BAIYU Holdings, Inc. - Quarter Report: 2018 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2018

☐ 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)

No.1 Zhongying Commercial Plaza,

Zhong Ying Road,

Wujiang, Suzhou,

Jiangsu Province, China

(Address of principal executive offices)

+86-10 5944-1080

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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 November 8, 2018, 24,595,612 shares of the Company’s Common Stock, $0.001 par value per share, were issued and outstanding.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

CHINA COMMERCIAL CREDIT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to the consolidated financial statements

CHINA COMMERCIAL CREDIT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

See notes to the consolidated financial statements

CHINA COMMERCIAL CREDIT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)

CHINA COMMERCIAL CREDIT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to the consolidated financial statements

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

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

On March 22, 2018, the Company formed HC High Summit Holding Limited (“HC High BVI”), a wholly owned subsidiary, in British Virgin Island (“BVI”). HC High BVI is authorized to issue a maximum of 50,000 shares of one class, at par value of $1.00 per share.

On April 16, 2018, HC High BVI formed a wholly owned subsidiary, HC High Summit Limited (“HC High HK”) in Hong Kong. On April 17, 2018, the Company, through HC High HK, established Hao Limo Technology (Beijing) Co. Ltd.  (“Hao Limo”).

VIE AGREEMENTS WITH BEIJING YOUJIAO

On June 19, 2018, Hao Limo entered into a series of agreements (the “Youjiao VIE Agreements”) with Beijing Youjiao and Aizhen Li. The Youjiao VIE Agreements were designed to provide Hao Limo with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Beijing Youjiao, including absolute control rights and the rights to the management, operations, assets, property and revenue of Beijing Youjiao. The purpose of Youjiao VIE Agreements is solely to give Hao Limo the exclusive control over Beijing Youjiao’s management and operations. Beijing Youjiao has the requisite license to carry out used luxurious car leasing business in China. On June 19, 2018, the net liabilities of Beijing Youjiao are comprised of followings:

Material terms of each of the Youjiao VIE Agreements are described below:

Exclusive Business Cooperation Agreement

Pursuant to the Exclusive Business Cooperation Agreement between Beijing Youjiao and Hao Limo, Hao Limo provides Beijing Youjiao with technical support, consulting services and management services on an exclusive basis, utilizing its advantages in technology, human resources, and information. Additionally, Beijing Youjiao granted an irrevocable and exclusive option to Hao Limo to purchase from Beijing Youjiao, any or all of Beijing Youjiao’s assets at the lowest purchase price permitted under the PRC laws. Should Hao Limo exercise such option, the parties shall enter into a separate asset transfer or similar agreement. For services rendered to Beijing Youjiao by Hao Limo under this agreement, Hao Limo is entitled to collect a service fee calculated based on the time of services rendered multiplied by the corresponding rate, plus amount of the services fees or ratio decided by the board of directors of Hao Limo based on the value of services rendered by Hao Limo and the actual income of Beijing Youjiao from time to time, which is substantially equal to all of the net income of Beijing Youjiao.

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

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

Share Pledge Agreement

Under the Share Pledge Agreement among Beijing Youjiao, Aizhen Li and Hao Limo, Aizhen Li pledged all of her equity interests in Beijing Youjiao to Hao Limo to guarantee the performance of Beijing Youjiao’s obligations under the Exclusive Business Cooperation Agreement. Under the terms of the agreement, in any event of default, as set forth in the Share Pledge Agreement, including that Beijing Youjiao or Aizhen Li breach their respective contractual obligations under the Exclusive Business Cooperation Agreement, Hao Limo, as pledgee, will be entitled to certain rights, including, but not limited to, the right to dispose of the pledged equity interest in accordance with applicable PRC laws. Hao Limo shall have the right to collect any and all dividends declared or generated in connection with the equity interest during the term of pledge.

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

Exclusive Option Agreement

Under the Exclusive Option Agreement, Aizhen Li irrevocably granted Hao Limo (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 Beijing Youjiao. The option price is equal to the capital paid in by Aizhen Li subject to any appraisal or restrictions required by applicable PRC laws and regulations.

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

Power of Attorney

Under the Power of Attorney, Aizhen Li authorized Hao Limo to act on her behalf as her exclusive agent and attorney with respect to all rights as shareholder, 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 Beijing Youjiao, including but not limited to the sale or transfer or pledge or disposition of shares held by Aizhen Li in part or in whole; and (c) designating and appointing on behalf of Aizhen Li the legal representative, the executive director, supervisor, the chief executive officer and other senior management members of Beijing Youjiao.

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 Aizhen Li is a shareholder of Beijing Youjiao.

Timely Reporting Agreement

To ensure Beijing Youjiao promptly provides all of the information that Hao Limo and the Company need to file various reports with the SEC, a Timely Reporting Agreement was entered between Beijing Youjiao and the Company.

Under the Timely Reporting Agreement, Beijing Youjiao agreed 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. The Youjiao VIE Agreements became effective immediately upon their execution.

On November 8, 2018, Hao Limo entered certain termination agreement with Beijing Youjiao and Aizhen Li to terminate the June Youjiao VIE Agreements (the “Termination Agreement”). The Termination Agreement became effective immediately upon its execution.

VIE AGREEMENTS WITH BEIJING TIANXING

On May 17, 2018, Hao Limo entered into a series of agreements (the “Tianxing VIE Agreements”) with Beijing Tianxing Kunlun Technology Co. Ltd. (“Beijing Tianxing”) and Shun Li and Jialin Cui, the shareholders of Beijing Tianxing. The Tianxing VIE Agreements are designed to provide Hao Limo with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Beijing Tianxing, including absolute control rights and the rights to the management, operations, assets, property and revenue of Beijing Tianxing. The purpose of the VIE Agreements is solely to give Hao Limo the exclusive control over Beijing Tianxing’s management and operations. Beijing Tianxing has the requisite license to carry out used luxurious car leasing business in China.

Material terms of each of the Tianxing VIE Agreements are similar to those of Youjiao VIE Agreements.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

During the nine months ended September 30, 2018, Beijing Tianxing Kunlun Technology Co. Ltd. (“Beijing Tianxing”) has acquired eight subsidiaries, each with a license to hold a car in Beijing  or Zhejiang. On acquisition date, the asset, liability and net asset of the eight companies are comprised of followings:

DESPOSITION OF CCC BVI

On June 19, 2018, the Company, HK Xu Ding Co, Limited, a private limited company duly organized under the laws of Hong Kong (the “Purchaser”) and CCCR International Investment Ltd., a business company incorporated in the British Virgin Islands with limited liability which was previously 100% owned by the Company (“CCC BVI”) entered into certain Share Purchase Agreement (the “Purchase Agreement”). Pursuant to the Purchase Agreement, the Purchaser agreed to purchase CCC BVI in exchange of cash purchase price of $500,000.

CCC BVI is the sole shareholder of CCC International Investment Ltd. (“CCC HK”), a company incorporated under the laws of the Hong Kong S.A.R. of the PRC, which is the sole shareholder of WFOE. WFOE, via a series of contractual arrangements, controls Wujiang Luxiang. CCC HK is the sole shareholder of PFL.

Upon closing of the disposition on June 21, 2018, the Purchaser became the sole shareholder of CCC BVI and as a result, assume all assets and obligations of all the subsidiaries and VIE entities owned or controlled by CCC BVI, including but not limited to Wujiang Luxiang and PFL.

Below is the Company’s structure chart after the completion of the Termination Agreement, Youjiao VIE Agreements and Purchase Agreement.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

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

The unaudited condensed interim financial information as of September 30, 2018 and for the nine and three months ended September 30, 2018 and 2017 have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and pursuant to Regulation S-X. Certain information and footnote disclosures, which are normally included in annual financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. The unaudited condensed interim financial information should be read in conjunction with the audited financial statements and the notes thereto, included in the Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on April 16, 2018.

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s unaudited condensed financial position as of September 30, 2018, its unaudited condensed results of operations for the nine and three months ended September 30, 2018 and 2017, and its unaudited condensed cash flows for the nine months ended Sep 30, 2018 and 2017, as applicable, have been made. The unaudited interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

The consolidated financial statements include the accounts of the Company and include the assets, liabilities, revenues and expenses of all wholly owned subsidiary’s VIEs over which the Company exercises control and, when applicable, entities for which the Company has a controlling financial interest or is the primary beneficiary. The Company has two VIEs – Beijing Youjiao and Beijing Tianxing, and Beijing Tianxing has eight subsidiaries (See Note 1 for subsidiary information), each of which is entitled to a license to hold a car in Beijing or Zhejiang.

