qualified replacements. Our business may be severely disrupted and our financial condition and results of operations may be materially and adversely affected. In addition, members of our management team may join a competitor or form a competing company. We may not be able to successfully enforce any contractual rights we have with our management team, in particular in China, where all of these individuals reside and where our business is operated through Wujiang Luxiang through various VIE Agreements. As a result, our business may be negatively affected due to the loss of one or more members of our management.

 

We require highly qualified personnel and if we are unable to hire or retain qualified personnel, we may not be able to grow effectively.

 

Our future success also depends upon our ability to attract and retain highly qualified personnel. Expansion of our business and our management will require additional managers and employees with industry experience, and our success will be highly dependent on our ability to attract and retain skilled management personnel and other employees. We may not be able to attract or retain highly qualified personnel. Competition for skilled personnel is significant in China. This competition may make it more difficult and expensive to attract, hire and retain qualified managers and employees.

 

We have no insurance coverage for our lending or guarantee business or our bank accounts, which could expose us to significant costs and business disruption.

 

Risks associated with our business and operations include, but are not limited to, borrowers' failure to repay the outstanding principal and interest when due and our loss reserve is not sufficient cover such failure, losses of key personnel, business interruption due to power shortages or network failure, and risks posed by natural disasters including storms, floods and earthquakes, any of which may result in significant costs or business disruption. We do not maintain any credit insurance, business interruption insurance, general third-party liability insurance, nor do we maintain key-man life insurance or any other insurance coverage except the mandatory social insurance for the employees of Wujiang Luxiang. If we incur any loss that is not covered by our loss reserve, our business, financial condition and results of operations could be materially and adversely affected.

 

We maintain our cash with various banks. Our cash accounts are not insured or otherwise protected. Should any bank or trust company holding our cash deposits become insolvent, or if we are otherwise unable to withdraw funds, we could lose the cash on deposit with that particular bank or trust company.

 

Risks Relating to Our Financial Leasing Business

 

We only generated a small amount of revenue from our financial leasing operations as of now and our financial leasing business plan may not be executed as planned.

 

We are currently at the initial stage of developing our financial leasing business. In February 2015, we signed two leasing contracts worth a total of total $4.88 million. The success of our financial leasing operations will highly depend upon our ability to obtain funds to deploy and successfully develop and market our financial leasing services to the targeted customers. We may not be able to develop our financial leasing business as planned and generate significant revenues. The revenue and income potential of our proposed financial leasing business is unproven and the lack of operating history makes it difficult to evaluate the future prospects of this business.

 

We have no experience in the equipment leasing and financing business and our knowledge of the Chinese financial leasing market is limited.

 

None of the PFL management has any prior experience in the operation or management of equipment financing and leasing. Our knowledge of the Chinese financial leasing industry and market is very limited. Our perception of the potential customers’ needs and their acceptance of our financial leasing services may not be accurate. We may not be able to work with equipment providers to successfully purchase qualified equipment identified by our customers on terms acceptable to us. We may not be able to establish sound financial modeling in the calculation of the interest rate and residual value. Such inexperience and lack of active knowledge may lead to failure of our financial leasing business.

 

 

Lack of knowledge of financial leasing benefits among potential customers may make it difficult for us to market our services.

 

Currently, a high proportion of Chinese management, especially management of SMEs, still perceive leasing companies as a “second-class bank”, and very few recognize the flexibility and benefits that financial leasing provides. We may need to invest a tremendous amount of time and effort toward lease education so that potential customers can fully appreciate the flexibility leasing offers to deploy their assets. Failure in such education may make it difficult for us to market our financial leasing services.

 

A protracted economic downturn may cause an increase in defaults under our leases and lower demand for the commercial equipment we lease.

 

A protracted economic downturn, similar to the one China experienced in recent years, could result in a decline in the demand for some of the types of equipment or services we finance, which could lead to a decline in originations. A protracted economic downturn may slow the development and continued operation of small commercial businesses, which is one of the primary markets for the commercial equipment leased by us. In addition, a protracted downturn could result in an increase in delinquencies and defaults by our lessees and other obligors, which could have an adverse effect on our cash flow and earnings. These factors could have a material adverse effect on our business, financial condition and results of operations.

 

Our allowance for lease credit losses may prove to be inadequate to cover future credit losses.

 

We will maintain an allowance for credit losses on our leases, at an amount we believe is sufficient to provide adequate protection against losses on the leases. We cannot be sure that our allowance for credit losses will be adequate over time to cover losses caused by adverse economic factors, or unfavorable events affecting specific leases, industries or geographic areas. Losses in excess of our allowance for credit losses may have a material adverse effect on our business, financial condition and results of operations. 

 

We are vulnerable to changes in the demand for the types of equipment we plan on leasing or price reductions in such equipment.

 

Our leasing portfolio will be comprised of a wide variety of equipment including, but not limited to, public transportation vehicles such as subway cars, trains, buses, medical equipment, equipment used in textile production and agricultural equipment. Reduced demand for financing of the types of equipment we lease could adversely affect our lease origination volume, which in turn could have a material adverse effect on our business, financial condition and results of operations. Technological advances may lead to a decrease in the price of these types of equipment and a consequent decline in the need for financing of such equipment. These changes could reduce the need for outside financing sources that would reduce our lease financing opportunities and origination volume in such products. In the event that demand for financing the types of equipment that we lease declines, we will need to expand our efforts to provide lease financing for other products.

  

We may face growing competition, which could cause us to lower our lease rates, hurt our origination volume and strategic position and adversely affect our financial results.

 

The Chinese financial leasing industry is becoming competitive in recent years. We will compete for customers with a number of international, national, regional and local banks and finance companies and financial leasing companies. Our competitors also include equipment manufacturers that lease or finance the sale of their own products. Our competitors include larger, more established companies, some of which may possess substantially greater financial, marketing and operational resources than us, including lower cost of funds and access to capital markets and other funding sources which may be unavailable to us. If a competitor was to lower its lease rates, we could be forced to follow such trend or be unable to retain origination volume, either of which would have a material adverse effect on our business, financial condition and results of operations.

 

If PFL were to lose key personnel, its operating results may suffer.

 

The success of our financial leasing business depends to a large extent upon the abilities and continued efforts of senior management. The loss of the services of one or more of the key members of our senior management before we are able to attract and retain qualified replacement personnel could have a material adverse effect on the development and success of our financial leasing business.

 

Recently proposed accounting changes may negatively impact the demand for equipment leases.

