BAIYU Holdings, Inc. - Quarter Report: 2018 March (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 March 31, 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)

+86-512 6396-0022

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 May 15, 2018, 22,236,579 shares of the Company’s Common Stock, $0.001 par value per share, were issued and outstanding.

PART 1. 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 LOSS

See notes to the consolidated financial statements

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 THREE MONTHS ENDED MARCH 31, 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 set up HC High Summit Holding Limited (“HCHS”), a wholly owned subsidiary, in British Virgin Island (“BVI”). HCHS is authorized to issue 50,000 shares, at par value of $1.00 per share.

VIE AGREEMENTS WITH WUJIANG LUXIANG

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

The significant terms of the VIE Agreements are summarized below:

Exclusive Business Cooperation Agreement

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

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

Share Pledge Agreement

Under the Share Pledge Agreement between the Wujiang Luxiang Shareholders and WFOE, the 12 Wujiang Luxiang Shareholders pledged all of their equity interests in Wujiang Luxiang to WFOE to guarantee the performance of Wujiang Luxiang’s obligations under the Exclusive Business Cooperation Agreement. Under the terms of the agreement, in the event that Wujiang Luxiang or its shareholders breach their respective contractual obligations under the Exclusive Business Cooperation Agreement, WFOE, as pledgee, will be entitled to certain rights, including, but not limited to, the right to collect dividends generated by the pledged equity interests. The Wujiang Luxiang Shareholders also agreed that upon occurrence of any event of default, as set forth in the Share Pledge Agreement, WFOE is entitled to dispose of the pledged equity interest in accordance with applicable PRC laws. The Wujiang Luxiang Shareholders further agree not to dispose of the pledged equity interests or take any actions that would prejudice WFOE’s interest.

Exclusive Option Agreement

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

Power of Attorney

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

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

Timely Reporting Agreement

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

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

INCORPORATION OF PFL

On September 5, 2013, our wholly owned subsidiary, CCC International Investment Holding Ltd. (“CCC HK”), established Pride Financial Leasing (Suzhou) Co. Ltd. (“PFL”) in Jiangsu Province, China. PFL was expected to offer financial leasing of machinery and equipment, transportation vehicles, and medical devices to municipal government agencies, hospitals and SMEs in Jiangsu Province and beyond. As of March 31, 2018, PFL had no continuous financial lease transactions. 

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

The following includes conditions give rise to substantial doubt about the Company’s ability to continue as a going concern within one year from the financial statements issuance date and management’s plans to mitigate these adverse conditions:

The Company had an accumulated deficit of US$81,920,294 as of March 31, 2018. In addition, the Company had a negative net asset of US$4,450,241 as of March 31, 2018.  As of March 31, 2018, the Company had cash of US$2,265,145 and total liabilities other than accrual for financial guarantee services of $1,875,894. Caused by the limited funds, the management assessed that the Company was not able to keep the size of lending business within one year from the financial statement issuance date.

The Company is actively seeking other strategic partners with experience in lending business.

During the three months ended March 31, 2018, the Company incurred operating loss of US$385,898. Affected by the reduction of lending business and guarantee business, the management was in the opinion that recurring operating losses would be made continue within one year from the financial statements issuance date.

The Company continues to use its best effort to improve collection of loan receivable and interest receivable. Management engaged one PRC law firm to represent the Company in the legal proceedings against the borrowers and their counter guarantors.

During the three months ended March 31, 2018, the Company incurred negative operating cash flow of US$608,646. Affected by significant balance of charged-off interest receivable, the management assessed the Company would continue to have negative operating cash flow within one year from the financial statements issuance date.

Since January 1, 2018, the Company is making efforts to introduce new businesses to improve the operating cash flow of the Company.  

Most loan customers are from textile industry which has been facing downward pressure. Additionally adversely affected by emergence of internet finance entities, the Company was facing fierce competition. Considering the high risks from both customers and competitors, management assessed the Company would further reduced the loan business without strong financial support.

The Company is actively seeking other strategic partners with experience in lending business.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

The Company has been actively seeking strategic investors with experience in lending business as well as financial investors. Management had  invested in the Company during the year ended December 31, 2017 and will continue to invest in the Company during the year ended December 31, 2018, if necessary.

The Company plans to continue to seek financial as well as strategic investors for additional financing.

On April 11, 2018, the Company closed a private placement to two individual investors in China for a gross proceeds of US$500,000 at a per share price of US$0.77.  The net proceeds of the sale of the shares shall be used by the Company for working capital and general corporate purpose. 

Although we have continued to use our best effort to improve our collection of loan receivable and interest receivable by engaging local law firms in China, it has been very difficult for us to collect from the borrowers. As such, the Company has been actively seeking strategic acquisition of business or assets to improve our liquidity. Since the termination of the Exchange Agreement with Sorghum in last December, we have evaluated a few potential acquisition targets. As of now, the Company plans to acquire certain second-hand luxury cars dealership business assets or other appropriate business deemed to be appropriate by the board of directors.

On April 28, 2018, the Company entered into certain securities purchase agreements (the “Initial SPAs”) with certain “non-U.S. Persons” (the “Purchasers”) as defined in Regulation S of the Securities Act of 1933, as amended (the “Securities Act”) pursuant to which the Company agreed to sell 1,336,314 shares of its common stock (“Common Stock”), par value $0.001 per share, at a per share purchase price of $0.78. The net proceeds to the Company from the Initial SPAs Offering will be approximately $1,042,324. The Initial SPAs are part of the subscription the Company received in a private placement offering (the “Offering”) of its Common Stock at a per share purchase price of $0.78 up to an aggregate gross proceeds of three million dollars ($3,000,000) to “non-U.S. Persons” as defined in Regulation S. The Offering shall be on a rolling basis until June 30, 2018 unless the Company extends for an additional 30 days at its sole discretion. The net proceeds of the Offering shall be used by the Company in connection with the Company’s planned operation (the “Planned Business”) of certain used luxurious car leasing or other related business as approved by the board of directors of the Company.  On May 10, 2018, the Company issued the 1,336,314 shares of Common Stock to the Purchasers since all the closing conditions of the Initial SPAs have been satisfied when the Company obtained required license to carry out the used luscious car leasing business.

