SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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

For the fiscal year ended December 31, 2015

☐    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.)

 

890 Yongkang Road, Wujang, Suzhou, Jiangsu Province People’s Republic of China		215200
(Address of principal executive offices)		(Zip Code)

Issuer’s telephone number: +86 512 63960022

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of exchange on which registered
Common stock, par value $.001		Nasdaq Capital Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or 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. (Check one): 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐  (Do not check if a smaller reporting company)	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 June 30, 2015, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $15.2 million based on the closing price of $1.24 for the registrant’s common stock as reported on the NASDAQ Capital Market.

As of April 13, 2016, there were 12,396,062 shares of the Company’s common stock issued and outstanding.

 

 

China Commercial Credit, Inc.

 

Annual Report on Form 10-K

 

For the Fiscal Year Ended December 31, 2015

 

TABLE OF CONTENTS

 

Note Regarding Forward-Looking Statements
PART I
Item 1.	Description of Business	1
Item 1A.	Risk Factors	21
Item 1B.	Unresolved Staff Comments	21
Item 2.	Description of Property	21
Item 3.	Legal Proceedings	22
Item 4.	Mine Safety Disclosure	22
		35
PART II
Item 5.	Market for Common Equity and Related Stockholder Matters	23
Item 6.	Selected Financial Data	24
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 8.	Financial Statements	35
Item 9.	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure	35
Item 9A.	Controls and Procedures	35
Item 9B.	Other Information	36
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	37
Item 11.	Executive Compensation	40
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	41
Item 13.	Certain Relationships and Related Transactions, and Director Independence	42
Item 14.	Principal Accountant Fees and Services	42
PART IV		43
Item 15.	Exhibits, Financial Statement Schedules	43

 

 

All references to “we,” “us,” “our,” “CCC,” “Company,” “Registrant” or similar terms used in this report refer to China Commercial Credit, Inc., a Delaware corporation (“CCC”), including its consolidated subsidiaries and variable interest entities (“VIE”), unless the context otherwise indicates. We conduct our business through three operating entities, Wujiang Luxiang Rural Microcredit Co., Ltd., a PRC company with limited liability by stock (“Wujiang Luxiang”), which is a VIE controlled by Wujiang Luxiang Information Technology Consulting Co., Ltd (“WFOE”), a wholly-owned subsidiary of ours, through a series of contractual arrangements, and Pride Financial Leasing (Suzhou) Co. Ltd (“PFL”), our wholly-owned indirect subsidiary.

 

“PRC” or “China” refers to the People’s Republic of China, excluding, for the purpose of this report, Taiwan, Hong Kong and Macau. “RMB” or “Renminbi” refers to the legal currency of China and “$”, “US$” or “U.S. Dollars” refers to the legal currency of the United States.

 

Note Regarding Forward-Looking Statements

 

The information contained in this Annual Report on Form 10-K 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 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 and financial guarantee 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.

 

We qualify all of our forward-looking statements by these cautionary statements. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

 

 

PART I

 

Item 1.

Description of Business.

 

General

 

China Commercial Credit, Inc., is a financial services firm operating in China. Our mission is to fill the significant void in the market place by offering lending, financial guarantee and financial leasing products and services to a target market which has been significantly under-served by the traditional Chinese financial community.  Our current operations consist of providing direct loans, loan guarantees and financial leasing services to small-to-medium sized businesses (“SMEs”), farmers and individuals in the city of Wujiang, Jiangsu Province.

 

Our loan and loan guarantee business is conducted through Wujiang Luxiang, a fully licensed microcredit company which we control through our subsidiaries and certain contractual arrangements. Our financial leasing business is conducted through PFL, our wholly owned subsidiary. Historically, many SMEs and farmers have been borrowing at high interest rates from unregulated and often illegal lenders, referred to as “underground” lenders, to finance their operations and growth, contrary to the preferences of Chinese banking authorities. Such high interest rate borrowing makes it difficult for businesses to grow, and also exacerbates China’s concerns about inflation. By operating through licensed and regulated businesses, we seek to bridge the gap between Chinese state-owned and commercial banks that have not traditionally served the capital needs of SMEs and higher interest rate “underground” lenders.

 

Jiangsu, which is an eastern coastal province, has among the highest population density in China and is home to many of the world’s leading exporters of electronic equipment, chemicals and textiles. As a result, the city of Wujiang ranks as one of the most economically successful cities in China. The SMEs, both in Jiangsu and other provinces in China, have historically been an under-served segment of the Chinese banking market. Due to the significant demand from SMEs, the number of microcredit companies in China is increasing rapidly. According to the People’s Bank of China (the “PBOC”), there were approximately 8,910 microcredit companies in China with a total outstanding loan balance of over $149.5 billion (RMB941.0 billion) as of the end of 2015.

 

Since Wujiang Luxiang’s inception in October 2008, it has developed a large number of borrowers in Wujiang City.  All of our loans are made from our sole office, located in Wujiang City.  As of December 31, 2015, we have built a $63.1 million portfolio of direct loans to 115 borrowers and a total of $11.7 million in loan guarantees for 14 borrowers.

 

During 2014 and 2015, the microcredit companies in Wujiang area went through the most difficult time since their inceptions in 2008. Three of them went bankrupt while the remainder are struggling with high default rates due to the poor economic condition, especially the slow-down in the textile industry. The operations of Wujiang Luxiang were also affected. For the year ended December 31, 2015, we had a loss of $56 million and a net loss of $61 million compared to a loss of $23 million and net loss of $27 million in 2014, a decrease of 139% and 124%, respectively.  As a result of the deteriorating economic condition, we experienced a substantial increase in the amount of default loans in both our direct lending and guarantee business. The amount of underlying loans we guaranteed has been reduced by 46.3% to $11.7 million as of December 31, 2015 compared to $21.8 million as of December 31, 2014. As the rate of fees and commissions generated from the guarantee business has been decreasing, the Company decided that the revenue does not justify the default risks involved in the guarantee business, 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 in the future if economic conditions improve.

 

Our financial leasing services are anticipated to be provided to a diverse base of customers, including textile and other manufacturing companies, railroads, port facilities, local bus, and rail companies and municipal governments. Customers will include existing clients of Wujiang Luxiang in addition to new clients.  PFL, our wholly owned subsidiary, plans to provide leases on both new and used manufacturing equipment, medical devices, transportation vehicles and industrial equipment, purchased both domestically and from foreign suppliers, to meet its customer’s needs. As of the date of this Annual Report, PFL entered into two financial leasing agreements for an aggregate of $5.61 million in lease receivables. We do not currently have further funds to deploy in the financial leasing business and plan to hold off expansion of the leasing business until the economic environment improves.

 

Going Concern 

 

The Company has suffered recurring losses from operations and has incurred a net loss of $61,264,714 for the year ended December 31, 2015. In addition, the Company had a working capital (total consolidated current liabilities exceeding total consolidated current assets) of $934,372 as of December 31, 2015. As of December 31, 2015, the Company had cash and cash equivalents of $306,401, and total short-term borrowings of $2,618,729.

 

These and other factors disclosed in this annual report raise substantial doubt as to the Company’s ability to continue as a going concern. Management believes that it has developed a liquidity plan, as summarized below, that, if executed successfully, will provide sufficient liquidity to meet the Company obligations for a reasonable period of time.

 

●	Bank Financing and Other Financial Support

 

On October 30, 2015, the Company entered into a borrowing agreement with Agriculture Bank of China for a one-year bank facility of RMB 29 million (or approximately $4 million). As of March 23, 2016, the Company has paid off all outstanding bank borrowings. The Company may use this bank credit line in the next few months and lend new direct loans to customers if the economic condition in Wujiang area improved. The credit line is guaranteed by Wujiang Luxiang Shareholders and can be renewed with a prior written application to Agriculture Bank of China.

 

 

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

 

●	Improvement in Working Capital Management

 

In order to meet the capital needs for our continued operations, we continue to use our best effort to improve our collection of loan receivable and interest receivable. We engaged four law firms, Jiangsu Zhenyuzhen Law Firm, Jiangsu Tianbian Law Firm, Jiangsu Mingren Law Firm and He-Partners Law Firm to represent us in the legal proceedings against the borrowers and their counter guarantors. Among them, He-Partners Law Firm, is one of the largest law firms in Suzhou City. 

 

While management believes that the measures in the liquidity plan will be adequate to satisfy its liquidity and cash flow requirements for the twelve months ending December 31, 2016, there is no assurance that the liquidity plan will be successfully implemented. Failure to successfully implement the liquidity plan will have a material adverse effect on the Company’s business, results of operations and financial position, and may materially adversely affect its ability to continue as a going concern.

 

Emerging Growth Company Status

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, (the “JOBS Act”) and we are eligible to take advantage of certain exemptions from various reporting and financial disclosure requirements that are applicable to other public companies, that are not emerging growth companies, including, but not limited to, (1) presenting only two years of audited financial statements and only two years of related management’s discussion and analysis of financial condition and results of operations in our initial public offering, (2) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), (3) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and (4) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We intend to take advantage of these exemptions. As a result, stockholders may have less information then they might otherwise have.

 

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. As a result, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We elected to opt out of such extended transition period and acknowledge such election is irrevocable pursuant to Section 107 of the JOBS Act.

 

We could remain an emerging growth company for up to five years, or until the earliest of (1) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (2) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter and we have been publicly reporting for at least 12 months, or (3) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.  

 

Corporate Structure

 

China Commercial Credit, Inc. is a holding company that was incorporated under the laws of the State of Delaware on December 19, 2011. The Company, through its indirect wholly-owned subsidiary, Wujiang Luxiang Information Technology Consulting Co. Ltd. (“WFOE”), a limited liability company formed under the laws of the PRC on September 26, 2012, controls Wujiang Luxiang, a company established under the laws of the PRC on October 21, 2008, through a series of contractual arrangements.  CCC International Investment Ltd. (“CCC BVI”), a company incorporated under the laws of the British Virgin Islands (“BVI”) on August 21, 2012, is wholly owned by the Company.  CCC BVI wholly owns CCC International Investment Holding Ltd. (“CCC HK”), a company incorporated under the laws of the Hong Kong S.A.R. of the PRC on September 4, 2012.  WFOE is wholly owned by CCC HK.  On September 5, 2013, CCC HK incorporated PFL a wholly owned subsidiary, to start our financial leasing business. 

 

On April 11, 2015, WFOE delivered a notice of termination to Pride Information Technology Co. Ltd. (“Pride Online”), a domestic entity established on February 19, 2014 and 100% owned by Huichun Qin, a former officer and director of the Company, to terminate the VIE agreements by and among the parties. The Company entered into the VIE agreements with Pride Online in order to provide WFOE absolute control over the economic interest in Pride Online. As a result of the termination notice, the contractual arrangements by and among the Company, Mr. Qin and Pride Online terminated as of May 11, 2015 and WFOE no longer controls Pride Online.

 

 

The following diagram illustrates our corporate structure as of the date of this Annual Report:

 

 

(1)    Pursuant to a series of contractual arrangements, WFOE effectively controls and manages the business activities of Wujiang Luxiang.

 

Contractual Arrangements between WFOE and Wujiang Luxiang

 

There are no PRC state, provincial or local laws, rules and regulations prohibiting or restricting direct foreign equity ownership in companies engaged in rural microcredit business. However, the provincial authorities regulate microcredit companies through strict licensing requirements and approval procedures.  Direct controlling foreign ownership in a for-profit microcredit company has never been approved by competent Jiangsu government authorities. Based on the current position taken by the competent Jiangsu government authorities, direct foreign controlling ownership of a for-profit rural microcredit company will not be approved in the foreseeable future.

 

As such, neither we nor our subsidiaries own any equity interest in Wujiang Luxiang.  Instead, we control and receive the economic benefits of Wujiang Luxiang’s business operation through a series of contractual arrangements.  WFOE, Wujiang Luxiang and its shareholders entered into a series of contractual arrangements, also known as VIE Agreements, on September 26, 2012.   The VIE Agreements are designed to provide WFOE with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Wujiang Luxiang, including absolute control rights and the rights to the assets, property and revenue of Wujiang Luxiang.  Based on a legal opinion issued by Dacheng Law Offices to WFOE, the VIE Agreements constitute valid and binding obligations of the parties to such agreements, and are enforceable and valid in accordance with the laws of the PRC. 

 

Each of the VIE Agreements is described in detail 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 granted an irrevocable and exclusive option to WFOE to purchase from Wujiang Luxiang, any or all of Wujiang Luxiang’s assets at the lowest purchase price permitted under the PRC laws. WFOE may exercise, at its sole discretion, the option to purchase equity interests of Wujiang Luxiang from all the 12 equity holders of Wujiang Luxiang (the “Wujiang Shareholders”) permitted by PRC laws. Should WFOE exercise such option, the parties shall enter into a separate asset transfer or similar agreement. For services rendered to Wujiang Luxiang by WFOE under this agreement, WFOE is entitled to collect a service fee calculated based on the time of services rendered multiplied by the corresponding rate, the plus amount of the services fees or ratio decided by the board of directors of WFOE based on the value of services rendered by WFOE and the actual income of Wujiang Luxiang from time to time, 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.

 

The sole director and president of WFOE, Mr. Ling, is currently managing Wujiang Luxiang pursuant to the terms of the Exclusive Business Cooperation Agreement. WFOE has absolute authority relating to the management of Wujiang Luxiang, including but not limited to decisions with regard to expenses, salary raises and bonuses, hiring, firing and other operational functions. The Exclusive Business Cooperation Agreement does not prohibit related party transactions. The audit committee of CCC is required to review and approve in advance any related party transactions, including transactions involving WFOE or Wujiang Luxiang.

 

Share Pledge Agreement

 

Under the Share Pledge Agreement between the Wujiang Shareholders and WFOE, the Wujiang Shareholders pledged all of their equity interests in Wujiang Luxiang to WFOE to guarantee the performance of Wujiang Luxiang’s obligations under the Exclusive Business Cooperation Agreement.  Under the terms of the agreement, in the event that Wujiang Luxiang or its shareholders breach their respective contractual obligations under the Exclusive Business Cooperation Agreement, WFOE, as pledgee, will be entitled to certain rights, including, but not limited to, the right to collect dividends generated by the pledged equity interests.  The Wujiang 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 Shareholders further agree not to dispose of the pledged equity interests or take any actions that would prejudice WFOE’s interest.

 

The Share Pledge Agreement shall be effective until all payments due under the Exclusive Business Cooperation Agreement have been paid by Wujiang Luxiang.  WFOE shall cancel or terminate the Share Pledge Agreement upon Wujiang Luxiang’s full payment of fees payable under the Exclusive Business Cooperation Agreement.

 

Exclusive Option Agreement

 

Under the Exclusive Option Agreement, the Wujiang 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 Shareholders subject to any appraisal or restrictions required by applicable PRC laws and regulations. As of the date of this report, if WFOE exercised such option, the total option price that would be paid to all of the Wujiang Shareholders would be $51.2 million, which is the aggregate registered capital of Wujiang Luxiang.   The option purchase price shall increase in the event that the Wujiang Shareholders make additional capital contributions to Wujiang Luxiang, including when the registered capital is increased upon Wujiang Luxiang receiving the proceeds from our initial public offering.

 

The agreement remains effective for a term of ten years and may be renewed at WFOE’s election.

 

Power of Attorney

 

Under the Power of Attorney, the Wujiang 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 of Wujiang Luxiang, 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.

 

Although it is not explicitly stipulated in the Power of Attorney, the term of the Power of Attorney shall be the same as the term of that of the Exclusive Option Agreement.

 

This Power of Attorney is coupled with an interest and shall be irrevocable and continuously valid from the date of execution of this Power of Attorney, so long as the Wujiang Shareholder is a shareholder of 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.

 

Although it is not explicitly stipulated in the Timely Reporting Agreement, the parties agreed its term shall be the same as that of the Exclusive Business Cooperation Agreement.

 

Our Business

 

General

 

We have three business lines, lending, guarantee and financial leasing.

 

For our lending and guarantee services, we generally provide direct loans and guarantee services, to borrowers located within City of Wujiang, Jiangsu Province of China. In our direct loan business, we provide short-term loans to the borrowers and generate interest income.  In our guarantee business, we act as a guarantor to borrowers applying for short-term direct loans with other lenders and generate fee income.  Our clients in both the direct loan and guarantee businesses are primarily SMEs, farmers and individuals who generally use the proceeds of the loans for business related purposes. We are not dependent on any one borrower in either our direct loan or guarantee business.

 

We fund our lending and guarantee operations by using our registered capital, drawing down from the line of credit we have with state-owned or commercial banks, and using cash generated from our operations.  We currently have only one line of credit agreement with Agricultural Bank of China, the amount we are allowed to finance through debt financing is limited at 50% of our net capital. As of December 31, 2015, we had borrowed approximately $2.6 million (RMB 17 million) from Agricultural Bank of China, which balance has been paid in full as of the date of this report. Currently there is $4.5 million (RMB 29 million) available under the line of credit. This line of credit was granted to Wujiang Luxiang since its inception in 2008 as a provincial government's measure to support rural microcredit company's operations. The total line of credit decreased from RMB 150 million to RMB 100 million during 2014 due to PBOC’s tightened monetary policy.  Interest rates under this line of credit vary, but have been no more than 110% of the PBOC benchmark interest rate (the "PBOC Rate"). 

 

On September 5, 2013, we formed PFL to start our financial leasing business. PFL is licensed by SAIC to provide leasing services in all of the Chinese provinces. PFL offers financial leases on machinery and equipment, public transportation vehicles, and medical devices to municipal government agencies, public transportation agencies, hospitals and SMEs in Jiangsu Province and other provinces.  As of December 31, 2015, PFL incurred two finance lease transactions with total lease receivables of $5.61 million.

  

Our Services

 

Direct Loans

 

We provide direct loans to borrowers with terms not exceeding one year. During 2015 and 2014 the average principal loan amount we provided was approximately $208,527 and $336,000, respectively. The interest rate we charge on a specific direct loan depends on a number of factors, including the type of borrower and whether the loan is secured or unsecured. We also take into account the quality of the collateral or guarantee given and the term of the loan.

 

Interest on our loans is usually payable monthly and averaged 13.50% and 14.19% for our direct loan portfolio for the twelve months ended December 31, 2015 and 2014, respectively. Under certain Jiangsu banking regulations, since August 2012, we are allowed to charge an interest rate within the range of 0.9 times and 3 times PBOC Rate. As of December 31, 2015, the PBOC Rate was set at 4.35% per annum for one-year term loans and 4.35% for six-month term loans. During the fiscal year ended 2015, the average interest rate we charged to SMEs was three times the PBOC Rate or 15.21% for one-year term loans and 12.25% for six-month term loans. The interest on loans to farmers is subsidized by the Jiangsu government and usually results in farmers paying a 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 government as a government incentive. It is within the provincial government's discretion as to the amount of incentive to be remitted to us. The revenue we generated from such government incentive has always been less than 5% of our gross revenue since Wujiang Luxiang's inception.

 

 

We offer both secured and unsecured direct loans. As of December 31, 2015, there were 115 direct loans outstanding, with a total aggregate outstanding balance of approximately $63.1 million and interest rates ranging from 5.6% to 19.44% and original terms of the loans ranging from 1 month to 12 months, none of which were unsecured loans.  The following table sets forth a summary of our direct loan portfolio as of December 31, 2014 and 2015:

 

		Total Outstanding Balance as of 12/31/2014				Percentage of the Total Loan Portfolio as of 12/31/2014				Total Outstanding Balance as of 12/31/2015				Percentage of the Total Loan Portfolio as of 12/31/2015
Guarantee-backed loans			75,059,359				91.4	%			59,008,573				93.6	%
Pledge assets-backed loans			6,368,940				7.76	%			4,068,147				6.4	%
Collateral-backed loans			650,830				0.79	%			-				0	%
Total:			82,079,129				100	%			63,076,720				100	%

 

All our loans are secured. We offer three types of secured loans:

 

●	loans guaranteed by a third party, referred to in China as “guarantee-backed loans;”
●	loans secured by real property, referred to in China as “collateral-backed loans;” and
●	loans secured by personal property, referred to in China as “pledge-backed loans.”

 

Guarantee-backed loans

 

In the case of guarantee-backed loans, the third party guarantor and the borrower are jointly and severally liable for the repayment of the loan.  The third party guarantor, whether being an individual or legal entity, must be creditworthy.  We do not require any asset from the borrower as collateral for such guarantee-backed loans.

 

Collateral-backed loans

 

In the case of collateral-backed loans, the borrowers provide land use rights or building ownership as collateral for the loan.

 

For loans secured by land use rights, the principal amount we grant is no more than 50-70% of the value of the land use rights. The percentage varies depending on the liquidity of the land use rights. For loans secured by building ownership, the principal amount we grant can be up to 100% of the value of the building. We engage independent appraisal firms to determine the value of the land use rights or the building.

 

Prior to funding a direct loan secured by land use rights or building ownership, we register our security interest in the collateral with the appropriate government authority.  In the event the borrower defaults, we take legal actions including legal proceedings against the default borrower and enforcement action resulting in the court’s sale of the asset through an auction.

 

Pledge-backed loans

 

In the case of pledge-backed loans, the borrowers pledge negotiable instruments as collateral for the loan.  The maximum principal amount of pledge-backed loans we extend is generally within 90% of the value of the pledged negotiable instrument.

 

We will take physical possession of the negotiable instrument at the time the loan is made and do not need to register such security interest with any government authority.  If the borrower defaults, we can acquire ownership of the negotiable instrument upon the borrower’s consent.  If the borrower refuses to settle the outstanding balance amicably by rendering ownership to the pledged instrument to us, we will then initiate legal proceedings in which the court will be required to enforce transfer of the ownership.

 

We require the business owners or individual shareholders of business borrowers to be jointly and severally liable for the repayment of the loan.  In addition, we also require either a guarantee from a third party or certain assets as collateral.

 

Guarantee Services

 

For a fee, we also provide guarantees to third party lenders on behalf of borrowers applying for loans with such other lenders. Our guarantee is a commitment by us to repay the loan to the lender if the borrower defaults.  We, as the third party guarantor, are jointly and severally liable with the borrower for the repayment of the full amount of the loan.  We have cooperation agreements with six state-owned and commercial banks pursuant to which we are accepted as a guarantor.

 

In order for us to agree to act as a guarantor, a borrower must provide a counter-guarantor to us or acceptable collateral to the third party lender such as land use rights, building ownership, or a negotiable instrument. In addition, the borrower must deposit cash with us in an amount equal to the amount we are required to deposit with the third party lender which is usually 10% to 20% of the principal amount of the loan. If the borrower defaults and we pay the lender on the borrower’s behalf, we will first recover from the cash deposit the borrower provided us and then demand the counter-guarantor make payment to us or recover the payment from the sale proceeds of the collateral asset.