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

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance if effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the timing and impact of adopting the updated provisions to its consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”), which provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of ASU 2018-02 is permitted, including adoption in any interim period for the public business entities for reporting periods for which financial statements have not yet been issued. The amendments in this ASU should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.

In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception” (“ASU 2017-11”), which addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. The amendments in Part I of this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact of the adoption of ASU 2017-11 on its consolidated financial statements.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

In February 2016, the FASB issued ASU 2016-02, Amendments to the ASC 842 Leases. This update requires the lessee to recognize the assets and liability (the lease liability) arising from operating leases on the balance sheet for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Within twelve months or less lease term, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. If a lessee makes this election, it should recognize lease expense on a straight-line basis over the lease term. In transition, this update will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is evaluating the effect, if any, on the Company’s consolidated financial statements.

The Company does not believe other recently issued but not yet effective accounting standards would have a material effect would have a material effect on the consolidated financial position, statements of operations and cash flows.

In August 2016, the FASB has issued Accounting Standards Update (ASU) No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide guidance on the following eight specific cash flow issues: (1) Debt Prepayment or Debt Extinguishment Costs; (2) Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing; (3) Contingent Consideration Payments Made after a Business Combination; (4) Proceeds from the Settlement of Insurance Claims; (5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned; (6) Life Insurance Policies; (7) Distributions Received from Equity Method Investees; (8) Beneficial Interests in Securitization Transactions; and Separately Identifiable Cash Flows and Application of the Predominance Principle. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The amendments should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. Management is evaluating the effect, if any, on the Company’s consolidated financial statements. The adoption of this guidance did not have a material impact on its consolidated financial statements.

On November 22, 2017, the FASB ASU No. 2017-14, “Income Statement—Reporting Comprehensive Income (Topic 220), Revenue Recognition Topic 605), and Revenue from Contracts with Customers (Topic 606): Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 116 and SEC Release 33-10403.” The ASU amends various paragraphs in ASC 220, Income Statement — Reporting Comprehensive Income; ASC 605, Revenue Recognition; and ASC 606, Revenue From Contracts With Customers, that contain SEC guidance. The amendments include superseding ASC 605-10-S25-1 (SAB Topic 13) as a result of SEC Staff Accounting Bulletin No. 116 and adding ASC 606-10-S25-1 as a result of SEC Release No. 33-10403. The adoption of this guidance did not have a material impact on its consolidated financial statements.

The Company accounts for its business combination using the acquisition method of accounting in accordance with ASC 805 “Business Combinations”. The cost of an acquisition is measured as the aggregate of the acquisition date fair values of the assets transferred and liabilities incurred by the Company to the sellers and equity instruments issued. Transaction costs directly attributable to the acquisition are expensed as incurred. Identifiable assets and liabilities acquired or assumed are measured separately at their fair values as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total costs of acquisition, fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill.

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

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 other current assets; (ii) useful lives of long-lived assets; (iii) the impairment of long-lived assets; (iv) the valuation allowance of deferred tax assets; and (v) contingencies and litigation.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

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 PRC subsidiaries and VIEs prepared using RMB, are translated into the Company’s reporting currency, US$, at the exchange rates quoted by www.oanda.com. Assets and liabilities are translated using the exchange rate at each balance sheet date. Revenue and expenses are translated using average rates prevailing during each reporting period, and shareholders’ equity is translated at historical exchange rates, except for the change in accumulated deficit during the year which is the result of the income statement translation process. Adjustments resulting from the translation are recorded as a separate component of accumulated other comprehensive income in shareholders’ deficit.

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 income (loss).

Pursuant to ASC 830-30-40-1, upon sale or upon complete or substantially complete liquidation of an investment in a foreign entity, the amount attributable to that entity and accumulated in the translation adjustment component of equity shall be both:

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

The Company has adopted ASC Topic 820, Fair Value Measurement and Disclosure, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. It does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. It establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may be used to measure fair value and include the following:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.

The carrying value of financial items of the Company including cash and cash equivalents approximate their fair values due to their short-term nature and are classified within Level 1 of the fair value hierarchy.

As of December 31, 2017, the Company’s other noncurrent liabilities represented the share settlement in class actions were measured at fair value within Level 1 by reference to the quoted market price per share as the Company is a public entity. The balance was settled during the nine months ended September 30, 2018.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

Operating lease asset, net, represents the automobiles that are underlying our automotive lease contracts and is reported at cost, less accumulated depreciation and net of impairment charges and origination fees or costs. Depreciation of vehicles is recorded on a straight-line basis to an estimated residual value over the useful life of nine years. We periodically evaluate our depreciation rate for leased vehicles based on expected residual values and adjust depreciation expense over the remaining life of the lease if deemed necessary.

We have significant investments in the residual values of the assets in our operating lease portfolio. The residual values represent an estimate of the values of the assets at the end of the lease contracts. At contract inception, we determine pricing based on the projected residual value of the lease vehicle. This evaluation is primarily based on a proprietary model, which includes variables such as age, expected mileage, seasonality, segment factors, vehicle type, economic indicators, production cycle, automotive manufacturer incentives, and shifts in used vehicle supply. This internally-generated data is compared against third-party, independent data for reasonableness. Realization of the residual values is dependent on our future ability to market the vehicles under the prevailing market conditions. Over the life of the lease, we evaluate the adequacy of our estimate of the residual value and make adjustments to the depreciation rates to the extent the expected value of the vehicle at lease termination changes. In addition to estimating the residual value at lease termination, we also evaluate the current value of the operating lease asset and test for impairment to the extent necessary when there is an indication of impairment based on market considerations and portfolio characteristics. Impairment is determined to exist if fair value of the leased asset is less than carrying value and it is determined that the net carrying value is not recoverable. The net carrying value of a leased asset is not recoverable if it exceeds the sum of the undiscounted expected future cash flows expected to result from the lease payments and the estimated residual value upon eventual disposition. If our operating lease assets are considered to be impaired, the impairment is measured as the amount by which the carrying amount of the assets exceeds the fair value as estimated by discounted cash flows. No impairment was recognized in the three and nine months ended September 30, 2018. We accrue rental income on our operating leases when collection is reasonably assured.

When a lease vehicle is returned to us, either at the end of the lease term or through repossession, the asset is reclassified from operating lease assets to property and equipment, net and recorded at the lower-of-cost or estimated fair value, less costs to sell. Any losses recognized at this time are recorded as depreciation expense. Subsequent decline in value and any gain or loss recognized at the time of sale is recognized as a remarketing gain or loss and presented as a component of depreciation expense.

Income from operating lease represents lease origination fees and rental fee, netting off lease origination costs. In accordance with ASC 840, Leases, the Company recognized the income from operating lease on a straight-line basis over the scheduled lease term. For the three and six months ended September 30, 2018, the Company generated income from operating lease of $140,856 and $237,577, respectively.

The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applicable for the differences that are expected to affect taxable income.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

Basic income (loss) per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is the same as basic income (loss) per share due to the lack of dilutive items in the Company for the three and nine months ended September 30, 2018 and 2017. The number of warrants is omitted excluded from the computation as the anti-dilutive effect.

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

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

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.

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

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

The Company had warrants to four individuals in private placements, through which the Company issued both common shares and warrants as separable units, and neither instrument is registered when issued. Warrants requiring share settlement are classified as equity.

The capital raised from the private placement is allocated between the fair value of the common stocks and warrants. The Company determined the fair value of warrants by application of the Black-Scholes-Merton formula.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

In accordance with ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meets the criteria in paragraph 205-20-45-1E to be classified as held for sale. When all of the criteria to be classified as held for sale are met, including management, having the authority to approve the action, commits to a plan to sell the entity, the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations, less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the net income (loss) of continuing operations in accordance with ASC 205-20-45.

As of September 30, 2018, the Company’s microcredit service segment met all the conditions required in order to be classified as a discontinued operation (Note 1). Accordingly, the operating results of microcredit service segment are reported as a gain from discontinued operations in the accompanying consolidated financial statements for all periods presented. In addition, the assets and liabilities related to our microcredit service segment are reported as assets and liabilities of discontinued operations in the accompanying consolidated balance sheets at December 31, 2017. For additional information, see Note 6, “Disposition of CCC BVI”.

Our business had been organized into two reportable operating segments: (i) our microcredit service segment, and (ii) our luxury car leasing segment. However, due to changes in our organizational structure associated with the microcredit service segment as a discontinued operation (Note 2(p)), management has determined that the Company now operates in one operating segment with one reporting segment. The accounting policies of our one reportable segment are the same as those described in this Note 2.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

In assessing the Company’s liquidity and its ability to continue as a going concern, the Company monitors and analyzes its cash and cash equivalent and its ability to generate sufficient cash flow in the future to support its operating and capital expenditure commitments. The Company’s liquidity needs are to meet its working capital requirements and operating expenses obligations.