 

On August 17, 2010, the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) released a joint exposure draft that would dramatically change lease accounting for both lessees and lessors by requiring balance sheet recognition of all leases. At their June 13, 2012 joint board meeting, the International Accounting Standards Board (IASB) and the FASB (collectively, the “Boards”) agreed on an approach for the accounting for lease expenses as part of their joint project to revise lease accounting. In September 2012, the Boards reached tentative decisions regarding sale and leaseback transactions and other lease accounting issues. The Boards issued revised exposure draft in May 2013, with a 120-day comment period. As part of the deliberation process, the Boards reviewed nearly 800 comment letters and held public roundtable meetings and preparer workshops. A key issue raised by stakeholders in this process was the front-loading of expense recognition for lessees in the proposal. The Boards have tentatively agreed to change the expense recognition pattern and income statement presentation for certain leases. If these accounting changes are adopted in a form that makes equipment leasing less attractive to small business owners, it could result in a reduction in the demand for equipment leases, and could have an adverse effect on our results of operations and financial condition.

 

 

Risks Relating to Doing Business in China

 

PRC regulation of loans to, and direct investments in, PRC entities by offshore holding companies may delay or prevent us from using proceeds from financing activities to make loans or additional capital contributions to our PRC operating subsidiaries.

 

As an offshore holding company with PRC subsidiaries, we may transfer funds to our PRC subsidiaries or finance our operating entity by means of loans or capital contributions. Any loans to our PRC subsidiaries, which are foreign-invested enterprises, cannot exceed statutory limits based on the difference between the amount of our investments and registered capital in such subsidiaries, and shall be registered with SAFE, or its local counterparts. Furthermore, any capital increase contributions we make to our PRC subsidiaries, which are foreign-invested enterprises, shall be approved by MOFCOM, or its local counterparts. We may not be able to obtain these government registrations or approvals on a timely basis, if at all. If we fail to receive such registrations or approvals, our ability to provide loans or capital to increase contributions to our PRC subsidiaries may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

 

A slowdown of the Chinese economy or adverse changes in economic and political policies of the PRC government could negatively impact China’s overall economic growth, which could materially adversely affect our business.

 

We are a holding company and all of our operations are entirely conducted in the PRC. Although the PRC economy has grown in recent years, such growth may not continue. A slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in the PRC may materially reduce the demand for our direct lending, guarantee and financial leasing services and may have a materially advserse effect on our business.

 

China’s economy differs from the economies of most other countries in many respects, including the amount of government involvement in the economy, the general level of economic development, growth rates and government control of foreign exchange and the allocation of resources. While the PRC economy has grown significantly over the past few decades, this growth has remained uneven across different periods, regions and economic sectors.

 

The PRC government also exercises significant control over China’s economic growth by allocating resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Any actions and policies adopted by the PRC government could negatively impact the Chinese economy, which could materially adversely affect our business.

 

Substantial uncertainties and restrictions with respect to the political and economic policies of the PRC government and PRC laws and regulations could have a significant impact upon the business we may be able to conduct in the PRC and accordingly on the results of our operations and financial condition.

 

Our business operations may be adversely affected by the current and future political environment in the PRC. The Chinese government exerts substantial influence and control over the manner in which we must conduct our business activities. Our ability to operate in China may be adversely affected by changes in Chinese laws and regulations. Under the current government leadership, the government of the PRC has been pursuing economic reform policies that encourage private economic activities and greater economic decentralization. However, the government of the PRC may not continue to pursue these policies, or may significantly alter these policies from time to time without notice.

 

 

There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing our business, or the enforcement and performance of our arrangements with borrowers in the event of the imposition of statutory liens, death, bankruptcy or criminal proceedings. Only after 1979 did the Chinese government begin to promulgate a comprehensive system of laws that regulate economic affairs in general, deal with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade, as well as encourage foreign investment in China. Although the influence of the law has been increasing, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. Also, because these laws and regulations are relatively new, and because of the limited volume of published cases and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. In addition, there have been constant changes and amendments of laws and regulations over the past 30 years in order to keep up with the rapidly changing society and economy in China. Because government agencies and courts provide interpretations of laws and regulations and decide contractual disputes and issues, their inexperience in adjudicating new business and new polices or regulations in certain less developed areas causes uncertainty and may affect our business. Consequently, we cannot clearly foresee the future direction of Chinese legislative activities with respect to either businesses with foreign investment or the effectiveness on enforcement of laws and regulations in China. The uncertainties, including new laws and regulations and changes of existing laws, as well as judicial interpretation by inexperienced officials in the agencies and courts in certain areas, may cause possible problems to foreign investors. 

 

Our microcredit business is subject to extensive regulation and supervision by state, provincial and local government authorities, which may interfere with the way we conduct our business and may negatively impact our financial results.

 

We are subject to extensive and complex state, provincial and local laws, rules and regulations with regard to our loan and guarantee operations, capital structure, allowance for loan losses, among other things. These laws, rules and regulations are issued by different central government ministries and departments, provincial and local governments while enforced by different local authorities in the city of Wujiang. In addition, it is not clear whether microcredit companies are subject to certain banking regulations the state-owned and commercial banks are subject to, including the regulation with regard to loan loss reserves. Therefore the interpretation and implementation of such laws, rules and regulations may not be clear and occasionally we have to depend on oral inquiries with local government authorities. As a result of the complexity, uncertainties and constant changes in these laws, rules and regulation, including changes in interpretation and implementation of such, our business activities and growth may be adversely affected if we do not respond to the changes in a timely manner or are found to be in violation of the applicable laws, regulations and policies as a result of a different position from ours taken by the competent authority in the interpretation of such applicable laws, regulations and policies. If we were found to be not in compliance with these laws and regulations, we may be subject to sanctions by regulatory authorities, monetary penalties and/or reputation damage, which could have a material adverse affect on our business operation and profitability.

 

Lack of financial leasing regulations could negatively impact our business.

 

Currently, there is no uniform equipment title registration process and system in China, as each municipality adopts different procedures. The pending China Financial Leasing Law is expected to unify the registration procedures and protect the lessor against a “good-faith” third-party claim if the leased assets are registered in the lessor’s name. In the absence of such central title registration system, the lessors’ ownership interest on the leased equipment may be threatened. Loss of ownership to the leased equipment will have a negative effect on our financial position.

 

We may be subject to administrative sanctions in the event we are found to have charged excessive interest rates on some of the historical direct loans we extended.