 

 

In exchange for our guarantee, the borrowers pay us guarantee fees. We charge a per annum guarantee fee ranging from 1.56% to 1.80% of the principal amount of the underlying loan. The guarantee fees are payable in full when the guarantee is made. The criteria in determining the guarantee fee paid by the borrower are summarized in the following table:

 

Types of Security Interest		New Client		Previous or Existing Client
Land Use Rights or Building Ownership		1.68% of the principal amount of the underlying loan multiplied by the number  of years of the guarantee		1.56% of the principal amount of the  underlying loan multiplied by the number  of years of the guarantee
Counter-Guarantor		1.80 % of the principal amount of the  underlying loan multiplied by the number  of years of the guarantee		1.62 % of the principal amount of the underlying loan multiplied by the number of  years of the guarantee

 

In addition to the fee income, we earn interest on the refundable cash deposits provided to us by the borrowers.  Such cash deposits are required to be made to our bank account when we approve the guarantee application. After the expiration of the guarantee term, such cash deposits, without interest, will be refunded to the borrower once we receive a notice from the third party lender confirming termination of our guarantee obligation.

 

As of December 31, 2015, we have provided guarantees for a total of $11.7 million underlying loans to approximately 14 borrowers.

 

Due to a substantial increase in the amount of default loans in the loan guarantee business, the amount of underlying loans we guaranteed has been reduced by 46.3% as of December 31, 2015 compared to as of December 31, 2014. As the rate of fees and commissions generated from the guarantee business has been decreasing, the Company has decided that the revenue does not justify the default risks involved, and therefore expects to further reduce the traditional guarantee business and hold off on pursuing the guarantee business to be provided via the Kaixindai platform as previously planned. Management may actively resume the guarantee business in the future if economic conditions improve.

 

Financial Leasing Services

 

On September 5, 2013, we formed PFL, a wholly owned subsidiary, to start our financial leasing business. PFL is licensed by SAIC to provide leasing services in all of the Chinese provinces. PFL plans to offer financial leases on machinery and equipment, public transportation vehicles, and medical devices to municipal government agencies, public transportation agencies, hospitals and SMEs in Jiangsu Province and other provinces. As of the date of this annual report, PFL entered into two financial leasing agreements for an aggregate of $5.61 million in loan receivables. We do not currently have further funds to deploy in the financial leasing business.

 

We had used substantially all of the net proceeds from the follow-on public offering closed in May 2014 to increase the registered capital of PFL and corresponding financing leasing capacity. Currently, PFL is approved to have a registered capital of $50 million. We were required to contribute 15% of the $50 million by December 4, 2013. In 2014, we orally obtained an extension from the relevant government authority to delay the initial contribution without any monetary penalty. In October 2014, approximately $5.7 million (RMB 30.7 million) of the net proceeds raised in our follow-on public offering closed in May 2014 was transferred to PFL to increase its registered capital.

 

Due to the short history of China’s financial leasing industry, there are certain gaps in relevant PRC law. There is no nation-wide uniform equipment title registration process and system in China and each municipality adopts different procedures.  As such, our ownership interest on the leased property may be threatened.  In addition, there is no guidance on the reserve requirement for financial leasing companies. We have followed the same “Five-Tier Principal” in our measurement of reserve for the financial leasing business except at different reserve rates. We will have reserve rates of 0%, 2%, 25%, 50% and 100% for the leases categorized as “pass”, “special-mention”, “substantial”, “doubtful” and “loss”, respectively. We believe such reserve should be sufficient to cover potential loan loss in the first few years of PFL’s operations. We may adjust these rates as we roll out our operations.

 

Loan/Guarantee Application, Review and Approval Process

 

We have a standard process with regard to how a loan or guarantee application is reviewed, processed and approved.  The same process applies to both applications for direct loans and for guarantees.

 

 

The application process starts with an inquiry from potential borrowers to our Loan Officer. The Loan Officer has the discretion whether to accept the inquirer as an applicant. If accepted, the Loan Officer assists in the preparation of an application package and implements a field visit of the applicant.

 

The application package usually includes the following items in order for it to be considered:

 

●	Summary of the desired loan/guaranty: general description of the borrower, use of proceeds, amount, term of the loan, guarantee, collateral or counter-guarantee to be provided.
●	Identity information:  if the borrower is a legal entity, we require articles of incorporation, business license, state and local tax registration certificates, copies of the personal identification cards of all the shareholders and the legal representative; if the borrower is an individual, we require copies of personal identification cards of all the borrowers.
●	Banking relationship documents: including loan application with banks or other lenders, permission to open bank accounts, and credit record.
●	Financial reports such as prior three years’ financial statements, interim financial reports, and recent tax returns.
●	Business operation documents including samples of sales contracts or customer contracts, and utility bills over the past few months.
●	Consents: if the borrower is an entity, board or shareholder consent for the loan.

   

 

The flow chart below summarizes the loan/guarantee application, review and approval process.

 

 

The reviews during steps 1, 2, 3 and 4 are deemed Level One review. The Loan Review Committee’s review is deemed Level Two review. The General Manager’s final review is the Level Three review. Typically it takes one to two weeks to complete our review.

 

Loan Extension and Renewal

 

In our direct loan business, if a borrower has difficulty repaying the principal amount and/or accrued interest in full at the maturity date due to a temporary situation, the borrower may choose to either apply for an extension of the term or a renewal of the loan.  The extension or renewal applications are reviewed in accordance with the same loan application, review and approval process outlined above.  In our guarantee business, we generally do not extend the guarantee period.

 

 

Loan Extension

 

We will generally approve loan extensions for borrowers who have made timely interest payments, are capable of paying the balance and have loans secured by sufficient collateral or guaranteed by an acceptable guarantor. The term of the loan extensions we grant is generally no longer than the term of the original loan and we only agree to extend a loan one time. If the loan extension application is not approved prior to the original maturity date of the loan, it will be transferred to the collection department and labeled as a default loan. As of December 31, 2015 and 2014, extended loans constituted 1.33% and 5.36% of our total outstanding direct loan balance, respectively. During 2015, the Company approved extension to certain default customers who demonstrated a strong likelihood to repay or already paid part of this outstanding principal and interest. Management believes that extending the term of the default loans instead of suing the borrowers will give the borrowers a better chance to recover during the extended term and thus make the repayment. We treated these extended loans according to their original terms in our loan loss reserve provision calculation.

 

Loan Renewal

 

Many of our borrowers repay their loans and re-borrow at a later date, being referred to as a “loan renewal”. We consider a renewed loan a new loan, not a loan extension, despite our previous relationship with the borrower. Prior to the maturity date of the loan, the borrower may choose to apply to renew the loan. In order for the loan renewal application to be approved, the borrower must agree to repay the existing loan’s principal amount and accrued interest in full before the renewal application is approved.  Although we do not have a specific clean-up period policy, we do require that the period of time between repayment of the existing loan and the funding of the new loan to be 2-10 days. As of December 31, 2015 and 2014, renewed loans constituted 15.2% and 86.9% of our total outstanding direct loan balance, respectively.

 

Collection Procedure

 

We have standard collection procedures in our direct loan business. We call every borrower approximately 15 days prior to the maturity date to remind them that if we do not receive the repayment in full on the maturity date, we will send a written collection notice within 7 days after the maturity date.  The Loan Officer will frequently call and make on-site visits to a borrower upon a loan going into default.  Within 90 days after the default, our legal counsel will send warning letters to the default borrower.  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 plan, we will initiate legal proceedings in the court.

 

We apply the same collection procedure in our guarantee business.  The only difference is that we will collect from both the borrowers (including recovery from the cash deposit the borrowers deposit with us) and the counter-guarantor or pursue recovery from the collateral.

 

We will apply the same collection procedure in our financial leasing business.

 

Description of Our Financial Leasing Business

 

Target Customers

 

PFL plans to serve a diverse base of customers, including textile and other manufacturing companies, railroads, port facilities, local bus and rail companies and municipal governments. Customers will include existing clients of the Company in addition to new clients. PFL plans to initially offer leases to four primary customer categories, first in Jiangsu Province and then in other provinces in China:

 

(1) Municipal Governments - Municipal governments throughout China have begun to realize the benefits of leasing equipment utilized to manage and run China’s large newly developed infrastructure. PFL believes this is an opportunity for substantial growth of its leasing business, especially as a result of the Company’s strong and long-term relationship with Wujiang and other Jiangsu municipal government agencies.

 

(2) Public Transportation Agencies - PFL plans to lease transportation vehicles to public transportation agencies which would replace existing municipally and regionally owned buses, subway cars, and trains. For example, PFL has been engaged in discussions with a local transportation authority to provide leases for the replacement of existing buses on several city bus routes.

 

(3) Hospitals - The Company has existing relationships with several local hospitals that are potential customers to lease medical devices, such as x-ray equipment. Since healthcare and medical technologies are constantly improving, frequently making existing medical technology and equipment obsolete, hospitals and other healthcare facilities are increasingly interested in leasing versus purchasing more modern equipment. The switch from one-time cash purchases to leasing will allow hospitals to preserve more of their working capital for other purposes, such as building upgrades, education and training programs and/or the leasing of additional equipment and devices.

 

(4) SMEs - PFL plans to lease a variety of industrial equipment and machinery to local SMEs in Jiangsu Province and beyond. Potential customers include local manufacturing businesses, mining companies, farmers and individuals.  PFL initially targeted the Company’s existing SME lending clients since it has a relationship with these customers and understands their operational and credit history and financing needs.

 

As PFL’s business develops further, we expect to provide leases to customers in other sectors as opportunities arise. PFL, although not required by government mandate, will only lease to businesses that are within the sectors encouraged by the Chinese national industry development and planning policy and environmentally friendly businesses.

 

The two customers whom PFL provided financial leasing to during 2015 are local SMEs in the manufacturing industry. They are existing borrowers in our lending business. They paid off the outstanding principal and interest of their loans before the Company provided the financial leasing to them.

 

 

Leased Equipment

 

PFL plans to provide leases on both new and used manufacturing equipment, medical devices, transportation vehicles and industrial equipment, purchased both domestically and from foreign suppliers to meet its customer’s needs. PFL may attempt to import technologically advanced transportation vehicles, engines, other vehicular components, industrial equipment and machinery identified by its lessees. PFL anticipates its potential customers will have strong demand for imported technologically advanced equipment and machinery and expects to lease these to its customers at a significant premium due to the real and perceived technical and superior performance and durability characteristics of these imported products.

 

PFL leased manufacturing equipment to the two current customers.

 

Lease Underwriting

 

PFL underwrites the leases via a 3-step process:

 

(1) A potential customer applies to PFL for a lease on certain equipment that the customer has already identified from a seller;

 

(2) PFL performs a detailed legal and credit analysis to determine the potential customer’s creditworthiness and ability to make the lease payments; and

 

(3) If the application is approved, PFL will purchase the asset from the seller, take ownership of such asset, and then lease it to the customer/lessee. Sometimes PFL will require a third party guarantor, who must be pre-approved by PFL, who will guaranty the monthly payment obligations of the lessee.

 

The underwriting process takes approximately 2 weeks.

 

Lease Terms

 

The terms and conditions of the lease will generally include following:

 

(1) A lease term ranging between 3 and 10 years.

 

(2) The lessee will be required to pay 30% of the purchase price to the seller and PFL will pay 70% of the purchase price (which will be the lease value) to the seller.

 

(3) The lessee will pay a deposit equal to 10% of the lease value to PFL and PFL will finance the remaining 90%.

 

(4) The lessee will pay a one-time servicing fee equal to 1% of the total lease value multiplied by the number of years of the lease (for example, a four-year lease requires a 4% service fee.

 

(5) The lessee will make amortized lease payments consisting of principal and interest (generally at the interest rate of 12%), which will be due monthly or quarterly.

 

(6) Lessees must (i) operate the leased equipment and perform minimum maintenance in accordance with the manufacturer’s instructions during the entire term of the lease; (ii) insure the equipment against property and casualty loss; and (iii) make all scheduled lease and interest payment regardless of the performance of the equipment.

 

(7) At the end of the lease term, the lessee will have the option to purchase the leased asset for its residual value. We expect to enter into our boiler plate lease contracts with lessees. Pursuant to the terms of these lease agreements, lessee shall either pay RMB 1,000 (approximately $160) to acquire or automatically acquire the title of the leased assets at the end of the lease term. The buy-back purchase price of RMB 1,000 shall be paid along with the last installment of the rent.

 

Collateral and Default Assumptions

 

Some of PFL’s initial target customers are our direct loan customers. We are very familiar with these businesses and individuals and their growth prospects, credit worthiness, management teams, and profitability. We will take advantage of this knowledge and lease to creditworthy customers only, thereby potentially reducing defaults and bad debt expense. When evaluating potential customers with which we do not have a pre-existing relationship, we will utilize our prior experience in the risk assessment of lending clients to timely evaluate a new customer’s creditworthiness.

 

PFL may require a third party guarantor to reduce financial exposure in the event of a default. PFL may choose to work with a third party to assist with the repossession, storage and sale of the leased equipment in the event of lease defaults.

 

 

Risk Management

 

Credit Risk

 

As a microcredit lender, credit risk is the most significant risk for our business. In our direct loan business, we suffer financial loss when a borrower defaults and full collection cannot be achieved. In our guarantee business, in the event the borrower defaults in its payment obligation and we pay the lender on behalf of the borrower, we suffer financial loss when we cannot recover the full amount of the payment we paid to the lender (after collection from the cash deposit provided by the borrower) from the counter guarantor or the sale proceeds of the collateral. In our financial leasing business, we suffer financial loss when a lessee defaults while we are unable to lease the equipment at the same or better leasing terms in a timely manner.

 

Risk Assessment

 

We apply the same risk assessment approach and procedures for direct lending, guarantee as well as financial leasing activities. We have a dedicated Risk Department which assesses and evaluates the credit risks through in-house research and analysis.  We follow the methodology and procedure outlined in our risk assessment guidelines.  According to our risk assessment guidelines, the basic principle is that the bench mark ratio multiplied by the financial risk quotient and non-financial risk quotient and the result is the comprehensive risk ratio. The financial risk quotient takes into consideration 16 factors in three categories, i.e. leverage, profitability and growth.  The non-financial risk quotient takes into consideration 12 factors in four categories, i.e. industry risk, enterprise risk, management risk and other risks.  In summary, our Risk Department assesses the credit risks based on the payment ability of the underlying obligors, transaction structure as well as the industry of borrower and the general economic condition of the market in which we operate.

 

Risk Control

 

In our direct lending business, we assess, monitor and control the credit risks both before and after the loan is extended.

 

As discussed above, we assess the risks through the loan application, review and approval process.  Our Risk Department quantifies the risks related to a loan application in a risk assessment report by classifying the loan into one of three categories.  A loan with a score of less than 0.35 points is deemed to be a low-risk loan. A loan with a score of between 0.35 and 0.5 points is considered a medium-risk loan. A loan with a score higher than 0.5 points will be classified as a high-risk loan.  We have higher requirements for the collateral and require the guarantor to be of higher payment capacity for loans labeled as higher risk.

 

After the loan or guarantee application is approved, we continue to monitor the credit risk. Our Loan Officers collect the borrower’s financial statements at the end of each quarter and conduct periodic field trips to the borrower’s facilities to observe its operation, sales, ability to make timely repayments, etc.  Based on the Loan Officer’s report, the comprehensive risk ratio of each loan is reviewed on a quarterly basis and adjustments are made to the ratio as necessary, according to the borrower’s operational and financial position and other factors outlined above. We label each outstanding loan as “Good”, “Maintenance” or “Contraction”.  For “Good” loans, we may extend further credit. For “Maintenance” loans, we will maintain the current credit level. For “Contraction” loans, we may reduce credit to the borrower.

 

We will apply the same risk control procedure for the financial leasing business.

 

Liquidity Risk

 

Liquidity risk is the risk to a bank's earnings and capital arising from its inability to timely meet obligations when they come due without incurring unacceptable losses.  As a microcredit company, we are prohibited by PRC banking regulations to accept deposits from the public.  Our funding sources include our registered capital, draw-down ability from any lines of credit we have with state-owned or commercial banks as well as cash generated from our operations.  Liquidity risk in our operation is therefore limited.  We monitor the repayment of loans drawn from the line of credit with Agricultural Bank of China, the only line of credit we currently have. 

 

Allowance for Loan Loss

 

Reserve for Direct Loan

 

In our direct loan business, we apply three loan loss reserve measurements:

 

●	Measurement 1- The Specific Reserve:

 

In determining our loan loss reserve, we follow the guidelines for the specific reserve set forth in “The Guidance on Provisioning for Loan Losses ” (the “Provision Guidance”) issued by PBOC.

 

 

Specific reserves are funds set aside based on the anticipated level of loss of each loan after categorizing the loan according to the risks. Such specific reserves are to be used to cover specific losses. According to the “Five-Tier Principle” set forth in the Provision Guidance, the loans are categorized as “pass”, “special-mention”, “substantial”, “doubtful” or “loss”. The definition and provision rate for each category is set forth below.

 

Tier		Definition		Reserve Rate
Pass		Loans for which borrowers are expected to honor the terms of the contracts, and there is no reason to doubt their ability to repay the principal and accrued interest in full and on a timely basis.		0%
Special-mention		Loans for which borrowers are currently able to repay the principal and accrued interest in full, although the repayment of loans might be adversely affected by some factors.		2%
Substantial		Loans for which borrowers’ ability to repay the principal and accrued interest in full is apparently in question and borrowers cannot depend on the revenues generated from ordinary operations to repay the principal and accrued interest in full.  Lender may suffer some losses even though the underlying obligation is guaranteed by a third party or collateralized by certain assets.		25%
Doubtful		Loans for which borrowers are unable to repay principal and accrued interest in full. Lender will suffer significant losses even though the underlying obligation is guaranteed by a third party or collateralized by certain assets.		50%
Loss		Principal and accrued interest cannot be recovered or only a small portion can be recovered after taking all possible measures and resorting to necessary legal procedures.		100%

 

●	Measurement 2 - The General Reserve:

 

General reserves are funds set aside based on certain percentage of the total outstanding balance and to be used to cover unidentified probable loan loss. The General Reserve is required to be no less than 1% of total outstanding balance. We use 1% of total outstanding balance in our calculation for the General Reserve.

 

●	Measurement 3 - Special Reserve

 

Special reserves are funds 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 estimates of loan collectability.

 

For the fiscal year ended December 31, 2014, we utilized Special Reserve and Five-Tiers Principal in estimating the loan loss as it is higher than the amount calculated based on the General Reserve. For the fiscal year ended December 31, 2015, we utilized Specific Reserve in estimating the loan loss as it is higher than the amount calculated based on the General Reserve. We review the loss reserve on a quarterly basis.

 

In February and March 2015, the Company revisited the classification of its loan portfolios within its rating system to test the adequacy of the allowances calculated thereby. As a result of such testing, the Company decided to reclassify certain loans into different categories. The Company reviewed the profile, financial condition and other relevant information and documents of each customer in the lending businesses. For customers with several loans with different due dates, if one loan was past due, the Company decided to reclassify all of this customer's loans as past due (even the other loans that were not mature yet). For extended loans, the Company 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. These reclassifications affected numerous customer accounts.

 

As of December 31, 2015 and 2014, the total outstanding direct loan balance was $63,076,720 and $82,079,129 and the loan loss reserve $55,595,654 and $24,490,721, respectively.

 

Reserve for the Guarantee Services.

 

In our guarantee business, we are required to set aside reserves consisting of no less than 1% of the total outstanding balance of loans we guaranteed at the end of fiscal year and 50% of the income generated by our guarantee business during the fiscal year to cover probable losses.  The reserve of 50% of the income is applicable only to commission income. Since it is our standard practice to receive the guarantee fee in full in advance when the guarantee is made, we did not think we were exposed to any risk with regard to receipt of such income. Therefore we did not set aside the reserve based on the 50% of the commission income.  

 

 

We follow the same “Five-Tier Principal” in our measurement of reserve for the guarantee business. We review the loss reserve on a quarterly basis. For the fiscal year ended December 31, 2014, our reserve measurements indicate the aggregate amount calculated based on Five-Tier Principal is higher than the amount calculated based on the statutory requirement of 1% of the total outstanding guarantee portfolio, as such, the reserve we made for the guarantee business was the aggregate amount calculated based on Five-Tier Principal.

 

In February and March 2015, the Company revisited the classification of its guarantee portfolios within its rating system to test the adequacy of the allowances calculated thereby. As a result of such testing, the Company decided to reclassify certain guarantees into different categories. The Company reviewed the profile, financial condition and other relevant information and documents of each customer in the guarantee businesses. For customers with several guarantees with different due dates, if one guaranteed loan was past due, the Company decided to reclassify all of this customer's guaranteed loans as past due (even the other loans that were not mature yet). These reclassifications affected numerous customer accounts. We engaged He-Partners Law Firm, one of the largest law firms in Suzhou City, to represent us in the legal proceedings against the borrowers and their counter guarantors, and expect to collect part of the outstanding balance in a period ranging from six 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.

 

As of December 31, 2015 and 2014, the total outstanding balance we guaranteed was and $11,653,342 and $21,794,663 and the accrual for financial guarantee services was $19,322,557 and $5,546,128, respectively.

 

Reserve for the Financial Leasing Services

 

We plan to follow the same “Five-Tier Principal” in our measurement of reserve for the financial leasing business except at different reserve rates. We will have reserve rates of 0%, 2%, 25%, 50% and 100% for the leases categorized as “pass”, “special-mention”, “substantial”, “doubtful” and “loss”, respectively.

 

Business Strategy

 

As we anticipate the economic condition will remain challenging in the next 12 months, the Company plans to aggressively collect the default loans and guarantees with all available legal remedies. The Company also plans to closely monitor the trend in the microfinance industry and may explore microfinance products and services other than lending, guarantee and financial leasing to SMEs.

 

When the economic condition substantially improves in the future, we intend to implement three primary strategies to expand and grow the size of our Company: (i) increase our lending capacity through the cash generated from operations and through increases in our registered capital by additional equity and/or debt financing, (ii) implementation of our financial leasing business plan in Jiangsu province and other Chinese provinces, and (iii) potential acquisitions of similar microcredit companies in Jiangsu Province, China. 

 

Organic growth will occur through expansion of our direct loan and guarantee services directed at SMEs and farmers. Our existing direct loan and guarantee services could also be expanded by increasing our registered capital base with proceeds of future financings.  The lending capacity of Wujiang Luxiang is limited to the aggregate of its registered capital, any proceeds from borrowings and profits generated from operation, subject to certain statutory reserve deductions required under the PRC laws and regulation. According to a policy named “Opinions Regarding Further Pushing Forward the Reform of Rural Microcredit Companies,” Su Zheng Ban Fa (2011) No. 8 (“Jiangsu Document No. 8”), the maximum obligation Wujiang Luxiang is allowed to provide guarantees for is three times its net capital. As of December 31, 2015, the registered capital of Wujiang Luxiang was approximately $51.2 million. Under PRC laws, the registered capital refers to the total amount of equity investment made by the shareholders. Once the registered capital is established, it cannot be used for purposes beyond the approved business scope of that entity. Because our target market has been historically underserved by the state-owned and commercial banks in China, we believe there will be a continued high demand for our services and we will be able to attract a steady flow of borrowers.

 

Also, we believe that we may have the opportunity to acquire other microcredit companies of similar size and scope in Jiangsu province, China.  As a result of such acquisitions, we may expand our geographic coverage by obtaining requisite licenses to conduct business in other cities in Jiangsu province. We intend to actively pursue acquisition opportunities as they arise, although we currently do not have any written or oral binding agreements, arrangements or understandings with any acquisition target and there can be no assurance that we will be able to locate any target or negotiate definitive agreements with them.