Since the Company disposed its microcredit business and launched luxurious car leasing business in May 2018. As of September 30, 2018, the Company had cash balance of $838,634 and a positive working capital of $2,073,049. The management estimated the operating expenses obligation for the next twelve months after issuance of the financial statements to be $500,000. Therefore, the management believes that the Company will continue as a going concern in the following 12 months. In addition, the Company’s shareholders will continuously provide financial support to the Company when there is any business expansion plan.

On May 17, 2018 and June 19, 2018, Hao Limo entered into VIE Agreements with Beijing Youjiao and Beijing Tianxing. The key terms of these VIE Agreements are summarized in “Note 1 - Organization and Nature of Operation” above. As a result of the VIE Agreements, the Company classifies both Beijing Youjiao and Beijing Tianxing as VIEs. 

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. Hao Limo is deemed to have a controlling financial interest and be the primary beneficiary of Beijing Youjiao and Beijing Tianxing, because it has both of the following characteristics:

Pursuant to the VIE Agreements, Beijing Youjiao and Beijing Tianxing each pays service fees equal to all of its net income to Hao Limo. At the same time, Hao Limo is entitled to receive all of their expected residual returns. The VIE Agreements are designed so that Beijing Youjiao and Beijing Tianxing each operates for the benefit of the Company. Accordingly, the accounts of Beijing Youjiao and Beijing Tianxing are both consolidated in the accompanying financial statements pursuant to ASC 810-10, Consolidation. In addition, their financial positions and results of operations are included in the Company’s consolidated financial statements.

In addition, as all of these VIE agreements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in 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 VIE agreements. 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 VIE agreements, it may not be able to exert effective control over Beijing Youjiao and Beijing Tianxing and its ability to conduct its business may be materially and adversely affected.

All of the Company’s main current operations are conducted through Beijing Youjiao during May and June 2018 and through Beijing Tianxing and its subsidiaries from June. Current regulations in China permit Beijing Youjiao and Beijing Tianxing to pay dividends to the Company 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 Beijing Youjiao and Beijing Tianxing 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.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

The following financial statement amounts and balances of the VIEs were included in the unaudited condensed consolidated financial statements as of September 30, 2018 and December 31, 2017 and for the three and nine months ended September 30, 2018 and 2017:

Assets that potentially subject the Company to significant concentration of credit risk primarily consist of cash and cash equivalents. The maximum exposure of such assets to credit risk is their carrying amount as at the balance sheet dates. As September 30, 2018, approximately $671,174 was deposited with a bank in the United States which was insured by the government up to $250,000. At September 30, 2018 and December 31, 2017, approximately $167,460 and $nil, respectively, were primarily deposited in financial institutions located in Mainland China, which were uninsured by the government authority. To limit exposure to credit risk relating to deposits, the Company primarily place cash deposits with large financial institutions in China which management believes are of high credit quality.

The Company’s operations are carried out in Mainland China. 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. In addition, the Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, rates and methods of taxation, and the extraction of mining resources, among other factors.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

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.

Substantially all of the Company’s operating activities and the Company’s major assets and liabilities are denominated in RMB, except for the cash deposit of approximately $671,174 which was in U.S. dollars at September 30, 2018, 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. Where there is a significant change in value of RMB, the gains and losses resulting from translation of financial statements of a foreign subsidiary will be significant affected.

It is possible that the VIE Agreements among Beijing Youjiao, Hao Limo, and the Beijing Youjiao Shareholder would not be enforceable in China if PRC government authorities or courts were to find that such contracts contravene PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event that the Company were unable to enforce these contractual arrangements, the Company would not be able to exert effective control over the VIE. Consequently, the VIE’s results of operations, assets and liabilities would not be included in the Company’s consolidated financial statements. If such were the case, the Company’s cash flows, financial position, and operating performance would be materially adversely affected. The Company’s contractual arrangements with Beijing Youjiao, Hao Limo, and the Beijing Youjiao Shareholder are approved and in place. Management believes that such contracts are enforceable, and considers the possibility remote that PRC regulatory authorities with jurisdiction over the Company’s operations and contractual relationships would find the contracts to be unenforceable.

This is the same case for the VIE Agreements among Beijing Tianxing, Hao Limo and the Beijing Tianxing Shareholders.

The Company’s operations and businesses rely on the operations and businesses of its two VIEs, which holds certain recognized revenue-producing assets including the luxury used cars. The VIE also has an assembled workforce, focused primarily on promotion and marketing, whose costs are expensed as incurred. The Company’s operations and businesses may be adversely impacted if the Company loses the ability to use and enjoy assets held by its VIEs.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

On June 19, 2018, the Company, HK Xu Ding Co., Limited, a private limited company duly organized under the laws of Hong Kong (the “Purchaser”) and CCCR International Investment Ltd., a business company incorporated in the British Virgin Islands with limited liability (“CCC BVI”) entered into certain Share Purchase Agreement (the “Purchase Agreement”). Pursuant to the Purchase Agreement, the Purchaser agreed to purchase CCC BVI in exchange of cash purchase price of $500,000. The consideration was paid as of June 30, 2018.

CCC BVI is the sole shareholder of CCC International Investment Ltd. (“CCC HK”), a company incorporated under the laws of the Hong Kong S.A.R. of the PRC, which is the sole shareholder of WFOE. WFOE, via a series of contractual arrangements, controls Wujiang Luxiang. CCC HK is the sole shareholder of PFL. Upon the Disposition, the Purchaser will become the sole shareholder of CCC BVI and as a result, assume all assets and obligations of all the subsidiaries and VIE entities owned or controlled by CCC BVI. Upon the closing of the transaction, the Company does not bear any contractual commitment or obligation to the microcredit business or the employees of CCC BVI and its subsidiaries and VIEs, nor to the Purchaser.

On June 17, 2018, management was authorized to approve and commit to a plan to sell CCC BVI, therefore the major assets and liabilities relevant to the disposal are reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations, less applicable income taxes, are reported as components of net income (loss) separate from the net loss of continuing operations in accordance with ASC 205-20-45. The assets relevant to the sale of CCC BVI with a carrying value of $6.2 million were classified as assets held for sale as of June 19, 2018. The liabilities relevant to the sale of CCC BVI with a carrying value of $10.5 million were classified as liabilities held for sale as of June 19, 2018. A net gain of $9.8 million was recognized as the net gain from disposal of discontinued operation in 2018.

In accordance with ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meets the criteria in paragraph 205-20-45-1E to be classified as held for sale. When all of the criteria to be classified as held for sale are met, including management, having the authority to approve the action, commits to a plan to sell the entity, the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations, less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the net income (loss) of continuing operations in accordance with ASC 205-20-45.

Reconciliation of the carrying amounts of assets and liabilities of discontinued operations in the unaudited condensed consolidated balance sheet.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

Reconciliation of the Amounts of Major Classes of Income from Operations to be Disposed Classified as Discontinued Operations in the Consolidated Statements of Operations and Comprehensive Income (Loss).

As of September 30, 2018, the balance of advance to employees for purchase of operating lease assets represents the amount advanced to the Company’s management and staff for purchase of used luxurious cars.

During the nine months ended September 30, 2018, the Company disbursed a loan of $1,473,458 to a third party. The loan to the third party is interest free and is due within twelve months since its disbursement.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

The Company started its used luxurious car leasing business in China since May 2018.

During the nine months ended September 30, 2018, the Company purchased six used luxurious cars and disposed of one car. As of the September 30, 2018, the Company had investments in five used luxurious cars. The balance of the used luxurious cars is comprised of the following:

During the three and nine months ended September 30, 2018, the Company incurred depreciation expenses on these cars of $58,854. No impairment was recognized in the six months ended June 30, 2018.

In August 2018, the Company sold a used car with net book value $134,683 in exchange for a consideration of $122,481. As a result, the Company incurred a loss of $12,202 from the disposal.

In May and July, 2018, the Company pledged one and one luxurious cars for a one-year period and a three-month period for loan, respectively. In October 15, 2018, the pledge of the latter car was released.

On November 22, 2016, the Company entered into a Stipulation and Agreement of Settlement (the “Stipulation”) to settle the Securities Class Action. The Stipulation resolves the claims asserted against the Company and certain of its current and former officers and directors in the Securities Class Action without any admission or concession of wrongdoing or liability by the Company or the other defendants. The Stipulation also provides, among other things, a settlement payment by the Company of $245,000 in cash and the issuance of 950,000 shares of its common stock (the “Settlement Shares”) to the plaintiff’s counsel and class members. The terms of the Stipulation were subject to approval by the Court following notice to all class members. The issuance of the Settlement Shares are exempt from registration pursuant to Section 3(a)(10) of the Securities Act of 1933, as amended. A fairness hearing was held on May 30, 2017, and the Court approved the settlement.