 

During 2010, 2011 and 2012, we provided certain financing consulting services to an aggregate of approximately 114 individuals and companies and generated consulting fees of approximately US$693,555(RMB 4.6 million). According to the consulting arrangements we had with these parties, we agreed to provide consulting services such as advising on the applicable lending rules and regulations, making recommendations about financing plans, assisting the parties to complete and submit financing applications and providing general guidance in the capital raising process. Some of these clients were also borrowers. We also charged additional consulting fees when such borrowers asked to expedite the review and approval process of their loan applications, as such expedited lendings require funds to be allocated from other positions at an additional cost to us. The maximum interest rate a microcredit lender is allowed to charge on microcredit loans was four times the PBOC’s Benchmark Rate, according to Circular 23 and Several Opinion Regarding the Trial of Cases promulgated by Supreme Court of PRC. Although none of these loans had interest rates higher than four times the PBOC Benchmark Rate, the aggregate amount of interest we charged such borrower plus the consulting fee would exceed four times the PBOC Benchmark Rate if the consulting fees paid by these borrowers were deemed as additional interest payments. We believe such consulting fees were compensation payments for the consulting services we provided. Also we have stopped providing such consulting services since July 31, 2012 and we do not anticipate engaging in such consulting service in the foreseeable future. However, in the event the competent government authority determines these historical consulting fees were de facto interest payments, we may be found to have charged excessive rates on these loans and, as a result, we may be subject to sanctions by the government authority, which may include return of the excessive interest to affected borrowers, confiscation of illegal gains, fine, suspension of operation and/or revocation of our business license.

 

 

We may be subject to administrative sanctions in the event the extension we obtained on contribution of PFL’s registered capital is reversed or determined to be not effective or if we are not able to contribute the remainder of the registered capital as required.

 

Pursuant to Foreign Wholly-Owned Enterprise Law and relevant implementation rules, 15% of the U.S. $50 million registered capital of PFL is required to be contributed within initial three months of PFL obtaining its business license on September 5, 2013 and the remainder to be contributed within two years after the business license is granted. We did not make any contributions within the three month period since we expected to fund such contribution with the proceeds from the follow-on offering. Based on our oral inquiries with the local Commission of Commerce of Wujiang, we were told that the required initial installment would be reduced to 10% in 2014 and that the competent authority would refrain from taking specific administrative measures against us once the first installment of capital contribution is paid. In addition, we were told by Wujiang Economic and Technological Development Zone (“WETDZ”), where PFL is incorporated and located, that there will be no penalty for the delayed contribution of the first installment of the registered capital. In the event the orally granted extension or the advice we received from WETDZ is reversed or found to be not valid by a relevant authority, we may be subject to administrative sanctions, including monetary penalties ranging from 5% to 15% of the portion that has not been paid on time, or from $375,000 to $1,125,000 if none was contributed at the time of the sanction. We had contribute all of the net proceeds raised in the following-on offering to the registered capital requirement of PFL.

 

In addition, the new PRC Company Law that became effective on March 1, 2014, radically changed the registered capital requirements, including deleting the requirement to contribute the registered capital within certain time frames and the minimum registered capital requirement. However, it is unclear whether PFL will be subject to the loosened registered capital requirements under the new PRC Company Law and, as a result, be exempted from contributing the remainder of the registered capital within two years after the business license is granted. If it is later determined that PFL cannot enjoy the loosened registered capital requirement set forth in the new Company Law, we would have to contribute 85% of the then registered capital of PFL prior to September 4, 2015. In the event we are not able to make such contribution, we may be subject to administrative sanctions, including monetary penalties ranging from 5% to 15% of the portion that has not been paid on time, or from $2,125,000 to $6,375,000 if none of the remaining 85% was contributed at the time of the sanction.

 

Since we conduct substantially all of our operations in China, and almost all of our officers and directors reside outside the United States, our stockholders may face difficulties in protecting their interests and exercising their rights as a stockholder of CCC.

 

Although we are incorporated in Delaware, we conduct substantially all of our operations in China through Wujiang Luxiang, our consolidated VIE in China and PFL. All of our current officers and almost all of our directors reside outside the United States and substantially all of the assets of those persons are located outside of the United States. It may be difficult for you to conduct due diligence on the Company or such directors in your election of the directors and attend shareholders meeting if the meeting is held in China. We plan to have one shareholder meeting each year at a location to be determined, potentially alternating between United States and China. As a result of all of the above, our public shareholders may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than would shareholders of a corporation doing business entirely or predominantly within the United States.

 

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based upon United States laws, including the federal securities laws or other foreign laws against us or our management.

 

Substantially all of our operations are conducted in China, and all of our assets are located in China. A majority of our officers are nationals or residents of the PRC and a substantial portion of their assets are located outside the United States. As a result, Dacheng Law Firm, our counsel as to PRC law, advised us that it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce judgments against us which are obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

 

Dacheng Law Firm further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC laws, national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States.

 

Dacheng Law Firm also advised us that in the event that shareholders originate an action against a company without domicile in China for disputes related to contracts or other property interests, the PRC courts may accept a course of action if (a) the disputed contract was concluded or performed in the PRC, or the disputed subject matter is located in the PRC, (b) the company (as defendant) has properties that can be seized within the PRC, (c) the company has a representative organization within the PRC, (d) the parties choose to submit to jurisdiction of the PRC courts in the contract, or (e) the contract is executed or performed within the PRC. The action may be initiated by the shareholder through filing a complaint with the PRC courts. The PRC courts will determine whether to accept the complaint in accordance with the PRC Civil Procedures Law. The shareholder may participate in the action by itself or entrust any other person or PRC legal counsel to participate on behalf of such shareholder. Foreign citizens and companies will have the same right as PRC citizens and companies in an action unless such foreign country restricts the rights of PRC citizens and companies.

 

 

We may have difficulty in establishing adequate management and financial controls in China.

 

The PRC has only recently begun to adopt the management and financial reporting concepts and practices that investors in the U.S. are familiar with. We may have difficulty in hiring and retaining employees in China who have the experience necessary to implement the kind of management and financial controls that are required of a U.S. public company. If we cannot establish such controls, or if we are unable to collect the financial data required for the preparation of our financial statements, or if we are unable to keep our books and accounts in accordance with the U.S. accounting standards for business, we may not be able to continue to file required reports with the SEC, which would likely have a material adverse affect on the performance of our shares of common stock.

 

WFOE’s ability to pay dividends to us may be restricted due to foreign exchange control and other regulations of China.

 

As an offshore holding company, we may rely principally on dividends from our subsidiaries in China, WFOE and PFL, for our cash requirements. Under the applicable PRC laws and regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside a portion of its after-tax profit to fund specific reserve funds prior to payment of dividends. In particular, at least 10% of its after-tax profits based on PRC accounting standards each year is required to be set aside towards its general reserves until the accumulative amount of such reserves reach 50% of its registered capital. These reserves are not distributable as cash dividends.