 

Competition for Our Lending and Guarantee Business

 

The number of microcredit companies in China is increasing rapidly.  According to data compiled by PBOC and released on its website, as of December 2015, there were approximately 8,910 microcredit companies in China and the total loan balance from microcredit companies stood at $149.5 billion (RMB 941.0 billion).  In Jiangsu province, there are about 636 microcredit companies with total paid-in capital of $13.90 billion (RMB 89.6 billion) and a total outstanding balance of $16.55 billion (RMB 106.1 billion) as of December 31, 2015, according to PBOC.

 

 

Due to the poor economic condition in the Wujiang area, especially the slow-down in the local textile industry, many microcredit companies including most of our competitors went bankrupt during 2015. We believe currently we have only one competitor in the Wujiang region.

 

Competitive Strengths for Our Lending and Guarantee Business

 

We believe there are several key factors that will continue to differentiate us from other microcredit companies in the city of Wujiang.

 

●

Experienced Management Team.   We have a senior management team that has time-tested, hands-on experience with a high degree of market knowledge and a thorough understanding of the lending industry in China. Members of our management team have an average of over 25 years of previous banking, accounting or other relevant experience. We believe that our management’s significant experience in the lending industry and our efficient underwriting process allow us to more carefully determine to whom to lend to and how to structure the loans.

 

●	Stable Relationship with State-Owned Banks and Commercial Banks.  We have established relationships with local branches of the state-owned and provincial commercial banks.  We currently have a credit facility agreement in the amount of approximately $4.5 million (RMB 29 million), all of which is currently available, with Agricultural Bank of China pursuant to which it extended a line of credit to us. We also have established guarantee cooperation relationships with China Construction Bank, Agricultural Bank of China, Bank of Communications, China CITIC Bank Agriculture Commercial Bank and Jiangsu Bank pursuant to which these banks previously have agreed to accept us as a guarantor for third party loans. Although there is no written agreement or understanding between these banks and us with regard to the referral of lending business, we believe that the reputation of our management team will enable us to maintain and develop good relationships with the local branches of these state owned and commercial banks.
●	Early Entrance and Good Reputation.  We are one of the first microcredit companies approved in the city of Wujiang region. We have strong brand recognition among the small borrowers in the city of Wujiang, which we believe should create a steady flow of business from borrowers.

 

●	Stable Borrower Base.  Our early entrance into the micro credit market has resulted in our creating a sizeable market share. We have been able to retain a stable borrower base with recurring borrowing needs and good repayment histories.

 

We believe we have the following competitive strengths compared to the local branches of state-owned banks and commercial banks which are permitted to extend credit to microcredit borrowers.

 

●	Fast Service.  We are able to close loans more quickly than traditional Chinese banks due to our efficient yet comprehensive underwriting process and a less bureaucratic environment, which is important to SMEs, farmers and individuals.

 

●

Favorable Interest Rates to Borrowers with Good Track Records.  We offer favorable interest rates to borrowers who have good repayment histories with us, especially to the borrowers who provide real property as collateral.  SMEs appear more willing to establish and maintain good relationship with us than with the local branches of the state-owned and commercial banks which may not provide the same level of services to SMEs.

 

●

A Greater Willingness to Lend to SMEs. We are focused on providing credit to SMEs, farmers and individuals in the city of Wujiang. With our extensive knowledge and experience working with local SMEs, farmers and individuals, we are better equipped to attract such borrowers and maintain a long-standing relationship with them.

 

Competition for Our Financial Leasing Business

 

As one of the few leasing companies in Jiangsu Province, PFL enjoys little competition in Jiangsu province at this time. In fact, very few companies have received a leasing business license, and the companies that have licenses are mostly selling to a smaller and narrower customer base. However, in China, we compete with a number of international, national, regional and local banks and finance companies, financial leasing companies and equipment manufacturers that lease or finance the sale of their own products.

 

 

Due to the Company’s strong relationships with local business owners and government agencies and its expertise in evaluating the financial health of local businesses, PFL believes it is in a strong position to grow its leasing business in Jiangsu Province once it has the financial means. However, we currently do not have further funds to deploy in the financial leasing business.

 

Competitive Strengths for Our Financial Leasing Business

 

We believe we could thrive in the financial leasing business even with future competition in Jiangsu province due to following competitive advantages:

 

●

Substantial experience in identifying potential lessees.  Our financial and industrial lending experience in the local Jiangsu marketplace and our relationships with local business owners will enable us to identify potential leasing customers, and knowledge of these customers will allow us to more accurately anticipate and serve their financial leasing needs.

 

●	An early entrant to financial leasing segment in the Jiangsu region. As one of the few leasing companies in Jiangsu province, PFL enjoys little competition and we believe that being an early entrant will enable us to develop brand recognition and customer loyalty.

 

●	Strong relationships with local and regional government agencies. As a result of our relationships with local and regional government agencies, PFL may be afforded access to participate in projects sponsored by those government and public transportation agencies.

 

●

Local government support. PFL has been afforded certain tax benefits and incentives by the government.  PFL will be exempted from Jiangsu provincial income tax for the first five years, followed by a provincial income tax rate at half of normal tax rates for the following five years. PFL will also receive a registered capital bonus payment from the Wujiang city government equivalent to 2% of the actually contributed registered capital.

 

●	Our status as a NASDAQ listed company.  We believe we have a marketing advantage over other financial leasing companies due to our status as a NASDAQ listed company.

 

Applicable Government Regulations

 

Our operations are subject to extensive and complex state, provincial and local laws, rules and regulations including but not limited:

 

●	PRC Company Law and its implementation rules;
●	Wholly Foreign-Owned Enterprise Law and its implementation rules;
●	Guidance on Microcredit Company Pilot (Yin Jian Fa [2008]23)  (the “Circular 23”) issued by the CBRC and the PBOC on May 4, 2008 and effective on May 4, 2008;
●	Reply to Certain Issues on Microcredit Company Organization Yin Jian Fa [2006] 246 issued by the CBRC on September 20, 2006 and effective on September 20, 2006;
●	Guidance on Great Promotion to Rural Microcredit Business of the Banking Industry (Yin Jian Fa [2007] 67) issued by the CBRC on August 6, 2007 and effective on August 6 ,2007;
●	Circular on Implementing the “Accounting Rule for Financial Enterprise” to Microcredit Company (Cai Jin [2008]185) issued by Ministry of Finance on December 24, 2008 and effective on December 24, 2008;
●	Circular on Relevant Policies for Rural Bank, Loan Company, Rural Mutual Cooperative and Microcredit Company (Yin Fa [2008]137) issued by the PBOC and the CBRC on April 24, 2008 and effective on April 24, 2008;
●	Opinions on the pilot work for developing the Rural Microcredit Company (Trial) (Su Zheng Ban Fa [2007]142) (the “Jiangsu Document No. 142”) issued by General Office of Jiangsu Province Government promulgated on November 24, 2007;
●	Opinions on Promoting Fast and Well Development of Rural Microcredit Company (Su Zheng Ban Fa [2009]132) (the “Jiangsu Document No. 132”) issued by General Office of Jiangsu Province Government promulgated on November 28, 2009;

 

 

●	Implementation Rules on Supervision and Regulation of Rural Microcredit Companies (Su Fu Ban [2010] 288) issued by General Office of Suzhou Government on October 26, 2010 and effective on November 1, 2010;
●	Opinions Regarding Further Pushing Forward the Reform of Rural Microcredit Company (Su Zheng Ban Fa [2011]8) (the “Jiangsu Document No. 8”) issued by General Office of Jiangsu Province Government on January 27, 2011 and effective on January 27, 2011;
●	Interim Measures for the Administration of Financing Guarantee(Yin Jian Hui Ling [2010] 3) issued by the CBRC, National Development and Reform Commission, Ministry of Industry and Information Technology, Ministry of Finance, MOFCOM, PBOC and State Administration for Industry and Commerce on March 8, 2010 and effective on March 8, 2010;
●	Provisional Supervision and Rating System for Rural Microcredit Companies (the “Jiangsu Document No. 53”) issued by Finance Office of Jiangsu Province Government on August 7, 2012;
●	Financial Practices of Rural Microcredit Companies issued by Finance Office of Jiangsu Province Government in 2009 and effective on January 1, 2010;
●	The Guidance on Provisioning for Loan Losses (the “Provision Guidance”) issued by PBOC in 2002 and effective on  January 1, 2002;
●	PRC Contract Law, in particular the chapters with regard to lease contracts and financial leasing contracts;
●	Measures for the Administration of Foreign Investment in Leasing Industry issued by the MOFCOM effective on March 5, 2005;
●	Regulations promulgated by the Ministry of Commerce and State Administration of Industry and Commerce with regard to the formation, registered capital and leverage requirement and risk control of financial leasing companies; and
●	Accounting treatment and tax regulations and policy with regard to finance lease transactions.

 

We are supervised by many provincial and local government authorities, including Finance Office of Jiangsu Province Government, CBRC, PBOC, local tax bureaus, local government, local AIC, local Bureau of Finance, local Public Security Bureau and local rural employment department, etc.

 

Establishment

 

Wujiang Luxiang was established on October 21, 2008 pursuant to Circular No. 23, Jiangsu Document No. 142 and Jiangsu Document No. 132 which allowed for the establishment of a new type of financial vehicle that is permitted to lend to small-to-medium sized business, farmers and individuals.  PFL was established on September 5, 2013 and is permitted to provide financial leasing services in China.

 

Source of Funds

 

Pursuant to the Circular 23, the main sources of funds are capital contributions paid by its shareholders, donated funds, and debt financings from no more than two banking financial institutions.  Pursuant to Jiangsu Document No. 132, we believe the amount of debt financings we are allowed to obtain may be up to 100% of our net capital.  Pursuant to the Foreign Investment in Leasing Industry Regulations, PFL is permitted to leverage up to 10 times its registered capital to finance its leases.

 

Direct Loans

 

Pursuant to Jiangsu Document No. 8, the maximum amount of our actual liabilities (including bank loans) is limited to 100% of our net capital. Pursuant to Jiangsu Document No. 142 and Circular 23, the aggregate loan balance amount to one borrower cannot exceed 10% of our registered capital and must be less than 5% of our net assets. Pursuant to Jiangsu Document No. 132, the aggregate microcredit loan balances as a percentage of our total outstanding loan balances, must be not less than 70%.  The aggregate balances of operational loans of with terms longer than three months, as a percentage of total outstanding loan balances, must exceed 70%. The aggregate balances of loans made to agricultural or rural borrowers or farmers, as a percentage of our total outstanding loan balance must be no less than 70%. A loan equal or under the amount of $725,000 (RMB 4,500,000) is deemed a microcredit loan according to Implementation Rules on Supervision and Regulation of Rural Microcredit Companies (Su Fu Ban [2010] 288).

 

 

Prior to August 7, 2012, the maximum interest rate a microcredit lender was allowed to charge on microcredit loans was four times of the PBOC’s Benchmark Rate according to PBOC’s Notice on Cracking Down on the Underground Lenders and Lending at Excessive High Interest Rate promulgated by the PBOC and Several Opinion Regarding the Trial of Cases promulgated by the Supreme Court of PRC. On August 7, 2012, the Finance Office of Jiangsu Province implemented the Jiangsu Document No. 53. Microcredit companies are assessed and ranked according to Jiangsu Document No.53 and the microcredit companies in the highest ranking will, among other things, enjoy preferential treatments and government subsidies. As such, we have chosen to comply with the lower maximum interest rate requirement set forth in the Jiangsu Document No. 53.  In a document issued by Finance Office of Jiangsu Province on October 25, 2013 (the “Jiangsu Document No. 83”), we were rated as “AAA” and thus eligible for government subsidies and certain preferential treatment including be permitted to operate the online guarantee business as disclosed above, partly due to the fact that the maximum interest rate we charged in 2012 is no more than 3 times the Bench Mark Rate. We expect that we will continue to receive the highest ranking as we continue to adhere with our maximum interest rate protocol and other lending practices. In the event we receive less than BBB ranking, we will not be permitted to operate the online guarantee business, among other things.

 

In accordance with the Provision Guidance and Jiang Su Financial Practice, we are required to set aside a loan loss reserve according to the following three measurements:

 

●	Measurement 1- The Specific Reserve:

 

Specific reserves are funds set aside based on the anticipated level of loss of each loan after categorizing the loan according to the risks. Such specific reserves are to be used to cover specific losses. According to the “Five-Tier Principle” set forth in the Provision Guidance, the loans are categorized as “pass”, “special-mention”, “substantial”, “doubtful” or “loss”. The definition and provision rate for each category is set forth below.

 

Tier		Definition		Reserve Rate
Pass		Loans for which borrowers are expected to honor the terms of the contracts, and there is no reason to doubt their ability to repay the principal and accrued interest in full and on a timely basis.		0%
Special-mention		Loans for which borrowers are currently able to repay the principal and accrued interest in full, although the repayment of loans might be adversely affected by some factors.		2%
Substantial		Loans for which borrowers’ ability to repay the principal and accrued interest in full is apparently in question and borrowers cannot depend on the revenues generated from ordinary operations to repay the principal and accrued interest in full.  Lender may suffer some losses even though the underlying obligation is guaranteed by a third party or collateralized by certain assets.		25%
Doubtful		Loans for which borrowers are unable to repay principal and accrued interest in full. Lender will suffer significant losses even though the underlying obligation is guaranteed by a third party or collateralized by certain assets.		50%
Loss		Principal and accrued interest cannot be recovered or only a small portion can be recovered after taking all possible measures and resorting to necessary legal procedures.		100%

 

●	Measurement 2 - The General Reserve:

 

General reserves are funds set aside based on certain percentage of the total outstanding balance and to be used to cover unidentified probable loan loss. The General Reserve is required to be no less than 1% of total outstanding balance.

 

We believe we are required to make our loan loss reserve based on the higher of the amounts calculated based on the General Reserve and the Specific Reserve.

 

●	Measurement 3 - Special Reserve

 

Special reserves are funds 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 estimates of loan collectability.

 

Guarantee Services

 

Pursuant to Jiangsu Document No. 8, the aggregate amount of liabilities we are allowed to be exposed to in our guarantee business shall not exceed 300% of our net capital.  Pursuant to the Interim Measures for the Administration of Financing Guarantee, guarantees we are allowed to provide to a single borrower shall not exceed 10% of our net assets, and not exceed 15% of our net assets if the guarantee is provided to a single borrower and the person’s affiliated parties.  We are prohibited to provide guarantees to our subsidiaries and/or parent company.

 

 

For our guarantee business, pursuant to Interim Measures for the Administration of Financing Guarantee, we are required to set aside reserves not less than 1% of the aggregate outstanding balance of loans we guaranteed at end of fiscal year and 50% of the income generated by our guarantee business during the fiscal year.

 

Financial Leasing Services

 

Pursuant to the Foreign Investment in Leasing Industry Regulations, PFL is permitted to leverage up to 10 times its registered capital to finance its leases.

 

We believe there is no clear guidance on the reserve requirement for financial leasing companies.

 

Summaries of Certain Key PRC Laws

 

Below are summaries of the material terms of Circular 23, Jiangsu Document No. 8, Jiangsu Document No. 132 and Jiangsu Document No. 142, which are essential to our business.

 

Circular 23

 

Circular 23 divides “microcredit companies” into two categories:  a “company with limited liability” or a “company limited by shares” that consists of equity interests held by private parties, including individuals, corporate entities and other organizations.  The shareholders of a microcredit company shall meet the minimum requirement set by applicable laws. A company with limited liability shall be established with capital contributions from no more than fifty (50) shareholders; while a company limited by shares shall have 2-200 promoters, more than 50% of whom shall domicile in the PRC.  The promoters are the shareholders after the incorporation of the company. The source of registered capital of a microcredit company shall be true and legal. All the registered capital shall be fully paid in cash by the capital contributors or the promoters. The registered capital of a company with limited liability shall be no less than RMB 5,000,000 and the registered capital of a company limited by shares shall be no less than RMB 10,000,000. Any single individual, corporate entity or social organization (and their respective affiliates) shall not contribute more than 10% of the registered capital of a microcredit company.  Circular 23 also provides that the sources of funds of a microcredit company shall be limited to the capital contributions paid by its shareholders, profit from operations, monetary donations, and loans provided by no more than two (2) banking financial institutions.  Pursuant to applicable laws, administrative rules and regulations, the outstanding loans owed by a microcredit company to banking financial institutions shall not exceed 50% of its net registered capital. The interest rate and the terms for such loans shall be determined based on arms-length negotiations between the company and the financial institutions and such interest rate shall be determined using the “Shanghai inter-bank borrowing interest rate” for the same period as prime rate plus basis points.  Circular 23 also states that a provincial government who is able to clearly specify an authority-in-charge (finance office or relevant government organs) to be in charge of the supervision and administration of microcredit companies and is willing to assume the liabilities for the risk management of microcredit companies, such provincial government may, within its own province, roll out the trial run for the establishment of microcredit companies. A microcredit company shall abide by all applicable laws and shall not conduct any illegal fund-raising in any form. In the event an illegal fund-raising activity is conducted within the provincial territory, it shall be handled by the local government at the provincial level. Other activities in violation of the laws or the administrative rules and regulations will be fined by local authorities or prosecuted in the event a criminal offense has been committed.

 

Wujiang Luxiang is a microcredit company limited by shares.  There are currently 12 shareholders all of whom are domiciled in PRC. Except one entity shareholder, none of the shareholders owns more than 10% of Wujiang Luxiang’s registered capital. Pursuant to Administrative Measures of Microcredit Companies issued by Jiangsu provincial government on November 30, 2011, major promoters are permitted to hold more than 10% of the registered capital of a microcredit company. We believe the requirement that none of the shareholders shall own more than 10% of the registered capital of a microcredit company set forth in Circular No. 23, which is a pilot program giving guidance to the provincial government, has been superseded by the later Jiangsu provincial regulations. In addition, the current equity structure of Wujiang Luxiang has been approved by the Finance Office of Jiangsu, which is the governing authority of Wujiang Luxiang. We believe such approval is evidence of the Jiangsu government authority’s acknowledgement of such equity structure. Wujiang Luxiang’s current operations are in line with the other requirements set forth in Circular 23.

 

Jiangsu Document No. 8

 

Jiangsu Document 8 stresses the importance of encouraging the development of rural microcredit companies. The business scope of these companies approved by local authorities generally includes the following: providing loans to companies or individuals in agriculture industry located in rural areas, providing financial guarantees, and serving as agents for financial institutions. The aggregate outstanding balance of bank loans a rural microcredit company is allowed to obtain is up to 100% of the net capital of such company.

 

 

The business scope of Wujiang Luxiang is to provide small loans, guarantees, and other business approved by the provincial authority for agriculture related industry, which is in line with the Jiangsu Document No.8. As of December 31, 2015, Wujiang Luxiang’s net capital was approximately $51.2 million and its outstanding balance of bank loans was $2.6 million, which is line with the requirement set forth in the Jiangsu Document No. 8.

 

Jiangsu Document No. 132

 

Jiangsu Document No. 132 reflects the current developing status of rural microcredit companies. It empowers various local authorities to promote development of rural microcredit companies by facilitating access to capital markets and promoting good morals. The Document encourages establishment of rural microcredit companies in Jiangsu province. In each of the counties with economic importance, a local officer has been charged with responsibility to manage and oversee the establishment of the microcredit companies, including establishing pilot programs in certain territories. The number of pilot rural microcredit companies may be increased. Local governments at county level meeting certain criteria should, at the beginning of each year, provide a plan which sets forth an estimate of the number of newly established rural microcredit companies to be approved to do business during that year. Such plan will need to be reviewed first by the financial office at the municipal level and approved by the respective finance bureaus at the provincial level.  A rural microcredit company that has been operating for more than one year, in good standing, with good financial conditions and risk management systems may be allowed to establish branch offices in various towns where there is no such rural microcredit company located in the same town as such company.  Rural microcredit companies in southern Jiangsu region with capital of more than RMB 50 million can set up one additional branch for each additional RMB 30 million in excess of RMB 50 million; rural microcredit companies in central Jiangsu region with capital of more than RMB 30 million can set up one additional branch for each additional RMB 25 million exceeding RMB 30 million; rural microcredit companies in northern Jiangsu region with capital of more than RMB 20 million can set up one additional branch for each additional RMB 15 million exceeding RMB 20 million. The amount of debt financings a rural microcredit company serving the agriculture industry, with effective operations, good risk control and reasonable interest levels is allowed to obtain may be up to 100% of its registered capital. Sources of the funds for these companies may include: 1) loans or financing funding from commercial banks; 2) approved large-amount direct loans (mainly shareholders’ loans); 3) approved transfers and lending of funds between rural microcredit companies; and 4) explore the feasibility of loans from the government funds, the PBOC re-lending loans supporting agriculture, insurance funds and other funds which desire to play a role in servicing “agriculture, farmers and rural areas” through rural microcredit companies.  

 

As of December 31, 2015, Wujiang Luxiang’s registered capital was approximately $51.2 million and its total debt financing was approximately $2.6 million, less than 50% of its registered capital, in line with the requirement set forth in Jiangsu Document No. 132. Wujiang Luxiang’s major source of financing has been loans from commercial banks.

 

Jiangsu Document No. 142

 

Jiangsu Document No. 142 provides for general rules with respect to the establishment of microcredit companies. It includes the following material terms:

 

1. Shareholder: In general, the shareholders of a rural microcredit organization shall be three to five individuals (excluding members or employees of the Communist Party, governmental organizations, financial organizations as well as state-owned public institutions) or enterprise legal persons. The number of shareholders shall not exceed ten. Shareholders shall comply with laws, with good credibility and have no civil or criminal record indicating violation of laws and serious discredit.  The capital contributed by shareholders for equity interest shall be legitimate self-owned capital.

 

Wujiang Luxiang currently has 12 shareholders, which is more than the 10 shareholders requirement set forth in Jiangsu Document No. 42. However, Circular 23 permits up to 200 shareholders in a microcredit company limited by shares. We believe we will not be subject to any penalty by the Finance Office of Jiangsu Province, which is the governing authority of Wujiang Luxiang and the government body implementing the Jiangsu Document No. 42, since it approved the establishment of Wujiang Luxiang and its current shareholder structure.

 

2. Capital: The paid-up registered capital of a rural microcredit organization shall be no less than RMB 50 million for southern Jiangsu area, RMB 30 million for central Jiangsu area, and RMB 20 million for northern Jiangsu area. The registered capital shall be paid in cash.

 

As of December 31, 2015, Wujiang Luxiang’s registered capital was RMB 333 million which is more than the RMB 50 million required for Wujiang Luxiang as a microcredit company in the Southern Jiangsu area.

 

3. Offices: A rural microcredit organization shall have fixed operating premises which comply with the safety standards required by the public security department and other departments and is situated below township levels (including township).

 

 

4. Employees: A rural microcredit organization shall have no fewer than five main employees, who shall comply with laws, with good credibility and have no civil or criminal record. Among them, the chief person in charge shall be less than 65 years old with at least Technical Secondary School and have been engaged in financial industry for more than 4 years or economic industry for more than 8 years (with at least 2 years working experience in the financial area); the person in charge of credit shall have been engaged in financial industry for more than 3 years or economic industry (with a focus on agriculture) for more than 5 years; each accounting staff shall hold an Accounting Certificate and have been engaged in accounting and financial industry for more than 3 years; other personnel shall have been engaged in other related economic industry for more than 3 years. All key employees shall participate in a professional training program held by the Provincial Financial Office. Qualified trainees will be issued a qualification certificate which is required for their employment.