On June 1, 2017, following a final fairness hearing on May 30, 2017 regarding the proposed settlement, the Court entered a final judgment and order that: (i) dismisses with prejudice the claims asserted in the Securities Class Action against all named defendants in connection with the Securities Class Action, including the Company, and releases any claims that were or could have been asserted that arise from or relate to the facts alleged in the Securities Class Action, such that every member of the settlement class will be barred from asserting such claims in the future; and (ii) approves the payment of $245,000 in cash and the issuance of 950,000 shares of its common stock to members of the settlement class.  

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

On July 28, 2017, the Court amended the order that 1) Attorney’s Fees, Litigation Expenses, and Incentive Awards be paid out of the Settlement Fund; and 2) Levi& Korsinsky be awarded attorney’s fees in the amount of $55,000 in cash and 237,500 shares (Plaintiff Attorney Fee Shares). Thus, cash to be paid to the class shall be $190,000 (“Class Settlement Cash”) and shares to be issued to the class shall be 712,500 (“Class Settlement Shares”). 

The $245,000 cash portion was settled in December 2017.

On December 22, 2017, the Court entered a distribution order approving the distribution of the Settlement Shares to the class plaintiffs. The settlement has been finalized, and that thereafter there are no remaining claims outstanding as against the Company with respect to this litigation. On January 19, 2018 and April 10, 2018, the Company issued 712,500 and 237,500 class settlement shares, at the market share price of $1.68 and $1.18 per share, respectively.

The Company recorded expenses of $166,540 and $nil for the nine and three months ended September 30, 2018 under the account of “Changes in fair value of noncurrent liabilities”. As the Company is a public entity with quoted market price, the fair value of other noncurrent liabilities were classified as level 1. The expenses were accrued by reference to the quoted market share price per share on each reporting date. The movement of the other noncurrent liabilities during the nine months ended September 30, 2018 was as follows:

For the nine months ended September 30, 2018

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

Common Stock

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

On December 1, 2017, the Company has entered into a securities purchase agreement with Mr. Yang Jie, a significant shareholder and Vice President of Finance of the Company and Mr. Long Yi, the Chief Financial Officer of the Company to sell 150,000 and 50,000 common shares, respectively, at a per share price of US$3.5, in the total amount of US$525,000 and US$175,000, respectively. On February 20, 2018, the Company issued 50,000 shares of common stocks and warrants to purchase 20,000 shares of common stocks at $4.20 to Mr. Long Yi. On May 15, 2018, the Company issued 150,000 shares of common stocks and warrants to purchase 60,000 shares of common stocks at $4.20 to Mr. Jie Yang.

On January 19, 2018 and April 10, 2018, the Company issued 712,500 and 237,500 shares common stocks as the share settlement of 950,000 shares, respectively, as disclosed in Note 9.

During the three months ended June 30, 2018, the Company raised an aggregation of $3,265,370 from several private placements by issuing 4,194,697 shares of common stock, par value $0.001 per share, at the per share purchase price of $0.77 or $0.78. The shares of common stocks were issued to certain “non-U.S. Persons” as defined in Regulation S of the Securities Act of 1933, as amended (the “Securities Act”) pursuant to the securities purchase agreement (“SPA”) dated April 28, 2018, May 29, 2018 and June 19, 2018, respectively. The details of the issuance of shares of common stock in the private placements are as follows:

As of September 30, 2018, there were 24,595,612 shares of common stock issued and outstanding.

Warrants

As of December 31, 2017, the Company had outstanding warrants to purchase 193,370 shares with aggregation of fair value of $186,268.

On February 20, 2018, the Company issued warrants to purchase 20,000 shares to Mr. Long Yi, as part of the private placements mentioned above. The warrant has an exercise price of $4.2 per share and is exercisable on the date of issuance and expire five years from the date of issuance. The fair value of the warrants aggregated $24,662, estimated by using the Black-Scholes valuation model.

On May 15, 2018, the Company issued warrants to purchase 60,000 shares to Mr. Jie Yang, as part of the private placements mentioned above. The warrant has an exercise price of $4.2 per share and is exercisable on the date of issuance and expire five years from the date of issuance. The fair value of the warrants aggregated $69,900, estimated by using the Black-Scholes valuation model.

As of September 30, 2018, the Company had outstanding warrants to purchase 273,370 shares with fair value of $280,830.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

The balance of warrants as of September 30, 2018 and December 31, 2017 is comprised of the followings:

The following table sets forth the computation of basic and diluted earnings per common share for the three and nine months ended September 30, 2018 and 2017, respectively:

Basic income (loss) per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is the same as basic income (loss) per share due to the lack of dilutive items in the Company for the three and nine months ended September 30, 2018 and 2017. The number of warrants is excluded from the computation as the anti-dilutive effect.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

Effective January 1, 2008, the New Taxation Law of PRC stipulates that domestic enterprises and foreign invested enterprises (the “FIEs”) are subject to a uniform tax rate of 25%. Under the PRC tax law, companies are required to make quarterly estimate payments based on 25% tax rate; companies that received preferential tax rates are also required to use a 25% tax rate for their installment tax payments. The overpayment, however, will not be refunded and can only be used to offset future tax liabilities.

The Company evaluates the level of authority for each uncertain tax position (including the potential application of interest and penalties) based on the technical merits, and measures the unrecognized benefits associated with the tax positions. For the three and nine months ended September 30, 2018 and 2017, the Company had no unrecognized tax benefits. Due to uncertainties surrounding future utilization, the Company estimates there will not be sufficient future income to realize the deferred tax assets. The Company maintains a full valuation allowance on its net deferred tax assets as of September 30, 2018.

The Company does not anticipate any significant increase to its liability for unrecognized tax benefit within the next 12 months. The Company will classify interest and penalties related to income tax matters, if any, in income tax expense.

The Company does not have any current and deferred tax expenses for the three and nine months ended September 30, 2018 and 2017.

The Company accounts for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. Interest and penalties related to uncertain tax positions are recognized and recorded as necessary in the provision for income taxes. The Company is subject to income taxes in the PRC. According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations is extended to five years under special circumstances, where the underpayment of taxes is more than RMB 100,000. In the case of transfer pricing issues, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion. There were no uncertain tax positions as of September 30, 2018 and December 31, 2017 and the Company does not believe that its unrecognized tax benefits will change over the next twelve months.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

As of September 30, 2018 and December 31, 2017, the balance of due from related parties was as follows:

During the nine months ended September 30, 2018, the Company disbursed a loan of $29,119 to a shareholder. The loan is interest free and is due on demand.

We leased certain office space in New York, NY where we paid a monthly rent of US$3,600 during 2018. In addition, during the nine months ended September 30, 2018, we entered into one rental free office lease agreement with a third party and one office lease agreement with monthly rental fee of $5,506 with a third party which expires in September 2020. The following table sets forth the Company’s contractual obligations as of September 30, 2018 in future periods:  

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

On or about October 6, 2014, Dennison, the Yun Group and another purported shareholder, Jason Stark, filed motions to consolidate the cases, be appointed as lead plaintiff and to have their respective counsel appointed as lead counsel.

On October 31, 2014, the N.J. district court entered an order consolidating the cases under the caption “In re China Commercial Credit Inc. Securities Litigation” and appointing the Yun Group as lead plaintiff (“Class Plaintiff”) and the Yun Group’s counsel as lead counsel. On November 18, 2014, the Yun Group and the Company, which at that point was the only defendant served, entered into a stipulation to transfer of the case to the Southern District of New York. On December 18, 2014, Mr. Levy, who had by then been served, joined in the stipulation.

On December 29, 2014, the N.J. district court entered an order transferring the action. The transfer was effected on January 22, 2015, and assigned docket number 1:15-cv-00557-ALC (S.D.N.Y.) (the “Securities Class Action”). Under the schedule stipulated by the parties, the Yun Group was to file an amended complaint within 60 days of the date that the transfer was effected, and the defendants’ date to answer or move was within 60 days of that filing.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

On April 7, 2015, the Class Plaintiff filed a Second Amended Class Action Complaint (the “CAC”). The CAC also asserts securities law claims against defendants Axiom Capital Management, Inc., Burnham Securities Inc. and ViewTrade Securities, Inc. (collectively, the “Underwriter Defendants”). The CAC alleges that the Company engaged in a fraudulent scheme by engaging in undisclosed and improper lending practices and made misleading representations regarding its underwriting policies, the loan portfolio quality, the loan loss allowance, compliance with U.S. GAAP and its internal control systems. In accordance with the Court’s procedures, the Company and Mr. Levy and the Underwriter Defendants requested a Pre-Motion Conference in anticipation of filing a motion to dismiss the CAC, which was held on June 25, 2015. At the conference, the Court adjourned the date to answer or move in order to provide the Class Plaintiff with time to serve certain overseas defendants. After the conference, the Class Plaintiff voluntarily dismissed Jianming Yin, Jinggen Ling and Xiangdong Xiao from the action, and Long Yi agreed to waive service, which left Huichun Qin as the sole remaining defendant to serve.