 

Furthermore, WFOE’s and PFL’s ability to pay dividends may be restricted due to foreign exchange control policies and the availability of its cash balance. Substantially all of our operations are conducted in China and all of our revenue received, by WFOE through VIE arrangement and by PFL, are denominated in RMB. RMB is subject to exchange control regulation in China, and, as a result, WFOE and PFL may be unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict our ability to convert RMB into U.S. dollars.

 

The lack of dividends or other payments from WFOE may limit our ability to make investments or acquisitions that could be beneficial to our business, pay dividends or otherwise fund, and conduct our business. Our funds may not be readily available to us to satisfy obligations which have been incurred outside the PRC, which could adversely affect our business and prospects or our ability to meet our cash obligations. Accordingly, if we do not receive dividends from WFOE or PFL, our liquidity and financial condition will be materially and adversely affected.

 

There is uncertainty in the preferential tax treatment we currently enjoy and financial subsidy commitment we expect to enjoy. Any change in the preferential tax treatment we currently enjoy in the PRC may materially adversely impact our net income.

 

Effective January 1, 2008, the New Enterprise Income Tax Law of PRC stipulates that domestically owned enterprises and foreign invested enterprises (the “FIEs”) are subject to a uniform income tax rate of 25%. While the New Enterprise Income Tax Law equalizes the income 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. Pursuant to the Jiangsu Document No. 132 issued in November 2009, microcredit companies in Jiangsu Province are subject to a preferential tax rate of 12.5%. As a result, Wujiang Luxiang has been subject to the preferential income tax rate of 12.5% since its inception in 2008. The taxation practice implemented by the tax authority governing our business from 2008 through 2011 was that we paid enterprise income taxes at a rate of 25% on a quarterly basis, and upon annual tax settlement done by the Company and the tax authority within five (5) months after December 31, the tax authority refunded us the excess enterprise income taxes we paid beyond the rate of 12.5% in tax credit. In 2013and 2012 the tax authority allowed us to pay enterprise income tax, on a monthly basis, at 12.5% for our income generated from our direct loan business and at 25% for income generated from our guarantee business. During the twelve month period ended December 31, 2013, we paid an aggregate $2,191,329 for income tax. We received a refund of $985,332 in April 2014. The refund is the difference between actual income tax prepayment, which is made at 25% for income generated from both our direct loan business and our guarantee business, and the income tax expense, which is calculated at 12.5% for direct loan and 25% for our guarantee business. In addition, Wujiang Luxiang has been subject to business tax at the preferential rate of 3% since its inception in 2008.

 

In April 2012 Wujiang Luxiang received a notice from local tax authority, informing us that only income generated from Wujiang Luxiang’s direct loan business was qualified to enjoy a preferential income tax rate of 12.5% and business tax of 3% under the Jiangsu Document No. 132, but its taxable income arising from Wujiang’s other business such as the guarantee business was still subject to a standard tax rate of 25% for income tax and 5% for business tax. The local tax authority required Wujiang Luxiang to implement the above-mentioned policy starting with the tax filing for 2011 which was filed in April 2012, and the policy applies to all years thereafter. The impact of the changed policy on the income tax provision on the issued financial statements of 2011 was $225,445. However, we believe the underpayment was comparatively minimal as it only accounted for less than 3% of net income of 2011, thus it recorded the underpayment of $225,445 in the financial statements for financial year of 2012. There was no underpayment penalty assessed. Furthermore, such tax policy change may be applied retroactively to financial year of 2008, 2009 and 2010. Although we have not received any notice from local tax authority to request Wujiang Luxiang to make any underpayment with surcharge, there is no assurance that the local tax authority will not do so in the future.

 

 

There is a risk that the competent tax authority may decide that Wujiang Luxiang will not be eligible for the preferential tax rates for the direct loan business in the future. Moreover, the PRC government could eliminate any of these preferential tax treatments before their scheduled expiration. Expiration, reduction or elimination of such preferential tax treatments will increase our income tax expenses and in turn decrease our net income.

 

There is uncertainty in the policy at the state and provincial levels as to how the direct loan and guarantee businesses carried out by the microcredit companies shall be treated with regard to income tax and business tax.  If the tax authority determines that the income tax, business tax or other applicable tax we previously paid were less than what was required, we may be requested to make payment for the overdue tax and interest on the overdue payment.

 

In addition, pursuant to an agreement PFL has with the WETDZ, PFL expects to receive from a financial award equal to 100% of the portion of the enterprise income tax proceeds contributed by PFL that is reserved by the WETDZ for the first five years following the date of its establishment, and will further receive a financial award equal to 50% of the portion of the enterprise income tax proceeds contributed by PFL that is reserved by the WETDZ for the following five years. PFL will receive a science and technology financial award from the WETDZ for up to approximately $325,000 (RMB 2 million) to be paid pro rata according to the actually contributed registered capital. In the event that the central government promulgates laws or regulations that expressly prohibit local governments from providing financial subsidies for enterprises’ income tax payment obligation, this agreement with WETDZ may be rendered illegal and/or unenforceable and therefore PFL’s business plan may be negatively affected.

 

Our global income may be subject to PRC taxes under the PRC Enterprise Income Tax Law, which could have a material adverse effect on our results of operations.

 

Under the PRC Enterprise Income Tax Law, or the New EIT Law, and its implementation rules, which became effective in January 2008, an enterprise established outside of the PRC with a “de facto management body” located within the PRC is considered a PRC resident enterprise and will be subject to the enterprise income tax at the rate of 25% on its global income. The implementation rules define the term “de facto management bodies” as “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel and human resources, finance and treasury, and acquisition and disposition of properties and other assets of an enterprise.” On April 22, 2009, the State Administration of Taxation (the "SAT"), issued a circular, or SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although the SAT Circular 82 only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the determining criteria set forth in the SAT Circular 82 may reflect the SAT’s general position on how the “de facto management body” text should be applied in determining the resident status of all offshore enterprises for the purpose of PRC tax, regardless of whether they are controlled by PRC enterprises or individuals. Although we do not believe that our legal entities organized outside of the PRC constitute PRC resident enterprises, it is possible that the PRC tax authorities could reach a different conclusion. In such case, we may be considered a PRC resident enterprise and may therefore be subject to the 25% enterprise income tax on our global income. If we are considered a resident enterprise and earn income other than dividends from our PRC subsidiary, a 25% enterprise income tax on our global income could significantly increase our tax burden and materially and adversely affect our cash flow and profitability. In addition to the uncertainty regarding how the new PRC resident enterprise classification for tax purposes may apply, it is also possible that the rules may change in the future, possibly with retroactive effect.