  

We believe our management, accounting staff and other personnel meet the requirements set forth in the Jiangsu Document No. 142.

 

5. Articles of Association: Rural microcredit organizations shall adopt Articles of Association of the organizations in accordance with the Company Law of the People’s Republic of China and the provisions of these provisions in the Jiangsu Document No. 142, and carry out business and operating activities according to their Articles of Association.

 

Wujiang Luxiang has carried out its business and operations according to its Articles of Associations, as amended.

 

6. Markit Exit:  When a rural microcredit organization has any of the following activities, in addition to investigation and fine by law enforcement authorities, the provincial Rural Microcredit Organization Pilot Program Management Group may terminate its pilot program, report it to the local AIC to revoke its business license, or impose other punitive measures:

 

	1)	Violating the provisions in the Jiangsu Document No. 142 with respect of business scope and provision of  loans;
	2)	Illegally solicit funding from the general public directly or indirectly;
	3)	Issuing loans with excessive interest rates in violation of relevant national provisions to make exorbitant profits;
	4)	Other behaviors deemed by the provincial and local Rural Microcredit Organization Pilot Program Management Groups as material violation of relevant laws and regulations and these provisions in the Jiangsu Document No. 142.

 

We believe we were not involved in any of the prohibited activities set forth in the sections above.

 

Employees

 

As of the date of this report, we have 11 employees all of which are full time. We have employment contracts with all of our employees in accordance with PRC Labor Law and Labor Contract Law.  The contracts comply with the PRC laws. There are no collective bargaining contracts covering any of our employees. We believe our relationship with our employees is satisfactory.

 

We have 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 general administration expenses when incurred.

 

Intellectual Property

 

We do not own or have any significant intellectual property rights. 

 

Item 1A.

RISK FACTORS

 

Not applicable. 

 

Item 1B.

Unresolved Staff Comments.

 

Not applicable.

 

Item 2.

Description of Property.

 

Our principal executive offices are located at 890 Yongkang Road, Wujang, Suzhou, Jiangsu Province, China, where we lease approximately 3,767 square foot of office space pursuant to a lease entered on May 26, 2015.The term of lease is from June 1, 2015 through May 31, 2021 and the annual rent is approximately $74,419 (RMB 480,000). We do not own any real property or have any land use rights.

 

We believe that our current facility is adequate for our operations and that suitable additional or substitute space will be available to accommodate the foreseeable expansion of our operations.

 

 

Item 3.

Legal Proceedings.

The Company is involved in various legal actions arising in the ordinary course of its business. As of December 31, 2015, the Company was involved in 100 collection lawsuits, among which 63 were related to its loan business and 37 were related to guarantee business. The Company initiated legal proceedings to collect delinquent balances from borrowers and guarantees. 91 of these cases with an aggregated claim of $39.29 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 $10.18 million have not been adjudicated by the Court as of December 31, 2015.
 

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

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

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

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

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

On or about February 4, 2016, the Company, Mr. Levy, Mr. Li and the plaintiffs reached a settlement in principal and are in the process of exchanging documentation. Under the terms of the proposed agreement, CCCR will pay defendants $200,000 cash, plus $25,000 towards the cost of notice to the class, and issue 750,000 CCCR shares to the class. The settlement will be subject to court approval.

Two of the Underwriter Defendants, Axiom Capital Management, Inc., and ViewTrade Securities, Inc., have asserted their respective rights to indemnification under the Underwriting Agreements entered into in connection with the Company’s initial public offering and secondary offering. On or about March 16, 2016, CCCR entered into an Advance Funding and Escrow Agreement, under which the CCCR agreed to deposit shares into escrow to fund the advancement obligation, with the initial deposit to be shares valued at Two Hundred Thousand Dollars ($200,000), based upon 80% of the 30 day volume weighted average trading price for each of the 30 consecutive trading days prior to the date of the agreement.

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

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

Item 4.

Mine Safety Disclosures.

Not applicable. 

 

PART II

 

Item  5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Information

 

Our common stock is currently listed on the NASDAQ Capital Market under the symbol “CCCR”. The following table sets forth the high and low sales prices as reported on the NASDAQ Capital Market. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

 

FISCAL YEAR 2015		HIGH				LOW
First Quarter		$	*			$	*
Second Quarter		$	2.98			$	0.99
Third Quarter		$	1.39			$	0.60
Fourth Quarter		$	0.78			$	0.31

 

 

FISCAL YEAR 2014		HIGH				LOW
First Quarter		$	9.63			$	5.17
Second Quarter		$	6.28			$	2.75
Third Quarter		$	4.62			$	2.39
Fourth Quarter		$	*			$	*

 

* On September 11, 2014, trading of the Company’s common stock was halted by NASDAQ until the Company had fully satisfied NASDAQ’s request for additional information. The trading of the Company’s common stock resumed on April 22, 2015.

 

The last reported sales price of our common stock on the NASDAQ Capital Market on April 12, 2016 was $0.54.

 

Holders

 

We had 62 holders of record of our common stock as of April 13, 2016.

 

Dividends

 

We did not declare or pay any dividend in 2015 and do not plan to do so in the foreseeable future. Although we intend to retain our earnings, if any, to finance the growth of our business, our board of directors will have the discretion to declare and pay dividends in the future, subject to applicable PRC regulations and restrictions as described below. Payment of dividends in the future will depend upon our earnings, capital requirements, and other factors, which our board of directors may deem relevant.

 

In addition, due to various restrictions under PRC laws on the distribution of dividends by WFOE, we may not be able to pay dividends to our stockholders. The Wholly-Foreign Owned Enterprise Law (1986), as amended, and The Wholly-Foreign Owned Enterprise Law Implementing Rules (1990), as amended, and the Company Law of the PRC (2006), contain the principal regulations governing dividend distributions by wholly foreign owned enterprises. Under these regulations, wholly foreign owned enterprises may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, such companies are required to set aside a certain amount of their accumulated profits each year, if any, to fund certain reserve funds until such time as the accumulated reserve funds reach and remain above 50% of the registered capital amount. These reserves are not distributable as cash dividends except in the event of liquidation and cannot be used for working capital purposes. Furthermore, if our subsidiaries and affiliates in China incur debt on their own in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments. If we or our subsidiaries and affiliates are unable to receive all of the revenues from our operations through the current contractual arrangements, we may be unable to pay dividends on our common stock.

 

 

Item 6.

Selected Financial Data.

 

Not applicable.

 

Item 7.

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 year ended December 31, 2015 should be read in conjunction with the Financial Statements and corresponding notes included in this Annual Report on Form 10-K. 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.

 

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 small and medium enterprises (“SME”s) located in Wujiang City, Jiangsu Province of China. As of December 31, 2015, we have built a $63.1 million portfolio of direct loans to 115 borrowers and a total of $11.7 million in loan guarantees for 14 borrowers. We were established under the 2008 Guidance on the Small Loan Company Pilot of the China Banking Regulatory Commission and the People's Bank of China (“PBOC”) (No.23) (“Circular No. 23”) to extend short term loans and loan guarantees to SMEs, a class of borrowers that we believe have been underserved in the Chinese lending market. The loans that we provide bridge the gap between Chinese-state run banks that have not traditionally served the capital needs of SMEs and high interest rate “underground” lenders, and our loans provide capital at more favorable terms and sustainable interest rates.

 

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

 

On September 5, 2013, our wholly owned subsidiary, CCC International Investment Holding Ltd. (“CCC HK”), established Pride Financial Leasing (Suzhou) Co. Ltd. (“PFL”) in Jiangsu Province, China. PFL was expected to offer financial leasing of machinery and equipment, transportation vehicles, and medical devices to municipal government agencies, hospitals and SMEs in Jiangsu Province and beyond. As of the date of this annual report, PFL entered into two financial leasing agreements for an aggregate lease receivable of $5.65 million (one with a monthly principle and interest income approximating $81,600 for the period during November 13, 2014 to May 12, 2015, and approximating $80,000 for the period from May 13, 2015 and thereafter, and the other with a quarterly principle and interest income approximating $342,800). We do not currently have further funds to deploy in the financial leasing business.

 

Key Factors Affecting Our Results of Operation

 

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

 

Our results of operations are also affected by the provision for loan losses and provision for financial guarantee loss which are noncash items and 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

 

Year Ended December 31, 2015 as Compared to Year Ended December 31, 2014

 

		For the Years Ended December 31,
		2015				2014				Amount				Change %
Interest income
Interests and fees on loans and direct financing lease		$	2,944,135			$	7,093,803			$	(4,149,668	)			-58	%
Interests and fees on loans and direct financing lease - related party			-				2,278				(2,278	)			-100	%
Interest on deposits with banks			37,706				84,602				(46,896	)			-55	%
Total interest and fees income			2,981,841				7,180,683				(4,198,842	)			-58	%
Interest expense							-
Interest expense on short-term bank loans			(496,753	)			(900,225	)			403,472				-45	%
Net interest income			2,485,088				6,280,458				(3,795,370	)			-60	%
Provision for loan losses			(41,133,808	)			(24,641,375	)			(16,492,433	)			67	%
Over provision for direct financing lease losses			(2,376,122	)			(610,183	)			(1,765,939	)			289	%
Net interest income/(loss) after provision for loan losses and financing lease losses			(41,024,842	)			(18,971,100	)			(22,053,742	)			116	%
Commissions and fees on financial guarantee services			127,980				559,571				(431,591	)			-77	%
Provision on financial guarantee services			(14,939,203	)			(4,960,867	)			(9,978,336	)			201	%
Commission and fees loss on guarantee services, net			(14,811,223	)			(4,401,296	)			(10,409,927	)			237	%
Net Revenue			(55,836,065	)			(23,372,396	)			(32,463,669	)			139	%
Non-interest income
Government incentive			-				130,172				(130,172	)			-100	%
Other non-interest income			33,653				146,444				(112,791	)			-77	%
Total non-interest income			33,653				276,616				(242,963	)			-88	%
Non-interest expense
Salaries and employee surcharge			(892,240	)			(932,789	)			40,549				-4	%
Rental expenses			(240,704	)			(264,585	)			23,881				-9	%
Business taxes and surcharge			(101,376	)			(270,833	)			169,457				-63	%
Other operating expense			(1,724,757	)			(3,394,688	)			1,669,931				-49	%
Total non-interest expense			(2,959,077	)			(4,862,895	)			1,903,818				-39	%
Foreign exchange loss			(8,077	)			(55,223	)			47,146				-85	%
Loss Before Taxes			(58,769,566	)			(28,013,898	)			(30,755,668	)			110	%
Income tax expense			(2,495,148	)			723,403				(3,218,551	)			-445	%
Net Loss			(61,264,714	)			(27,290,495	)			(33,974,219	)			124	%
Loss per Share- Basic and Diluted			(4.962	)			(2.352	)			(2.610	)			111	%
Weighted Average Shares Outstanding-Basic and Diluted			12,345,678				11,601,558				744,120				6	%
Net Loss			(61,264,714	)			(27,290,495	)			(33,974,219	)			124	%
Other comprehensive income
Foreign currency translation adjustment			(919,855	)			(532,597	)			(387,258	)			73	%
Comprehensive Loss		$	(62,184,569	)		$	(27,823,092	)		$	(34,361,477	)			123	%

  

 

The Company’s net loss for the year ended December 31, 2015 was $61,264,714 representing an increase of $33,974,219 or 124%, from net loss of $27,290,495 for the year ended December 31, 2014. The increase in net loss for the year ended December 31, 2015 was the net effect of the changes in the following components:

 

	●	a decrease in net interest income of $3,795,370;
	●	increases in the provision for loan losses of $16,492,433 and in the provision for direct financing leases of $1,765,939;
	●	a decrease in commission and fees loss on financial guarantee services of $431,591;
	●	an increase of provision on financial guarantee services of $9,978,336;
	●	a decrease in total non-interest expense of $1,903,818; and
	●	a change in enterprise income tax expense of $3,218,551 from a tax credit to a tax provision.

 

The following paragraphs discuss changes in the components of net loss in greater details during the year ended December 31, 2015, as compared to the year ended December 31, 2014.

 

Net Interest Income

 

Net interest income is equal to interest income we generated less interest expenses on short-term bank loans we incurred. The Company’s net interest income decreased by $3,795,370, or 60% to $2,485,088 during the year ended December 31, 2015, as compared to net interest income of $6,280,458 during the year ended December 31, 2014.

 

The interests and fees on loans, direct financing leases and deposits with banks decreased by $4,198,842, or 58% from $7,180,683 for the year ended December 31, 2014 to $2,981,841 the year ended December 31, 2015. The decrease is the combined effect of: (1) the charge-off of non-performing loans of approximately $7.1 million, leading to reversal of significant interest income of $2.6 million; (2) decrease in effective weighted average loan interest rate from 14.11% for the loan portfolio as of December 31, 2014 to 13.50% as of December 31, 2015; and (3) the decrease in the amount of monthly interest received. Compared to the same period last year, a substantial amount of borrowers choose 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.

 

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. Additionally, the banks denied to extend new loans to some SMEs even after they made the full repayment for the loans due and satisfied other conditions. Management is concerned that the borrowers may use the proceeds from the loans we grant to them as a means of repayment to the other banks or even to the underground lenders, instead of using them in operations. Therefore, management decided to grant new loans in a more cautious manner. During the year ended December 31, 2015, we did not grant any loans but renewed 46 loans with an average loan size of $208,527, as compared to grant of 10 loans with an average loan size of $336,000 during the year ended December 31, 2014. As a result, the interest income generated during the year ended December 31, 2015 declined.

 

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 $37,706 during the year ended December 31, 2015 as compared to $84,602 during the year ended December 31, 2014. Caused by the reduction of our traditional guarantee business with banks, we have closed several restricted deposit accounts with banks through which we provided guarantee services to our customers. As a result, the interest income on deposits with bank was insignificant during the year ended December 31, 2015 and 2014, respectively.

 

Interest expense represents interest incurred on short-term bank loans. The interest incurred on short-term bank loans decreased by $403,472 or 45%. This was mainly caused by a decrease of total bank borrowing balance by $8.8 million from $11.4 million as of December 31, 2014 to $2.6 million as of December 31, 2015. During the year ended December 31, 2015, the interest expense related to the loans from banks was $496,753.

 

Provision for Loan Losses

 

The Company’s provision for loan losses was $41,133,808 and $24,641,375 for the years ended December 31, 2015 and 2014, 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 of financial statements.

 

 

Provision for loan losses increased significantly for the year ended December 31, 2015. This is mainly caused by deterioration of loan quality commenced during the year ended December 31, 2015. During the year ended December 31, 2015, management determined to charge off non-performing loan balances against allowances, in the amount of $7.1 million. This led to a dramatic increase of “loss loans” and therefore an increase in accrual of provision during that period.

 

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, has been facing downward pressure. As the local SMEs’ profitability and repayment ability deteriorates, “doubtful” and “loss” bank loans drastically increased. As such, our provision for loan losses substantially increased since 2014.

 

In February and March 2015, the Company reviewed the classification of its loan portfolios within its rating system to test the adequacy of the allowances calculated thereby. As a result of such testing, the Company decided to reclassify certain loans into different categories. The Company reviewed the profile, financial condition and other relevant information and documents of each customer in the lending businesses. For customers with several loans with different due dates, if one of whose loans was past due, the Company decided to reclassify all loans of the customer's as past due (even the other loans that were not mature yet). For extended loans, the Company 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. These reclassifications affected numerous customer accounts.

 

During the year ended December 31, 2015, management continued to assess the adequacy of the allowances in a cautious manner. Management assessed the collectability of loan receivable balances on an individual basis and concluded the collection from certain borrowers is remote. Therefore, management determined to charge off loan balances against allowances, in the amount of $7.1 million, as these loans are deemed as uncollectible. Management concluded that these borrowers had neither ability nor intention to make repayment as (1) these charged loans are guarantee backed loans which are subordinated to asset backed loans these borrowers obtained from the banks, (2) most of our borrowers or their guarantors are in the textile industry and the majority of the textile businesses are struggling due to the continued and worsened downturn trend in China’s macro-economic environment during the third quarter of fiscal year 2015 and quite a number of textile businesses went bankrupt and (3) management was advised by local counsels representing the Company in the collection lawsuits that the chances of collection is quite remote given the large scale defaults in both large and small businesses in Wujiang region.

 

Net Commission and Fees on Guarantee Business

 

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

 

As of December 31, 2015, the off-balance-sheet financial guarantee amounted to $11.7 million. The commissions and fees generated from our financial guarantee services decreased from $559,571 for the year ended December 31, 2014 to $127,980 for the year ended December 31, 2015, representing a decrease of $431,591, or 77%. The reduction was due to the decreased number of guarantee transactions as management reduced the guarantee portfolio to control the default risk.

 

As of December 31, 2015, we have provided guarantees for a total of $11.7 million underlying loans to approximately 14 financial guarantee service customers, a reduction of 46.3% compared to a total of $21.8 million as of December 31, 2014.

 

Provision on Financial Guarantee Services

 

The provision on financial guarantee services increased from $4,960,867 for the year ended December 31, 2014, to $14,939,203 for the year ended December 31, 2015, representing an increase of $9,978,336.

 

The methodology the Company used to estimate the liability for probable guarantee loss considers the guarantee contract amount and a variety of factors, which include, dependence on the counterparty, latest financial position and performance of the customers, actual defaults, estimated future defaults, historical loss experience, estimated value of collaterals or guarantees the costumers or third parties offered, and other economic conditions such as the economic trend of the area and the country. The estimates are based upon currently available information. Based on the recent lawsuit results and repayment status by defaulted customers, the Company estimated approximately 50% of off-balance-sheet financial guarantee services may be subject to default and their repayment may be “not likely”. As of December 31, 2015, the Company accrued 50% of contract amount as compared to 1% of contract amount as of December 31, 2014.

 

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”.

 

 

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 twelve months ended December 31, 2014, the banks denied to extend new loans to many SMEs even after they made the full repayment for the loans due and satisfied other conditions. As a result, some of the SME borrowers for which we provided the guarantees decided to default on the bank loans. Therefore the amount of repayment we made to the bank lenders substantially increased since the year ended December 31, 2014. We have brought collection actions against both the borrowers and their counter-guarantors. However, management was advised by counsel in the collection action that the chance of collection is remote given the large scale bad debt prevalent in Wujiang region. During the three months ended September 2015, we charged off guarantee paid on behalf of one customer against accrual for financial guarantee service in the amount of $0.27 million. In addition, due to the uncertainty of the collection outcome, we increased our accrual for financial guarantee services significantly from $5,546,128 as of December 31, 2014 to $19,322,557 as of December 31, 2015.

 

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

 

Non-interest Expenses

 

Non-interest expenses decreased from $4,862,895 for the year ended December 31, 2014 to $2,959,077 for the year ended December 31, 2015, representing a decrease of $1,903,818 or 39%. 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 decrease was mainly attributable to a decrease of business tax and surcharge by $169,457, or 63%, and a decrease of other operating expenses by $1,669,931, or 49%. The decrease of business tax and surcharge was mainly affected by decrease of interest income on direct loans and commission and fees on financial guarantee service. Other operating expenses were lower during the year ended December 31, 2015 as compared to the year ended December 31, 2014, primarily due to a combined effect of a decrease in legal and consulting fee of $1,274,394 which was mainly due to significant legal expenses incurred during the year ended December 31, 2015 in connection with the investigation of Huichun Qin’s inappropriate transfer of funds of approximately $1.15 million to his personal account and defending the class action lawsuit and shareholder derivative suit, a decrease in insurance expense of $200,812 as the Company did not buy any insurance during the year ended December 31, 2015, and a decrease in bank charges of $156,652 as a result of decrease of balances of cash and restricted cash as of December 31, 2015.

 

Income Tax

 

Income tax expenses changed from an income tax credit of $723,403 for year ended December 31, 2014 to an income tax provision of $2,495,148 for year ended December 31, 2015, representing a fluctuation of $3,218,551. Both Wujiang Luxiang, the Company’s VIE, and PFL, the Company’s direct financing lease business, suffered a net loss after tax reconciliation during the year ended December 31, 2015 and the management assessed that the deferred tax asset generated from net loss after tax reconciliation would not be recoverable in the foreseeable future, leading to a full allowance on the deferred tax asset.

 

Loan Portfolio Quality

 

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

 

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

 

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

 

 

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

 

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

 

We use a comprehensive methodology to monitor credit quality and prudently manage credit concentration within our portfolio of loans. Currently our loan portfolio concentrates in the textile industry and during the year ended December 31, 2015, both the domestic and international demand for textile products have been decreasing. To maintain our loan portfolio quality, we have modified our loan policy to accept only textile companies with real estate as collateral or guaranteed by guarantee companies. During the year ended December 31, 2015, we assessed the loan portfolio quality and charged off loan receivable balances in the amount of $7,058,495, with $6,017,116 for business loans and $1,041,379 for personal loans.

 

In addition, we plan to minimize our risks by concentrating on smaller amount loans that are below $462,000 (or approximately RMB 3.0 million).

 

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 December 31, 2015, as a result of charge off of loan receivable balances, our business loan balance decreased by $11.8 million as compared to that as of December 31, 2014 while personal loan decreased by $7.2 million.

 

The following table sets forth the classification of loans receivable as of December 31, 2015 and 2014, respectively:

 

		December 31, 2015				Percent of				December 31, 2014				Percent of
		Amount				Total				Amount				Total
Business loans		$	40,498,813				64.21	%		$	52,254,805				63.66	%
Personal loans			22,577,907				35.79	%			29,824,324				36.34	%
Total Loans receivable		$	63,076,720				100.00	%		$	82,079,129				100.00	%

  

Nonaccrual loans totaled $32.11 million, or 50.92% of loans receivable as of December 31, 2015, as compared with $33.31 million, or 40.58% of loans receivable, as of December 31, 2014. The allowance for loan losses was $55.60 million, representing 88.14% of loans receivable and 173.09% of non-accrual loans as of December 31, 2015. As of December 31, 2014, the allowance for loan losses was $24.49 million, representing 29.84% of loans receivable and 73.53% of non-accrual loans.

 

 

The following table sets forth information concerning our nonaccrual loans as of December 31, 2015 and 2014, respectively:

 

		December 31, 2015				December 31, 2014
Nonaccrual loans		$	31,118,910			$	33,306,861
Allowance for loan losses		$	55,595,654			$	24,490,721
Loans receivable		$	63,076,720			$	82,079,129
Total assets		$	24,446,840			$	83,089,787
Nonaccrual loans to loans receivable			50.92	%			40.58	%
Nonperforming assets to total assets			127.29	%			40.08	%
Allowance for loan losses to loans receivable			88.14	%			29.84	%
Allowance for loan losses to non-accrual loans			173.09	%			73.53	%

 

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 was kept at a high level as of December 31, 2015.

 

Cash Flows and Capital Resources

 

We have financed our operations primarily through shareholder contributions, cash flow from operations, bank loans, and public offerings of securities. As a result of our total cash activities, net cash decreased from $4,991,973 as of December 31, 2014 to $306,401 as of December 31, 2015.