On November 22, 2016, the Company entered into a Stipulation and Agreement of Settlement (the “Stipulation”) to settle the Securities Class Action. The Stipulation resolved the claims asserted against the Company and certain of its current and former officers and directors in the Securities Class Action without any admission or concession of wrongdoing or liability by the Company or the other defendants. The Stipulation also provides, among other things, a settlement payment by the Company of $245,000 in cash and the issuance of 950,000 shares of its common stock (the “Settlement Shares”) to the plaintiff’s counsel and class members.The terms of the Stipulation were subject to approval by the Court following notice to all class members. The issuance of the Settlement Shares are exempt from registration pursuant to Section 3(a)(10) of the Securities Act of 1933, as amended. A fairness hearing was held on May 30, 2017, and the Court approved the settlement.

On December 22, 2017, the Court entered a distribution order approving the distribution of the Settlement Stock to the class plaintiffs. The $245,000 cash portion of the settlement has been paid in full. The 712,500 Class Settlement Shares were issued on or about January 19, 2018. The settlement has been finalized, and that thereafter there are no remaining claims outstanding as against the Company with respect to this litigation. On April 10, 2018, the 237,500 of plaintiff attorney fee shares were issued to plaintiff’s attorney’s broker account.

Two of the Underwriter Defendants, Axiom Capital Management, Inc., and ViewTrade Securities, Inc., have asserted their respective rights to indemnification under the Underwriting Agreements entered into in connection with the Company’s initial public offering and secondary offering. On or about March 16, 2016, CCCR entered into an Advance Funding and Escrow Agreement (“Advance Funding Agreement”), under which the CCCR agreed to deposit shares into escrow to fund the advancement obligation, with the initial deposit to be 637,592 shares which was valued at Two Hundred Thousand Dollars ($200,000), based upon 80% of the 30 day volume weighted average trading price for each of the 30 consecutive trading days prior to the date of the agreement. As of the completion of the settlement, an aggregate of 527,078 shares are unused in the escrow account and the Underwriter Defendants acknowledged there is no additional payment of fees and expenses owed to the Underwriter Defendants and the Advance Funding Agreement shall be terminated. The Company has instructed the transfer agent to cancel the 527,078 shares and return them to authorized shares. As of the date of this Form 10-Q, the Company is working with its counsel and the escrow agent to complete such cancelation.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

On February 3, 2015, a purported shareholder Kiran 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”). The action alleges that the Company and its current and former officers and directors Huichun Qin, Long Yi, Jianming Yin, Jinggen Ling, Chunfang Shen, John F. Levy, Xiaofang Shen and Chunjiang Yu violated their fiduciary duties, grossly mismanaged the Company and were unjustly enriched based upon the transfer that was the subject of the Internal Review and other grounds substantially similar to those asserted in the class action complaints. Kodali did not serve a demand upon the Company and alleges that demand is excused. The Company and Mr. Levy are the only defendants who have been served. On April 17, 2015, Plaintiff amended the complaint in the Action. Plaintiff’s Amended Verified Shareholder Derivative Complaint (“Amended Complaint”) has alleged that the individual defendants breached their fiduciary duties as officers and directors of the Company by causing the Company to issue false or misleading statements concerning its: (i) lending and underwriting practices; (ii) loan quality of direct and guarantee loans; (iii) allowance and provision for loan losses; (iv) accrual and provision for financial guarantee loans; (v) liquidity credit risk; (vi) compliance with Generally Accounting Principles (“GAAP”); and (vii) internal controls. Additionally, Plaintiff has alleged in the Amended Complaint that the Individual Defendants breached their fiduciary duties by allegedly allowing Defendant Huichun Qin to pilfer approximately $1.1 million from the Company.

On May 29, 2015, the Court “so ordered” a stipulation among Kodali, the Company, and Mr. Levy staying all proceedings in the derivative case, except for service of process on individual defendants, until the earlier of thirty days of termination of the stipulation, dismissal of the class action with prejudice or the date any of the defendants in the class action file an answer to the CAC.

The Company intends to vigorously defend against it. At this stage of the proceedings, the Company is not able to estimate the probability of success or loss. The Court ordered CCCR to answer or otherwise move with respect to this action on or before November 13, 2017. Thereafter, CCCR and Mr. Levy submitted a pre-motion letter to the Court requesting permission to move to dismiss the derivative complaint; submission of this letter stayed the proceedings pending the Court’s review thereof. The Court held a hearing on this pre-motion letter on January 22, 2018, denying permission to file a motion to dismiss the complaint without prejudice and setting forth a schedule under which Kodali must serve the remaining defendants in the derivative litigation. The parties are due to file a joint status report on August 23, 2018. On behalf of the Company and Mr. Levy, this firm is engaged in active settlement discussions with counsel for Kodali, but the parties have not entered into a settlement agreement. 

On or about August 22, 2018, our litigation counsel noticed their appearance in the Action. The parties filed a Joint Status Report on August 22, 2018, advising the Court that the parties continued to have discussions regarding a potential resolution of the matter. The parties have come to a potential agreement regarding a monetary settlement. However, the parties continue to discuss the non-monetary aspects of a potential resolution, and have filed a Joint Status Report on November 1, 2018, requesting a brief amount of time to complete its settlement discussions and resolve the matter.

The Company and its directors were party to a lawsuit filed on September 1, 2017, by certain a stockholder of the Company on behalf of himself and similarly situated stockholders of the Company CCC in the Chancery Court of the State of Delaware (the “Delaware Chancery Court”) (Case No. 2017-0633-JTL) (the “Action”), Plaintiff stockholders which sought injunctive relief, costs, and attorney’s fees. Plaintiff’s Verified Class Action Complaint (“Complaint”) alleged that the Company’s directors breached their fiduciary duties to the Company’s stockholders by failing to disclose all necessary material information relating to the Company’s entry into an the Exchange Agreement (“Exchange Agreement”) with Sorghum Investment Holdings Limited (“Sorghum”) on August 9, 2017, and preventing the Company’s stockholders from casting a fully informed vote on the Company’s acquisition of Sorghum, and other proposals contained in the Company’s preliminary proxy statement, dated August 14, 2017 (“Preliminary Proxy Statement).

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

On October 10, 2017, the Company filed Amendment No. 1 to its Preliminary Proxy Statement (the “Amended Preliminary Proxy”) with the U.S. Securities and Exchange Commission (the “Commission”) in response to the Commission’s September 8, 2017 comment letter (“Comment Letter”). After reviewing the Amended Preliminary Proxy, Plaintiff determined that the Company’s Amended Preliminary Proxy rendered the claims asserted in Plaintiff’s Complaint moot and/or otherwise unsuitable for further pursuit. On October 19, 2017, the Company and Plaintiff entered into a stipulation (“Stipulation”) wherein Plaintiff agreed to voluntarily dismiss his claims against the Company, and its directors, with prejudice. The Delaware Chancery Court granted the Stipulation on October 20, 2017, and entered an Order dismissing the Action with prejudice. In accordance with the Order, the Company will advise the Delaware Chancery Court within fifteen (15) days of the earlier of (a) the stockholder vote on the Exchange Agreement relating to the proposals, or (b) the termination of the Exchange Agreement, and whether the parties to the Action have reached an agreement with respect to Plaintiff’s anticipated request for fees and expenses. Currently, no compensation in any form has passed from the Company, or its directors, to Plaintiff or Plaintiff’s attorneys in the Action, and the Company has not made a promise to give any such compensation. On or about November 6, 2017, the Company filed Amendment No. 2 to its Preliminary Proxy Statement with the Commission in further response to the Comment Letter. On December 29, 2017, the Company received notice from Sorghum notifying the Company that the Exchange Agreement is terminated. The Company advised Plaintiff of the termination of the Exchange Agreement on January 9, 2018.

On December 21, 2017, the Company delivered notice (“Notice”) to Sorghum notifying Sorghum that certain recent actions of Sorghum constituted breaches of Sorghum’s covenants under the Exchange Agreement. Specifically, we believe that Sorghum is in breach of Section 6.9 (a) and Section 6.11 (b) of the Exchange Agreement which required Sorghum to use commercially reasonable efforts and to cooperate fully with the other parties to consummate the transactions contemplated by the Exchange Agreement and to make its directors, officers and employees available in connection with responding in a timely manner to SEC comments. According to the terms of the Exchange Agreement, the Company is entitled to terminate the Exchange Agreement if the breach is not cured within twenty (20) days after the Notice is provided to Sorghum.