 

Fluctuations in the foreign currency exchange rate between U.S. Dollars and Renminbi could adversely affect our financial condition.

 

The value of the RMB against the U.S. dollar and other currencies may fluctuate. Exchange rates are affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC government changed its policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of foreign currencies. Following the removal of the U.S. dollar peg, the RMB appreciated more than 20% against the U.S. dollar over three years. From July 2008 until June 2010, however, the RMB traded stably within a narrow range against the U.S. dollar. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in a further and more significant appreciation of the RMB against foreign currencies. On June 20, 2010, the PBOC announced that the PRC government would reform the RMB exchange rate regime and increase the flexibility of the exchange rate. We cannot predict how this new policy will impact the RMB exchange rate.

 

Our revenues and costs are mostly denominated in the RMB, and a significant portion of our financial assets are also denominated in the RMB. Any significant fluctuations in the exchange rate between the RMB and the U.S. dollar may materially adversely affect our cash flows, revenues, earnings and financial position, and the amount of and any dividends we may pay on our common stock in U.S. dollars. In addition, fluctuations in the exchange rate between the RMB and the U.S. dollar could also result in foreign currency translation losses for financial reporting purposes.

 

 

Future inflation in China may inhibit economic activity and adversely affect our operations.

 

The Chinese economy has experienced periods of rapid expansion in recent years which can lead to high rates of inflation or deflation. This has caused the PRC government to, from time to time, enact various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the PRC government to once again impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China. Any action on the part of the PRC government that seeks to control credit and/or prices may adversely affect our business operations.

 

PRC laws and regulations have established more complex procedures for certain acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

 

Further to the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rules, the Anti-monopoly Law of the PRC, the Rules of Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated by MOFCOM or the MOFCOM Security Review Rules, was issued in August 2011, which established additional procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors more time-consuming and complex, including requirements in some instances that MOFCOM be notified in advance of any change of control transaction in which a foreign investor takes control of a PRC enterprise, or that the approval from MOFCOM be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. PRC laws and regulations also require certain merger and acquisition transactions to be subject to merger control review and or security review.

 

The MOFCOM Security Review Rules, effective from September 1, 2011, which implement the Notice of the General Office of the State Council on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated on February 3, 2011, further provide that, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors is subject to the security review by MOFCOM, the principle of substance over form should be applied and foreign investors are prohibited from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions.

 

Further, if the business of any target company that we seek to acquire falls into the scope of security review, we may not be able to successfully acquire such company either by equity or asset acquisition, capital contribution or through any contractual arrangement. We may grow our business in part by acquiring other companies operating in our industry. Complying with the requirements of the relevant regulations to complete such transactions could be time consuming, and any required approval processes, including approval from MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to maintain or expand our market share.

 

In addition, SAFE promulgated the Circular on the Relevant Operating Issues concerning Administration Improvement of Payment and Settlement of Foreign Currency Capital of Foreign-invested Enterprises, or Circular 142, on August 29, 2008. Its subsequent Supplementary Notice on Issues Relating to the Improvement of Business Operations over Payment and Settlement of Foreign Exchange Capital of Foreign-Invested Enterprises was promulgated by SAFE on July 18, 2011. Under Circular 142, registered capital of a foreign-invested company settled in RMB converted from foreign currencies may only be used within the business scope approved by the applicable governmental authority and may not be used for equity investments in the PRC. In addition, foreign-invested companies may not change how they use such capital without SAFE’s approval, and may not in any case use such capital to repay RMB loans if they have not used the proceeds of such loans according to the loan agreement. Furthermore, SAFE promulgated a circular on November 19, 2012, or Circular 59, which requires the authenticity of settlement of net proceeds from offshore offerings to be closely examined and the net proceeds to be settled in the manner described in the offering documents. Circular 142 and Circular 59 may significantly limit our ability to effectively use the proceeds from future financing activities as the WFOE may not convert the funds received from us in foreign currencies into RMB, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC.

 

Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.

 

As our ultimate holding Company is a Delaware corporation, we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur from time-to-time in the PRC. Our employees or other agents may engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

 

 

Recent SEC’s administrative proceedings against the China affiliates of the five multi-national accounting firms may lead to the deregistering of Chinese accounting firms by the PCAOB, which may affect our ability to engage qualified independent auditors.

 

The SEC recently commenced administrative proceedings against BDO China Dahua Co. Ltd., Deloitte Touche Tohmatsu Certified Public Accountants Ltd., Ernst & Young Hua Ming LLP, KPMG Huazhen (Special General Fund) and PricewaterhouseCoopers Zhong Tian CPAs Limited for refusing to produce audit work papers and other documents related to PRC-based companies under investigation by the SEC for potential accounting fraud against U.S. investors. The SEC has launched an initiative to address concerns arising from reverse mergers and foreign issuers. The SEC charged these accounting firms with violations of the Securities Exchange Act and the Sarbanes-Oxley Act, which requires foreign public accounting firms to provide, upon the request of the SEC, audit work papers involving any company trading on U.S. markets. Under PRC law, auditors are not permitted to hand over audit work papers as books and records of Chinese companies are afforded protection of secrecy laws.  We are not in a position to assess the outcome or ramifications of these ongoing proceedings and investigations. Unless the PRC government changes its secrecy laws, there are risks that the Public Company Accounting Oversight Board (“PCAOB”) may deregister Chinese accounting firms whose audit work papers the PCAOB cannot inspect and such deregistering of Chinese accounting firms by the PCAOB would, in turn, make it difficult for us to engage qualified independent auditors.

 

If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, and our reputation and could result in a loss to our stockholders, especially if such matter cannot be addressed and resolved favorably.

 

Recently, U.S. public companies that have substantially all of their operations in China, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our company and our business. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend the Company. This situation may be a major distraction to our management. If such allegations are not proven to be groundless, our company and business operations will be severely hampered and your investment in our stock could be rendered worthless.

 

The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC. 

 

Our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Our SEC filings and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review by CSRC, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any review of our company, our SEC reports, other filings or any of our other public pronouncements.

 

Risks Relating to Our Corporate Structure

 

We conduct our lending and guarantee business through Wujiang Luxiang by means of contractual arrangements. If the PRC courts or administrative authorities determines that these contractual arrangements do not comply with applicable regulations, we could be subject to severe penalties and our business could be adversely affected. In addition, changes in such Chinese laws and regulations may materially and adversely affect our business.