Though management had plans to mitigate the conditions or events that raise substantial doubt, there is substantial doubt about the Company’s ability to continue as a going concern within one year from the financial statements issuance date, as there is no assurance that the liquidity plan will be successfully implemented. Failure to successfully implement the plan will have a material adverse effect on the Company’s business, results of operations and financial position, and may materially adversely affect its ability to continue as a going concern.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

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

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

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s unaudited condensed financial position as of March 31, 2018, its unaudited condensed results of operations for the three months ended March 31, 2018 and 2017, and its unaudited condensed cash flows for the three months ended March 31, 2018 and 2017, as applicable, have been made. The unaudited interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

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

Adoption of ASC Topic 606, “Revenue from Contracts with Customers” (“Topic 606”)

Effective January 1, 2018, the Company adopted Topic 606 using modified retrospective approach applied its contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are accounted for and presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with ASC Topic 605 “Revenue Recognition”.

We recognize revenue when control of the promised services is transferred to our traders and offering agents. Revenue is measured at the transaction price which is based on the amount of consideration that the Company expects to receive in exchange for transferring the promised services to our loan customers. During the three months ended March 31, 2018, the Company did not generate service fees from direct loan customers.

Pursuant to ASC606-10-15-2, the interest income generated by the Company which is in industry of national commercial bank and commission generated from financial guarantee services are scoped out of ASC606.

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

During the three months ended March 31, 2018 and 2017, no interest was reversed as interests on aged loan receivables were reversed before the presented periods.

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

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

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

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

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

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

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

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

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. Financial instruments representing credit risk are as follows:

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

A provision for possible loss to be absorbed by the Company for the financial guarantee it provides is recorded as an accrued liability when the guarantees are made and recorded as “Accrual for financial guarantee services” on the consolidated balance sheets. This liability represents probable losses and is increased or decreased by accruing a “(Provision)/ Reversal of provision for financial guarantee services” against the income of commissions and fees on guarantee services.

This is done throughout the life of the guarantee, as necessary when additional relevant information becomes available. The methodology used to estimate the liability for possible guarantee loss considers the guarantee contract amount and a variety of factors, which include, depending on the counterparty, latest financial position and performance of the borrowers, actual defaults, estimated future defaults, historical loss experience, estimated value of collaterals or guarantees the customers or third parties offered, and other economic conditions such as the economy trend of the area and the country. The estimates are based upon currently available information.

In addition, the Company accrued specific provisions for repayment on behalf of guarantee customers who defaulted on their loans. The Company reviews the provision on a quarterly basis. The allowance are detailed in following table:

The Company recorded a provision of US$104,391 and a reversal of provision US$7,207 for the three months ended March 31, 2018 and 2017, respectively.

As of March 31, 2018 and December 31, 2017, the management charged off specific provision for 31 and 31 customers in the amount of US$10,815,328 and US$10,440,156, considering remote collectability from the customers. 

Non-interest expenses primarily consist of changes in fair value of other noncurrent liabilities, salaries and benefits for employees, traveling cost, entertainment expenses, depreciation of equipment, office rental expenses, legal and consulting expenses, office supplies, etc.

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

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

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

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

We have various share-based awards pursuant to which the employees, consultants and directors of our company are granted share-based compensations.

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

The Company accounts for share-based compensation issued to nonemployees in accordance with the provisions of ASC 505-50 “Equity-Based Payments to Non-Employees” which codified SFAS 123 and the Emerging Issues Task Force consensus in Issue No. 9618, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services”. Measurement of share based payment transactions with non-employees shall be based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of the share based payment transaction should be determined at the earlier of performance commitment date or performance completion date.

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

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

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

As of March 31, 2018, the Company had only one VIE.

The following financial statement amounts and balances of the VIE were included in the audited consolidated financial statements as of March 31, 2018 and December 31, 2017 and for the three months ended March 31, 2018 and 2017:

Credit risk is one of the most significant risks for the Company’s business. Credit risk exposures arise principally in lending activities, finance lease and financial guarantee activities which is an off-balance sheet financial instrument.

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

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

1.1 Lending activities

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

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

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

1.2 Guarantee activities

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

Off-balance sheet commitments with credit exposures are also assessed and categorized with reference to the Guideline and include additional amounts on a specific basis.

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

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

As of March 31, 2018 and December 31, 2017, the Company held cash of US$2,265,145 and US$2,498,194, respectively, that is uninsured by the government authority.

To limit exposure to credit risk relating to deposits, the Company primarily places cash deposits only with large financial institutions in the PRC with acceptable credit ratings.

The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC as well as by the general state of the PRC’s economy. The business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

No customer accounted for more than 10% of total loan balance as of March 31, 2018 and December 31, 2017.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

The interest rates on loan issued ranged between 9.6%~ 19.44% and 9.6%~ 19.44% for the three months ended March 31, 2018 and 2017, respectively.

6.1 Loans receivable consist of the following:

The Company originates loans to customers located primarily in Wujiang City, Jiangsu Province. This geographic concentration of credit exposes the Company to a higher degree of risk associated with this economic region.

All loans are short-term loans that the Company has made to either business or individual customers. As of March 31, 2018 and December 31, 2017, the Company had 37 and 37 business loan customers, and 33 and 34 personal loan customers, respectively. Most loans are either guaranteed by a third party whose financial strength is assessed by the Company to be sufficient or secured by collateral. Allowance on loan losses are estimated loan by loan on a quarterly basis based on an assessment of specific evidence indicating doubtful collection, historical experience, loan balance aging and prevailing economic conditions. No allowance is made for loans subsequently received.

For the three months ended March 31, 2018 and 2017, a reversal of provision of US$330,282  and a provision of US$782,882 were charged to the unaudited condensed consolidated statements of operation, respectively. No write-offs against allowances have occurred for the three months ended March 31, 2018 and 2017.

The following table presents nonaccrual loans with aging over 90 days by classes of loan portfolio as of March 31, 2018 and December 31, 2017, respectively:

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

The following table represents the aging of loans as of March 31, 2018 by type of loan:

The following table represents the aging of loans as of December 31, 2017 by type of loan:

6.2 Analysis of loans by credit quality indicator

The following table summarizes the Company’s loan portfolio by credit quality indicator as of March 31, 2018 and December 31, 2017, respectively:

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

6.3 Analysis of loans by collateral

The following table summarizes the Company’s loan portfolio by collateral as of March 31, 2018:

The following table summarizes the Company’s loan portfolio by collateral as of December 31, 2017:

Guarantee Backed Loans

A guaranteed loan is a loan guaranteed by a third party who is usually a corporation or high net worth individual. As of March 31, 2018 and December 31, 2017, guaranteed loans make up 98.0% and 97.9% of our direct loan portfolio, respectively.