On January 25, 2018, the Company filed an arbitration demand (“Arbitration Demand”) with the American Arbitration Association (“AAA”) against Sorghum in connection with Sorghum’s breach of the Exchange Agreement. On December 21, 2017, prior to filing the Arbitration Demand, the Company provided Sorghum with formal notice of its breaches to the Exchange Agreement. The AAA has forwarded the Company’s Arbitration Demand to Sorghum, and Sorghum’s response to the Arbitration Demand was due on or before February 14, 2018. Sorghum did not provide a written response to the Company’s Arbitration Demand by the deadline. However, in accordance with the Commercial Arbitration Rules of the AAA (“Rules”), Sorghum’s failure to respond is deemed as a general denial of the Company’s claims. On March 14, 2018, the AAA initially appointed a single arbitrator to the matter subject to the parties’ approval. On March 28, 2018, the AAA conducted an initial telephonic conference with Arbitrator Barbara Mentz, but neither Sorghum nor its counsel appeared for the call. On March 28, 2018, after the Company’s counsel appeared for the initial telephonic conference, Sorghum and its counsel contacted the AAA claiming that it was not in receipt of the AAA’s correspondence although the AAA forwarded its correspondence to Sorghum’s Chief Executive Officer’s active email. In response, the AAA scheduled another telephonic conference for April 9, 2018. All parties appeared at the April 9, 2018 conference, and approved Arbitrator Mentz’s appointment. On April 11, 2018, pursuant to the Rules, Sorghum filed its answer and counterclaim. The Company filed a written denial to Sorghum’s counterclaim on April 26, 2018. On May 2, 2018, the parties jointly requested an extension of time to file their respective proposals for resolution with the AAA, and Arbitrator Mentz granted the extension. On May 17, 2018, Sorghum requested another extension and Arbitrator Mentz granted the extension. In accordance with Arbitrator Mentz’s Order, the parties’ proposals was due May 31, 2018. On May 30, 2018, due to a delay in receiving additional evidence from a relevant third party, the Company requested an extension of time to file its proposal for resolution, which Arbitrator Mentz granted extending the deadline to June 7, 2018. To provide additional time to allow certain relevant documents to be translated due to the unavailability of the parties’ mutually accepted translator, the Company requested a final extension of time to June 14, 2018, to submit the parties’ proposal for resolution. Arbitrator Mentz granted the Company’s request. On June 14, 2018, the Company submitted its proposal for resolution to the AAA. On July 30, 2018, Arbitrator Mentz entered a reasoned award, accepting the Company’s proposal for resolution, awarding the Company damages of $1,436,521.50 against Sorghum and denying Sorghum’s Counterclaim against the Company in its entirety with prejudice.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

During the course of preparing the 2017 consolidated financial statements, certain errors to the previously issued unaudited condensed consolidated financial statements appearing in the Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2017 filed with SEC on November 14, 2017, were discovered by management. The errors related to the accounting of the settlement shares agreed upon per the Stipulation (See Note 9). These settlement shares have not been issued until January 19, 2018 and April 10, 2018, respectively. These settlement shares should be recorded in accordance with ASC 450-20, Loss Contingencies, and as a result the share settlement should be also accounted for as a liability measured at market value of share price rather than accounting for contracts to be settled with the Company’s own equity. After the errors have been quantified, the previously-issued financial statements have been evaluated to determine whether they are materially misstated in accordance with guidance provided in SAB Topic 99 and the Company has concluded the previously-issued 2016 consolidated financial statements are not materially misstated and the errors will be corrected prospectively.  As a result, the Company made the corrections to the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2017 and condensed consolidated statements of cash flows for the three and nine months ended September 30, 2017 contained in this Form 10-Q.

The effects of the restatement on the Company’s condensed consolidated statements of operations and comprehensive loss and earnings per share for the three and nine months ended September 30, 2017 are as follows:

The effects of the restatement on the Company’s condensed consolidated statements of cash flows for the nine months ended September 30, 2017 are as follows:

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

On February 28, 2018, the company received a letter (the “Notification Letter”) from The NASDAQ Stock Market LLC (“ Nasdaq”) notifying the Company that it is not in compliance with the minimum Market Value of Listed Securities (MVLS) requirement set forth in Nasdaq Listing Rule 5550(b)(2) for continued listing on the Nasdaq Capital Market. Nasdaq Listing Rule 5550(b)(2) requires listed securities to maintain a minimum MVLS of $35 million. Nasdaq Listing Rule 5810(c)(3)(C) provides that a failure to meet a minimum MVLS exists if the deficiency continues for a period of 30 consecutive business days. Based upon Nasdaq’s review of the Company’s MVLS for the last 30 consecutive business days, the Company no longer meets the minimum MVLS requirement. The Nasdaq staff noted the Company also does not meet the requirements under Listing Rules 5550(b)(1) and 5550(b)(3). The Notification Letter does not impact the Company’s listing on the Nasdaq Capital Market at this time. In accordance with Nasdaq Listing Rule 5810(c)(3)(C), the Company has been provided 180 calendar days, or until August 27, 2018, to regain compliance with Nasdaq Listing Rule 5550(b)(2).

On August 22, 2018, the Company received a letter from Nasdaq notifying the Company that based on the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2018 filed on August 17, 2018, in which it reported stockholders’ equity of $4,132,773, Nasdaq has determined that the Company satisfies the $2.5 million stockholders’ equity requirement under Listing Rule 5550(b)(1) and this matter is now closed.

On September 5, 2018, the Company received a notification letter from the Nasdaq Listing Qualifications Staff of The NASDAQ Stock Market LL notifying the Company that the minimum bid price per share for its common shares has been below $1.00 for a period of 30 consecutive business days and the Company therefore no longer meets the minimum bid price requirements set forth in Nasdaq Listing Rule 5550(a)(2).

The notification received has no immediate effect on the listing of the Company’s common stock on Nasdaq. Under the Nasdaq Listing Rules, the Company has until March 4, 2019 to regain compliance. If at any time during such 180-day period the closing bid price of the Company’s common shares is at least $1 for a minimum of 10 consecutive business days, Nasdaq will provide the Company written confirmation of compliance.

If the Company does not regain compliance during such 180-day period, the Company may be eligible for an additional 180 calendar days, provided that the Company meets the continued listing requirement for market value of publicly held shares and all other initial listing standards for Nasdaq except for Nasdaq Listing Rule 5550(a)(2), and provide a written notice of its intention to cure this deficiency during the second compliance period, by effecting a reverse stock split, if necessary.

The Company has been evaluating options available to regain compliance and to timely submit evidence of compliance. There can be no assurance that the Company’s plan will be accepted or that, if it is, the Company will be able to regain compliance with the applicable Nasdaq listing requirements.

1) On October 16, 2018, the Company completed private placement of convertible promissory notes to certain “non-U.S. Persons” as defined in Regulation S of the Securities Act in the original principal amount of $312,170, convertible into shares of common stock of the Company at a per share conversion price of $0.6. If the notes are fully converted, the Company will issue an aggregate of 520,283 shares of common stock. In addition, the Company is obliged to pay interest on the outstanding balance of principal amount at the rate of 8% per annum until the note is paid in full. The net proceeds of the private placement was used by the Company as working capital.

2) TX Kunlun obtained necessary license to conduct the used luxurious car leasing business and other related business on June 2018. Since then TX Kunlun has been our major operating entity. Management decided to terminate Beijing Youjiao via agreement to improve efficiency and save administrative costs.

On November 8, 2018, Hao Limo entered certain termination agreement with Beijing Youjiao and Aizhen Li to terminate the June Youjiao VIE Agreements (the “Termination Agreement”). The Termination Agreement became effective immediately upon its execution.

3) On November 15, 2018, Mr. Chenguang Kang resigned from his positions as Chief Executive Officer (“CEO”), President and a director of the Company effective November 20, 2018. Mr. Kang’s resignation is not as a result of any disagreement with the Company relating to its operations, policies or practices.

The Company’s board of directors (the “Board”), upon recommendation by the Nomination Committee of the Board, appointed Mr. Jiaxi Gao as CEO and President of the Company and elected him as a director of the Board of to fill the vacancy to be created by the resignation of Mr. Gao effective November 20, 2018.