 

There are uncertainties regarding the interpretation and application of PRC laws, rules and regulations, including but not limited to the laws, rules and regulations governing the validity and enforcement of the contractual arrangements between WFOE and each of Wujiang Luxiang. Although we were advised by our PRC counsel, Dacheng Law Offices, that based on their understanding of the current PRC laws, rules and regulations, the structure for operating our business in China (including our corporate structure and contractual arrangements with Wujiang Luxiang and their respective shareholders) comply with all applicable PRC laws, rules and regulations, and do not violate, breach, contravene or otherwise conflict with any applicable PRC laws, rules or regulations, the PRC courts or regulatory authorities may determine that our corporate structure and contractual arrangements violate PRC laws, rules or regulations. We are aware of a recent case involving Chinachem Financial Services where certain contractual arrangements for a Hong Kong Company to gain economic control over a PRC Company were declared to be void by the PRC Supreme People's Court. If the PRC courts or regulatory authorities determine that our contractual arrangements are in violation of applicable PRC laws, rules or regulations, our contractual arrangements will become invalid or unenforceable.

 

 

If WFOE, Wujiang Luxiang or their ownership structure or the contractual arrangements, are determined to be in violation of any existing or future PRC laws, rules or regulations, or WFOE, or Wujiang Luxiang fails to obtain or maintain any of the required governmental permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including:

 

	●	revoking the business and operating licenses of WFOE, or Wujiang Luxiang;
	●	discontinuing or restricting the operations of WFOE or Wujiang Luxiang;
	●	imposing conditions or requirements with which we, WFOE or Wujiang Luxiang may not be able to comply;
	●	requiring us, WFOE or Wujiang Luxiang to restructure the relevant ownership structure or operations;
	●	restricting or prohibiting our use of the proceeds from our initial public offering to finance our business and operations in China; or
	●	imposing fines.

 

The imposition of any of these penalties would severely disrupt our ability to conduct business and have a material adverse effect on our financial condition, results of operations and prospects.

 

On or around September 2011, various media sources reported that the China Securities Regulatory Commission (the “CSRC”) had prepared a report proposing pre-approval by a competent central government authority of offshore listings by China-based companies with variable interest entity structures, such as ours, that operate in industry sectors subject to foreign investment restrictions. However, it is unclear whether the CSRC officially issued or submitted such a report to a higher level government authority or what any such report provides, or whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or what they would provide. If our ownership structure, contractual arrangements or businesses of Wujiang Luxiang are found to be in violation of any existing or future PRC laws or regulations, the relevant governmental authorities, including the CSRC, would have broad discretion in dealing with such violation, including levying fines, confiscating our income or the income of Wujiang Luxiang, revoking the business licenses or operating licenses of Wujiang Luxiang, discontinuing or placing restrictions or onerous conditions on our operations, requiring us to undergo a costly and disruptive restructuring, restricting or prohibiting our use of proceeds from overseas financings to finance our business and operations in China, and taking other regulatory or enforcement actions that could be harmful to our business. Any of these actions could cause significant disruption to our business operations and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition and results of operations.

 

Our contractual arrangements with Wujiang Luxiang may not be effective in providing control over Wujiang Luxiang.

 

All of our current revenue and net income is derived from Wujiang Luxiang. According to our inquiries with Jiangsu provincial authorities, provincial direct foreign controlling equity ownership in for-profit companies engaged in rural microcredit services in Jiangsu Province has never been approved and such position will not change in the foreseeable future. Therefore, we do not intend to have an equity ownership interest in Wujiang Luxiang but rely on contractual arrangements with Wujiang Luxiang to control and operate its business.  However, these contractual arrangements may not be effective in providing us with the necessary control over Wujiang Luxiang and its operations. Any deficiency in these contractual arrangements may result in our loss of control over the management and operations of Wujiang Luxiang, which will result in a significant loss in the value of an investment in our company. Because of the practical restrictions on direct foreign equity ownership imposed by the Jiangsu provincial government authorities, we must rely on contractual rights through our VIE structure to effect control over and management of Wujiang Luxiang, which exposes us to the risk of potential breach of contract by the shareholders of Wujiang Luxiang. In addition, as Wujiang Luxiang is jointly owned by its shareholders, it may be difficult for us to change our corporate structure if such shareholders refuse to cooperate with us.

 

The failure to comply with PRC regulations relating to mergers and acquisitions of domestic enterprises by offshore special purpose vehicles may subject us to severe fines or penalties and create other regulatory uncertainties regarding our corporate structure.

 

On August 8, 2006, MOFCOM, joined by the CSRC, the State-owned Assets Supervision and Administration Commission of the State Council, the SAT, the State Administration for Industry and Commerce (the “SAIC”), and SAFE, jointly promulgated regulations entitled the Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the "M&A Rules"), which took effect as of September 8, 2006, and as amended on June 22, 2009. This regulation, among other things, has certain provisions that require offshore special purpose vehicles formed for the purpose of acquiring PRC domestic companies and controlled directly or indirectly by PRC individuals and companies, to obtain the approval of MOFCOM prior to engaging in such acquisitions and to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock market. On September 21, 2006, the CSRC published on its official website a notice specifying the documents and materials that are required to be submitted for obtaining CSRC approval.

 

 

The application of the M&A Rules with respect to our corporate structure remains unclear, with no current consensus existing among leading PRC law firms regarding the scope and applicability of the M&A Rules. We believe that the MOFCOM and CSRC approvals under the M&A Rules were not required in the context of our share exchange transaction because at such time the share exchange was a foreign related transaction governed by foreign laws, not subject to the jurisdiction of PRC laws and regulations. However, we cannot be certain that the relevant PRC government agencies, including the CSRC and MOFCOM, would reach the same conclusion, and we cannot be certain that MOFCOM or the CSRC will not deem that the transactions effected by the share exchange circumvented the M&A Rules, and other rules and notices, or that prior MOFCOM or CSRC approval is required for overseas financing. Further, we cannot rule out the possibility that the relevant PRC government agencies, including MOFCOM, would deem that the M&A Rules required us or our entities in China to obtain approval from MOFCOM or other PRC regulatory agencies in connection with WFOE’s control of Wujiang Luxiang through contractual arrangements.

 

If the CSRC, MOFCOM, or another PRC regulatory agency subsequently determines that CSRC, MOFCOM or other approval was required for the share exchange transaction and/or the VIE arrangements between WFOE and Wujiang Luxiang, or if prior CSRC approval for overseas financings is required and not obtained, we may face severe regulatory actions or other sanctions from MOFCOM, the CSRC or other PRC regulatory agencies. In such event, these regulatory agencies may impose fines or other penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from overseas financings into the PRC, restrict or prohibit payment or remittance of dividends to us or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our common stock. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to delay or cancel overseas financings, to restructure our current corporate structure, or to seek regulatory approvals that may be difficult or costly to obtain.