Collateral Backed Loans

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

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

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

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

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

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

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

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

The following tables present the activity in the allowance for loan losses and related recorded investment in loans receivable by classes of the loans individually and collectively evaluated for impairment as of and for the three months ended March 31, 2018 and 2017:

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard, doubtful and loss within the Company’s internal risk rating system as of March 31, 2018:

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard, doubtful and loss within the Company’s internal risk rating system as of December 31, 2017:

As of March 31, 2018 and December 31, 2017, guarantee paid on behalf of guarantee service customers represents payment made by the Company to banks on behalf of six of its third-party guarantee service customers who defaulted on their loan repayments to the banks. Management performs an evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss history, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors.

As of March 31, 2018 and December 31, 2017, the Company charged off allowance for repayment on behalf of customers for 31 and 31 customers in the amount of US$10,815,328 and US$10,440,156, considering remote collectability from the customers. The guarantee paid on behalf of customers were impaired when, based on current information and events, it is probable that the Company would be unable to collect the outstanding balance when due according to the contractual terms of guarantee agreements. Factors considered by management in determining impairment include impairment status, payment ability and intention of counter-guarantee and the probability of collecting scheduled principal and interest payments.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

On September 25, 2014, PFL entered into a finance lease agreement for the leasing of manufacturing equipment with a total lease receivable of US$2.73 million, with a lease term of 2 years. The lease bears an interest rate of 10.36% per annum.

On October 13, 2014, PFL entered into another finance lease agreement for the leasing of manufacturing equipment with a total lease receivable of US$2.88 million, with a lease term of 3 years. The lease bears an interest rate of 11.11% per annum.

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

Following is a summary of the components of the Company’s net investment in direct financing leases as of March 31, 2018 and December 31, 2017:

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

Property and equipment consist of the following:

Depreciation expense totaled US$1,889 and US$1,646 for the three months ended March 31, 2018 and 2017, respectively.

Deposits payable are security deposits required from customers in order to obtain loans and guarantees from the Company. The deposits are refundable to the customers when the customers fulfill their obligations under loan and guarantee contracts. 

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

Other current liabilities as of March 31, 2018 and December 31, 2017 consisted of:

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

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

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

On December 22, 2017, the Court entered a distribution order approving the distribution of the Settlement Stock to the class plaintiffs. The settlement has been finalized, and that thereafter there are no remaining claims outstanding as against the Company with respect to this litigation.

As of March 31, 2018, the $245,000 cash portion of the settlement has been paid in full and 712,500 Class Settlement Shares were issued.

On April 10, 2018, the 237,500 of plaintiff attorney fee shares were issued to plaintiff’s attorney’s broker account.

As of March 31, 2018, the Company accounted for the unissued share settlement of 237,500 shares in the amount of US$261,540  (at market value of $1.10 per share on March 29, 2018) as noncurrent liability. Accordingly the Company recorded expenses of $147,540 for the three months ended March 31, 2018 under the account of “Changes in fair value of noncurrent liabilities”.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

Other operating expenses for the three months ended March 31, 2018 and 2017 consisted of:

Common Stock

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

On December 1, 2017, the Company has entered into a securities purchase agreement with Mr. Yang Jie, a significant shareholder and Vice President of Finance of the Company and Mr. Long Yi, the Chief Financial Officer of the Company to sell 150,000 and 50,000 common shares, respectively, at a per share price of US$3.5, in the total amount of US$525,000 and US$175,000, respectively. On February 20, 2018, the Company issued 50,000 shares of common stocks and warrants to purchase 20,000 shares of common stocks at $4.20 to Mr. Long Yi. As of March 31, 2018, the 150,000 shares of common stocks and related warrants unissued to Mr. Yang Jie. 

On January 19, 2018, the Company issued 712,500 shares common stocks as the share settlement of 950,000 shares as disclosed in Note 13.

As of March 31, 2018, there were 20,013,415 shares of Common Stock issued and outstanding.

Warrants

As of December 31, 2017, the Company had outstanding warrants to purchase 193,370 shares.

On February 20, 2018, the Company issued warrants to purchase 20,000 shares to Mr. Long Yi, as part of the private placements mentioned above. The warrant has an exercise price of $4.2 per share and is exercisable on the date of issuance and expire five years from the date of issuance. The fair value of the warrants aggregated $11,073, estimated by using the Black-Scholes valuation model.

As of March 31, 2018, the Company had outstanding warrants to purchase 213,370 shares.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

The following table sets forth the computation of basic and diluted earnings per common share for the three months ended March 31, 2018 and 2017, respectively:

Basic loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share is the same as basic loss per share due to the lack of dilutive items in the Company for the three months ended March 31, 2018 and 2017. The number of warrants is omitted excluded from the computation as the anti-dilutive effect.

Effective January 1, 2008, the New Taxation Law of PRC stipulates that domestic enterprises and foreign invested enterprises (the “FIEs”) are subject to an uniform tax rate of 25%. A preferential income tax rate of 12.5% is provided to micro-credit companies that are located in Jiangsu Province. Thus, the Company’s loan business segment located in Jiangsu Province benefits from the preferential enterprise income tax rate of 12.5%. Under the PRC tax law, companies are required to make quarterly estimate payments based on 25% tax rate; companies that received preferential tax rates are also required to use a 25% tax rate for their installment tax payments. The overpayment, however, will not be refunded and can only be used to offset future tax liabilities.

The Company evaluates the level of authority for each uncertain tax position (including the potential application of interest and penalties) based on the technical merits, and measures the unrecognized benefits associated with the tax positions. For the three months ended March 31, 2018 and 2017, the Company had no unrecognized tax benefits. As of March 31, 2018, the Company has carry forward net operating losses of US$78,570,841, which will begin to expire as of December 31, 2019. The Company recognized deferred tax assets of US$14,837,696 as of March 31, 2018. However, due to uncertainties surrounding future utilization, the Company estimates there will not be sufficient future income to realize the deferred tax assets. The Company maintains a full valuation allowance on its net deferred tax assets as of March 31, 2018. The Company increased its valuation allowance on deferred tax assets by $ 598,051 from $14,239,645 as of December 31, 2017 to $14,837,696 as of March 31, 2018.