 

These and other factors disclosed in this annual report raise substantial doubt as to the Company’s ability to continue as a going concern. Management believes that it has developed a liquidity plan, as summarized below, that, if executed successfully, will provide sufficient liquidity to meet the Company obligations for a reasonable period of time.

 

Bank Financing and Other Financial Support

 

On October 30, 2015, the Company entered into a borrowing agreement with Agriculture Bank of China for a one-year bank facility of Rmb 29 million (or approximately $4 million). As of March 23, 2016, the Company has paid off all outstanding bank borrowings. The Company may use this bank credit line in the next few months and lend new direct loans to customers if the economic condition in Wujiang area improved. The credit line is guaranteed by Wujiang Luxiang Shareholders and can be renewed with a prior written application to Agriculture Bank of China.

 

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

 

Improvement in Working Capital Management

 

In order to meet the capital needs for our continued operations, we continue to use our best effort to improve our collection of loan receivable and interest receivable. We engaged four law firms, Jiangsu Zhenyuzhen Law Firm, Jiangsu Tianbian Law Firm, Jiangsu Mingren Law Firm and He-Partners Law Firm to represent us in the legal proceedings against the borrowers and their counter guarantors. Among them, He-Partners Law Firm, is one of the largest law firms in Suzhou City.

 

While management believes that the measures in the liquidity plan will be adequate to satisfy its liquidity and cash flow requirements for the twelve months ending December 31, 2016, there is no assurance that the liquidity plan will be successfully implemented. Failure to successfully implement the liquidity plan will have a material adverse effect on the Company’s business, results of operations and financial position, and may materially adversely affect its ability to continue as a going concern.

 

 

Statement of Cash Flows

 

The following table sets forth a summary of our cash flows for the years ended December 31, 2015 and 2014, respectively:

 

		For the years ended  December 31,
		2015				2014
Net cash provided by operating activities		$	465,606			$	2,700,692
Net cash provided by/(used in) investing activities			3,429,127				(6,778,898	)
Net cash used in financing activities			(8,508,863	)			(222,095	)
Effects of exchange rate changes on cash			(71,442	)			(113,591	)
Net cash outflow		$	(4,685,572	)		$	(4,413,892	)

 

Net Cash Provided by Operating Activities

 

During the year ended December 31, 2015, we had a cash inflow from operating activities of $465,606, a decrease of $2,235,086 from the year ended December 31, 2014, during which we had cash inflow from operating activities of $2,700,692. We incurred a net loss for the year ended December 31, 2015 of $61,264,714, an increase in net loss of $33,974,219 from the year ended December 31, 2014, during which we generated net loss of $27,290,495. In addition to the decrease in profitability, the decrease in net cash provided by operating activities was the result of several factors, including:

 

●	A decrease in cash flow due to the decrease in changes in other assets by $1,193,217. The other asset decreased by $37,711 and by $1,230,928 as of December 31, 2015 and 2014, respectively, as compared to December 31, 2014 and 2013, respectively. This is mainly attributable to a significant increase in court filing fees and legal fees which will be claimed from increased default customers;
●	An increase in cash flow due to the decrease in changes in prepaid taxes against income tax payable by $2,809,864. The net off prepaid taxes and income tax payable decreased by $1,867,138 and increased by $942,746 as of December 31, 2015 and 2014, respectively, as compared to December 31, 2014 and 2013. This is mainly attributable to reversal of prepaid taxes in 2015 as prepaid taxes cannot be refunded but offset against future tax payable. However management estimates that the Company is unable to make sufficient taxable income to generate tax payable in the future 5 years.

 

Net Cash Provided by/(Used in) Investing Activities

 

Net cash provided investing activities for the year ended December 31, 2015 was $3,429,127 as compared to net cash used in investing activities of $6,778,898 for the year ended December 31, 2014. The cash provided by investing activities for the year ended December 31, 2015 was mainly caused by collection of loans of $25,860,398 in our direct loans business, collection from guarantees for loan of $336,245 paid on their behalf, and installment repayment of $446,412from direct financing lease customers, netting off loan disbursement to third party customers of $17,855,764, payment on behalf of default guarantees of $6,816,408.

 

Net Cash Used in Financing Activities

 

Net cash used in financing activities for the year ended December 31, 2015 totaled $8,508,863 as compared to net cash used in financing activities of $222,095 for the year ended December 31, 2014. The cash used in financing activities for the year ended December 31, 2015 was mainly attributable to the repayment of bank borrowing of $13,164,655, netting off proceeds from bank borrowing of $4,655,792. 

 

Contractual Obligations

 

As of December 31, 2015, 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)		$	2,618,729			$	2,618,729			$	-			$	-			$	-			$	-
Operating lease (2) (3)			369,704				43,132				73,941				73,941				147,882				30,808
		$	2,988,433			$	2,661,861			$	73,941			$	73,941			$	147,882			$	30,808

  

 

(1)   The bank loans bear an average annual interest rate of 6.31%.

(2)   Our prior lease for our office in Wujiang commenced on October 1, 2013 and would expire on December 31, 2018. In October 2015, we terminated this office lease as we leased a new office (see note 3). No penalty was paid for early termination.

(3)   During the year ended December 31, 2015, we leased a new office. The new lease commenced on June 1, 2015 and will expire on May 31, 2021. 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.

 

		December 31,  2015				December 31,  2014
Guarantee		$	11,653,342			$	21,794,663

 

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.

 

Termination of VIE agreements with Pride Information

 

On April 11, 2015, WFOE delivered a notice of termination to Pride Information. As a result, the contractual arrangements between WFOE, Pride Information and Mr. Qin were terminated effective on May 11, 2015 and WFOE no longer controls Pride Information.

 

Pride Information operates an online portal (www.pridelendingclub.com) to match prospective borrowers with lenders. As of May 11, 2015, Pride Information was in the beginning stage of operation and had generated minimal revenue. The derecognition of Pride Information was accounted for as a deconsolidation.

 

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. Additionally, any previously accrued but uncollected interest is discontinued of accrual and reversed, 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.

 

●

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.

 

 

●

Income on direct financing lease. The financing agreements are classified as direct financing lease as prescribed by the Financial Accounting Standards Board ("FASB Codification"). Revenues representing the capitalized costs of the investment are recognized as income upon inception of the leases. The portion of revenues representing the difference between the gross investment in the lease (the sum of the minimum lease payments and the guaranteed residual value, if any) and the sum of the present value of the two components is recorded as unearned income and amortized over the lease term.

 

	●	Taxes assessed by governmental authorities that are directly imposed on revenue-producing transactions between the Company and its customers (which may include, but are not limited to, sales, use, value added and some excise taxes) are excluded from revenues.

●

Lessees are responsible for all taxes, insurance and maintenance costs.

 

●

Non-interest income. Non-interest income mainly includes rental income from the sub-leasing of certain of the Company’s leased office space to third parties and income from disposal of property and equipment.

 

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 allowance for loan losses 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.

 

Allowance for Loan Losses and Loan Impairment

 

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 operations and comprehensive income (loss).

 

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. The Company evaluates its allowance for loan losses on a quarterly basis or more often as necessary.

 

The allowance is calculated at portfolio-level since our loans portfolio is typically of smaller balance homogenous loans and is collectively evaluated for impairment. Additionally, the management also reviewed the portfolio on a loan by loan basis and individually evaluated each loan for impairment if any.

 

For the purpose of calculating portfolio-level reserves, we have grouped our loans into two portfolio segments: Corporate and Personal. The allowance consists of the combination of a quantitative assessment component based on statistical models, a retrospective evaluation of actual loss information to loss forecasts, value of collaterals and could include a qualitative component based on management judgment.

 

In estimating the probable loss of the loan portfolio, the Company also considers qualitative factors such as current economic conditions and/or events in specific industries and geographical areas, including unemployment levels, trends in real estate values, peer comparisons, and other pertinent factors such as regulatory guidance. Finally, as appropriate, the Company also considers individual borrower circumstances and the condition and fair value of the loan collateral, if any.

 

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

 

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

 

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

 

While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance.

 

 

Income Tax

 

Current income tax expenses are provided for in accordance with the laws of the relevant taxing authorities. As part of the process of preparing financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. The Company accounts for income taxes using the liability approach. Under this method, deferred income taxes are recognized for tax consequences in future years of differences between the tax bases of assets and liabilities and their reported amounts in the financial statements at each year-end and tax loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates applicable for the differences that are expected to affect taxable income. 

 

Recently Issued Accounting Standards

 

In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1) A lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and 2) A right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. The Company is evaluating this ASU and has not determined the effect of this standard on its ongoing financial reporting.

 

In November 2015, the FASB issued ASU No. 2015-17, "Income Taxes, Balance Sheet Classification of Deferred Taxes" ("ASU 2015-17"). The new guidance requires that deferred tax assets and liabilities be classified as non-current on the balance sheet, as opposed to current guidance which requires a net current asset or liability and net non-current asset or liability on the balance sheet. The new standard is effective for financial statements issued for fiscal years beginning after December 15, 2016. The new standard may be applied either prospectively or retrospectively to all periods presented. Early adoption is permitted. The Company adopted this new standard for its fiscal year 2015 financial statements and applied the new guidance on a prospective basis.

 

In September 2015, the Financial Accounting Standards Board (“FASB”) issued updated guidance, which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Acquirers must recognize measurement-period adjustments during the period of resolution, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The updated guidance is effective for fiscal years beginning after December 15, 2015. Earlier adoption is permitted for any interim and annual financial statements that have not yet been issued. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

 

In August 2015, the FASB issued an accounting standards update for a one-year deferral of the revenue recognition standard's effective date for all entities, which changed the effectiveness to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. We are currently evaluating this standard and our existing revenue recognition policies to determine which contracts in the scope of the guidance will be affected by the new requirements and what impact they would have on our consolidated financial statements upon adoption. We have not yet determined which transition method we will utilize upon adoption on the effective date.

 

In August 2015, the FASB issued updated guidance concerning presentation and subsequent measurement of debt issuance costs relating to line of credit arrangements, which can be presented on the balance sheet as an asset to be subsequently amortized ratably over the term of the line of credit arrangement. The updated guidance is effective immediately. This updated guidance did not have a material impact on our financial statements.

 

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt issuance costs in financial statements. Under this ASU, an entity presents such costs on the balance sheet as a direct deduction from the related debt liability rather than as an asset. This new standard is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period, with early adoption permitted. We do not plan to adopt this standard early and do not expect that it will have a material impact on our consolidated financial statements or disclosures upon adoption.

 

 

In February 2015, the FASB issued ASU 2015-02 "Consolidation: Amendments to the Consolidation Analysis" in order to clarify the basis for consolidation of certain legal entities. ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Specifically, ASU 2015-02 (i) modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, (ii) eliminates the presumption that a general partner should consolidate a limited partnership, (iii) affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and (iv) provides a scope exception from consolidation guidance for reporting entities with interests in certain legal entities. ASU 2015-02 is effective for public business entities for fiscal years and interim periods beginning on or after December 15, 2015. Early adoption is permitted. The Company is currently assessing the impact of ASU 2015-02 on its consolidated financial position, results of operations and cash flows.

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 8.

Financial Statements and Supplementary Data.

 

Our Consolidated Financial Statements and Notes thereto and the report of Marcum Bernstein & Pinchuk LLP, our independent registered public accounting firm, are set forth on pages F-1 through F-37 of this Report.

 

Item 9.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A.

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 December 31, 2015 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.

 

Management’s Annual Report on Internal Control Over Financial Reporting 

 

Our management, including our Chief Executive Officer and our Chief Financial Officer, has assessed the effectiveness of our internal control over financial reporting as of December 31, 2015. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Because of the material weaknesses described in the following paragraphs, management believes that, as of December 31, 2015, our internal control over financial reporting was not effective based on those criteria.

 

 

A “material weakness” is defined under the SEC rules as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis by our internal controls. As a result of its review, management concluded that we had material weaknesses in our internal control over financial reporting process consisting of the following:

 

●	Certain personnel primarily responsible for the preparation of our financial statements require additional requisite levels of knowledge, experience and training in the application of U.S. GAAP commensurate with our financial reporting requirements.
●	The Company’s internal control over financial reporting require additional supervision. For example, controls over the authorization and recording of funds transfers and bank accounts were not effective.
●	The Company needs to further improve its allowance analysis system to timely respond to changing economic conditions and have additional qualified personnel to perform allowance analysis.
●	The Company needs to improve its system to better track the collection litigations.

 

Management Plan to Remediate Material Weaknesses

 

We expect to implement the following measures in 2016 to remediate the material weaknesses identified:

 

●	To provide applicable training for our financial and accounting staff to enhance their understanding of U.S. GAAP and internal control over financial reporting.
●	To expand involvement of qualified external consultants to supervise and review our financial reporting process.
●	To monitor the effectiveness of the new fund transfer approval policy and procedures and new standards of credit risk assessment.
●	To assess the effectiveness of the new standards of credit risk assessment which are carried out by the revised Loan Review Committee to improve the allowance analysis.
●	To engage outside consultants to assist in the allowance analysis.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the fourth quarter of 2015 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 at Issue, 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 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.

 

Item 9B.

Other Information.

 

None.

 

PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance.

 

Executive Officers, Key Employees and Directors

 

The following table sets forth certain information concerning our executive officers, key employees, and directors:

 

Name		Age		Position
Jingen Ling		50		Chairman of the Board of Directors and Chief Executive Officer
Long Yi		38		Chief Financial Officer and Secretary
Qinyan Yang		42		Director
Bo Xu		52		Director
John F. Levy		60		Director

 

Mr. Jingen Ling has served as a director of CCC since the consummation of our initial public offering on August 12, 2013. In August 2014, Mr. Ling was appointed as the sole director and president of WFOE. On December 29, 2014, Mr. Ling was appointed as Chief Executive Officer of CCC. From 2003 to 2012, he served as a chairman of the board of directors of Suzhou Dingli Real Estate Co. Ltd., one of the largest real estate development companies in the city of Wujiang. Mr. Liang’s business aptitude and strong analytical skills, qualify him for his position as one of our directors.

 

Mr. Long Yi was appointed as the Chief Financial Officer and Secretary of CCC on January 1, 2013. Mr. Yi acted as the interim Chief Executive Officer of CCC between August 21, 2014 and December 29, 2014. Prior to joining CCC, Mr. Yi was the senior financial manager in Sutor Technology Group Ltd. (Nasdaq: SUTR) from 2008 to August 2012. He served as an accounting manager at Forterra Inc. in Canada from 2006 to 2008.  He is a Certified Public Accountant in the State of Illinois.  Mr. Yi has a Bachelor’s degree in Accounting from Northeastern University and a Master’s degree in Accounting and Finance from University of Rotterdam. He also obtained a graduate diploma in accounting from McGill University.

 

Ms. Qinyan Yang. Ms. Yang has served as a director of CCC since June 2015. Ms.Yang. is the vice president and founder of Beijing Ruibo Culture and Entertainment, which was founded in May of 2015. From January to May of 2015, Ms. Yang served as a director on the compensation committee of China Tycoon Beverage Co., Ltd (HKEX 0209), a beverage manufacturer based in China. From September 2003 until April 2015, Ms. Yang served as General Manager at Shangyang Media Group, also known as MEC, a subsidiary of WPP plc (Nasdaq:WPPGY; LSE:WPP), a company engaged in global media agency services. Ms. Yang is a graduate of the Beijing Institute of Fashion Technology. Ms. Yang brings the Board her valuable knowledge and experience in corporate governance. 

 

Mr. Bo Xu. Mr. Xu has served as a director of CCC since June 2015. Mr. Xu has served as the chief executive officer of Dishen International Travel Agency since May 2014. From 2008 until present, Mr. Xu has also served as a director at Shanghai Jun Qian Legal Consulting Firm. From 2006 until 2008, Mr. Xu was engaged in various portfolio investment transactions. From 2003 until 2006, Mr. Xu was general manager at Xin Hongjun Investment Company and Huichan Investment Company. Mr. Xu received his master’s degree in economics at the Shanghai Academy of Social Sciences. We believe Mr. Xu is qualified to server on our Board thanks to his rich experience in capital market transactions. 

 

Mr. John F. Levy has served as a director of CCC since the consummation of our initial public offering on August 12, 2013. Since May 2005, Mr. Levy has served as the Chief Executive Officer of Board Advisory, a consulting firm which advises public companies in the areas of corporate governance, corporate compliance, financial reporting and financial strategies. Mr. Levy currently serves on the board of directors of three public companies including China Commercial Credit, Inc. Mr. Levy has been a director of Takung Art Co., Ltd. since March, 2016. The Hong Kong-based company is an online trading platform for acquiring shared ownership in Asian fine art, jewelry and precious gems. From 2009 through February 2015, Mr. Levy was a director and audit committee member of Applied Energetics, Inc. (AERG), a publicly-traded company that specialized in the development and application of high power lasers, high voltage electronics, advanced optical systems, and energy management systems technologies, since 2009. Mr. Levy has been a director of Applied Minerals, Inc. (AMNL) a publicly traded exploration stage natural resource and mining company since January 2008, and has served as chairman since August 2009. From October 2006 to October 2013, Mr. Levy served as a director, and chair of the audit committee of Gilman Ciocia, Inc. (GTAX), a publicly traded financial planning and tax preparation firm. From September 2010 to October 2012, he served as director of Brightpoint, Inc. (CELL), a publicly traded company that provides supply chain solutions to leading stakeholders in the wireless industry. From November 2008 through June 2010, he served as a director of Applied Natural Gas Fuels, Inc. (formerly PNG Ventures, Inc.). From March 2006 to April 2010, Mr. Levy served as a director and Audit Committee chairman of Take Two Interactive Software, Inc., a public company which is a global developer and publisher of video games best known for the Grand Theft Auto franchise. Mr. Levy served as Interim Chief Financial Officer from November 2005 to March 2006 for Universal Food &Beverage Company, which filed a voluntary petition under the provisions of Chapter 11 of the United States Bankruptcy Act on August 31, 2007. Mr. Levy is a Certified Public Accountant with nine years of experience with the national public accounting firms of Ernst & Young, Laventhol & Horwath and Grant Thornton. Mr. Levy is a frequent speaker on the roles and responsibilities of Board members and audit committee members. He has authored The 21st Century Director: Ethical and Legal Responsibilities of Board Members, Acquisitions to Grow the Business: Structure, Due Diligence, and Financing, Creating the Best Projections You Can: Insights and Techniques and Ethics and Sustainability: A 4-way Path to Success. All four courses have initially been presented to various state accounting societies. Mr. Levy has a B.S. degree in economics from the Wharton School of the University of Pennsylvania and received his M.B.A. from St. Joseph’s University in Philadelphia. Mr. Levy brings to our board vast financial experiences as a Certified Public Accountant, former Chief Financial Officer of several companies and as Chief Executive Officer of a consulting firm which advises public companies in the areas of corporate governance, corporate compliance, financial reporting and financial strategies. In addition, Mr. Levy brings to our board, substantial experience with complex accounting and reporting issues, financial strategies, SEC filings, corporate governance and corporate transactions.

 

 

Director Independence

 

Our Board reviewed the materiality of any relationship that each of our directors has with us, either directly or indirectly. Based on this review, it is determined that Qinyan Yang, Bo Xu and John F. Levy are “independent directors” as defined by NASDAQ.

  

Committees of the Board of Directors

 

We have established an audit committee, a compensation committee and a nominating and governance committee. Each of the committees of the Board has the composition and responsibilities described below.

 

Audit Committee

 

Mr. Levy, Ms. Yang and Mr. Xu are members of our Audit Committee, where Mr. John F. Levy serves as the chairman. All members of our Audit Committee satisfy the independence standards promulgated by the SEC and by NASDAQ as such standards apply specifically to members of audit committees.

 

We have adopted and approved a charter for the Audit Committee. In accordance with our Audit Committee Charter, our Audit Committee shall perform several functions, including:

 

●	evaluates the independence and performance of, and assesses the qualifications of, our independent auditor, and engages such independent auditor;
●	approves the plan and fees for the annual audit, quarterly reviews, tax and other audit-related services, and approves in advance any non-audit service to be provided by the independent auditor;
●	monitors the independence of the independent auditor and the rotation of partners of the independent auditor on our engagement team as required by law;
●	reviews the financial statements to be included in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and reviews with management and the independent auditors the results of the annual audit and reviews of our quarterly financial statements;
●	oversees all aspects of our systems of internal accounting control and corporate governance functions on behalf of the Board;
●	reviews and approves in advance any proposed related-party transactions and reports to the full Board on any approved transactions; and
●	provides oversight assistance in connection with legal, ethical and risk management compliance programs established by management and the Board, including Sarbanes-Oxley Act implementation, and makes recommendations to the Board regarding corporate governance issues and policy decisions.

 

It is determined that Mr. Levy possesses accounting or related financial management experience that qualifies him as an "audit committee financial expert" as defined by the rules and regulations of the SEC.

 

Compensation Committee

 

Mr. Levy, Ms. Yang and Mr. Xu are members of our Compensation Committee and Ms. Yang serves as the chairwoman.  All members of our Compensation Committee are qualified as independent under the current definition promulgated by NASDAQ.  We have adopted a charter for the Compensation Committee. In accordance with the Compensation Committee’s Charter, the Compensation Committee is responsible for overseeing and making recommendations to the Board regarding the salaries and other compensation of our executive officers and general employees and providing assistance and recommendations with respect to our compensation policies and practices.

 

Nominating and Governance Committee

 

Mr. Levy, Ms. Yang and Mr. Xu are the members of our Nominating and Governance Committee where Mr. Xu serves as the chairman. All members of our Nominating and Governance Committee are qualified as independent under the current definition promulgated by NASDAQ.  Our Board adopted and approved a charter for the Nominating and Governance Committee. In accordance with the Nominating and Governance Committee’s Charter, the Nominating and Governance Committee is responsible to identify and propose new potential director nominees to the board of directors for consideration and review our corporate governance policies.

 

Code of Conduct and Ethics

 

We have adopted a code of conduct and ethics applicable to our directors, officers and employees in accordance with applicable federal securities laws and NASDAQ rules.

 

Significant Employees

 

We have no significant employees other than the named executive officers described above.

 

 

Section 16 Compliance

 

Section 16(a) of the Exchange Act, requires our directors, officers and persons who own more than 10% of our common stock to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other of our equity securities. To our knowledge, based solely on review of the copies of such reports furnished to us, all Section 16(a) filings applicable to officers, directors and greater than 10% shareholders were timely made during fiscal year 2015 except as set forth below:

 

●	Mr. Levy was late for filling a Form 4 to report the issuance of 6,000 shares in lieu of cash compensation for services;
●	Mr. Yi was late for filling a Form 4 to report the issuance of 60,000 shares in lieu of cash compensation for services;
●	Mr. Ling was late for filling a Form 4 to report the issuance of 75,000 shares in lieu of cash compensation for services;
●	Ms. Yang was late for filing her Form 3; and
●	Mr. Xu was late for filing his Form 4.

 

Family Relationships

 

There are no family relationships by between or among the members of the Board or other executive officers of the Company.