The Company entered into an executive employment agreement (the “Employment Agreement”) with Mr. Gao on November 15, 2018, pursuant to which he shall receive 800,000 restricted shares as inducement for his employment. The Compensation Committee of the Company approved such compensation. Such restricted shares shall vest in four quarterly installments starting from January 2019.

Overview

As of June 30, 2018, the Company had two lines of business: one was the direct loans, loan guarantees and financial leasing services to small-to-medium sized businesses, farmers and individuals in the city of Wujiang, Jiangsu Province; and the other one was the used luxurious car leasing business which was started in May 2018.

On June 19, 2018, the Company, HK Xu Ding Co, Limited, a private limited company duly organized under the laws of Hong Kong (the “Purchaser”) and CCCR International Investment Ltd., a business company incorporated in the British Virgin Islands with limited liability which was previously 100% owned by the Company (“CCC BVI”) entered into certain Share Purchase Agreement (the “Purchase Agreement”). CCC BVI is the sole shareholder of CCC International Investment Ltd. (“CCC HK”), a company incorporated under the laws of the Hong Kong S.A.R. of the PRC, which is the sole shareholder of WFOE. WFOE, via a series of contractual arrangements, controls Wujiang Luxiang. CCC HK is the sole shareholder of PFL. Pursuant to the Purchase Agreement, the Purchaser agreed to purchase CCC BVI in exchange of cash purchase price of $500,000. The transaction contemplated by the Purchase Agreement is hereby referred as Disposition.

Upon closing of the Disposition on June 21, 2018, the Purchaser became the sole shareholder of CCC BVI and as a result, assumed all assets and obligations of all the subsidiaries and VIE entities owned or controlled by CCC BVI, including but not limited to Wujiang Luxiang and PFL.

In May 2018, the Company launched a used luxurious car leasing business, which was carried out by the Company’s VIE entity, Beijing Youjiao Technology Limited (“Beijing Youjiao”) during May and June and by Tianxing Kunlun Technology Co. Ltd (“TX Kunlun”) from June till now.

VIE agreements with Beijing Youjiao and TX Kunlun

On May 10, 2018. Beijing Youjiao, Aizhen Li, the sole shareholder of Beijing Youjiao and our former indirect subsidiary, Wujiang Luxiang Information Technology Consulting Co. Ltd., (“WFOE”), entered into a series of contractual agreements including, Exclusive Business Cooperation Agreement, Exclusive Option Agreement, Share Pledge Agreement and the Powers of Attorney (the “May Youjiao VIE Agreements”). The May Youjiao VIE Agreements were 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 Beijing Youjiao, including absolute control rights and the rights to the management, operations, assets, property and revenue of Beijing Youjiao. The purpose of the VIE Agreements is solely to give WFOE the exclusive control over Beijing Youjiao’s management and operations. We entered into the May Youjiao VIE Agreements because Beijing Youjiao has the requisite license to carry out used luxurious car leasing business in China.

In anticipation of the Disposition, on June 19, 2018, WFOE entered into certain termination agreement with Beijing Youjiao and Aizhen Li pursuant to which the May Youjiao VIE Agreements was terminated immediately.

On the same day, our indirectly wholly owned subsidiary Hao Limo Technology (Beijing) Co., Ltd. (“Hao Limo”) entered into a series of agreements (the “June Youjiao VIE Agreements”) with Beijing Youjiao and Aizhen Li. The June Youjiao VIE Agreements were designed to provide Hao Limo with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Beijing Youjiao, including absolute control rights and the rights to the management, operations, assets, property and revenue of Beijing Youjiao. The purpose of the Youjiao VIE Agreements is solely to give Hao Limo the exclusive control over Beijing Youjiao’s management and operations.

On May 17, 2018, Hao Limo entered into a series of agreements with Tianxing Kunlun Technology Co. Ltd (“TX Kunlun”) and Shun Li and Jialin Cui, the shareholders of TX Kunlun pursuant to which Hao Limo was provided with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of TX Kunlun, including absolute control rights and the rights to the management, operations, assets, property and revenue of TX Kunlun. TX Kunlun obtained necessary license to conduct the used luxurious car leasing business and other related business on June 2018. Since then TX Kunlun has been our major operating entity. Management decided to terminate Beijing Youjiao via agreement to improve efficiency and save administrative costs.

On November 8, 2018, Hao Limo entered certain termination agreement with Beijing Youjiao and Aizhen Li to terminate the June Youjiao VIE Agreements (the “Termination Agreement”). The Termination Agreement became effective immediately upon its execution.

Our Current Business

During the quarter ended September 30, 2018, the Company, through Tianxing Kunlun Technology Co. Ltd (“TX Kunlun”), which was controlled by the Company via contractual arrangements, offers our customers the opportunity to rent luxurious pre-owned automobiles in Beijing. During the nine months ended September 30, 2018, the Company purchased six used luxurious cars for operating lease services and generated operating lease income of US$237,577 from the leasing business.

Our Inventory and Vehicle Acquisition Process

Currently we have six used luxurious cars valued at approximately USD 1.88 million, including a white Ferrari 458, a white Land Rover (Range Rover Executive Edition), a blue Maserati Geberit dark, a blue McLaren 570GT, a red Ferrari 458 Spider and a Tesla Model X 100D. To determine the model of vehicles to be purchased, we collect data related to customers’ demands and preferences through sales and online promotions. Our professional procurement personnel then compare models of vehicles offered by different sellers. The decision to purchase a specific vehicle is based on a number of considerations including time of delivery, vehicle condition, vehicle safety feature, mileage, repaire and maintenance history, accidents history, market scarcity, and etc. All the sellers of the six vehicles we own are individuals.

Pursuant to local Beijing laws, each entity in Beijing has its quotas to purchase and own vehicles, even for auto leasing businesses. Therefore, all the six vehicles are owned by TX Kunlun’s wholly-owned subsidiaries while managed by TX Kunlun. The purchase price of the vehicles we currently own ranges from 50% to 80% of that of the new vehicles.

We intend to purchase thirty pre-owned luxurious vehicles by the end of 2018 assuming we can secure sufficient funding from equity and/or debt financing. Management are under negotiation with a number of Chinese financial institutions, including investment management companies and crowdfunding platforms, regarding capital raising. However, we cannot assure you that we will be able to raise sufficient funds from these or other sources to achieve our business goal.

Renting Process

We rent our luxurious cars to our customers from our store in Beijing. We market our cars to targeted potential customers via phone calls or messages. The rental price varies based on the rental term which ranges from one day to one months. The longer the rental term, the cheaper the price. The daily rental price is the highest, while the average weekly rental price and average monthly rental price are 10% to 20% and 20% to 30% cheaper than that of daily rental price.

We conduct comprehensive credit check against customers who placed orders. We work with credit rating platform such as JD Wanxiang and TYi Onine to evaluate the customer’s credit. We may reject the order for any reason including unacceptable credit rating. Once an order is accepted, we will require deposit ranging from US$7,500 and US$15,000 based on the vehicle being ordered and the customer’s credit score. The deposit consists of vehicle deposit and traffic violation deposit. Customer can confirm the time and place for vehicle delivery and rental term via SNS messages, phone calls or face-to-face communication with our sales personnel. After then, our sales personnel will deliver the vehicle to the customers as designated. The customer, before signing the car rental agreement, will inspect the vehicle in person and pay the rent along with the deposit in credit card, Wechat Pay or Alipay. The customer is responsible for the gas, the toll, and any other expenses related to the use of the vehicle during the rental term. 

We installed five GPS on each vehicle to track the location of the vehicle. Once the rental period is over, the vehicle should be returned to designated place to our salesperson. In the event the vehicle is returned with no damage other than normal wear and tear, we will process the refund of the vehicle deposit on the next business day. The traffic deposit will be refunded after we receive traffic violation records associated with the vehicle from the local police (approximately a month after the return) showing no traffic violation. .

If the following conditions occur, the corresponding fee will be deducted from the deposit. In the event that the amount of deposit to be deduced by the Company to the customer is lower than the payment to the damage or repair cost, the customer shall pay such deficient to the Company. In the event that the amount of deposit to be paid by the Company is greater than the payment to the damage or repair cost, the Company shall refund such differences to the customer:

In addition to direct renting to customers, we intend to rent to other auto rental companies as a wholesale model. We and our peer companies plan to form vehicle pool consisting of all available pre-owned vehicles.  When a customer placed an order via a company while it does not have such vehicles available, vehicles of company B in such pool will be delivered to company A at its request.

Marketing

Currently we market our services by our own sales personnel and online promotion. Our operation is branded as “Batcar”. We have launched WeChat public account and Weibo to promote our services. We started to introduce our services via major search engines, such as zhida and baidu. We also started to advertise on major search engines to acquire users. We actively engaged social media such as tieba.baidu.com, Tik Tok, Weibo, WeChat, and zhihu.com. We plan to launch wider and deeper social media marketing in the near future. We also plan to advertise via offline channels.