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

The principal components of the Company’s deferred tax assets and liabilities were as follows:

The Company does not have any current and deferred tax expenses for the three months ended March 31, 2018 and 2017.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

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

On December 1, 2017, the Company has entered into a securities purchase agreement with Mr. Yang Jie and Mr. Long Yi to sell 150,000 and 50,000 shares of common stocks, respectively, at a per share price of US$3.5, in the total amount of US$525,000 and US$175,000, respectively. The total amount was received as of March 31, 2018. As of March 31, 2018, the Company has issued 50,000 shares of common stocks to Mr. Long Yi. The shares of common stocks have not been issued to Mr. Yang Jie as of the financial statement issuance date.

Amount due from related parties were as follows:

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

Huichun Qin transferred $1,098,197 (equivalent of RMB 7 million) to his personal account without proper authorization on July 2, 2014. As of March 31, 2018, Huichun Qin has not repaid the balance. The amount was recorded as a deduction of the Company’s equity as of March 31, 2018 and December 31, 2017, respectively.  The management is making efforts to collect the outstanding balance from Huichun Qin’s family and was in the opinion that the collection is probable.

Amount due to related parties were as follows:

The balance due to Wujiang Xiaocun Shengda Founding Investment Co., Ltd. represented operating expenses paid by this related party on behalf of the Company. The balance was payable on demand and free of interest.

The balances due to Mr. Yang Jie and Mr. Long Yi mainly represented the amount advanced from the management for purchase of shares and warrants in the private placements closed in 2018. As of March 31, 2018, the Company has issued 50,000 shares of common stocks and 20,000 shares of warrants to Mr. Long Yi. The shares of common stocks and warrants have not been issued to Mr. Yang Jie as of the financial statement issuance date. 

During the year ended December 31, 2016, the Company leased its new office under a lease agreement from January 1, 2017 to December 31, 2019. As a result, in January 2017, the Company terminated the lease agreement for its former principal office which agreement was to expire on May 31, 2021. No default penalty was paid for the earlier termination. We leased certain office space in New York, NY where we paid a monthly rent of US$3,600 during 2018. The following table sets forth the Company’s contractual obligations as of March 31, 2018 in future periods: 

The guarantees will terminate upon payment and/or cancellation of the obligation; however, payments by the Company would be triggered by failure of the guaranteed party to fulfill its obligation covered by the guarantee. Generally, the average guarantee expiration terms ranged within 12 to 24 months and the average percentage of the guarantee amount as security deposit is 10% ~ 20%. As of March 31, 2018 and December 31, 2017, the loan amount guaranteed by the Company was US$12,044,836 and US$11,627,013, respectively, for its financial guarantee service customers. 

The Company is involved in various legal actions arising from providing financial guarantee services to defaulted guarantees. As of March 31, 2018, eleven cases against the Company was finally adjudicated by the Court, in which the Company was jointly liable, together with the defaulted customers and other guarantees, to repayment the principal, interest and penalties of $6.91 million. Additionally, three cases against the Company has not been adjudicated by the Court, in which the Company was jointly liable, together with the defaulted customers and other guarantees, to repayment the principal, interest and penalties of $2.97 million.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

The Company is involved in various legal actions arising in the ordinary course of its business to collect delinquent balances from borrowers and guarantees. As of March 31, 2018, 4 cases with an aggregated claim of US$2.3 million have not been finally adjudicated by the Court. At this stage of the proceedings, the Company is not able to estimate the probability of success or loss.

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

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

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

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

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

On November 22, 2016, the Company entered into a Stipulation and Agreement of Settlement (the “Stipulation”) to settle the Securities Class Action. The Stipulation resolves the claims asserted against the Company and certain of its current and former officers and directors in the Securities Class Action without any admission or concession of wrongdoing or liability by the Company or the other defendants. The Stipulation also provides, among other things, a settlement payment by the Company of $245,000 in cash and the issuance of 950,000 shares of its common stock (the “Settlement Shares”) to the plaintiff’s counsel and class members. The terms of the Stipulation were subject to approval by the Court following notice to all class members. The issuance of the Settlement Shares are exempt from registration pursuant to Section 3(a)(10) of the Securities Act of 1933, as amended. A fairness hearing was held on May 30, 2017, and the Court approved the settlement. On December 22, 2017, the Court entered a distribution order approving the distribution of the Settlement Stock to the class plaintiffs. The $245,000 cash portion of the settlement has been paid in full. The 712,500 Class Settlement Shares were issued on or about January 19, 2018. The settlement has been finalized, and that thereafter there are no remaining claims outstanding as against the Company with respect to this litigation. On April 10, 2018, the 237,500 of plaintiff attorney fee shares were issued to plaintiff’s attorney’s broker account. 

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

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

On February 3, 2015, a purported shareholder KiramKodali filed a putative shareholder derivative complaint in the United States District Court for the Southern District of New York, captioned KiranKodali v. Huichun Qin, et al., Case No. 15-cv-806. The action alleges that the Company and its current and former officers and directors Huichun Qin, Long Yi, Jianming Yin, Jinggen Ling, Chunfang Shen, John F. Levy, Xiaofang Shen and Chunjiang Yu violated their fiduciary duties, grossly mismanaged the Company and were unjustly enriched based upon the transfer that was the subject of the Internal Review and other grounds substantially similar to those asserted in the class action complaints. Kodali did not serve a demand upon the Company and alleges that demand is excused. The Company and Mr. Levy are the only defendants who have been served. An amended derivative complaint was filed on April 20, 2015. 

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

The Company intends to vigorously defend against it. At this stage of the proceedings, the Company is not able to estimate the probability of success or loss. The Court ordered CCCR to answer or otherwise move with respect to this action on or before November 13, 2017. Thereafter, CCCR and Mr. Levy submitted a pre-motion letter to the Court requesting permission to move to dismiss the derivative complaint; submission of this letter stayed the proceedings pending the Court’s review thereof. The Court held a hearing on this pre-motion letter on January 22, 2018, denying permission to file a motion to dismiss the complaint without prejudice and setting forth a schedule under which Kodali must serve the remaining defendants in the derivative litigation. The parties are due to file a joint status report on May 21, 2018. On behalf of the Company and Mr. Levy, this firm is engaged in active settlement discussions with counsel for Kodali, but the parties have not entered into a settlement agreement. 