 

Legal Proceedings Involving Officers and Directors

 

Unless otherwise indicated in this report, to the knowledge of the Company after reasonable inquiry, during the past ten years, no current director, executive officer of the Company or any promoter who was a promoter at any time during the past five fiscal years, has (1) been subject to a petition under the Federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing; (2) been convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) been the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities: (i) acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity; (ii) engaging in any type of business practice; or (iii) engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws; (4) been the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph (3)(i) of this section, or to be associated with persons engaged in any such activity; (5) been was found by a court of competent jurisdiction in a civil action or by the Commission to have violated any Federal or State securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended, or vacated; (6) been found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated; (7) been the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: (i) any Federal or State securities or commodities law or regulation; or (ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or (8) been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26)), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29)), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

There are no material pending legal proceedings to which any of the individuals listed above is party adverse to the Company or any of its subsidiaries or has a material interest adverse to the Company or any of its subsidiaries.

   

 

Item 11.

Executive Compensation.

 

The following table provides disclosure concerning all compensation paid for services to CCC and Wujiang Luxiang in all capacities for our fiscal years ended 2015 and 2014 provided by (i) each person serving as our principal executive officer (“PEO”), (ii) each person serving as our principal financial officer (“PFO”) and (iii) our two most highly compensated executive officers other than our PEO and PFO whose total compensation exceeded $100,000 (collectively with the PEO, referred to as the “named executive officers” in this Executive Compensation section).

 

Summary Compensation Table

 

Name and Principal Position		Fiscal Year				Salary ($)				Bonus ($)				Stock Awards ($)				Option Awards ($)				Other Compensation ($)				Total ($)
Long Yi (1)			2015				56,907				-				110,400				-				-				167,307
(CFO)			2014				35,492				17,741				-				-				-				53,233
Jingen Ling (2)			2015				10,327				-				138,000				-				-				148,327
(CEO)			2014				24,219				-				-				-				-				24,219

  

(1)	Mr. Long Yi was appointed as the CFO of CCC on January 1, 2013. Mr. Yi was entitled to an annual base salary of $50,000 pursuant to the employment agreement he had with the Company. Mr. Yi agreed to waive the difference between the amount he was entitled to pursuant to his employment agreement and the actual amount he was paid by the Company during fiscal year ended December 31, 2015 and 2014.
(2)	Mr. Jingen Ling was appointed as the CEO of the Company on December 29, 2014. Mr. Ling received this salary as the president of WFOE when he was appointed such position in August 2014.

 

Grants of Plan Based Awards in the Fiscal Year Ended December 31, 2015

 

We currently have a 2014 equity incentive plan pursuant to which 1,500,000 shares were authorized. During the fiscal year ended December 31, 2015, an aggregate of 135,000 shares of common stock were granted to our officers and directors under the plan.

 

Outstanding Equity Awards at Fiscal Year-End

 

None.

 

Employment Contracts, Termination of Employment, Change-in-Control Arrangements

  

As of January 1, 2013, CCC entered into an employment agreement with our CFO, Mr. Long Yi, pursuant to which he shall receive an annual base salary of $50,000.  Under his employment agreement, Mr. Yi is employed as our CFO for a term of two years, which automatically renews for additional one year terms unless previously terminated on three months written notice by either party. We may terminate the employment for cause, at any time, without notice or remuneration, for certain acts of the executive officer, such as conviction or plea of guilty to a felony or grossly negligent or dishonest acts to our detriment, or misconduct or a failure to perform agreed duties.  In such case, the executive officer will not be entitled to receive payment of any severance benefits or other amounts by reason of the termination, and the executive officer’s right to all other benefits will terminate, except as required by any applicable law. We may also terminate an executive officer’s employment without cause upon one-month advance written notice. In such case of termination by us, we are required to provide compensation to the executive officer, including severance pay equal to 3 months of base salary. The executive officer may terminate the employment at any time with a one-month advance written notice if there is any significant change in the executive officer’s duties and responsibilities or a material reduction in the executive officer’s annual salary. In such case, the executive officer will be entitled to receive compensation equivalent to 12 months of the executive officer's base salary.

 

As of December 29, 2014, CCC entered into an employment agreement with Mr. Jingen Ling pursuant to which he shall be employed as the CEO of CCC and receive an annual base salary of $75,000. Under this employment agreement, Mr. Ling is employed as our CEO for a term of five years, which automatically renews for additional one year terms unless previously terminated on three months written notice by either party. We may terminate the employment for cause, at any time, without notice or remuneration, for certain acts of the executive officer, such as conviction or plea of guilty to a felony or grossly negligent or dishonest acts to our detriment, or misconduct or a failure to perform agreed duties.  In such case, the executive officer will not be entitled to receive payment of any severance benefits or other amounts by reason of the termination, and the executive officer’s right to all other benefits will terminate, except as required by any applicable law. We may also terminate an executive officer’s employment without cause upon one-month advance written notice. In such case of termination by us, we are required to provide compensation to the executive officer, including severance pay equal to 12 months of base salary. The executive officer may terminate the employment at any time with a one-month advance written notice if there is any significant change in the executive officer’s duties and responsibilities or a material reduction in the executive officer’s annual salary. In such case, the executive officer will be entitled to receive compensation equivalent to 12 months of the executive officer's base salary.

 

Each executive officer has agreed to hold, both during and after the termination of his employment agreement, in strict confidence and not to use, except as required in the performance of his or her duties in connection with the employment, any of our confidential information or proprietary information of any third party received by us and for which we have confidential obligations.

 

In addition, each executive officer has agreed to be bound by non-competition and non-solicitation restrictions during the term of his employment and for one year following termination of the employment.

 

  

Director Compensation

 

The following table represents compensation earned by our non-executive directors in 2015.

 

Name		Fees earned in cash ($)				Stock awards ($)				Option awards ($)				All other compensation ($)				Total ($)
John L Levy (1)		$	50,000				-				-				-			$	50,000
Chunjiang Yu (2)		$	-				-				-				-			$	-
Xiaofang Shen (2)		$	-				-				-				-			$	-
Qinyan Yang (3)		$	-				-				-				-			$	-
Bo Xu (3)		$	-				-				-				-			$	-

 

(1)	Mr. Levy shall receive $36,000 in cash per year and 6,000 restricted shares of the Company’s common stock per year, which shall vest in four equal quarterly installments. Mr. Levy also shall receive an additional $14,000 per year for acting as Chairman of the Audit Committee.
(2)	Mr. Yu and Ms. Shen shall receive $20,000 in cash per year for serving on the Board. They resigned as directors of the Company on June 12, 2015.
(3)	Ms. Yang and Mr. Xu were appointed as directors of the Company on June 12, 2015 and shall receive annual compensation at $15,000 each.

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

The following table sets forth information regarding the beneficial ownership of our common stock as of April 13, 2016 by our officers, directors and 5% or greater beneficial owners of common stock. There is no other person or group of affiliated persons, known by us to beneficially own more than 5% of our common stock.

 

We have determined beneficial ownership in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. The person is also deemed to be a beneficial owner of any security of which that person has a right to acquire beneficial ownership within 60 days. Unless otherwise indicated, the person identified in this table has sole voting and investment power with respect to all shares shown as beneficially owned by him, subject to applicable community property laws.

 

Name of Beneficial Owner		Number Common Stock Beneficially Owned				Percent of Class Beneficially Owned (1)
5% Stockholder
Hok Ming Tseung			933,322 (2)				7.5	%
Directors and Executive Officers:
Ling, Jingen Chief Executive Officer and Chairman of the Board of Directors			75,000				*
Long Yi Chief Financial Officer			60,000				*
John F. Levy Director			14,250				*
Qinyan Yang Director			-				-
Bo Xu Director			-				-
All officers and directors as a group (five persons)			74,250				*

 

*	Represents less than 1%
(1)	Applicable percentage of ownership is based on 12,396,062 shares of common stock outstanding as of April 13, 2016 together with securities exercisable or convertible into ordinary shares within sixty (60) days as of the date hereof for each stockholder.
(2)	Hok Ming Tseung beneficially owns 588,000 shares through Candid Finance Ltd, a BVI entity he 100% owns and 375,322 shares through Pioneer Resources Industrial Holdings Limited, a BVI entity he 100% owns.

 

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

 

Contractual Arrangements between WFOE and Pride Online

 

On February 19, 2014, entered into certain contractual arrangements with Mr. Huichun Qin, Pride Online, a domestic entity established on February 19, 2014 and 100% owned by Mr. Qin and. Pursuant to these contractual arrangements, WFOE shall have the power, rights and obligations equivalent in all material respects to those it would possess if it were the sole equity holder of Pride Online, including absolute control rights and the rights to the assets, property and revenue of Pride Online and the receipt of approximately 100% of the net income of Pride Online as a service fee to WFOE. Mr. Qin did not receive any consideration in exchange for his agreement to give up his control over Pride Online. The contractual arrangements between WFOE, Pride Online and its sole stockholder, Mr. Huichun Qin, had substantially the same terms as those between WFOE and Wujiang Luxiang. Effective May 11, 2015, these contractual arrangements were terminated.

 

During the year ended December 31, 2015, the Company repaid the loan of Wujiang Chunjia Textile Trading Co., Ltd (“Chunjia Textile”), a company controlled by Huichun Qin, the Company’s former Chief Executive Officer and Chairman, in the amount of $468,764 to banks on its behalf as of December 31, 2015. 

 

During the year ended December 31, 2015, Suzhou Dingli Real Estate Co., Ltd., a company controlled by Mr. Jingen Ling, the Chief Executive Officer of the Company, was involved to provide guarantee services for the bank borrowings. No commissions or fees are required from the Company.

 

During the year ended December 31, 2014, the Company also provided financial guarantee service for Chunjia Textile to guarantee a loan of $813,577 and repaid Chunjia Textile’s loan of $162,707 to banks on its behalf as of December 31, 2014. The Company earned commission income of $14,644 from the financial guarantee service provided to Chunjia Textile.

 

As of December 31, 2015, the Company provided financial guarantee service for Chunjia Textile to guarantee loans of $622,807. The Company accrued provision of $311,404 on the outstanding balance as of December 31, 2015.

 

Huichun Qin transferred $1,098,197(equivalent of RMB 7 million) to his personal account without proper authorization on July 2, 2014. As of December 31, 2015, Huichun Qin has not repaid the balance. The amount was recorded as a deduction of the Company’s equity as of December 31, 2015 and December 31, 2014, respectively.

  

Review, Approval or Ratification of Transactions with Related Persons

 

Our Audit Committee consisting of independent directors, is charged with reviewing and approving all agreements and transactions with related parties.

 

Item 14.

Principal Accountant Fees and Services.

 

Audit Fees. The aggregate fees billed by Marcum Bernstein & Pinchuk LLP for professional services rendered for the audit of our annual financial statements, review of the financial information included in our Forms 10-Q for the respective periods and other required filings with the SEC for the year ended December 31, 2015 and 2014 totaled $282,544 and $140,311, respectively. The above amounts include interim procedures and audit fees, as well as attendance at audit committee meetings.

 

All Other Fees. None

 

The Audit Committee of our board of directors has established its pre-approval policies and procedures, pursuant to which the Audit Committee approved the foregoing audit, tax and non-audit services provided by Marcum Bernstein & Pinchuk LLP in 2015. Consistent with the Audit Committee’s responsibility for engaging our independent auditors, all audit and permitted non-audit services require pre-approval by the Audit Committee. The full Audit Committee approves proposed services and fee estimates for these services.  One or more independent directors serving on the Audit Committee may be delegated by the full Audit Committee to pre-approve any audit and non-audit services. Any such delegation shall be presented to the full Audit Committee at its next scheduled meeting. Pursuant to these procedures, the Audit Committee approved the foregoing audit services provided by Marcum Bernstein & Pinchuk LLP.

 

 

PART IV

 

Item 15.

Exhibits, Financial Statement Schedules.

 

(1)	Financial Statements

 

Financial Statements and Report of Independent Registered Public Accounting Firms are set forth on pages F-1 through F-37 of this report.

 

(2)	Financial Statement Schedules

 

Schedules are omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedule or because the information required is given in the consolidated financial statements or the notes thereto.

 

(3)

Exhibits

 

Exhibit		Description
2.1		Form of Share Exchange Agreement, incorporated herein by reference to Exhibit 2.1 of the draft registration statement on Form DRS filed on February 14, 2013
2.2		Form of Amended Share Exchange Agreement, incorporated herein by reference to Exhibit 2.2 of the registration statement on Form S-1 filed on June 7, 2013
3.1		Certificate of Incorporation of Registrant, incorporated herein by reference to Exhibit 3.1 of the draft registration statement on Form DRS filed on February 14, 2013
3.2		Bylaws of Registrant, incorporated herein by reference to Exhibit 3.2 of the draft registration statement on Form DRS filed on February 14, 2013
3.3		Articles of Association of Wujiang Luxiang Rural Microcredit Co. Ltd., incorporated herein by reference to Exhibit 3.3 of the registration statement on Form S-1/A filed on June 27, 2013
3.4		Certificate of Approval of Wujiang Luxiang Rural Microcredit Co. Ltd., incorporated herein by reference to Exhibit 3.4 of the registration statement on Form S-1 filed on June 7, 2013
3.5		Certificate of Amendment of the Certificate of Incorporation of Registrant , incorporated herein by reference to Exhibit 3.5 of the registration statement on Form S-1/A filed on July 16, 2013
10.1		Form of Exclusive Business Cooperation Agreement dated September 26, 2012, incorporated herein by reference to Exhibit 10.2 of the draft registration statement on Form DRS filed on February 14, 2013
10.2		Form of Share Pledge Agreement dated September 26, 2012, incorporated herein by reference to Exhibit 10.3 of the draft registration statement on Form DRS filed on February 14, 2013
10.3		Form of Exclusive Option Agreement dated September 26, 2012, incorporated herein by reference to Exhibit 10.4 of the draft registration statement on Form DRS filed on February 14, 2013
10.4		Form of Power of Attorney dated September 26, 2012, incorporated herein by reference to Exhibit 10.5 of the draft registration statement on Form DRS filed on February 14, 2013
10.5		Form of Timely Reporting Agreement dated September 26, 2012, incorporated herein by reference to Exhibit 10.6 of the draft registration statement on Form DRS filed on February 14, 2013
10.6*		Finance Agreement dated October 29, 2015, between Wujiang Luxiang Rural Microcredit Co. Ltd. and Agriculture Bank of China
10.7		Employment Agreement between China Commercial Credit, Inc. and Long Yi, incorporated herein by reference to Exhibit 10.10 of the registration statement on Form S-1 filed on June 7, 2013
10.8		Employment Agreement between China Commercial Credit, Inc. and Jingen Ling incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K filed on December 31, 2014
14.1		Code of Conduct and Ethics, incorporated herein by reference to Exhibit 99.6 to the registration statement on Form S-1/A filed on July 16, 2013
21.1		Subsidiaries of the Company, incorporated herein by reference to Exhibit 21.1 to the registration statement on Form S-1 filed on January 15, 2014.
31.1*		Certification by Chief Executive Officer pursuant to Sarbanes Oxley Section 302
31.2*		Certification by Chief Financial Officer pursuant to Sarbanes Oxley Section 302
32.1**		Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350
32.2**		Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350
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 XBRL
101.PRE *		XBRL Taxonomy Extension Presentation Linkbase Document

 

*	Filed herewith.
**	Furnished herewith.

 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	CHINA COMMERCIAL CREDIT, INC.
Date: April 14, 2016	By:	/s/ Jingen Ling
	Name:	Jingen Ling
	Title:	Chief Executive Officer (Principal Executive Officer)
	By:	/s/ Long Yi
	Name:	Long Yi
	Title:	Chief Financial Officer and Secretary
		(Principal Financial and Accounting Officer)

 

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature		Title		Date
/s/ Jingen Ling		Chief Executive Officer and Director		April 14, 2016
Jingen Ling		(Principal executive officer)
/s/ Long Yi		Chief Financial Officer and Director		April 14, 2016
Long Yi		(Principal financial officer and principal accounting officer)
/s/ John F. Levy		Director		April 14, 2016
John F. Levy

 

 

TABLE OF CONTENTS

 

	Page
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets at December 31, 2015 and 2014	F-2
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2015 and 2014	F-3
Consolidated Statement of Changes in Shareholders’ Equity for the years ended December 31, 2015 and 2014	F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2015 and 2014	F-5
Notes to the Consolidated Financial Statements	F-6 - F-37

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Audit Committee of the Board of Directors and Stockholders of

China Commercial Credit, Inc.

 

We have audited the accompanying consolidated balance sheets of China Commercial Credit, Inc. and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations and comprehensive loss, changes in shareholders’ equity and cash flows for the years then ended. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material aspects, the financial position of China Commercial Credit, Inc. and its subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2(a) to the consolidated financial statements, the Company has accumulated deficit that raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2(a). The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

  

/s/ Marcum Bernstein & Pinchuk LLP

 

New York, New York 

April 14, 2016 

 

 

CHINA COMMERCIAL CREDIT, INC.

CONSOLIDATED BALANCE SHEET

 

		December 31
		2015				2014
ASSETS
Cash		$	306,401			$	4,991,973
Restricted cash			388,361				1,983,285
Notes receivable			15,404				130,166
Loans receivable, net of allowance for loan losses $55,595,653 and $24,490,721 for December 31, 2015 and 2014, respectively,			7,481,067				57,588,408
Investment in direct financing lease, net of allowance for direct financing lease losses of $2,857,554 and $610,153 for December 31, 2015 and 2014, respectively			1,177,442				4,104,230
Interest receivable			-				543,603
Prepaid taxes			-				1,758,693
Property and equipment, net			126,120				142,154
Intangible asset			4,435				14,530
Guarantee paid on behalf of guarantee service customers			14,031,603				10,577,352
Guarantee paid on behalf of related party			622,807				162,707
Other assets			293,200				387,227
Deferred tax assets			-				705,459
Total Assets		$	24,446,840			$	83,089,787
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Short-term bank loans		$	2,618,729			$	11,389,522
Deposits payable			1,070,598				2,725,363
Unearned income from financial guarantee services and finance lease service			61,302				182,657
Accrual for financial guarantee services			19,322,557				5,546,128
Other current liabilities			182,242				196,003
Income tax payable			126,485				-
Deferred tax liability			204,266				313,874
Total Liabilities			23,586,179				20,353,547
Shareholders' Equity
Series A Preferred Stock (par value $0.001 per share, 1,000,000 shares authorized at December 31, 2015 and 2014, respectively; nil and nil shares issued and outstanding at December 31, 2015 and 2014, respectively)		$	-			$	-
Series B Preferred Stock (par value $0.001 per share, 5,000,000 shares authorized at December 31, 2015 and 2014, respectively; nil and nil shares issued and outstanding at December 31, 2015 and 2014, respectively)			-				-
Common stock (par value $0.001 per share, 100,000,000 shares authorized; 12,390,062 and 12,255,062 shares issued and outstanding at December 31, 2015 and 2014, respectively)			12,390				12,255
Subscription receivable			(1,062	)			(1,062	)
Additional paid-in capital			59,698,864				59,458,797
Statutory reserve			5,442,150				5,442,150
Due from a non-controlling shareholder			(1,078,300	)			(1,147,088	)
Accumulated deficit			(68,254,520	)			(6,989,806	)
Accumulated other comprehensive income			5,041,139				5,960,994
Total Shareholders’ Equity			860,661				62,736,240
Total Liabilities and Shareholders’ Equity		$	24,446,840			$	83,089,787

 

* 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 LOSS

 

		For the Years Ended
		2015				2014
Interest income
Interests and fees on loans and financing lease		$	2,944,135			$	7,093,803
Interests and fees on loans-related party			-				2,278
Interests on deposits with banks			37,706				84,602
Total interest and fees income			2,981,841				7,180,683
Interest expense
Interest expense on short-term bank loans			(496,753	)			(900,225	)
Net interest income			2,485,088				6,280,458
Provision for loan losses			(41,133,808	)			(24,641,375	)
Provision for direct financing lease losses			(2,376,122	)			(610,183	)
Net interest loss after provision for loan losses and financing lease losses and financing lease losses			(41,024,842	)			(18,971,100	)
Commissions and fees on financial guarantee services			127,980				559,571
Provision on financial guarantee services			(14,939,203	)			(4,960,867	)
Loss on commission and fees loss on guarantee services, net			(14,811,223	)			(4,401,296	)
Net Loss			(55,836,065	)			(23,372,396	)
Non-interest income
Government incentive			-				130,172
Other non-interest income			33,653				146,444
Total  non-interest income			33,653				276,616
Non-interest expense
Salaries and employee surcharge			(892,240	)			(932,789	)
Rental expenses			(240,704	)			(264,585	)
Business taxes and surcharge			(101,376	)			(270,833	)
Other operating expenses			(1,724,757	)			(3,394,688	)
Total non-interest expense			(2,959,077	)			(4,862,895	)
Foreign exchange loss			(8,077	)			(55,223	)
Loss Before Income Taxes			(58,769,566	)			(28,013,898	)
Income tax (expense)/credit			(2,495,148	)			723,403
Net Loss			(61,264,714	)			(27,290,495	)
Loss per Share- Basic and Diluted		$	(4.962	)		$	(2.352	)
Weighted Average Shares Outstanding-Basic and Diluted			12,345,678				11,601,558
Net Loss			(61,264,714	)			(27,290,495	)
Other comprehensive loss
Foreign currency translation adjustment			(919,855	)			(532,597	)
Comprehensive Loss		$	(62,184,569	)		$	(27,823,092	)

 

See notes to the consolidated financial statements

 

 

CHINA COMMERCIAL CREDIT, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

 

		Preferred A								Preferred B								Common Stock								Additional Paid-in				Subscription				Statutory				Retained earnings/				Due from a non-controlling				Accumulated Other Comprehensive
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				receivable				reserve				(loss)				shareholder				income				Total
Balance as of December 31, 2013			-			$	-				-			$	-				10,430,657			$	10,431			$	52,704,107			$	(1,062	)		$	5,442,150			$	20,300,689			$	-				6,493,591			$	84,949,906
Issuance of Common Stocks pursuant to second public offering			-				-				-				-				1,750,000				1,750				6,998,250				-				-				-				-				-				7,000,000
Issuance of Common Stocks pursuant to second public offering			-				-				-				-				(99,614	)			(100	)			(398,356	)			-				-				-				-				-				(398,456	)
Issuance of Common Stocks pursuant to two consultants			-				-				-				-				165,769				166				919,805				-				-				-				-				-				919,971
Issuance of Common Stocks pursuant to one director																			8,250				8				24,577																								24,585
Direct offering cost			-				-				-				-				-				-				(797,784	)			-				-				-				-				-				(797,784	)
Paid in capital in Pride Information from a non-controlling shareholder			-				-				-				-				-				-				8,198				-				-				-				-				-				8,198
Cash disbursed to a non-controlling shareholder, net			-				-				-				-				-				-				-				-				-				-				(1,147,088	)			-				(1,147,088	)
Net loss for the year			-				-				-				-				-				-				-				-				-				(27,290,495	)			-				-				(27,290,495	)
Foreign currency translation loss			-				-				-				-				-				-				-				-				-				-				-				(532,597	)			(532,597	)
Balance as of December 31, 2014			-			$	-				-			$	-				12,255,062			$	12,255			$	59,458,797			$	(1,062	)		$	5,442,150			$	(6,989,806	)		$	(1,147,088	)		$	5,960,994			$	62,736,240
Issuance of Common Stocks pursuant to two management directors			-				-				-				-				135,000				135				248,265				-				-				-				-				-				248,400
Disposal of Pride Information			-				-				-				-				-				-				(8,198	)			-				-				-				8,198				-				-
Net loss for the year			-				-				-				-				-				-				-				-				-				(61,264,714	)			-				-				(61,264,714	)
Foreign currency translation loss			-				-				-				-				-				-				-				-				-				-				60,590				(919,855	)			(859,265	)
Balance as of December 31, 2015			-			$	-				-			$	-				12,390,062			$	12,390			$	59,698,864			$	(1,062	)		$	5,442,150			$	(68,254,520	)		$	(1,078,300	)		$	5,041,139			$	860,661