 

The M&A Rules, along with certain foreign exchange regulations discussed below, will be interpreted or implemented by the relevant government authorities in connection with our future offshore financings or acquisitions, and we cannot predict how they will affect our acquisition strategy. For example, Wujiang Luxiang’s ability to remit its profits to us, or to engage in foreign-currency-denominated borrowings, may be conditioned upon compliance with the SAFE registration requirements by such Chinese domestic residents, over whom we may have no control.

 

SAFE regulations relating to offshore investment activities by PRC residents may increase our administrative burdens and restrict our overseas and cross-border investment activity. If our shareholders and beneficial owners who are PRC residents fail to make any required applications, registrations and filings under such regulations, we may be unable to distribute profits and may become subject to liability under PRC laws.

 

SAFE has promulgated several regulations, including Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Inbound Investment via Overseas Special Purpose Vehicles ("Circular No. 75"), issued on October 21, 2005 and effective as of November 1, 2005 and certain implementation rules issued in recent years, requiring registrations with, and approvals from, PRC government authorities in connection with direct or indirect offshore investment activities by PRC residents and PRC corporate entities. These regulations apply to our shareholders and beneficial owners who are PRC residents, and may affect any offshore acquisitions that we make in the future.

 

SAFE Circular No. 75 requires PRC residents, including both PRC legal person residents and/or natural person residents to register with the local SAFE branch before establishing or controlling any company outside of China for the purpose of equity financing with assets or equities of PRC companies, referred to in the notice as an "offshore special purpose company." In addition, any PRC resident who is a direct or indirect shareholder of an offshore company is required to update his registration with the relevant SAFE branches, with respect to that offshore company, in connection with any material change involving an increase or decrease of capital, transfer or swap of shares, merger, division, equity or debt investment or creation of any security interest. Moreover, failure to comply with the various foreign exchange registration requirements described above could result in liabilities for such PRC subsidiary under PRC laws for evasion of applicable foreign exchange restrictions.

 

In addition to the disclosure obligation, the PRC onshore subsidiaries indirectly invested by a PRC resident through that offshore company are required to coordinate and supervise the filing of SAFE registrations by the offshore company's shareholders who are PRC residents in a timely manner. If a PRC shareholder with a direct or indirect stake in an offshore parent company fails to make the required SAFE registration, such PRC resident will be subject to administrative penalties under PRC foreign administration regulations, including fines.

 

Although we have requested our PRC shareholders to complete the SAFE Circular No. 75 registration, we cannot be certain that all of our PRC resident beneficial owners will comply with the SAFE regulations. The failure or inability of our PRC shareholders to receive any required approvals or make any required registrations may subject us to fines and legal sanctions, restrict our overseas or cross-border investment activities, prevent us from transferring the net proceeds of overseas financings or making other capital injection into our PRC affiliates, limit our PRC affiliates' ability to make distributions or pay dividends or affect our ownership structure, as a result of which our acquisition strategy and business operations and our ability to distribute profits to you could be materially and adversely affected.

 

 

Under Notice of the SAFE on Issues Related to Foreign Exchange Administration in Domestic Individual’s Participation in Equity Incentive Plans of Companies listed Aboard (Hui Fa (2012) No. 7), issued and effective as of February 15, 2012 by SAFE ("Circular No. 7"), SAFE requires PRC residents who are granted shares or share options by an overseas-listed company under such company’s employee share option or share incentive plan, through such company’s PRC subsidiary or branch located in the PRC, any other PRC entity that is under control of such company or other qualified PRC agents, or collectively the PRC agent, to register with SAFE and complete certain other procedures related to the share option or other share incentive plan and to open a special foreign currency account and to use such account to pay for funds required for exercising the option and to receive overseas share sale proceeds in foreign exchange and to distribute such proceeds to relevant employees in U.S. dollars or in RMB after conversion. More specifically, the PRC agent can also apply for the annual quota of currency conversion to convert overseas share sale proceeds in U.S. dollars into RMB. In addition, an offshore entity must be appointed to act as trustee to handle share transfer transactions or option exercises relating to the share option or other share incentive plan. We believe that all of our PRC employees who are granted share options are subject to Circular No. 7. If we grant our PRC employees stock options, we will request our PRC management, personnel, directors and employees who are to be granted stock options to register them with local SAFE pursuant to Circular No. 7. However, each of these individuals may not successfully comply with all the required procedures above. If we or our PRC security holders fail to comply with these regulations, we or our PRC security holders may be subject to fines and legal sanctions. Further, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for foreign exchange evasion and we may become subject to a more stringent review and approval process with respect to our foreign exchange activities.

 

Our agreements with Wujiang Luxiang are governed by the laws of the PRC and we may have difficulty in enforcing any rights we may have under these contractual arrangements.

 

As all of our contractual arrangements with Wujiang Luxiang are governed by the PRC laws and provide for the resolution of disputes through arbitration in the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in the United States. As a result, uncertainties in the PRC legal system could further limit our ability to enforce these contractual arrangements. Furthermore, these contracts may not be enforceable in China if PRC government authorities or courts take a view that such contracts contravene PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event we are unable to enforce these contractual arrangements, we may not be able to exert effective control over Wujiang Luxiang, and our ability to conduct our business may be materially and adversely affected.

 

The Wujiang Luxiang Shareholders have potential conflicts of interest with us, which may adversely affect our business.

 

All ultimate individual shareholders of the 11 Chinese entities and Mr. Huichun Qin, which collectively own 100% of Wujiang Luxiang’s outstanding equity interests, or their representatives,  are beneficial owners of shares of common stock of CCC through their BVI entities.  Equity interests held by each of these shareholders in CCC is less than its interest in Wujiang Luxiang as a result of our introduction of outside investors as shareholders of CCC. In addition, such shareholders’ equity interest in our company will be further diluted as a result of any future offering of equity securities. As a result, conflicts of interest may arise as a result of such dual shareholding and governance structure.

 

If such conflicts arise, these shareholders may not act in our best interests and such conflicts of interest may not be resolved in our favor. In addition, these shareholders may breach or cause Wujiang Luxiang to breach or refuse to renew the VIE Agreements that allow us to exercise effective control over Wujiang Luxiang and to receive economic benefits from Wujiang Luxiang. Delaware law provides that directors owe a fiduciary duty to a company, which requires them to act in good faith and in the best interests of the company and not to use their positions for personal gain. If we cannot resolve any conflicts of interest or disputes between us and such shareholders or any future beneficial owners of Wujiang Luxiang, we would have to rely on arbitral or legal proceedings to remedy the situation. Such arbitral and legal proceedings may cost us substantial financial and other resources and result in disruption of our business, the outcome of which may adversely affect the Company.