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

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

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

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017 

On January 25, 2018, the Company filed an arbitration demand (“Arbitration Demand”) with the American Arbitration Association (“AAA”) against Sorghum in connection with Sorghum’s breach of the Exchange Agreement. On December 21, 2017, prior to filing the Arbitration Demand, the Company provided Sorghum with formal notice of its breaches to the Exchange Agreement. The AAA has forwarded the Company’s Arbitration Demand to Sorghum, and Sorghum’s response to the Arbitration Demand was due on or before February 14, 2018. Sorghum did not provide a written response to the Company’s Arbitration Demand by the deadline. However, in accordance with the Commercial Arbitration Rules of the AAA (“Rules”), Sorghum’s failure to respond is deemed as a general denial of the Company’s claims. On March 14, 2018, the AAA initially appointed a single arbitrator to the matter subject to the parties’ approval. On March 28, 2018, the AAA conducted an initial telephonic conference with Arbitrator Barbara Mentz, but neither Sorghum nor its counsel appeared for the call. On March 28, 2018, after the Company’s counsel appeared for the initial telephonic conference, Sorghum and its counsel contacted the AAA claiming that it was not in receipt of the AAA’s correspondence although the AAA forwarded its correspondence to Sorghum’s Chief Executive Officer’s active email. In response, the AAA scheduled another telephonic conference for April 9, 2018. All parties appeared at the April 9, 2018 conference, and approved Arbitrator Mentz’s appointment. On April 11, 2018, pursuant to the Rules, Sorghum filed its answer and counterclaim. The Company filed a written denial to Sorghum’s counterclaim on April 26, 2018. On May 2, 2018, the parties jointly requested an extension of time to file their respective proposals for resolution with the AAA, and Arbitrator Mentz granted the extension. In accordance with Arbitrator Mentz’s Order, the parties’ proposals are due May 31, 2018. The Company intends to prosecute its claims and defend against Sorghum’s counterclaim vigorously.

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

We have been advised that the Financial Industry Regulatory Authority (“FINRA”) (formerly, the NASD) is   conducting a review of trading in the Company surrounding the December 27, 2017 Form 8-K filing report, that on December 21, 2017, the company notified Sorghum Investment Holdings, Ltd. that certain recent actions of Sorghum constitute a breach of Sorghum’s covenants under the Share Exchange Agreement dated August 9, 2017 (the “corporate disclosure”). We have been responding to FINRA’s request for information and intend to continue to cooperate in the investigation. Although we cannot, at this time, assess either the duration or the likely outcome or consequences of this investigation, FINRA has the authority to impose sanctions on our Company that could adversely affect its effectiveness in that capacity.

During the course of preparing the 2017 consolidated financial statements, certain errors to the previously issued unaudited condensed consolidated financial statements appearing in the Quarterly Report on Form 10-Q for the three months ended March 31, 2017 filed with SEC on May 18, 2017, were discovered by management. The errors related to the accounting of the settlement shares agreed upon per the Stipulation (See Note 13). These settlement shares have not been issued until January 19, 2018 and April 10, 2018, respectively. These settlement shares should be recorded in accordance ASC 450-20, Loss Contingencies, and as a result the share settlement should be also accounted for as a liability measured at market value of share price rather than accounting for contracts to be settled with the Company’s own equity. After the errors have been quantified, the previously-issued financial statements have been evaluated to determine whether they are materially misstated in accordance with guidance provided in SAB Topic 99 and the Company has concluded the previously-issued 2016 consolidated financial statements are not materially misstated and the errors will be corrected prospectively.  As a result, the Company made the corrections to the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2017 and condensed consolidated statements of cash flows for the three months ended March 31, 2017 contained in this Form 10-Q.

The effects of the restatement on the Company’s condensed consolidated statements of operations and comprehensive loss and earnings per share for the three months ended March 31, 2017 are as follows:

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017 

The effects of the restatement on the Company’s condensed consolidated statements of cash flows for the three months ended March 31, 2017 are as follows:

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

During the period from April 1, 2018 to the date of this report, the Company assessed the charged-off loan and guarantee balances recorded as of March 31, 2018 and was of the opinion that charged off loan balance of US$22,605,017 and charged off guarantee balance of US$10,815,328 were uncollectible. In addition, the Company assessed the remaining balances of loan receivable and financial guarantee and was of the opinion that it was not necessary to charge-off these balances.

On April 10, 2018, the Company issued the remaining 237,500 shares of common stocks as the share settlement of 950,000 shares as disclosed in Note 13 to Levi & Korsinsky.  Besides the Company sold 649,350 shares of newly issued common stocks to certain individual investors in exchange of $500,000.

On April 28, 2018, the Company entered into certain securities purchase agreements (the “Initial SPAs”) with certain “non-U.S. Persons” as defined in Regulation S of the Securities Act of 1933, as amended pursuant to which the Company agreed to sell 1,336,314 shares of its common stock, par value $0.001 per share, at a per share purchase price of $0.78. The net proceeds to the Company from the Initial SPAs Offering will be approximately $1,042,324.

CHINA COMMERCIAL CREDIT, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017 

On May 10, 2018, the Company through the WFOE, entered into a series of Agreements with Beijing Youjiao Technology Limited (“Beijing Youjiao”) and Aizhen Li, the sole shareholder of Beijing Youjiao.

On April 16, 2018, HCHS set up HC High Summit Limited (“HCHS HK”), a wholly owned subsidiary, in Hong Kong. On April 17, 2018, the Company, through its subsidiary, established Tianxing Haoche Technology (Beijing) Co. Ltd. (“Beijing WFOE”). On May 17, 2018, Beijing WFOE entered into a series of agreements (“Kunlun VIE Agreements”) with Beijing Tianxing Kunlun Technology Co. Ltd. (“Kunlun”) and Shun Li and Jialin Cui, the shareholders of Beijing Kunlun.

Overview

We are a financial services firm operating in China. Our current operations are mainly conducted through Wujiang Luxiang, a fully licensed microcredit company which we control through our subsidiaries and certain contractual arrangements, and consist of providing short-term direct loans and loan guarantees to small and medium enterprises (“SME”s) located in Wujiang City, Jiangsu Province of China. As of March 31, 2018, we have built a US$42.5 million portfolio of direct loans to 70 borrowers and a total of US$12.0 million in loan guarantees for 14 borrowers. Additionally, we accrued allowance for loan losses of $37.6 million and allowance for financial guarantee services of $9.9 million. We were established under the 2008 Guidance on the Small Loan Company Pilot of the China Banking Regulatory Commission and the People’s Bank of China (“PBOC”) (No.23) (“Circular No. 23”) to extend short term loans and loan guarantees to SMEs, a class of borrowers that we believe have been underserved in the Chinese lending market. The loans that we provide bridge the gap between Chinese-state run banks that have not traditionally served the capital needs of SMEs and high interest rate “underground” lenders, and our loans provide capital at more favorable terms and sustainable interest rates.