 

See notes to the consolidated financial statements

 

 

CHINA COMMERCIAL CREDIT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		For The Years Ended December 31,
		2015				2014
Cash Flows from Operating Activities:
Net loss		$	(61,264,714	)		$	(27,290,495	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			126,849				111,684
Provision for loan losses			41,133,808				24,641,375
Provision for direct financing lease losses			2,376,122				610,183
Provision on financial guarantee services			14,939,203				4,960,867
Deferred tax expense			599,267				(723,403	)
Income from disposal of property and equipment			(14,585	)			-
Restricted shares issued to executive officers			248,400				24,585
Changes in operating assets and liabilities:			-				-
Interest receivable			536,377				574,974
Prepaid taxes			1,867,138				(942,726	)
Other assets			37,711				1,230,928
Unearned income from guarantee services and finance lease services			(116,340	)			(296,736	)
Other current liabilities			(3,630	)			(200,544	)
Net Cash Provided by Operating Activities			465,606				2,700,692
Cash Flows from Investing Activities:
Originated loans disbursement to third parties			(17,855,764	)			(52,355,875	)
Loans collection from third parties			25,860,398				58,107,291
Originated loans disbursement to a related party			-				(1,137,010	)
Loans collection from a related party			-				1,137,010
Payment of loans on behalf of guarantees			(6,816,408	)			(12,260,287	)
Collection from guarantees for loan paid on behalf of customers			336,245				2,598,632
Payment for principal of finance lease			-				(4,881,462	)
Collection of principal of finance lease, in installments			446,412				166,848
Deposit released from banks for financial guarantee services			1,885,805				11,146,059
Deposit paid to banks for financial guarantee services			(333,636	)			(9,284,484	)
Purchases of property and equipment and intangible asset			(112,308	)			(15,620	)
Disposal of property and equipment			18,383				-
Net Cash Provided by/(used in) Investing Activities			3,429,127				(6,778,898	)
Cash Flows From Financing Activities:
Proceeds from short-term bank borrowings			4,655,792				11,390,078
Repayment of short-term bank borrowings			(13,164,655	)			(16,271,539	)
Proceeds from secondary offering, net off offering costs			-				6,601,544
Common Stock issuance cost			-				(797,784	)
Capital contribution from a shareholder			-				8,198
Cash disbursed to a non- controlling shareholder			-				(2,288,532	)
Cash repaid from a non- controlling shareholder			-				1,135,940
Net Cash Used in Financing Activities			(8,508,863	)			(222,095	)
Effect of Exchange Rate Changes on Cash and Cash Equivalents			(71,442	)			(113,591	)
Net Decrease In Cash and Cash Equivalents			(4,685,572	)			(4,413,892	)
Cash and Cash Equivalents at Beginning of Year			4,991,973				9,405,865
Cash and Cash Equivalents at End of Year		$	306,401			$	4,991,973
Supplemental Cash Flow Information
Cash paid for interest expense		$	476,635			$	820,110
Cash paid for income tax		$	3,388			$	944,277

 

See notes to the consolidated financial statements

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

1.	ORGANIZATION AND PRINCIPAL ACTITIVIES

 

China Commercial Credit, Inc. (“CCC” or “the Company”) is a holding company that was incorporated under the laws of the State of Delaware on December 19, 2011.

 

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 consist 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 Variable Interest Entity (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 stocks 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 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 ACTITIVIES (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, will be entitled to certain rights, including, but not limited to, the right to collect dividends generated by the pledged equity interests.  The Wujiang Luxiang Shareholders also agreed that upon occurrence of any event of default, as set forth in the Share Pledge Agreement, WFOE is entitled to dispose of the pledged equity interest in accordance with applicable PRC laws.  The Wujiang Luxiang Shareholders further agree not to dispose of the pledged equity interests or take any actions that would prejudice WFOE’s interest.

 

Exclusive Option Agreement

 

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

 

Power of Attorney

 

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

 

Timely Reporting Agreement

 

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

 

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

 

INCORPORATION OF PFL

 

On September 5, 2013, our wholly owned subsidiary, CCC International Investment Holding Ltd. (“CCC HK”), established Pride Financial Leasing (Suzhou) Co. Ltd. (“PFL”) in Jiangsu Province, China. PFL was expected to offer financial leasing of machinery and equipment, transportation vehicles, and medical devices to municipal government agencies, hospitals and SMEs in Jiangsu Province and beyond. As of December 31, 2015, PFL had two finance lease transactions.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

1.	ORGANIZATION AND PRINCIPAL ACTITIVIES (CONTINUED)

 

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 will 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.

 

On April 11, 2015, WFOE delivered a notice of termination to Pride Information. As a result, the contractual arrangements between WFOE, Pride Information and Mr. Qin were terminated effective on May 11, 2015 and WFOE no longer controls Pride Information.

 

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 had formed a Special Committee to undertake an internal review of the circumstances surrounding the transfer.

 

On January 26, 2015, 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 has 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.

 

 

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 accompanying consolidated financial statements of CCC and its subsidiaries and VIEs have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to operate profitably, to generate cash flows from operations, and to pursue financing arrangements to support its working capital requirements.

 

The Company has suffered recurring losses from operations and has incurred a net loss of US$61,264,714 for the year ended December 31, 2015. In addition, the Company had a working capital (total consolidated current liabilities exceeding total consolidated current assets) of US$934,372 as of December 31, 2015. As of December 31, 2015, the Company had cash and cash equivalents of US$306,401, and total short-term borrowings of US$2,618,729.

 

These and other factors disclosed in this annual report raise substantial doubt as to the Company’s ability to continue as a going concern. Management believes that it has developed a liquidity plan, as summarized below, that, if executed successfully, will provide sufficient liquidity to meet the Company obligations for a reasonable period of time.

 

●	Bank Financing and Other Financial Support

 

On October 30, 2015, the Company entered into a borrowing agreement with Agriculture Bank of China for a one-year bank facility of Rmb 29 million (or approximately $4 million). As of March 23, 2016, the Company has paid off all outstanding bank borrowings. The Company may use this bank credit line in the next few months and lend new direct loans to customers if the economic condition in Wujiang area improved. The credit line is guaranteed by Wujiang Luxiang Shareholders and can be renewed with a prior written application to Agriculture Bank of China.

 

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

 

●	Improvement in Working Capital Management

 

In order to meet the capital needs for our continued operations, we continue to use our best effort to improve our collection of loan receivable and interest receivable. We engaged four law firms, Jiangsu Zhenyuzhen Law Firm, Jiangsu Tianbian Law Firm, Jiangsu Mingren Law Firm and He-Partners Law Firm to represent us in the legal proceedings against the borrowers and their counter guarantors. Among them, He-Partners Law Firm, is one of the largest law firms in Suzhou City.

 

While management believes that the measures in the liquidity plan will be adequate to satisfy its liquidity and cash flow requirements for the twelve months ending December 31, 2016, there is no assurance that the liquidity plan will be successfully implemented. Failure to successfully implement the liquidity plan will have a material adverse effect on the Company’s business, results of operations and financial position, and may materially adversely affect its ability to continue as a going concern.

 

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

 

(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 years ended December 31, 2015 and 2014, there was no one customer that accounted for more than 10% of the Company's revenue.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(c) 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.

 

(d) 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.

 

(e) 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 allowance for loan losses 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.

 

(f) 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 operations and comprehensive income (loss).

 

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.

 

(g) 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 $2,593,611 and $1,684,691 as of December 31, 2015 and 2014, respectively.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(h) 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 12.

 

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.

 

(i) 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 years ended December 31, 2015 and 2014.

 

(j) 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 December 31, 2015 and 2014, financial instruments of the Company primarily comprise of cash, restricted cash, notes receivable, 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.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(k) Foreign currency translation

 

The reporting currency of the Company is United States Dollars (“US$”), which is also the Company’s functional currency. The PRC subsidiaries and VIEs maintain their books and records in its local currency, the Renminbi Yuan (“RMB”), which is their functional currencies as being the primary currency of the economic environment in which these entities operate.

 

For financial reporting purposes, the financial statements of the Company prepared using RMB, are translated into the Company’s reporting currency, United States Dollars, at the exchange rates quoted by www.oanda.com. Assets and liabilities are translated using the exchange rate at each balance sheet date. Revenue and expenses are translated using average rates prevailing during each reporting period, and shareholders’ equity is translated at historical exchange rates. Adjustments resulting from the translation are recorded as a separate component of accumulated other comprehensive income in shareholders’ equity.

 

		December 31, 2015				December 31, 2014
Balance sheet items, except for equity accounts			6.4917				6.1460

 

		For the year ended December 31,
		2015				2014
Items in the statements of income and comprehensive income, and statements of cash flows			6.2288				6.1457

 

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

 

(l) Use of estimates

 

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

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(m) 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. Additionally, any previously accrued but uncollected interest is discontinued of accrual and reversed, 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.

 

●

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.

 

●

Income on direct financing lease. The financing agreements are classified as direct financing lease as prescribed by the Financial Accounting Standards Board ("FASB Codification"). Revenues representing the capitalized costs of the investment are recognized as income upon inception of the leases. The portion of revenues representing the difference between the gross investment in the lease (the sum of the minimum lease payments and the guaranteed residual value, if any) and the sum of the present value of the two components is recorded as unearned income and amortized over the lease term.

 

Taxes assessed by governmental authorities that are directly imposed on revenue-producing transactions between the Company and its customers (which may include, but are not limited to, sales, use, value added and some excise taxes) are excluded from revenues.

 

Lessees are responsible for all taxes, insurance and maintenance costs.

 

●

Non-interest income. Non-interest income mainly includes rental income from the sub-leasing of certain of the Company’s leased office space to third parties and income from disposal of property and equipment.

 

(n) Financial guarantee service contract

 

Financial guarantee service contracts provides guarantee which protects the holder of a debt obligation against default. Pursuant to such guarantee, the Company makes payments if the obligor responsible for making payments fails to do so as scheduled.

 

The contract amounts reflect the extent of involvement the Company has in the guarantee transaction and also represent the Company’s maximum exposure to credit loss in its guarantee business.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(n) Financial guarantee service contract (continued)

 

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:

 

		December 31, 2015				December 31, 2014
Guarantee		$	11,653,342			$	21,794,663

 

A provision for possible loss to be absorbed by the Company for the financial guarantee it provides is recorded as an accrued liability when the guarantees are made and recorded as “Accrual for financial guarantee services” on the consolidated balance sheets. This liability represents probable losses and is increased or decreased by accruing a “Provision 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 customers or third parties offered, and other economic conditions such as the economy trend of the area and the country. The estimates are based upon currently available information.

 

Based on the past experience and expected customer default status of financial guarantee services, the Company estimates the probable loss for immature financial guarantee services to be approximately 50% and 1% of contract amount as of December 31, 2015 and 2014, and made a provision of $5,691,253 and $217,947 as of these two reporting dates, respectively, for possible credit risk of its guarantees. In addition, the Company accrued specific provisions for repayment on behalf of guarantee customers who defaulted on their loans, in the amount of $13,631,304 and $5,328,181 as of December 31, 2015 and 2014, respectively. As of December 31, 2015, the management charged off specific provision for one customer in the amount of $262,422, considering remote collectability from the customer. The total accrual for financial guarantee services amounted to $19,322,557 and $5,546,128 as of December 31, 2015 and 2014, respectively. The Company reviews the provision on a quarterly basis.

 

(o) Non-interest expenses

 

Non-interest expenses primarily consist of salary and benefits for employees, traveling cost, entertainment expenses, depreciation of equipment, office rental expenses, professional service fee, office supplies, etc.

 

(p) Income tax

 

Current income tax expenses are provided for in accordance with the laws of the relevant taxing authorities. As part of the process of preparing financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. The Company accounts for income taxes using the liability approach. Under this method, deferred income taxes are recognized for tax consequences in future years of differences between the tax bases of assets and liabilities and their reported amounts in the financial statements at each year-end and tax loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates applicable for the differences that are expected to affect taxable income.

 

(q) 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.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(r) Share-based awards

 

Share-based awards granted to the Company's employees are measured at fair value on grant date and share-based compensation expense is recognized (i) immediately at the grant date if no vesting conditions are required, or (ii) using the accelerated attribution method, net of estimated forfeitures, over the requisite service period. The fair value of restricted shares is determined with reference to the fair value of the underlying shares.

 

At each date of measurement, the Company reviews internal and external sources of information to assist in the estimation of various attributes to determine the fair value of the share-based awards granted by the Company, including but not limited to the fair value of the underlying shares, expected life, expected volatility and expected forfeiture rates. The Company is required to consider many factors and make certain assumptions during this assessment. If any of the assumptions used to determine the fair value of the share-based awards changes significantly, share-based compensation expense may differ materially in the future from that recorded in the current reporting period.

 

(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

 

In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1) A lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and 2) A right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. The Company is evaluating this ASU and has not determined the effect of this standard on its ongoing financial reporting.

 

In November 2015, the FASB issued ASU No. 2015-17, "Income Taxes, Balance Sheet Classification of Deferred Taxes" ("ASU 2015-17"). The new guidance requires that deferred tax assets and liabilities be classified as non-current on the balance sheet, as opposed to current guidance which requires a net current asset or liability and net non-current asset or liability on the balance sheet. The new standard is effective for financial statements issued for fiscal years beginning after December 15, 2016. The new standard may be applied either prospectively or retrospectively to all periods presented. Early adoption is permitted. The Company adopted this new standard for its fiscal year 2015 financial statements and applied the new guidance on a prospective basis.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(u) Recently issued accounting standards (continued)

 

In September 2015, the Financial Accounting Standards Board (“FASB”) issued updated guidance, which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Acquirers must recognize measurement-period adjustments during the period of resolution, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The updated guidance is effective for fiscal years beginning after December 15, 2015. Earlier adoption is permitted for any interim and annual financial statements that have not yet been issued. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

 

In August 2015, the FASB issued an accounting standards update for a one-year deferral of the revenue recognition standard's effective date for all entities, which changed the effectiveness to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. We are currently evaluating this standard and our existing revenue recognition policies to determine which contracts in the scope of the guidance will be affected by the new requirements and what impact they would have on our consolidated financial statements upon adoption. We have not yet determined which transition method we will utilize upon adoption on the effective date.

 

In August 2015, the FASB issued updated guidance concerning presentation and subsequent measurement of debt issuance costs relating to line of credit arrangements, which can be presented on the balance sheet as an asset to be subsequently amortized ratably over the term of the line of credit arrangement. The updated guidance is effective immediately. This updated guidance did not have a material impact on our financial statements.

 

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt issuance costs in financial statements. Under this ASU, an entity presents such costs on the balance sheet as a direct deduction from the related debt liability rather than as an asset. This new standard is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period, with early adoption permitted. We do not plan to adopt this standard early and do not expect that it will have a material impact on our consolidated financial statements or disclosures upon adoption.

 

In February 2015, the FASB issued ASU 2015-02 "Consolidation: Amendments to the Consolidation Analysis" in order to clarify the basis for consolidation of certain legal entities. ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Specifically, ASU 2015-02 (i) modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, (ii) eliminates the presumption that a general partner should consolidate a limited partnership, (iii) affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and (iv) provides a scope exception from consolidation guidance for reporting entities with interests in certain legal entities. ASU 2015-02 is effective for public business entities for fiscal years and interim periods beginning on or after December 15, 2015. Early adoption is permitted. The Company is currently assessing the impact of ASU 2015-02 on its consolidated financial position, results of operations and cash flows.

 

 

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. These VIE Agreements were terminated on May 11, 2015 and will be accounted for as a deconsolidation. Pride Information did not have any business since its inception. (See Note 1)

 

As of December 31, 2015, the Company had only one VIE.

 

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 Pride Information 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 and PFL. Current regulations in China permit Wujiang Luxiang and PFL 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 and PFL to make dividends and other payments to the Company may be restricted by factors including changes in applicable foreign exchange and other laws and regulations.

 

The following financial statement amounts and balances of the VIE were included in the accompanying audited consolidated financial statements as of December 31, 2015 and 2014 and for the years December 31, 2015 and 2014:

  

		December 31, 2015				December 31, 2014
Total assets		$	22,920,730			$	77,513,966
Total liabilities		$	23,932,841			$	19,793,537

 

		For the year ended December 31,
		2015				2014
Revenue		$	2,741,190			$	7,688,373
Net loss		$	58,005,789			$	24,656,161

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

3.	VARIABLE INTEREST ENTITIES AND OTHER CONSOLIDATION MATTERS (CONTINUED)

 

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;

 

●

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 currency for the distribution of profits to their shareholders may validate payment from their foreign currency accounts or purchase and pay foreign currencies 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 currency settlement accounts for current account receipts and payments of foreign exchange along with specialized accounts for capital account receipts and payments of foreign currency 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, finance lease and financial guarantee activities which is an off-balance sheet financial instrument.

 

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

 

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

 

1.1 Lending activities

 

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

 

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

 

1.

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

 

2.

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

 

3.

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

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

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 and include additional amounts on a specific basis.

 

(b) Liquidity risk

 

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

 

(c) Foreign currency risk

 

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

 

(d) Concentration risk

 

As of December 31, 2015 and 2014, the Company held cash of $306,401 and $4,991,973, 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 December 31, 2015 and 2014.

 

5.	RESTRICTED CASH

 

Restricted cash represents cash pledged with banks as guarantor deposit for the Company's guarantee service customers, amounting to $0.4 million and $2.0 million as of December 31, 2015 and 2014, 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 30% 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.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

6.	LOANS RECEIVABLE, NET

 

The interest rates on loan issued ranged between 9.6% ~ 19.44% and 9.6% ~ 18.0% for the years ended December 31, 2015 and 2014, respectively.

 

6.1 Loans receivable consist of the following:

 

		December 31, 2015				December 31, 2014
Business loans		$	40,498,813			$	52,254,805
Personal loans			22,577,907				29,824,324
Total Loans receivable			63,076,720				82,079,129
Allowance for loan losses
Collectively assessed			(55,595,653	)			(24,490,721	)
Individually assessed			-				-
Allowance for loan losses			(55,595,653	)			(24,490,721	)
Loans receivable, net		$	7,481,067			$	57,588,408

 

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 December 31, 2015 and 2014, the Company had 68 and 101 business loan customers, and 47 and 60 personal loan customers, respectively. Most loans are either guaranteed by a third party whose financial strength is assessed by the Company to be sufficient or secured by collateral. Allowance on loan losses are estimated loan by loan on a quarterly basis based on an assessment of specific evidence indicating doubtful collection, historical experience, loan balance aging and prevailing economic conditions.

 

For the years ended December 31, 2015 and 2014, a provision of $41,133,808 and $24,641,375 were charged to the consolidated statement of income, respectively. Write-offs of $7,058,495 and $1,517,832 against allowances have occurred for the years ended December 31, 2015 and 2014, respectively.

 

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 December 31, 2015 and 2014, respectively:

 

		December 31, 2015				December 31, 2014
Business loans		$	21,907,409			$	16,331,544
Personal loans			10,211,501				16,975,317
		$	32,118,910			$	33,306,861

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

6.	LOANS RECEIVABLE, NET (CONTINUED)

 

The following table represents the aging of loans as of December 31, 2015 by type of loan:

 

		1-89 Days Past Due				90 - 179 Days Past Due				180 - 365 Days Past Due				Over 1 year Past Due				Total Past Due				Current				Total Loans
Business loans		$	77,021			$	4,313,200			$	7,555,846				10,038,363			$	21,984,430			$	18,514,383			$	40,498,813
Personal loans			924,257				1,848,514				3,749,403				4,613,584				11,135,758				11,442,149				22,577,907
		$	1,001,278			$	6,161,714			$	11,305,249				14,651,947			$	33,120,188			$	29,956,532			$	63,076,720

 

The following table represents the aging of loans as of December 31, 2014 by type of loan:

 

		1-89 Days Past Due				90 - 179 Days Past Due				180 - 365 Days Past Due				Over 1 year Past Due				Total Past Due				Current				Total Loans
Business loans		$	11,112,919			$	5,043,931			$	8,595,516				2,692,097			$	27,444,463			$	24,810,342			$	52,254,805
Personal loans			728,929				9,406,980				7,373,088				195,249				17,704,246				12,120,078				29,824,324
		$	11,841,848			$	14,450,911			$	15,968,604				2,887,346			$	45,148,709			$	36,930,420			$	82,079,129

 

 

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 December 31, 2015 and 2014, respectively:

 

Five Categories		December 31, 2015				%				December 31, 2014				%
Pass		$	-				0.0	%		$	32,129,840				39.2	%
Special mention			-				-				4,165,311				5.1	%
Substandard			2,695,750				4.3	%			2,501,627				3.0	%
Doubtful			9,841,658				15.6	%			39,559,908				48.2	%
Loss			50,539,312				80.1	%			3,722,443				4.5	%
Total		$	63,076,720				100	%		$	82,079,129				100	%

 

6.3 Analysis of loans by collateral

 

The following table summarizes the Company’s loan portfolio by collateral as of December 31, 2015:

 

		December 31, 2015
		Business Loans				Personal Loans				Total
Guarantee backed loans		$	37,498,183			$	21,510,390			$	59,008,573
Pledged assets backed  loans			3,000,630				1,067,517				4,068,147
Collateral backed loans			-				-				-
		$	40,498,813			$	22,577,907			$	63,076,720

 

The following table summarizes the Company’s loan portfolio by collateral as of December 31, 2014:

 

		December 31, 2014
		Business Loans				Personal Loans				Total
Guarantee backed loans		$	47,613,818			$	27,445,541			$	75,059,359
Pledged assets backed  loans			3,990,157				2,378,783				6,368,940
Collateral backed loans			650,830				-				650,830
		$	52,254,805			$	29,824,324			$	82,079,129

 

Collateral Backed Loans

 

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

 

Pledged Asset Backed Loans

 

Pledged 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 agencies 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 loan is a loan guaranteed by a third party who is usually a corporation or high net worth individual. As of December 31, 2015 and 2014, guaranteed loans make up 93.6% and 91.4% 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. Additionally, the management also reviewed the portfolio on a loan by loan basis and individually evaluated for impairment if any..

 

For the purpose of calculating portfolio-level reserves, we have grouped our loans into two portfolio segments: Corporate and Personal. The allowance consists of the combination of a quantitative assessment component based on statistical models, a retrospective evaluation of actual loss information to loss forecasts, value of collaterals and could include a qualitative component based on management judgment.

 

In estimating the probable loss of the loan portfolio, the Company also considers qualitative factors such as current economic conditions and/or events in specific industries and geographical areas, including unemployment levels, trends in real estate values, peer comparisons, and other pertinent factors such as regulatory guidance. Finally, as appropriate, the Company also considers individual borrower circumstances and the condition and fair value of the loan collateral, if any.