 

If Wujiang Luxiang, or PFL fail to maintain the requisite registered capital, licenses and approvals required under PRC law, our business, financial condition and results of operations may be materially and adversely affected.

 

Foreign investment is highly regulated by the PRC government and the foreign investment in the lending industry is restricted by local authorities. Numerous regulatory authorities of the central PRC government, provincial and local authorities are empowered to issue and implement regulations governing various aspects of the lending industry. Foreign investment in the financial leasing industry is also subject to foreign investment regulations. Each of Wujiang Luxiang and PFL are required to obtain and maintain certain assets relevant to its business as well as applicable licenses or approvals from different regulatory authorities in order to provide their current services. These registered capital and licenses are essential to the operation of our business and are generally subject to annual review by the relevant governmental authorities. Furthermore, Wujiang Luxiang and PFL may be required to obtain additional licenses. If we fail to obtain or maintain any of the required registered capital, licenses or approvals, our continued business operations in the lending, and leasing industries may subject us to various penalties, such as confiscation of illegal net revenue, fines and the discontinuation or restriction of our operations. Any such disruption in the business operations of Wujiang Luxiang or PFL will materially and adversely affect our business, financial condition and results of operations.

 

 

Risks Relating to Our Securities

 

Even if our common stock resumes trading, it may be thinly traded and our stockholders may be unable to sell at or near ask prices or at all if they need to sell their shares to raise money or otherwise desire to liquidate their shares.

 

Our common stock may be “thinly-traded”, meaning that the number of persons interested in purchasing our common stock at or near bid prices at any given time may be relatively small or non-existent. This situation may be attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and might be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. Broad or active public trading market for our common stock may not develop or be sustained. 

 

The market price for our common stock may be volatile.

 

The market price for our common stock may be volatile and subject to wide fluctuations due to factors such as:

 

	·	the perception of U.S. investors and regulators of U.S. listed Chinese companies;
	·	actual or anticipated fluctuations in our quarterly operating results;

	·	changes in financial estimates by securities research analysts;
	·	negative publicity, studies or reports;

	·	conditions in Chinese credit markets;
	·	changes in the economic performance or market valuations of other microcredit companies;

	·	announcements by us or our competitors of acquisitions, strategic partnerships, joint ventures or capital commitments;
	·	addition or departure of key personnel;

	·	fluctuations of exchange rates between RMB and the U.S. dollar; and
	·	general economic or political conditions in China.

 

In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.

 

Volatility in our common stock price may subject us to securities litigation.

 

The market for our common stock may have, when compared to seasoned issuers, significant price volatility and we expect that our share price may continue to be more volatile than that of a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.

 

 

As an “emerging growth company” under applicable law, we will be subject to lessened disclosure requirements. Such reduced disclosure may make our common stock less attractive to investors.

 

For as long as we remain an “emerging growth company” as defined in the JOBS Act, we will elect to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies”, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. Because of these lessened regulatory requirements, our stockholders would be left without information or rights available to stockholders of more mature companies. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

Our status as an “emerging growth company” under the JOBS Act may make it more difficult to raise capital when we need to do it.

 

Because of the exemptions from various reporting requirements provided to us as an “emerging growth company”, we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.

 

We will incur increased costs and demands upon management as a result of complying with the laws and regulations that affect public companies, which could materially adversely affect our results of operations, financial condition, business and prospects.

 

As a public company and particularly after we cease to be an “emerging growth company,” we will incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting and corporate governance requirements. These requirements include compliance with Section 404(b) and other provisions of the Sarbanes-Oxley Act, as well as Section 14 rules implemented by the SEC and NASDAQ. In addition, our management team will also have to adapt to the requirements of being a public company. We expect that compliance with these rules and regulations will substantially increase our legal and financial compliance costs and will make some activities more time-consuming and costly.

 

The increased costs associated with operating as a public company will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. Additionally, if these requirements divert our management’s attention from other business concerns, they could have a material adverse effect on our results of operations, financial condition, business and prospects.

 

 

We are obligated to develop and maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.

 

We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for fiscal 2014, the first fiscal year beginning after our initial public offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting and, after we cease to be an “emerging growth company,” a statement that our independent registered public accounting firm has issued an opinion on our internal control over financial reporting.

 

We are in the early stages of the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective.

 

If we are unable to assert that our internal control over financial reporting is effective, or if, when required, our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline, and we may be subject to investigation or sanctions by the SEC.

  

We will be required to disclose changes made in our internal controls and procedures on a quarterly basis. However, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an “emerging growth company” as defined in the JOBS Act, if we take advantage of the exemptions contained in the JOBS Act. We will remain an “emerging growth company” for up to five years. However,  if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any July 31 before that time, our revenues exceed $1 billion, or we issue more than $1 billion in non-convertible debt in a three year period, we would cease to be an “emerging growth company” as of the following January 31. To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff.

 

 

Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an “emerging growth company.” At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may not enable us to avoid a material weakness in the future.

 

Provisions in our By-laws and Delaware laws might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

 

Provisions of our by-laws and Delaware laws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include: 

 

·

the inability of stockholders to act by written consent or to call special meetings;

·

the ability of our board of directors to make, alter or repeal our by-laws; and

·

the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval.

 

In addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions are approved by our board of directors. The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.

  

The elimination of monetary liability against our directors, officers and employees under our certificate of incorporation and the existence of indemnification of our directors, officers and employees under Delaware law may result in substantial expenditures by us and may discourage lawsuits against our directors, officers and employees.

 

Our certificate of incorporation contains provisions which eliminate the liability of our directors for monetary damages to us and our stockholders to the maximum extent permitted under the corporate laws of Delaware. We may also provide contractual indemnification obligations under agreements with our directors, officers and employees. These indemnification obligations could result in our incurring substantial expenditures to cover the cost of settlement or damage awards against directors, officers and employees, which we may be unable to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against directors, officers and employees for breach of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors, officers and employees even though such actions, if successful, might otherwise benefit the Company and our shareholders.

 

 

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

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

The following exhibits are filed herewith:

 

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

 

 

SIGNATURES

 

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

 

March 12, 2015	CHINA COMMERCIAL CREDIT, INC.
	By:	/s/ Jingen Lin
		Jingen Lin
		Chief Executive Officer
		(Principal Executive Officer)
	By:	/s/ Long Yi
		Long Yi
		Chief Financial Officer (Principal Financial and Accounting Officer)

 

 

EXHIBIT INDEX

 

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

 

 

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