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

On September 5, 2013, our wholly owned subsidiary, CCC International Investment Holding Ltd. (“CCC HK”), established Pride Financial Leasing (Suzhou) Co. Ltd. (“PFL”) in Jiangsu Province, China. PFL was expected to offer financial leasing of machinery and equipment, transportation vehicles, and medical devices to municipal government agencies, hospitals and SMEs in Jiangsu Province and beyond. As of the date of this report, PFL entered into two financial leasing agreements for an aggregate lease receivable of US$5.61 million (one with a monthly principle and interest income approximating US$81,600 for the period during November 13, 2014 to May 12, 2015, and approximating US$80,000 for the period from May 13, 2015 and thereafter. The other financial leasing agreement, with a quarterly principle and interest income approximating US$342,800, did not provide continuous financial leasing services. We do not currently have further funds to deploy in the financial leasing business.

Key Factors Affecting Our Results of Operation

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

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

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

Results of Operations

Three Months Ended March 31, 2018 as Compared to Three Months Ended March 31, 2017

The Company’s net loss for the three months ended March 31, 2018 was US$385,898, representing a decrease of US$842,179, or 69%, from net loss of US$1,228,077 for the three months ended March 31, 2017. The change in net loss for the three months ended March 31, 2018 was the net effect of the changes in the following components:

The following paragraphs discuss changes in the components of net loss in greater details during the three months ended March 31, 2018, as compared to the three months ended March 31, 2017.

Net Interest Income

Net interest income is equal to interest income we generated less interest expense on short-term bank loans. The Company’s net interest income decreased by US$6,004, or 6% to US$100,772 during the three months ended March 31, 2018, as compared to net interest income of US$106,776 during the three months ended March 31, 2017.

The interests and fees on loans, direct financing leases and deposits with banks decreased by US$6,004, or 6% from US$106,776 for the three months ended March 31, 2017 to US$100,772 for the three months ended March 31, 2018. The decrease is mainly caused by the decrease in the amount of monthly interest received from long-aged loans resulting from the existing customers’ deteriorating loan quality.

Typically, bank lenders require that a prior loan to be paid in full upon maturity before they approve a new loan to the same borrower. There are banks which have denied to extend new loans to some SMEs even after they made the full repayment for the loans due and satisfied other conditions. As a result, some SMEs have had to borrow from so-called “underground” lenders, or shadow banks to repay the loans due to the banks. Management is concerned that the borrowers may use the proceeds from the loans we grant to them, as a means of repayment to the other banks or even to the underground lenders, instead of using them in operations. Therefore, management decided to grant new loans in a more cautious manner. During the three months ended March 31, 2018, we renewed two existing loans. As of March 31, 2018, we had 106 loans with an average loan size of US$401,063. The loan balance of $37.55 million was accrued of full allowance for uncollectible loans. During the three months ended March 31, 2018, loans of $4.97 million generated interests and fees on loan.

Due to the long-term nature of our restricted deposits with third party banks, we utilized these deposits as term deposits which in turn generated interest income on deposits with banks of US$3,777 during the three months ended March 31, 2018 as compared to US$102 during the three months ended March 31, 2017. This result was caused by the contraction of our traditional guarantee business with banks, we have closed several restricted deposit accounts with banks through which we provided guarantee services to our customers. As a result, the interest income on deposits with bank was insignificant during the three months ended March 31, 2018 and 2017, respectively.

Provision for Loan Losses

The Company reversed a provision for loan losses of US$330,282 and provided a provision for loan losses of US$782,882 for three months ended March 31, 2018 and 2017, respectively. The provision for loan losses was determined by comparing the beginning and ending balance of allowance for loan losses for business and personal loans. If the ending balance of the allowance of loan losses after any charge offs (net of recoveries) is less than the beginning balance, it will be recorded as a “reversal” if it is larger, it will be recorded as a “provision” in the allowance for loan loss. The netting amount of “reversal” and “provision” is presented in the consolidated statements of operations and comprehensive loss and the components of the provision for loan losses were disclosed in Note 7 of financial statements.

Based on the management assessment over each individual loan in terms of the customers’ payment ability, and payment intention, almost all of the loan balances were classified as “loss” loans as of December 31, 2017. As a result, less “doubtful” loans rolled to “loss” loans during the three months ended March 31, 2018 as compared to that during the three months ended March 31, 2017. This has led to a reversal of loan losses for during the three months ended March 31, 2018 because the Company collected some loan repayments whose balances were accrued of allowance as of December 31, 2017, as compared to an accrual of loan losses during the three months ended March 31, 2017. 

Since the beginning of 2014, the economic conditions in the eastern part of China, especially the Yangtze River Delta region, has been challenging due to the downturn of the general economic situation in China. Wujiang, which is in the heart of this region, has been significantly affected. As the local SMEs’ profitability and repayment ability deteriorates, “doubtful” and “loss” bank loans drastically increased. As such, our provision for loan losses substantially increased since 2014 and we had a significant allowance balance for loan losses as of March 31, 2018 and December 31, 2017.

In December 2017, the Company reviewed the classification of its loan portfolios within its rating system to test the adequacy of the allowances calculated thereby. As a result of such testing, the Company decided to reclassify certain loans into different categories. The Company reviewed the profile, financial condition and other relevant information and documents of each customer in the lending businesses. For customers with several loans, each having a different due date, if one of their loans was past due, the Company decided to reclassify all loans of the customer’s as past due (even the other loans that were not mature yet). For extended loans, the Company re-evaluated the customer’s repayment ability in a more cautious manner and reclassified the loans of customers without very strong financial condition into the past due category. These reclassifications affected numerous customer accounts.

During the three months ended March 31, 2018, management continued to assess the adequacy of the allowances and charges-off in a cautious manner. Management assessed the collectability of loan receivable balances on an individual basis, and concluded that the collection from certain borrowers is remote. For loans charged off as of March 31, 2018, management concluded that these borrowers had neither ability nor intention to make repayment as (1) these charged loans are guarantee backed loans which are subordinated to asset backed loans these borrowers obtained from the banks; (2) most of our borrowers or their guarantors are in the textile industry and the majority of the textile businesses are struggling due to the continued and worsened downturn trend in China’s macro-economic environment during the three months ended March 31, 2018. Quite a number of textile businesses went bankrupt; and (3) management was advised by local counsels representing the Company in the collection lawsuits that the chances of collection is quite remote given the large scale defaults in both large and small businesses in Wujiang region.