 

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

 

1.

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

 

2.

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

 

While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance.

 

The following tables present the activity in the allowance for loan losses and related recorded investment in loans receivable by classes of the loans individually and collectively evaluated for impairment as of and for the year ended December 31, 2015 and 2014:

 

		Business Loans				Personal Loans				Total
For the year ended December 31, 2015
Beginning balance		$	14,836,650			$	9,654,071			$	24,490,721
Charge-offs			(6,017,116	)			(1,041,379	)			(7,058,495	)
Recoveries			-				-				-
Provisions			26,264,205				11,899,223				38,163,428
Ending balance			35,083,739				20,511,915				55,595,654
Ending balance: individually evaluated for impairment			-				-				-
Ending balance: collectively evaluated for impairment		$	35,083,739			$	20,511,915			$	55,595,654

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

7.	ALLOWANCE FOR LOAN LOSSES (CONTINUED)

 

		Business Loans				Personal Loans				Total
For the year ended December 31, 2014
Beginning balance		$	1,049,836			$	326,112			$	1,375,948
Charge-offs			(785,648	)			(732,184	)			(1,517,832	)
Recoveries			-				-				-
Provisions			14,572,462				10,060,143				24,632,605
Ending balance			14,836,650				9,654,071				24,490,721
Ending balance: individually evaluated for impairment			-				-				-
Ending balance: collectively evaluated for impairment		$	14,836,650			$	9,654,071			$	24,490,721

 

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard, doubtful and loss within the Company's internal risk rating system as of December 31, 2015:

 

		Pass				Special Mention				Substandard				Doubtful				Loss				Total
Business loans		$	-			$	-			$	2,618,729			$	6,103,192			$	31,776,892			$	40,498,813
Personal loans			-				-				77,021				3,738,466				18,762,420				22,577,907
		$	-			$	-			$	2,695,750			$	9,841,658			$	50,539,312			$	63,076,720

 

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard, doubtful and loss within the Company's internal risk rating system as of December 31, 2014:

 

		Pass				Special Mention				Substandard				Doubtful				Loss				Total
Business loans		$	20,628,050			$	3,456,669			$	2,115,197			$	22,561,860			$	3,484,029			$	52,254,805
Personal loans			11,501,790				699,642				386,430				16,998,048				238,414				29,824,324
		$	32,129,840			$	4,165,311			$	2,501,627			$	39,559,908			$	3,722,443			$	82,079,129

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

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 year ended December 31, 2015 and 2014, respectively.

 

9.	GUARANTEE PAID ON BEHALF OF GUARANTEE CUSTOMERS

 

		December 31, 2015				December 31, 2014
Guarantee paid on behalf of guarantee service customers		$	14,031,603			$	10,577,352
Guarantee paid on behalf of a related party			622,807				162,707
Total		$	14,654,410			$	10,740,059

 

As of December 31, 2015 and 2014, guarantee paid on behalf of guarantee service customers represents payment made by the Company to banks on behalf of thirty-two and twenty-six 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. The Company went through the payment made on behalf of guarantees for each individual customer basis considering factors of existence of guarantors, historical loss experience, the reasons behind default, professional assessment by lawyers in relation to mediations and proceedings. As of December 31, 2015 and 2014, the Company accrued allowance on the balance in “accrual for financial guarantee services” in the value of $19,322,557 and $5,546,128 respectively.

 

10.	OTHER ASSETS

 

Other assets as of December 31, 2015 and 2014 consisted of:

 

		December 31, 2015				December 31, 2014
Prepaid bank service charges		$	-			$	33,767
Prepaid expenses to investor relationship service providers			-				265,591
Other prepaid expense			30,809				-
Deposit for court filing fees and legal fees			222,934				53,318
Other receivables			39,457				34,551
		$	293,200			$	387,227

 

Deposit for court filing fees and legal fees will be claimed from default customers.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

11.	NET INVESTMENT IN DIRECT FINANCING LEASE

 

On September 25, 2014, PFL entered into a finance lease agreement for the leasing of manufacturing equipment with a total lease receivable of $2.73 million. The lease bears an interest rate of 10.36% per annum.

 

On October 13, 2014, PFL entered into another finance lease agreement for the leasing of manufacturing equipment with a total lease receivable of $2.88 million. The lease bears an interest rate of 11.11% per annum.

 

Future minimum lease receipts under non-cancellable finance lease arrangements are as follows:

 

		December 31, 2015				December 31, 2014
Within 1 year		$	3,635,411			$	2,834,364
2 years			754,810				1,981,777
3 years			-				797,267
Total minimum lease receipts			4,390,221				5,613,408
Less: amount representing interest			(464,100	)			(732,184	)
Present value of minimum lease receipts		$	3,926,121			$	4,881,224

 

Following is a summary of the components of the Company’s net investment in direct financing leases as of December 31, 2015 and 2014:

 

		December 31, 2015				December 31, 2014
Total minimum lease payments to be received		$	4,390,221			$	5,328,663
Less: Amounts representing estimated executory costs			-				-
Minimum lease payments receivable			4,390,221				5,328,663
Less Allowance for uncollectible			(2,857,554	)			(610,153	)
Net minimum lease payments receivable			1,532,667				4,718,510
Estimated residual value of leased property			-				-
Less: Unearned income			(355,225	)			(614,280	)
Net investment in direct financing lease		$	1,177,442			$	4,104,230

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

12.	PROPERTY AND EQUIPMENT

 

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

 

Property and equipment consist of the following:

 

		Useful Life (years)				December 31, 2015				December 31, 2014
Furniture and fixtures			5			$	22,261			$	23,513
Vehicles			4				153,288				242,876
Electronic equipment			3				140,001				125,333
Leasehold improvement			3				86,418				180,413
Less: accumulated depreciation							(275,847	)			(429,981	)
Property and equipment, net						$	126,121			$	142,154

 

During the year ended December 31, 2015, the Company disposed of two vehicles with net book value of $3,833 (original cost of $76,654, accumulated depreciation of $72,821). The Company generated non-interest income of $14,388 from the disposal.

 

Depreciation expense totaled $117,135 and $111,684 for the years ended December 31, 2015 and 2014, respectively.

 

13.	INTANGIBLE ASSETS

 

Intangible asset represents the software used for P2P platform, the useful life is estimated at 3 years.

 

		Useful Life (years)				December 31, 2015				December 31, 2014
Software			3			$	4,435			$	14,530

 

Amortization expense totaled $9,714 and nil for the years ended December 31, 2015 and 2014, respectively.

 

14.	SHORT-TERM BANK LOANS

 

Bank Name		Interest rate		Term				December 31, 2015				December 31, 2014
Agricultural Bank Of China		Fixed annual rate of 6.89%			From October 17, 2014 to October 16, 2015				-				8,948,910
Agricultural Bank Of China		Fixed annual rate of 6.89%			From October 31, 2014 to October 30, 2015				-				2,440,612
Agricultural Bank Of China		Fixed annual rate of 6.31%			From October 30, 2015 to October 30, 2016				2,618,729				-
								$	2,618,729			$	11,389,522

 

During the year ended December 31, 2015, the Company repaid the matured bank borrowings on time.

 

As of December 31, 2015 and 2014, 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 years ended December 31, 2015 and 2014 were $496,753 and $900,225, respectively.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

15.	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.

 

16.	UNEARNED INCOME FROM GUARANTEE SERVICES AND FINANCING LEASE 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 $1,610 and $109,439 as of December 31, 2015 and 2014, respectively.

 

The Company receives financing leasing service commissions at the inception and records unearned income before amortizing it throughout the guarantee service life. Unearned income from financing leasing services was $59,692 and $73,218 as of December 31, 2015 and 2014, respectively.

 

17.	OTHER CURRENT LIABILITIES

 

Other current liabilities as of December 31, 2015 and 2014 consisted of:

 

		December 31, 2015				December 31, 2014
Accrued payroll		$	85,144			$	84,791
Accrued office rental expenses			61,617				-
Other tax payable			14,187				99,335
Other payable			21,294				11,877
		$	182,242			$	196,003

 

18.	OTHER OPERATING EXPENSE

 

Other operating expense for the years ended December 31, 2015 and 2014 consisted of:

 

		For the year ended
		December 31,
		2015				2014
Depreciation		$	126,850			$	111,684
Travel expenses			7,718				36,027
Entertainment expenses			17,136				45,842
Promotion expenses			257				7,150
Car expenses			53,302				82,610
Legal and consulting expenses			1,016,711				2,291,105
Bank charges			37,202				193,854
Audit-related expense			282,544				140,311
Insurance expense			-				200,812
Other expenses			183,037				285,293
Total		$	1,724,757			$	3,394,688

 

19.	EMPLOYEE RETIREMENT BENEFIT

 

The Company has made employee benefit contribution in accordance with relevant Chinese regulations, including retirement insurance, unemployment insurance, medical insurance, housing fund, work injury insurance and maternity insurance. The Company recorded the contribution in the salary and employee charges when incurred. The contributions made by the Company were $61,495 and $79,486 for the years ended December 31, 2015 and 2014, respectively.

 

20.	DISTRIBUTION OF PROFIT

 

The Company did not distribute any dividend to its shareholders for the years ended December 31, 2015 and 2014, respectively.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

21.	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.

 

Secondary 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, 2014, there were 12,255,062 shares of Common Stock issued and outstanding.

 

On April 30 2015, the Company issued 60,000 unregistered shares to Long Yi, the Company’s CFO, and 75,000 unregistered shares to Jingen Ling, the Company’s CEO, at a market value of $1.84 per share, in the total amount of $248,400, for their services provided.

 

As of December 31, 2015, there were 12,390,062 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 the warrants 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 and are recorded as additional paid-in capital.

 

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 and are recorded as additional paid-in capital.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

21.	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 Stocks 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.

 

22.	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 years ended December 31, 2015 and 2014, the Company did not accrue the statutory reserve due to net loss.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

23.	LOSS PER COMMON SHARE

 

The following table sets forth the computation of basic and diluted earnings per common share for the years ended December 31, 2015 and 2014, respectively:

 

		For The Years Ended
		December 31,
		2015				2014
Net loss attributable to the common shareholders		$	61,264,714			$	27,290,495
Basic weighted-average common shares outstanding			12,345,678				11,601,558
Effect of dilutive securities			-				-
Diluted weighted-average common shares outstanding			12,345,678				11,601,558
Loss per share:
Basic		$	4.962			$	2.352
Diluted		$	4.962			$	2.352

 

Basic loss per share are computed by dividing the net income or loss by the weighted average number of common shares outstanding during the period. Diluted loss per share were the same as basic earnings per share due to the lack of dilutive items in the Company and the fact that Company is in net loss position for the years ended December 31, 2015 and 2014.

 

24.	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 its loan business for the periods presented. The taxation practice implemented by the tax authority governing the Company is that the Company pays enterprise income taxes at rate of 25% on a quarterly basis, and upon annual tax settlement done by the Company and the tax authority in five (5) months after December 31 the tax authority will refund the Company the excess enterprise income taxes it paid beyond the rate of 12.5%. However since 2015, the excess enterprise income taxes paid will not be refunded but can be used to offset the future income tax payable arising from taxable income.

 

The Company evaluates the level of authority for each uncertain tax position (including the potential application of interest and penalties) based on the technical merits, and measures the unrecognized benefits associated with the tax positions. For the years ended December 31, 2015 and 2014, the Company had no unrecognized tax benefits. For the year ended December 31, 2015, the Company had net tax operating losses from its PRC subsidiaries and its consolidated VIE of $37,253,988 which will expire in the year ending December 31, 2020. As of December 31, 2015, the Company has carry-forward tax operating losses from its PRC subsidiaries and its consolidated VIE of $61,906,374, which will expire from the year ending December 31, 2019 to 2020. The Company recognized deferred income tax assets of $12,741,099 as of December 31, 2015. However, the Company estimates there will be no sufficient net income before income tax from years ending December 31, 2015 to 2020 to realize the deferred income tax assets. The Company provided valuation allowance for deferred income tax assets of $12,741,099 as of December 31, 2015.

 

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.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

24.	INCOME TAXES AND TAX RECEIVABLE (CONTINUED)

 

Prepaid income tax and tax payable is comprised of:

 

		As of December 31,
		2015				2014
Prepaid taxes		$	-			$	1,758,693
Income tax payable		$	126,485			$	-

 

Prepaid taxes represented the income tax refund the Company will receive from the tax authority in the annual income tax settlement or can deduct future income tax payables. The prepaid taxes was mainly generated from the Company’s VIE. Since 2015, the excess enterprise income taxes paid will not be refunded but to recover the future income tax payable arising from taxable income. However, the Company estimates there will be no sufficient net income before income tax from years ending December 31, 2015 to 2020, and reversed full prepaid taxes as of December 31, 2015.

 

Income tax expense/(credit) for the years ended December 31, 2015 and 2014 is comprised of:

 

		For The Year Ended
		December 31,
		2015				2014
Current income tax		$	1,764,058			$	-
Deferred income tax			731,090				(723,403	)
Total provision/(credit) for income taxes		$	2,495,148			$	(723,403	)

 

The effective tax rates for the years ended December 31, 2015 and 2014 are -4.25% and 2.58%, respectively.

 

The reconciliation between the effective income tax rate and the PRC statutory income tax rate of 25% is as follows:

 

		For The Year Ended
		December 31,
		2015				2014
PRC statutory tax rate			25.00	%		$	25.00	%
Effect of preferential income tax rate on loan business			-8.65	%		$	-9.28	%
Effect of income tax rate difference in other jurisdiction			-0.22	%		$	0.00	%
Effect of non-deductible expenses			0.00	%		$	-1.21	%
Effect of valuation allowances			-17.43	%		$	-11.93	%
Effect of allowances on income tax receivable			-2.9	%		$	0.00	%
Effect of others			0.73	%			0.00	%
Total (provision)/credit for income taxes			-4.25	%		$	2.58	%

 

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 December 31, 2015, subsidy of $1,011,877 did not fulfill the purpose within due date and the related deferred tax liability was transferred to income tax payable. As of December 31, 2015 and 2014, the deferred tax liability amounted to $204,266 and $313,874, respectively.

 

As of December 31, 2015 and 2014, 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.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

25.	RELATED PARTY TRANSACTIONS AND BALANCES

 

1)	Nature of relationships with related parties

 

Name		Relationship with the Company
Wujiang Chunjia Textile Trading Co., Ltd (“Chunjia Textile”)		Controlled by Huichun Qin
Suzhou Dingli Real Estate Co., Ltd.		Controlled by Chief Executive Ofiicer
Huichun Qin		Non-controlling shareholder and former CEO and chairman of board of directors

 

2)	Related party transactions

 

During the year ended December 31, 2015, the Company repaid Chunjia Textile’s loan of $468,764 to banks on its behalf as of December 31, 2015. 

 

During the year ended December 31, 2015, Suzhou Dingli Real Estate Co., Ltd., a company controlled by Mr. Jingen Ling, the Chief Executive Officer of the Company, was involved to provide guarantee services for the bank borrowings. No commissions or fees are required from the Company.

 

During the year ended December 31, 2014, the Company also provided financial guarantee service for Chunjia Textile to guarantee a loan of $813,577 and repaid Chunjia Textile’s loan of $162,707 to banks on its behalf as of December 31, 2014. The Company earned commission income of $14,644 from the financial guarantee service provided to Chunjia Textile.

 

3)	Related party balances

 

Amount due from related parties were as follows:

 

		December 31, 2015				December 31, 2014
Chunjia Textile		$	622,807			$	162,707
Huichun Qin		$	1,078,300			$	1,147,088

 

As of December 31, 2015, the Company provided financial guarantee service for Chunjia Textile to guarantee loans of $622,807. The Company accrued provision of $311,404 on the outstanding balance as of December 31, 2015.

 

Huichun Qin transferred $1,098,197(equivalent of RMB 7 million) to his personal account without proper authorization on July 2, 2014. As of December 31, 2015, Huichun Qin has not repaid the balance. The amount was recorded as a deduction of the Company’s equity as of December 31, 2015 and December 31, 2014, respectively.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

26.	COMMITMENTS AND CONTINGENCIES

 

1)	Lease Commitments

 

During the year ended December 31, 2015, the Company leased its new office under a lease agreement from June 1, 2015 to May 31, 2021. As a result, in October 2015, the Company terminated the lease agreement for its former principal office, which agreement was to expire on September 30, 2018. No default penalty was paid for early termination. The following table sets forth the Company’s contractual obligations as of December 31, 2015 in future periods:

 

		Rental payments
Year ending December 31, 2016			73,941
Year ending December 31, 2017			73,941
Year ending December 31, 2018			73,941
Year ending December 31, 2019			73,941
Year ending December 31, 2020			73,941
Year ending December 31, 2021			30,809
Total		$	400,514

 

2)	Guarantee Commitments

 

The guarantees will terminate upon payment and/or cancellation of the obligation; however, payments by the Company would be triggered by failure of the guaranteed party to fulfill its obligation covered by the guarantee. Generally, the average guarantee expiration terms ranged within 12 to 24 months and the average percentage of the guarantee amount as security deposit is 10% ~ 20%. As of December 31, 2015 and 2014, the loan amount guaranteed by the Company was $11,653,342 and $21,794,663, respectively, for its financial guarantee service customers.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

26.	COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

3)	Contingencies

 

The Company is involved in various legal actions arising in the ordinary course of its business. As of December 31, 2015, the Company was involved in 100 lawsuits, among which 63 were related to its loan business and 37 were related to guarantee business. The Company initiated legal proceedings to collect delinquent balances from borrowers and guarantees. 91 of these cases with an aggregated claim of USD 39.29 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 USD 10.18 million have not been adjudicated by the Court as of December 31,2015.

 

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

 

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

 

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

 

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

 

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

 

On or about February 4, 2016, the Company, Mr. Levy, Mr. Li and the plaintiffs reached a settlement in principal with the plaintiffs and are in the process of exchanging documentation. Under the terms of the proposed agreement, CCCR will pay defendants $200,000 cash, plus $25,000 towards the cost of notice to the class, and issue 750,000 CCCR shares to the class. The settlement will be subject to court approval.

 

 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

26.	COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

3)	Contingencies (continued)

 

Two of the Underwriter Defendants, Axiom Capital Management, Inc., and ViewTrade Securities, Inc., have asserted their respective rights to indemnification under the Underwriting Agreements entered into in connection with the Company’s initial public offering and secondary offering. On or about March 16, 2016, CCCR entered into an Advance Funding and Escrow Agreement, under which the CCCR agreed to deposit shares into escrow to fund the advancement obligation, with the initial deposit to be shares valued at Two Hundred Thousand Dollars ($200,000), based upon 80% of the 30 day volume weighted average Trading Price ("VWAP") for each of the 30 consecutive trading days prior to the date of the Agreement.

 

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

 

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

 

27.	SUBSEQUENT EVENT

 

1)	Contingencies

 

During the period from January 1, 2016 to the date of this report, the Company was involved in 8 new lawsuits, which are related to loan business. The Company initiated legal proceedings to collect delinquent balance from the borrowers. These cases, with a claim of USD 5.50 million are still at the initial stage of the litigation. 

 

2)	Charged-off loans

 

During the period from January 1, 2016 to the date of this report, the Company assessed the charged-off loan and guarantee balances recorded as of December 31, 2015 and was of the opinion that these balances were uncollectible.

 

3)	Bid price deficiency

 

On February 18, 2016, the Company provided written notice of its intention to cure the bid price deficiency during a second compliance period. On February 24, 2016, NASDAQ issued a notice indicating that the Company’s compliance period has been formally extended until August 22, 2016. However, if the Company does not regain compliance by August 22, 2016, NASDAQ will provide written notification that the Company’s securities will be delisted. At that time, the Company may appeal Nasdaq’s delisting determination to a Hearings Panel. The notice has no immediate effect on the listing of the Company’s common stock, and its common stock will continue to trade on The Nasdaq Capital Market under the symbol “CCCR” at this time.

 

 

INDEX TO EXHIBITS

 

Exhibit		Description
2.1		Form of Share Exchange Agreement, incorporated herein by reference to Exhibit 2.1 of the draft registration statement on Form DRS filed on February 14, 2013
2.2		Form of Amended Share Exchange Agreement, incorporated herein by reference to Exhibit 2.2 of the registration statement on Form S-1 filed on June 7, 2013
3.1		Certificate of Incorporation of Registrant, incorporated herein by reference to Exhibit 3.1 of the draft registration statement on Form DRS filed on February 14, 2013
3.2		Bylaws of Registrant, incorporated herein by reference to Exhibit 3.2 of the draft registration statement on Form DRS filed on February 14, 2013
3.3		Articles of Association of Wujiang Luxiang Rural Microcredit Co. Ltd., incorporated herein by reference to Exhibit 3.3 of the registration statement on Form S-1/A filed on June 27, 2013
3.4		Certificate of Approval of Wujiang Luxiang Rural Microcredit Co. Ltd., incorporated herein by reference to Exhibit 3.4 of the registration statement on Form S-1 filed on June 7, 2013
3.5		Certificate of Amendment of the Certificate of Incorporation of Registrant , incorporated herein by reference to Exhibit 3.5 of the registration statement on Form S-1/A filed on July 16, 2013
10.1		Form of Exclusive Business Cooperation Agreement dated September 26, 2012, incorporated herein by reference to Exhibit 10.2 of the draft registration statement on Form DRS filed on February 14, 2013
10.2		Form of Share Pledge Agreement dated September 26, 2012, incorporated herein by reference to Exhibit 10.3 of the draft registration statement on Form DRS filed on February 14, 2013
10.3		Form of Exclusive Option Agreement dated September 26, 2012, incorporated herein by reference to Exhibit 10.4 of the draft registration statement on Form DRS filed on February 14, 2013
10.4		Form of Power of Attorney dated September 26, 2012, incorporated herein by reference to Exhibit 10.5 of the draft registration statement on Form DRS filed on February 14, 2013
10.5		Form of Timely Reporting Agreement dated September 26, 2012, incorporated herein by reference to Exhibit 10.6 of the draft registration statement on Form DRS filed on February 14, 2013
10.6*		Finance Agreement between dated October 29, 2015, Wujiang Luxiang Rural Microcredit Co. Ltd. and Agriculture Bank of China
10.7		Employment Agreement between China Commercial Credit, Inc. and Long Yi, incorporated herein by reference to Exhibit 10.10 of the registration statement on Form S-1 filed on June 7, 2013
10.8		Employment Agreement between China Commercial Credit, Inc. and Jingen Ling incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K filed on December 31, 2014
14.1		Code of Conduct and Ethics, incorporated herein by reference to Exhibit 99.6 to the registration statement on Form S-1/A filed on July 16, 2013
21.1		Subsidiaries of the Company, incorporated herein by reference to Exhibit 21.1 to the registration statement on Form S-1 filed on January 15, 2014.
31.1*		Certification by Chief Executive Officer pursuant to Sarbanes Oxley Section 302
31.2*		Certification by Chief Financial Officer pursuant to Sarbanes Oxley Section 302
32.1**		Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350
32.2**		Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350
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 XBRL
101.PRE *		XBRL Taxonomy Extension Presentation Linkbase Document

 

*	Filed herewith.
**	Furnished herewith.