In the future, we intend to acquire customers by working with more sizeable and established auto business. We have arrangements with Beijing Cuco Technology Co. LTD (“Cuco”) , a general car-rent platform and Beijing EasyCar Life Automobile Service Chain Co. LTD (“EasyCar Life”), a car service chain store in Beijing where Cuco and EasyCar Life may refer customers to us in exchange of commission equals to 20% of the rental price.

Key Factors Affecting Our Results of Operation

The car rental and car service industry in China is competitive and fragmented. We expect competition in China’s car rental and car service industry to persist and intensify.

We have a limited operating history. We just launched the car leasing business in May 2018. We believe our future success depends on our ability to significantly increase revenues as well as maintain profitability from our operations. Our limited operating history makes it difficult to evaluate our business and future prospects. You should consider our future prospects in light of the risks and challenges encountered by a company with a limited operating history in an emerging and rapidly evolving industry. These risks and challenges include, among other things,

Our business requires a significant amount of capital in large part because we are prompted to continue to grow our fleet and expand our business in existing markets and to additional markets where we currently do not have operations.

The significant increase in the number of vehicles in China, primarily in major cities, and the traffic and pollution resulting from this increase have drawn the attention of both the government and the public. To address this issue, local governments in China have promulgated various policies to limit the increase in the number of vehicles.

Results of Operations

Three Months Ended September 30, 2018 as Compared to Three Months Ended September 30, 2017

Income from operating lease

The Company commenced its new business of lease services of used luxurious cars in May 2018. During the three months ended September 30, 2018, the Company the Company disposed one of the six used luxurious cars. The lease term is generally within one month. The operating lease income is recognized on a straight-line basis over the scheduled lease term. The Company generated operating lease income of US$140,856.

Because we just launched its new business of lease services of used luxury cars in May 2018 and we did not have any operations, we did not generate any revenues for the three months ended September 30, 2017.

Net depreciation expense on operating lease assets

The net depreciation expense on operating lease assets represents the depreciation expenses of used luxurious cars. During the three months ended September 30, 2017, net depreciation expense on operating lease assets was nil.

Operating Expenses

Operating expenses decreased from US$1,521,688 for the three months ended September 30, 2017 to US$741,762 for the three months ended September 30, 2018, representing a decrease of US$779,926, or 51%. Operating expenses primarily consisted of salary and employee surcharge, office rental expense, business tax and surcharge, changes in fair value of other noncurrent liabilities, professional service fees, and other office supplies. The decrease was mainly attributable to combined effects of a change of US$313,500 of changes in fair value of noncurrent liabilities, as the share settlement was closed in April 2018 and no expenses incurred in relation to changes in share price during the three months ended September 30, 2018; and a decrease of transaction expenses of $1,356,285 in relation to the reverse acquisition with Sorghum.

Net loss from discontinued operations

The Company disposed of the discontinued operation in June 2018. During the three months ended September 30, 2018, no net income was generated from discontinued operations.

For details of discontinued operations, please refer to Note 6 of our Unaudited Consolidated Financial Statements included in Form 10-Q.

Net loss

As a result of the foregoing, net loss for the three months ended September 30, 2018 was $635,017 representing a decrease of $1,500,275 from net loss of $2,135,292 for the three months ended September 30, 2017.

Results of Operations

Nine Months Ended September 30, 2018 as Compared to Nine Months Ended September 30, 2017

Income from operating lease

The Company commenced its new business of lease services of used luxurious cars in May 2018. During the nine months ended September 30, 2018, the Company purchased six used luxurious cars for the purpose of operating lease. Later in August 2018, the Company disposed one of the used luxurious cars. The lease term is generally within one month. The operating lease income is recognized on a straight-line basis over the scheduled lease term. The Company generated operating lease income of US$237,577.

Because we just launched its new business of lease services of used luxury cars in May 2018 and we did not have any operations, we did not generate any revenues for the nine months ended September 30, 2017.

Net depreciation expense on operating lease assets

The net depreciation expense on operating lease assets represents the depreciation expenses of used luxurious cars. During the nine months ended September 30,, 2017, net depreciation expense on operating lease assets was nil.

Operating Expenses

Operating expenses decreased from US$5,029,838 for the nine months ended September 30, 2017 to US$1,767,575 for the nine months ended September 30, 2018, representing a decrease of US$3,262,263, or 65%. Operating expenses primarily consisted of salary and employee surcharge, office rental expense, business tax and surcharge, changes in fair value of other noncurrent liabilities, professional service fees, and other office supplies. The decrease was mainly attributable to combined effects of a decrease of US$1,514,960 of changes in fair value of noncurrent liabilities, as the changes in share price during the period between January 1, 2018 and the date of share settlement is far less than that during the nine months ended September 30, 2017; and a decrease of transaction expenses of $2,136,285 in relation to the reverse acquisition with Sorghum..

Net income (loss) from discontinued operations

During the nine months ended September 30, 2018, the net income from discontinued operations was comprised of a net loss of $277,756 from discontinued operations against a gain of $9,794,873 from disposal of the discontinued operations.

For details of discontinued operations, please refer to Note 6 of our Unaudited Consolidated Financial Statements included in Form 10-Q.

Net income (loss)

As a result of the foregoing, net income for the nine months ended September 30, 2018 was $8,482,353 representing a change of $16,764,097 from net loss of $8,281,744 for the nine months ended September 30, 2017.

Cash Flows and Capital Resources

We have financed our operations primarily through shareholder contributions, cash flow from operations, and public offerings of securities. As a result of net effects of discontinue of microcredit services and startup of used luxurious car business during the nine months ended September 30, 2018, net cash decreased from US$1,359,630 as of December 31, 2017 to US$838,634 as of September 30, 2018.

Liquidity

In assessing the Company’s liquidity and its ability to continue as a going concern, the Company monitors and analyzes its cash and cash equivalent and its ability to generate sufficient cash flow in the future to support its operating and capital expenditure commitments. The Company’s liquidity needs are to meet its working capital requirements and operating expenses obligations.

Since the Company disposed its microcredit business and launched luxurious car leasing business in May 2018. As of September 30, 2018, the Company had cash balance of $838,634 and a positive working capital of $2,073,049. The management estimated the operating expenses obligation for the next twelve months after issuance of the financial statements to be $500,000. Therefore, the management believes that the Company will continue as a going concern in the following 12 months. In addition, the Company’s shareholders will continuously provide financial support to the Company when there is any business expansion plan.

Statement of Cash Flows

The following table sets forth a summary of our cash flows. For the nine months ended September 30, 2018 and 2017, respectively: 

Net Cash Used in Operating Activities

During the nine months ended September 30, 2018, we had a cash outflow from operating activities of US$1,403,790, an increase of cash outflow of US$155,161 from a cash outflow of US$1,248,629 for the same period of last year. We generated a net income for the nine months ended September 30, 2018 of US$8,482,353, a change of US$16,764,087 from the nine months ended September 30, 2017, during which we incurred a net loss of US$8,281,734. In addition to the change in profitability, the decrease in net cash used in operating activities was the result of several factors, including:

Net Cash (Used in) Provided by Investing Activities 

Net cash used in investing activities for the nine months ended September 30, 2018 was US$4,009,223 as compared to net cash provided by investing activities of US$1,905,807 for the nine months ended September 30, 2017. The cash used in investing activities for the nine months ended September 30, 2018 was net effects of purchase of six used luxurious cars of $1,882,476, loan disbursement of $1,473,458 to a third party, and net cash of $1,270,070 used in investing activities from discontinued operation netting off against proceeds of $500,000 from disposal of discontinued operations and proceeds of $122,481 from disposal of one used luxurious car in August 2018. The cash provided by investing activities for the nine months ended September 30, 2017 was mainly caused by net cash provided by investing activities from discontinued operation.

Net Cash Provided by Financing Activities

During the nine months ended September 30, 2018, the cash provided by financing activities is mainly attributable to a bank borrowing of $1,473,458, a loan borrowed from a third party of $153,485, and capital of $3,265,371 raised from private placements.

During the nine months ended September 30, 2017, the Company raised proceeds of $1,560,000 from private placements.

Contractual Obligations

As of September 30, 2018, the annual amounts of future minimum payments under certain of our contractual obligations were:

Critical Accounting Policies

Please refer to Note 2 of our Unaudited Condensed Consolidated Financial Statements included in this Form 10Q for details of our critical accounting policies.

Recent Accounting Pronouncements

Please refer to Note 2(b) of our Unaudited Consolidated Financial Statements included in Form 10-Q for details of our recently issued accounting standards.