Net Commission and Fees on Guarantee Business

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

As of March 31, 2018, the off-balance-sheet financial guarantee amounted to US$12.0 million. The commissions and fees generated from our financial guarantee services decreased from US$2,843 for the three months ended March 31, 2017 to US$nil for the three months ended March 31, 2018. The reduction was due to the fact that the Company did not provide financial guarantee services as management reduced the guarantee portfolio to control the default risk.

As of March 31, 2018, we have provided guarantees for a total of US$12.0 million underlying loans to 14 financial guarantee service customers, as compared to a total of US$11.6 million as of December 31, 2017.

Provision on Financial Guarantee Services 

The provision for financial guarantee services changed from a reversal of provision of $7,207 for the three months ended March 31, 2017, to a provision of $104,391 for the three months ended March 31, 2018, representing a change of $111,598. The change was mainly attributable to accrual of provision of approximating $276,935 for interest, penalty and other expenses arising from default of repayment of loans on which the Company provided financial guarantee services, netting off against repayment of $172,544 from defaulted customers of which the Company accrued allowances on payment on behalf of financial guarantee customers.  

The methodology the Company used to estimate the liability for probable guarantee loss considers the guarantee contract amount and a variety of factors, which include, dependence on the counterparty, latest financial position and performance of the customers, actual defaults, estimated future defaults, historical loss experience, estimated value of collaterals or guarantees the costumers or third parties offered, and other economic conditions such as the economic trend of the area and the country. The estimates are based upon currently available information. Based on the recent lawsuit results and repayment status by defaulted customers, the Company estimated approximately 100% and 50% of off-balance-sheet financial guarantee services may be subject to default and their repayment may be considered “not likely”.

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

Since the beginning of 2016, People’s Bank of China injected a significant amount of liquidity to the market to encourage the development of emerging industries such as online-game, filming and virtual reality, which has made it easier than previous two years for entities to gain access to capital. However, the bank lenders are still cautious with SMEs in traditional industries. The bank lenders usually require a prior loan be paid in full upon maturity before they approve a new loan to the same borrower. Since the end of the year ended December 31, 2014, the banks denied to extend new loans to many SMEs even after they made the full repayment for the loans due and satisfied other conditions. As a result, some of the SME borrowers for which we provided the guarantees decided to default on the bank loans. Therefore the amount of repayment we made to the bank lenders substantially increased since the year ended December 31, 2014. We have brought collection actions against both the borrowers and their counter-guarantors. However, management was advised by counsel in the collection action that the chance of collection is remote given the large scale bad debt prevalent in Wujiang region. As of March 31, 2018 and December 31, 2017, the management charged off specific provision for 31 and 31 customers in the amount of US$10,815,328 and US$10,440,156, respectively.

In December 2017, the Company revisited the classification of its guarantee portfolios within its rating system to test the adequacy of the allowances calculated thereby.  As a result of such testing, the Company decided to reclassify certain guarantees into different categories. The Company reviewed the profile, financial condition and other relevant information and documents of each customer in the guarantee businesses. For customers with several guarantees, each having a different due date, if one of their guaranteed loan was past due, the Company decided to reclassify all of this customer’s guaranteed loans as past due (even the other loans that were not mature yet). These reclassifications affected numerous customer accounts. We engaged He-Partners Law Firm, one of the largest law firms in Suzhou City, to represent us in the legal proceedings against the borrowers and their counter guarantors, and expect to collect part of the outstanding balance in a period ranging from six twelve months to one and a half year upon adjudication by the court in favor of the Company. The timing of collection and ultimate amount of funds we can recover depends on a few factors, including the repayment ability of the borrower and their counter-guarantors, the execution time of the court, other obligations the borrowers have and priority over the claim for the Company.

Non-interest Expenses

Non-interest expenses increased from US$598,215 for the three months ended March 31, 2017 to US$712,126 for the three months ended March 31, 2018, representing an increase of US$113,911, or 19%. Non-interest expenses primarily consisted of salary and employee surcharge, office rental expense, business tax and surcharge, changes in fair value of other noncurrent liabilities, depreciation of equipment, travel expenses, entertainment expenses, professional service fees, and other office supplies. The increase was mainly attributable to net effects of a decrease of salaries and employee surcharge by US$226, 131, or 60%, a decrease of rental expenses by US$4,948, or 36% against an increase in change of fair value of other noncurrent liabilities for settlement of shares for the shareholders’ lawsuit by 204,540 and an increase in other operating expenses of $132,399, which is mainly caused by increase of legal and consulting expenses of US$97,953 as a result of increased legal proceedings the Company was involved to collect delinquent balances from borrowers and guarantees.

Loan Portfolio Quality

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

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

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

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

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

We use a comprehensive methodology to monitor credit quality and prudently manage credit concentration within our portfolio of loans. Currently our loan portfolio concentrates in the textile industry and during the three months ended March 31, 2018, the domestic demand for textile products have been decreasing. To maintain our loan portfolio quality, we have modified our loan policy to accept only textile companies with real estate as collateral or guaranteed by guarantee companies.  During the three months ended March 31, 2018, we assessed the loan portfolio quality and was in the opinion that the loans that were charged off in previous periods were uncollectible.

In addition, we plan to minimize our risks by concentrating on smaller amount loans that are below US$478,000 (or approximately RMB 3.0 million).

Currently, the banking industry encourages SMEs to apply for loans as individuals with recourse so that when it is past due, both the SME and the responsible individual are both liable for the past due amount and the individual borrower carries personal liability.

Affected by above factors, as of March 31, 2018, our loan balance experienced an increase of US$1,448,907 in business loan and an increase of US$385,458 in personal loan, as compared to that as of December 31, 2017.

The following table sets forth the classification of loans receivable as of March 31, 2018 and December 31, 2017, respectively:

Nonaccrual loans totaled US$37.55 million, or 88.32% of loans receivable as of March 31, 2018, as compared with US$36.81 million, or 90.48% of loans receivable, as of December 31, 2017. The allowance for loan losses was US$37.59 million, representing 88.43% of loans receivable and 100.13% of non-accrual loans as of March 31, 2018. As of December 31, 2017, the allowance for loan losses was US$36.61 million, representing 90.00% of loans receivable and 99.48%% of non-accrual loans.

The following table sets forth information concerning our nonaccrual loans as of March 31, 2018 and March 31, 2017, respectively:

As a traditional industry textiles, which is the pillar industry in Wujiang area, as well as other industries, have been facing downward pressure. As the local SMEs’ profitability and repayment ability deteriorates, “special mentioned”, “substandard” and “doubtful’ bank loans drastically increased. As such, our provision for loan losses remained at a high level as of March 31, 2018.

During the three months ended March 31, 2018, we reassessed the collectability of the loans and was in the opinion that the loans that were charged off in previous periods were uncollectible. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.

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 cash outflows for daily operations, net cash decreased from US$2,498,194 as of December 31, 2017 to US$2,265,145 as of March 31, 2018.

Going Concern 

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

The following includes conditions which give rise to substantial doubt about the Company’s ability to continue as a going concern within one year from the financial statement issuance date and management’s plans to mitigate these adverse conditions:

The Company had an accumulated deficit of US$81,920,294 as of March 31, 2018. In addition, the Company had a negative net asset of US$4,450,241 as of March 31, 2018.  As of March 31, 2018, the Company had cash of US$2,265,145 and total liabilities other than accrual for financial guarantee services of $1,875,894. Caused by the limited funds, the management assessed that the Company was not able to keep the size of lending business within one year from the financial statement issuance date.

The Company is actively seeking other strategic partners with experience in lending business.

During the three months ended March 31, 2018, the Company incurred operating loss of US$385,898. Affected by the reduction of lending business and guarantee business and increased loss loans, management was of the opinion that recurring operating losses would continue, within one year from the financial statement issuance date.

The Company continues to use its best efforts to improve collection of loans receivable and interest receivable. Management engaged a PRC law firms to represent the Company in the legal proceedings against the borrowers and their counter guarantors.

During the three months ended March 31, 2018, the Company incurred negative operating cash flow of US$608,646. Affected by significant balance of charged-off interest receivable, the management assessed the Company would continue to have negative operating cash flow within one year from the financial statements issuance date.

Since January 1, 2018, the Company is making efforts to introduce new businesses to improve the operating cash flow of the Company.

Most loan customers are from textile industry which has been facing downward pressure. Additionally, the Company has been facing fierce competition and has been adversely affected by emergence of internet finance entities. As such, considering the high risks from both customers and competitors, management assessed the Company would further reduced the loan business without strong financial support.

The Company is actively seeking other strategic partners with experience in lending business.

The Company has been actively seeking strategic investors with experience in lending business as well as financial investors. Management also invested in the Company during the year ended December 31, 2017 and plans continue to invest in the Company during the year ended December 31, 2018, if necessary.

The Company plans to continue to seek financial as well as strategic investors for additional financing.

On April 11, 2018, the Company closed a private placement to two individual investors in China for a gross proceeds of US$500,000 at a per share price of US$0.77. The net proceeds of the sale of the shares shall be used by the Company for working capital and general corporate purpose.

Although we have continued to use our best efforts to improve our collection of loan receivable and interest receivable by engaging local law firms in China, it has been very difficult for us to collect from the borrowers. As such, the Company has been actively seeking strategic acquisition of business or assets to improve our liquidity. Since the termination of the Exchange Agreement with Sorghum in last December, we have evaluated a few potential acquisition targets. As of now, the Company plans to acquire certain second-hand luxury cars dealership business assets or other appropriate business deemed to be appropriate by the board of directors. As of the date of this Quarterly Report, the Company has not entered into any letter of intent or definitive agreement for such acquisition and there can be no assurance that we will be able to locate any target or negotiate definitive agreements.

On April 28, 2018, the Company entered into certain securities purchase agreements (the “Initial SPAs”) with certain “non-U.S. Persons” (the “Purchasers”) as defined in Regulation S of the Securities Act of 1933, as amended (the “Securities Act”) pursuant to which the Company agreed to sell 1,336,314 shares of its common stock (“Common Stock”), par value $0.001 per share, at a per share purchase price of $0.78. The net proceeds to the Company from the Initial SPAs Offering will be approximately $1,042,324. The Initial SPAs are part of the subscription the Company received in a private placement offering (the “Offering”) of its Common Stock at a per share purchase price of $0.78 up to an aggregate gross proceeds of three million dollars ($3,000,000) to “non-U.S. Persons” as defined in Regulation S. The Offering shall be on a rolling basis until June 30, 2018 unless the Company extends for an additional 30 days at its sole discretion. The net proceeds of the Offering shall be used by the Company in connection with the Company’s planned operation (the “Planned Business”) of certain used luxurious car leasing or other related business as approved by the board of directors of the Company. On May 10, 2018, the Company issued the 1,336,314 shares of Common Stock to the Purchasers since all the closing conditions of the Initial SPAs have been satisfied when the Company obtained required license to carry out the used luscious car leasing business.

Though management had plans to mitigate the conditions or events that raise substantial doubt, there is substantial doubt about the Company’s ability to continue as a going concern within one year from the financial statements issuance date, as there is no assurance that the liquidity plan will be successfully implemented. Failure to successfully implement the plan will have a material adverse effect on the Company’s business, results of operations and financial position, and may materially adversely affect its ability to continue as a going concern.

Statement of Cash Flows

The following table sets forth a summary of our cash flows For the three months ended March 31, 2018 and 2017, respectively:

Net Cash Used in Operating Activities

During the three months ended March 31, 2018, we had a cash outflow from operating activities of US$608,646, an decrease of cash outflow of US$245,565 from a cash outflow of US$363,081 for the same period of last year. We generated a net loss for the three months ended March 31, 2018 of US$385,898, a change of US$842,179 from the three months ended March 31, 2017, during which we incurred a net loss of US$1,228,077. 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 Provided by Investing Activities 

Net cash provided by investing activities for the three months ended March 31, 2018 was US$332,966 as compared to net cash provided by investing activities of US$674,977 for the three months ended March 31, 2017. The cash provided by investing activities for the three months ended March 31, 2018 was the net effect of disbursement of loans to third party customers of US$1,635,683 against collection of US$1,402,912 from third party loan customers and $172,544 from third party financial guarantee services, respectively, and collection of short-term investments from a financial institution of US$393,193. The cash provided by investing activities for the three months ended March 31, 2017 was combined effects of collection of principals of US$121,931 from third party customers of direct loan business, collection of principal of US$72,578 from direct financing lease customers, and collection of short-term loans from a related party of US$473,210.

Net Cash Provided by Financing Activities

During the three months ended March 31, 2018 and 2017, the Company did not incur any significant financing activities.

Contractual Obligations

As of March 31, 2018, the annual amounts of future minimum payments under certain of our contractual obligations were: