Item 1. Business.
Overview
We strive to become a one-stop shop that focuses on lending service for micro, small-to-medium sized enterprises (“SMEs”) in China. We are primarily engaged in the business of microfinancing services. We operate our direct microfinancing business through our subsidiary, Arki E-Commerce, and our VIE, Arki Network. With the increased difficulty of obtaining sufficient financing through traditional channels by SMEs, we offer SMEs alternative financing means through risk-controlled private lending to meet their capital needs and develop their business. We offer advisory and risk assessment services to both lenders and borrowers to help increase the efficiency of loan origination by financial institutions. It is our belief that the growth of SMEs will become an important factor of China’s economic growth in the next decade. We believe that our expertise in streamlining microfinancing process will place our company in a unique position in the marketplace.
On December 31, 2015, we issued 1,357,300 shares of common stock pursuant to a Regulation S offering for an aggregate offering price of $3,382,500. Also on July 28, 2016, we issued an aggregate of 825,180 shares of the common stock pursuant to another Regulation S offering for an aggregate proceeds of $1,790,640. From these offerings, we raised approximately $5.3 million, approximately $1.5 million were contributed to Consumer Capital DE for working capital needs and approximately $3.7 million were contributed to America Arki Network Service Beijing Co., Ltd. for its microfinancing business.
Our Business
Microfinancing
Currently, we engage in microfinancing business through our subsidiary, Arki E-Commerce and VIE, Arki Network, to provide direct loans to SMEs and sole proprietors based in Liaoning Province. Through Arki Network’s collaboration with China UnionPay Merchant Service (Liaoning) Co. Ltd (“UnionPay Liaoning”), Arki E-Commerce provides private loans for borrowers and Arki Network and UnionPay act as intermediary to facilitate the loan transactions for a 5% service fee. Arki E-Commerce’s practice of microfinancing has been limited to certain businesses and sole proprietors pre-screened and recommended by UnionPay Liaoning based on historical sales volume generated through credit card transactions using UnionPay’s system.
UnionPay Liaoning are incentivized to recommend as many borrowers to us as possible as the additional service fee becomes another source of revenue for their operation. Arki E-Commerce’s practice of microfinancing has been limited to certain businesses and sole proprietors pre-screened by UnionPay Liaoning based on historical sales volume generated through credit card transactions using UnionPay’s system. Once a business owner submits his/her loan application to us, along with a recommendation letter provided by UnionPay Liaoning, Arki Network’s loan servicing team conducts additional due diligence on the quality of the borrowers. The loan servicing team first makes sure that the business is duly incorporated and in good standing with the State Administration for Industry and Commerce. The servicing team will then check business’s credit history based on public records provided by the National Enterprise Credit Information Publicity System. The servicing team will also check business’s history with local tax authority to ensure that it does not have any outstanding tax liability. Lastly, the servicing team will conduct phone or in-person interview with the applicant to verify all necessary information. In certain instance, the servicing team may conduct arbitrary on-site visit to the business to assess the validity of the business. Upon completion of the background check by Arki Network’s servicing team, Arki E-Commerce provides short-term loans in the form of original issue discount (“OID Loans”) to qualified borrowers with pre-set interest rate, terms and conditions. While Arki E-Commerce collects the interest generated through these loans, Arki Network generates revenue through a one-time 3% service fee while UnionPay Liaoning collects an additional 2% service fee based on the loan amount, due upon issuance of the OID Loans. When we first started the microfinancing, because we were a relatively new entry to this market, with the exception of three companies for which we granted loan amount of RMB 1,000,000, we provide loans to business with annual revenue of at least RMB 2,000,000 (approximately US$285,714) with the following terms in order to lower default risk by the borrowers:
● Principal loan amount: RMB 300,000
● Term: 3-6 months
● Security interest is not required
● Interest: 1% per month (in the form of original issue discount)
● Principal amount to be paid in equal monthly tranches with the first payment due at the end of the 1st month
We granted the three larger loans outside of our general practice due our interest in diversifying our loan portfolio and testing out markets’ demand for such products. We haven’t got any bad debt in the past year. And we increased the loan amount on a case by case basis.
Once the loan application is approved by Arki Network, Arki E-Commerce provides funding for the loan to Arki Network, which in turn transfer the funding, net of its service fee, to UnionPay Liaoning, which will wire the fund after deducing its service fee to borrower’s bank account stored in its system, the same account borrower uses for receivables from the credit card transactions. Once payments are due from the borrower, the borrower will send each tranche of repayment directly to Arki Network through Unionpay’s payment processing system and Arki Network will transfer the repayment back to Arki E-Commerce. Neither UnionPay nor Arki Network charges any service fee to process the repayments.
Because there are many SMEs throughout China, we believe that our microfinancing model offers substantial market potential and intend to devote additional resources to apply the business model in other regions throughout China.
Wealth Management
Arki Network through its 51%-owned subsidiary, America Arki (Tianjin) Capital Management Partnership (“Capital”), engages wealth management business. Arki Capital operates its business on its financial advisory platform “Bangnitou”, which translates to “Help You Invest” in English and attracts capital from investors to invest in fixed income opportunities such as inter-bank loans, currency exchange products and other equity investment opportunities to help investor obtain return on their investment. Still at its development stage, Bangnitou will have a number of financial products that aims to generate annual return ranging from 8-12%. The platform will allow retail investors to invest in products for as little as RMB 100 (or approximately US$15). Once each product reaches its maximum subscription or the end of its offering period, the investments are held for a period of time before being redeemable by the investors, along with the return. As of December 31, 2017, Arki Capital has loan payable amount of RMB 26,670,000 (approximately $4,099,315). RMB7,760,000 (Approximately 1,192,751) carry a one year term, and RMB18,910,000 carry a two year term without interest. Upon redemption date, the investors may demand back the funding or stay on as a limited partner. As of the date of this prospectus, Arki Capital invest the fund on the Company’s stock in U.S. capital market. As of December 31, 2017, Arki Capital owns 750,000 shares of the Company’s stock. Arki Capital haven’t sell any of the stock in the past years and therefore not generated any revenue. The funds may be redeemed back by the investors starting in September 2018, or investors may stay on as a limited partner.
We expect Arki Capital to derive substantially all of its revenues from the return generated by the performance of the underlying investment products. It would keep all return in excess of the return that is marketed to the retail investors for the product.
As of December 31, 2017, Consumer Capital DE had a total asset of $5,454,496, a total liability of $726,728, and a total equity of $4,727,768; and that for the fiscal year ended 2016, Consumer Capital DE had a net loss of $58,571 and a total revenue of $0, that for the year ended December 31, 2017, Consumer Capital DE had a net income of $462,097. The net income is brought mainly by the relief of debt by Yinhang on August 31, 2017, and partly due to the refund from IRS for wrongfully garnished of federal income tax in the previous years because of the confusion caused by IRS. As of December 31, 2017, Consumer Capital DE had 3 employees.
As of December 31, 2017, Consumer Capital CA had a total asset of $0, a total liability of $0, and a total equity of $0; and that for the year 2016, Consumer Capital CA had a net income of $0 and a total revenue of $0, that for the year ended December 31, 2017, Consumer Capital CA had a net income of $0. As of December 31, 2017, Consumer Capital CA had 0 employees.
As of December 31, 2017, Arki E-Commerce had a total asset of $1,307,325, a total liability of $2,431,996, and a total equity of $(1,124,672); and that for the year 2016, Arki E-Commerce had a net loss of $215,201 and a total revenue of $0, that for the year ended December 31, 2017, Arki E-Commerce had a net loss of $1,126,542 and a total revenue of $255,901. As of December 31, 2017, Arki E-Commerce had 3 employees.
As of December 31, 2017, American Pine had a total asset of $460,320, a total liability of $97,508, and a total equity of $362,811; and that for the year 2016, American Pine had a net loss of $793 and a total revenue of $0, that for the year ended December 31, 2017, American Pine had a net income of $185,818 (caused by relief of debt from Yinhang) and a total revenue of $0, As of December 31, 2017, American Pine had 0 employees.
As of December 31, 2017, American Arki had a total asset of $392,137, a total liability of $149,033, and a total equity of $243,104; and that for the year 2016, American Arki had a net loss of $724 and a total revenue of $0, that for the year ended December 31, 2017, American Arki had a net income of $401,480 (caused of relief of debt from Yinhang) and a total revenue of $0. As of December 31, 2017, American Arki had 0 employees.
As of December 31, 2017, Arki Network had a total asset of $429,319, a total liability of $1,956,632, and a total equity of $(1,527,313); and that for the year 2016, Arki Network had a net loss of $248,124 and a total revenue of $213,821, that for the year ended December 31, 2017, Arki Network had a net loss of $346,939 and a total revenue of $0. As of December 31, 2017, Arki Network had 4 employees.
As of December 31, 2017, Arki Capital had a total asset of $2,202,031, a total liability of $4,800,199, and a total equity of $(1,325,066); and that for the year 2016, Arki Capital had a net loss of $223,042 and a total revenue of $0, that for the year ended in December 31, 2017, Arki Capital had a net loss of $1,081,966 and a total revenue of $0. As of December 31, 2017, Arki Capital had 5 employees.
Ceased Businesses
On December 23, 2014, we entered into a share exchange agreement with Shanghai Zhonghui Financial Information Services Corp. (“Shanghai Zhonghui”), a PRC peer-to-peer lending company (the “Zhonghui Agreement”), pursuant to which we agreed to acquire 51% of the capital stock of Shanghai Zhonghui (the “Acquisition”). Pursuant to the term of the share exchange agreement, we agreed to issue 5,000,000 shares of common stock to certain individuals affiliated with Shanghai Zhonghui (the “Zhonghui Affiliates”), valued at $1.00 per share for a total of $5,000,000 or approximately 31,000,000 RMB, to exchange 51% of the capital stock of Shanghai Zhonghui. As incentive for the closing of the Acquisition, we also agreed to issue to the Affiliates 5,000,000 additional shares of our common stock. Through the acquisition, we engaged in peer-to-peer lending. On December 28, 2016, upon approval by the majority shareholder and Board of Directors of the Company and Arki Network, Arki Network entered into certain business sale agreement with Yanbian YaoTian Gas Group Co., Ltd, a company organized under the laws of the PRC whereby Arki Network sold all of its interest in Shanghai Zhonghui for no consideration. In connection with the sale, Zhonghui Affiliates agreed to cancel 5,000,000 shares of our common stock obtained from the transaction. We have since ceased our peer-to-peer lending business.
On November 29, 2010, our wholly-owned subsidiary CCG California received approval from the Beijing Fangshan District Business Council in the PRC to acquire the controlling interest of Beitun Trading Co. Ltd. (“Beitun Trading”), a PRC trading and distribution company. Beitun Trading had a registered capital of RMB500,000 (approximately $80,250), of which RMB255,000 (approximately $40,928) was contributed by CCG and RMB245,000 (approximately $39,323) was contributed by Wei Guo. Effectively, CCG had control of 51% of Beitun Trading, and Wei Guo owned 49% of Beitun Trading. Through Beitun Trading, we engaged in the wholesale distribution of various food and meat products. On April 1, 2014, we entered into an agreement to sell our 51% interest in Beitun Trading to Zhang Yifan in exchange for cash payment of RMB 255,000 ($41,030). We have since ceased our distribution business.
Business Strategy
We plan to implement two primary strategies to expand our market presence within the industry: (i) increase Arki E-Commerce’s lending capacity through the cash generated from operations and capital raised from offering; and (ii) expand the Company’s geographic coverage for both microfinancing and wealth management business to major metropolitan areas such as Beijing, Shanghai, Guangzhou through the establishment of sales force. We believe that we can experience significant growth in these areas because there is a large number of established SMEs and sole proprietors in need of capital resources but lack the ability to finance either due to their limited size of business or local banks’ preferences to finance bigger and more established companies. In addition, we believe that our wealth management business will be able to provide potential investors a more attractive return comparing to traditional investment products.
Competitive Strengths
Although we operate in a highly-competitive industry, we believe that the following factors provide us with the competitive advantage in the marketplace that could differentiate us from our potential competitors:
● Strong Relationships with Local Financial Institutions. We have developed strong relationships with local financial institutions. For our microfinancing business, we only provide financing to clients that have been pre-screened by the credit card processing companies such as UnionPay, who and Arki Network would then charge a service fee based on the loan amount. The additional stream of revenue incentivizes UnionPay to promote our services and provide us with potential lending opportunities. It is through leveraging this relationship with large financial institutions such as UnionPay that we believe we are able to provide a unique value-added service to our clients and will be able to grow our client base.
● Experienced and committed leadership. Our CEO, Mr. Jianmin Gao, has had extensive experience in the banking industry prior to founding our company. Mr. Gao’s experience has provided our company with the skills and expertise that are essential in approaching and selecting appropriate banks, dealing with bank personnel, identifying and evaluating appropriate financial products and services, structuring tailored financial solutions and bargaining with banks on behalf of our clients. In addition, Mr. Gao also has extensive experience working with SMEs. We believe the experience and resources that Mr. Gao can offer will help our company become a more active player in the industry.
● Substantial potential client base. Our microfinancing clients are provided by the Liaoning provincial branch of UnionPay. Almost all businesses of various sizes use UnionPay as their primary credit card payment processor within China. Our collaboration with UnionPay therefore places us in a unique position, as UnionPay’s large portfolio of users could provide us with lending opportunities on a mass scale. As our business grows, we believe the existing clients will also continue to be a referral source of our business.
Corporate History and Organization
We were originally incorporated under the name “Mondas Minerals Corp.” in Delaware on April 25, 2008 and was engaged in the acquisition, exploration, and development of natural resource properties. The principal executive offices were previously located at 13983 West Stone Avenue, Post Falls, ID 83854.
We received our initial funding of $15,000 through the sale of common stock to our officer and director who purchased 1,500,000 shares of our common stock at $0.01 per share on May 13, 2008. In January 2010, we raised $1,457,818 from an offering of 1,000,000 shares pursuant to a registration statement on Form S-1 filed with the SEC under file number 333-152330, which became effective on January 5, 2010. The offering was completed on January 27, 2010.
We were an exploration stage company with no revenues or operating history prior to our merger on February 4, 2011 described below. We owned a 100% undivided interest in a mineral property, the Ram 1-4 Mineral Claims (known as the “Ram Property.”) The Ram Property consists of an area of 82.64 acres located in the Lida Quadrangle Area, Esmeralda County, Nevada. Title to the Ram Property was held by Mondas. Our plan of operation was to conduct mineral exploration activities on the property in order to assess whether it contains mineral deposits capable of commercial extraction.
As of December 31, 2010 and immediately prior to the merger transaction described below, we were an exploration stage company with nominal assets, no revenues, or operating history. On January 11, 2011, we changed our fiscal year end from June 30 to December 31.
On February 4, 2011, we acquired Consumer Capital Group, Inc., a California corporation (“CCG California”), a consumer e-commerce business with operations in the People’s Republic of China (“PRC”) in a reverse merger transaction (the “Merger”) pursuant to an Agreement and Plan of Merger (“Merger Agreement”) by and among [ys,] our wholly owned subsidiary CCG Acquisition Corp., a Delaware corporation (“CCG Delaware”), CCG California, and Scott D. Bengfort.
In the Merger, CCG Delaware merged into CCG California with CCG California as the surviving corporation. As a result, CCG California became our wholly-owned subsidiary, and the subsidiaries of CCG Delaware including America Pine (Beijing) Bio-Tech, Inc. (“American Pine”), Arki (Beijing) E-Commerce Technology Corp. (“Arki E-Commerce”), Beijing Beitun Trading Co., Ltd. (since disposed in 2014), and America Arki (Fuxin) Network Management Co. Ltd. (“American Arki”), all of which are incorporated in China (together, the “PRC Subsidiaries”), became Mondas’s indirect subsidiaries. Arki E-Commerce and America Arki have a contractual relationship with America Arki Network Service Beijing Co., Ltd. (“Arki Network”), a PRC limited liability company, which is 100% owned by two of CCG California’s former major shareholders and officers. CCG California, the PRC Subsidiaries, and Arki Network are collectively referred to as the “CCG Group.”
On January 7, 2011, we formed a new wholly-owned subsidiary by the name of “Consumer Capital Group Inc.” (“CCG Name Sub”) in Delaware solely for purposes of changing its corporate name to “Consumer Capital Group Inc.” in conjunction with the closing of the Merger. On February 17, 2011, we changed our name to Consumer Capital Group Inc. Pursuant to Certificate of Ownership filed with the Secretary of State of Delaware by merging CCG Name Sub into our company with our company surviving and CCG Name Sub ceasing to exist.
Under the Merger Agreement, we issued an aggregate of 17,777,778 shares of common stock to the shareholders of CCG California immediately prior to the Merger (“CCG Shareholders”) at an exchange rate of one (1) share of our common stock for each 21.96 shares of CCG California common stock.
Immediately prior to the closing of the Merger, there were 2,500,000 issued and outstanding shares of common stock, 60% of which were held by the then-principal stockholder, CEO, and sole director of [the our] company, Mr. Bengfort. As a part of the Merger, CCG California paid USD $335,000 in cash to Mr. Bengfort in exchange for his agreement to enter into various transaction agreements relating to the Merger, as well as the cancellation of 1,388,889 shares of common stock directly held by him, constituting 92.6% of his pre-Merger holdings of our common stock.
In connection with the Merger, our mining rights were assigned to Mr. Bengfort, and in turn, Mr. Bengfort personally assumed all liabilities of our company existing immediately prior to the closing, under the terms of an Assignment and Assumption Agreement between our company and Mr. Bengfort effective on the closing date of the Merger (the “Assignment and Assumption Agreement”). Mr. Bengfort also agreed to discharge and forego his rights to be repaid approximately $16,000, which we owed to him immediately prior to the closing of the Merger, along with all other claims against us, by executing a release agreement (“Release”) effective on the closing date of the Merger. Mr. Bengfort also agreed to be a party to the Merger Agreement, including various representations and warranties. Further, Mr. Bengfort executed an indemnification agreement (“Indemnification Agreement”) in favor of CCG California and its shareholders to indemnify them for any breach of the Merger Agreement or unpaid or unresolved liabilities of our company that may materialize within a one year period after the closing. The closing of the Merger was on February 4, 2011.
In connection with the closing, Mr. Bengfort resigned from his role as our sole officer and director. New directors took office, and appointed new officers promptly following the closing of the Merger.
On December 1, 2016, Arki Network, a variable interest entity of the Company, entered into certain share exchange agreement with Yin Hang Financial Information Service (Shanghai) Co., Ltd., a company established under the laws of the People’s Republic of China (“Yin Hang”). Pursuant to the agreement, the Company acquired 100% of the capital stock of Yin Hang in exchange for the issuance of 4,680,000 shares of Company’s common stock, par value $0.0001 per share, to Yin Hang’s shareholders, to be issued upon completion of audit of Yin Hang.
On August 31, 2017, Arki Network and Yin Hang entered into a Supplementary Agreement and mutually agreed to terminate the share exchange agreement, effective immediately, because companies in the financial information industry are not permitted to be controlled by foreign companies outside of China. As a result of the termination, Yin Hang was no longer consolidated in the Company’s financial statements as of September 1, 2017.
On November 17, 2017, Arki Network, Beijing Shenzhou Rongtong Investment Management Co. Ltd. (“Shenzhou Rongtong”), a company organized under the law of People’s Republic of China, and all the shareholders of Shenzhou Rongtong entered into an equity transfer agreement, pursuant to which Arki Network agreed to acquire 100% of the issued and outstanding equity securities of Shenzhou Rongtong from its shareholders, in exchange for the issuance of an aggregate of 4,175,417 shares of common stock of the Company, to the shareholders of Shenzhou Rongtong within 15 days of the closing of the transaction. The transaction failed to go through as at December 31, 2017.
On March 29, 2018, the parties mutually terminated the Agreement through a termination agreement dated March 29, 2018 between Arki Network and Shenzhou Rongtong. According to the termination agreement, the shareholders of Shenzhou Rongtong returned to the Company 4,175,417 shares of common stock of the Company, and the Company returned all of Shenzhou Rongtong’s issued and outstanding equity securities to the shareholders of Shenzhou Rongtong.
Changes of Business
E-Commerce Business
The founders of the CCG Group formed America Pine California in California on November 27, 2006. America Pine was in the business of selling healthcare products imported from the United States of America to residents in the PRC via internet. The founders formed America Pine in the PRC on March 21, 2007 as a wholly owned subsidiary of America Pine California to conduct operations for this business in the PRC. These operations ceased on February 5, 2010.
The founders formed Arki E-Commerce in the PRC on March 6, 2008 as a wholly owned subsidiary of America Pine California with an intention to develop the CCG Group’s consumer e-commerce business.
On February 5, 2010, in connection with the execution of a Stock Right Transfer Agreement, America Pine California transferred all of its equity interests in both Arki E-Commerce and America Pine to CCG California, which was formed in California on October 14, 2009.
On November 26, 2010, CCG California formed America Arki, a PRC WFOE, as its wholly owned subsidiary.
On November 26, 2010, Arki E-Commerce, Arki Network, and Arki Network’s shareholders entered into contractual arrangements, and on December 2010, America Arki, Arki E-Commerce, and Arki Network shareholders entered into contractual arrangements, to operate Company’s consumer e-commerce website. Arki Network is owned by CCG’s two largest shareholders, Mr. Jianmin Gao and Mr. Fei Gao. These arrangements are more fully described below under “Corporate Structure.” Because of the lack of sales generated on our online retail platforms, we ceased our E-commerce business in first quarter of 2015.
Distribution Business
On November 29, 2010, CCG California received approval from the Beijing Fangshan District Business Council in the PRC to acquire the controlling interest of Beitun Trading Co. Ltd. (“Beitun Trading”). Beitun Trading had a registered capital of RMB500,000 (approximately $80,250), of which RMB255,000 (approximately $40,928) was contributed by CCG and RMB245,000 (approximately $39,323) was contributed by Wei Guo. Effectively, CCG had control of 51% of Beitun Trading, and Wei Guo owned 49% of Beitun Trading. Through Beitun Trading, we engaged in the wholesale distribution of various food and meat products. On April 1, 2014, we entered into an agreement to sell our 51% interest in Beitun Trading to Zhang Yifan in exchange for cash payment of RMB 255,000. We have since ceased our distribution business.
Debit Card Program
The Company cooperated with a Fuxin Bank, a retail bank in the PRC, to issue cobranded debit cards. Retail store vendors throughout China were signed up to the Company’s debit card program. The Company charged each participating vendor a percentage of transactions with that vendor. Each vendor received a percentage of future transactions of the cards issued by the vendor. Cardholders received certain amounts of cash refund from participating vendors and earned points to be spent on www.ccmus.com. We ceased such operation in 2015.
Peer-to-Peer Lending
On December 23, 2014, the Company and Shanghai Zhonghui Financial Information Services Corp., a company established under the laws of People’s Republic of China, entered into a Share Exchange Agreement (the “Agreement”), pursuant to which the Company agreed to acquire 51% of the capital stock of Shanghai Zhonghui (the “Acquisition”). Pursuant to the term of the Agreement, the Company agreed to issue 5,000,000 shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”), to certain individuals affiliated with Shanghai Zhonghui (the “Zhonghui Affiliates”), valued at $1.00 per share for a total of $5,000,000 or approximately 31,000,000 RMB, to exchange 51% of the capital stock of Shanghai Zhonghui. As incentive for the closing of the Acquisition, the Company also agreed to issue to the Affiliates 5,000,000 additional shares of the Common Stock.
Established on May 26, 2014, under the PRC laws, Shanghai Zhonghui offers a peer-to-peer lending platform that provided financing and investment opportunities for small to medium sized business and investors, including outsource of financial information technologies, investment management, investment consulting, as well as other related asset management services in China.
On December 28, 2016, upon approval by the majority shareholder and Board of Directors of the Company and Arki Network, Arki Network entered into certain business sale agreement with Yanbian YaoTian Gas Group Co., Ltd, a company organized under the laws of the PRC whereby Arki Network sold all of its interest in Shanghai Zhonghui for no consideration.
Current Business
Our current business is discussed in detail under the Section “Item 1. Business.”
Corporate Structure
As discussed above, we are a holding company incorporated under the laws of the State of Delaware on April 25, 2008. Through acquisitions and mergers, we are the parent company of i) Arki (Beijing) E-Commerce Technology Corp., which is a WFOE formed under the laws of the PRC on March 6, 2008 with a registered capital of US$300,000 and legal representative of Jianmin Gao, ii) America Pine (Beijing) Bio-Tech Inc., which is a WFOE formed under the law of the PRC on March 21, 2007 with a registered capital of approximately US$330,000 and legal representative of Jianmin Gao and iii) America Arki (Fuxin) Network Management Co. Ltd., which is a WFOE formed under the laws of the PRC on November 25, 2010 with a registered capital of US$200,000 and legal representative of Jianming Gao.
Contractual Arrangements among Arki E-Commerce, Arki Network, and America Arki
Our relationships with Arki Network, its stockholders, and Arki E-Commerce are governed by a series of contractual arrangements, as we (including our direct and indirect subsidiaries) do not own any equity interests in Arki Network. PRC law currently has limits on foreign ownership of certain companies. To comply with these restrictions, Arki Network and its shareholders entered into two sets of contractual arrangements with Arki E-Commerce and America Arki in November 2010:
Powers of Attorney. The equity owners of Arki Network irrevocably appointed Arki E-Commerce and America Arki to vote on their behalf on all matters they are entitled to vote on, including matters relating to the transfer of any or all of their respective equity interests in the entity and the appointment of the chief executive officer and other senior management members.
Share Pledge Agreements. The equity owners of Arki Network pledged their respective equity interests in the entity as a guarantee for the payment by the entity of consulting and services fees under the business cooperation agreements and repayment under the loan agreements.
Business Cooperation Agreement. Arki E-Commerce and America Arki provide the entity with technical support, consulting services, and other commercial services to Arki Network. The initial term of these agreements is ten years. In consideration for those services, Arki Network agrees to pay Arki E-Commerce and America Arki service fees. The service fees are eliminated upon consolidation.
Loan Agreements. Loans were granted to the equity owners of Arki Network by America Arki with the sole and exclusive purpose of providing funds necessary for its capitalization as required by the laws of the PRC.
Exclusive Option Agreements. Shareholders of Arki Network granted an option contract to Arki E-Commerce and America Arki to purchase their respective equity interests in the entity. As of the date of this prospectus, we conduct substantially all of our business operations through Arki E-Commerce and America Arki, which hold substantial control over Arki Network’s operations through their contractual arrangements.
The following diagram illustrates our current corporate structure:
Our Industry
According to a working paper published by Hong Kong University of Science and Technology, despite their on-going contributions to China’s economic development, SMEs face significant barriers in accessing credit from state-owned commercial banks. In 2013, only 23.2 percent of bank loans were extended to SMEs. Access to working capital loans is even more restricted: only 4.7 percent of short-term loans went to SMEs. Given these structural constraints on private sector borrowing from state banks, China’s SMEs have depended on non-banking sources of credit since the earliest years of economic reform. In surveys of private businesses conducted during the mid-1990s and mid-2000s, over two-thirds of the respondents indicated that they had relied on some form of informal finance. More recent research indicates that reliance on non-banking financing mechanisms has not abated. A World Bank survey of 2,700 private companies in 2011 to 2013 found that only 25 percent had bank credit and 90 percent drew on internal financing. Within that period, a 2012 survey of SMEs in fifteen provinces conducted by China’s Central University of Finance and Economics (CUFE) found that 57.5 percent had participated in informal credit markets. The bi-annual national surveys private enterprises administered by the All-China Federation of Industry and Commerce consistently find that ‘accessing bank credit’ is among the top self-reported challenges facing the private sector. As such, SMEs in China continue to rely heavily on non-banking financial intermediaries. (Source: Financing Small and Medium Enterprises in China: Recent Trends and Prospects beyond Shadow Banking, Kellee S. Tsai, HKUST IEMS Working Paper No. 2015-24, May 2015)
In China, the reliance on these non-banking financial intermediaries represents a market response to a combination of policy restrictions and related political priorities. At the most basic level, financial repression allows SOEs to receive subsidised credit, while inhibiting the ability of banks to price loans for higher risk SMEs. As such, since the earliest years of reform, various types of informal financial intermediaries and non-banking financial intermediaries have emerged to fill the SME funding gap. Some lend directly to private businesses, while others guarantee loans from commercial banks. Meanwhile, artificial suppression of deposit rates has driven savers to seek higher returns from other investment opportunities. Banks thus turned to off-balance sheet products to generate earnings from alternative sectors. The recent rise of on-line P2P lending platforms bypasses the banking system altogether by brokering between SMEs and private lenders/investors. This imbalance between supply and demand for capital among SMEs therefore presents business opportunities for us.
Business Strategy
We plan to implement three primary strategies to expand our market presence within the industry: (i) increase Arki E-Commerce’s lending capacity through the cash generated from operations and capital raised from this offering; (ii) increase the Company’s offering of financial services by expanding the business into financial consulting services throughout China; and (iii) expand the Company’s geographic coverage for both microfinancing and financial advisory service to major metropolitan areas such as Beijing, Shanghai, Guangzhou through the establishment of sales force. We believe that we can experience significant growth in these areas because there is a large number of established SMEs and sole proprietors in need of capital resources but lack the ability to finance either due to their limited size of business or local banks’ preferences to finance bigger and more established companies.
Competitive Strengths
Although we operate in a highly-competitive industry, we believe that the following factors provide us with the competitive advantage in the marketplace that could differentiate us from our potential competitors:
● Strong Relationships with Local Financial Institutions. We have developed strong relationships with local financial institutions. For our microfinancing business, we only provide financing to clients that have been pre-screened by the credit card processing companies such as UnionPay Liaoning, who and Arki Network would then charge a service fee based on the loan amount. The additional stream of revenue incentivizes UnionPay to promote our services and provide us with potential lending opportunities. For our financial advisory services, we assist lenders, often third-party banks, by assessing borrowers’ repayment ability and controlling default risk. In order to best serve our bank clients, we have familiarized ourselves with their product and service offerings, as well as their business needs. The banks, through our risk assessment service, could in turn identify borrowers with relatively low default risk. Our unique product offering helps us build a long-lasting relationship with local financial institutions who are looking to expand and diversify their loan portfolio. It is through leveraging this relationship with many banks that we believe we are able to provide a unique value-added service to our clients and will be able to grow our client base. These banks may also refer us clients that they are unable to serve either due to their internal client assessment requirements or availability of financial product and service offerings.
● Experienced and committed leadership. We have had extensive experience in the banking industry prior to the shift of our new core business. For instance, we have accumulated much industry resources and business experience when we issued our co-branded debit card with Fuxin Bank a few years ago. Our management’s experience has provided our company with the skills and expertise that are essential in approaching and selecting appropriate banks, dealing with bank personnel, identifying and evaluating appropriate financial products and services, structuring tailored financial solutions and bargaining with banks on behalf of our clients. In addition, based on our past experience working with SMEs when we engaged in peer-to-peer lending business, we understand the needs of both SMEs and retail investors. We believe the experience and resources that our management can offer will help our company become a more active player in the industry.
● Substantial potential client base. For our microfinancing business, our clients are recommended by the Liaoning provincial branch of UnionPay. Almost all businesses of various sizes use UnionPay as their primary credit card payment processor within China. Our collaboration with UnionPay therefore places us in a unique position, as UnionPay’s large portfolio of users could provide us with lending opportunities on a mass scale. As our business grows, we believe the existing clients will also continue to be a referral source of our business.
Competition
The microfinancing industry in China is intensely competitive and we compete with companies of various sizes. We believe that our major competition come from three sectors. First, many local banks and financial institutions, especially those located in Tier 2 or 3 cities in China have started engaging in lending business to finance SMEs locally. The banks and institutions have long-lasting relationships with the businesses locally. In addition, because most of the banks in China are state-owned enterprises (“SOEs”) or invested by SOEs, they have much more financial resources than we do. Second, we compete with many peer-to-peer lending platforms that match lenders and borrowers. Our key competitors include Yirendai, which is a public company listed on the NYSE, Ren Ren Dai and Lufax. Lastly, there are many private lending companies throughout China. In order to compete with them, including some of more established ones, we will need to be able to provide products that would be more attractive to the borrowers, including lower interest rate or free of collateral. We also compete with other financial products that attract borrowers. For example, we compete with traditional financial institutions, such as consumer finance business units in commercial banks, credit card issuers and other consumer finance companies. In light of the low barriers to entry in the microfinancing industry, more players may enter this market and increase the level of competition. We anticipate that more established internet, technology and financial services companies that possess large, existing user bases, substantial financial resources and established distribution channels may enter the market in the future.
Intellectual Property
We regard our domain names, know-how, proprietary technologies and similar intellectual property as critical to our success, and we rely on trademark and trade secret law and confidentiality, invention assignment and non-compete agreements with our employees and others to protect our proprietary rights.
Domains
Consumer Capital Group Inc. has one domain name: www.ccgusa.com.
Arki Network holds the ICP license issued by the Beijing Communications Control Bureau No. 100852 on June 28, 2013 and expires on August 31, 2018, subject to renewal. We have registered two websites using this ICP license: www.ccmus.com and www.bangnitou.net. www.ccmus.com was created for our E-Commerce business and www.bangnitou.net, which also has a corresponding mobile application, has been created for our wealth management business. As discussed elsewhere in this prospectus, neither business has generated substantial revenue as of today, if any.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our technology. Monitoring unauthorized use of our technology is difficult and costly, and we cannot be certain that the steps we have taken will prevent misappropriation of our technology. From time to time, we may have to resort to litigation to enforce our intellectual property rights, which could result in substantial costs and diversion of our resources.
In addition, third parties may initiate litigation against us alleging infringement of their proprietary rights or declaring their non-infringement of our intellectual property rights. In the event of a successful claim of infringement and our failure or inability to develop non-infringing technology or license the infringed or similar technology on a timely basis, our business could be harmed. Moreover, even if we are able to license the infringed or similar technology, license fees could be substantial and may adversely affect our results of operations.
Marketing and Sales
Microfinancing Business
Pursuant to the collaboration agreement between Arki Network and UnionPay Liaoning, we do not engage in any marketing efforts for our microfinancing business. However, because UnionPay is incentivized to push our loan products to their clients and almost all businesses in China use UnionPay as their primary credit card processing company, we believe that the lack of marketing efforts on our own will not significantly deter the development of our business.
Financial Advisory Service
Offline Marketing Activities. We rely on the sales teams to reach out to our potential clients through cold phone calls or personal meetings. The sales force receives commission for successful generation of service engagement. In addition, we leverage their presence in local cities to promote and raise awareness of our products.
Online Marketing Activities. To further promote our brand, we also take advantage of the Internet and various mobile social network applications, such as Wechat and Weibo, through which we introduce basic products and services information, market research and updates to our members.
Wealth Management Business
While we have had limited operation and income from our wealth management business, the existing clients have come to us through referrals from existing relationships and we believe word-of-mouth is an especially effective marketing tool for the wealth management product, as our product mainly targets retail investors. We intend to engage in nationwide marketing initiatives to further raise our brand awareness while continuing to improve client satisfaction to strengthen our word-of-mouth referrals. We also encourage our employees to introduce or recommend new clients to us by providing incentive bonus.
Insurance
We maintain property insurance policies covering certain equipment and other property that are essential to our business operation to safeguard against risks and unexpected events. We also provide social security insurance including pension insurance, unemployment insurance, work-related injury insurance and medical insurance for our employees. We do not maintain business interruption insurance or general third-party liability insurance, nor do we maintain product liability insurance or key-man insurance. We consider our insurance coverage to be sufficient for our business operations in China.
Seasonality
We experience seasonality in our business, reflecting seasonal fluctuations in internet usage and traditional personal consumption patterns, as our individual borrowers typically use their borrowing proceeds to finance their personal consumption needs. For example, we generally experience lower transaction value on our online consumer finance marketplace during national holidays in China, particularly during the Chinese New Year holiday season in the first quarter of each year. Overall, the historical seasonality of our business has been mild due to our rapid growth but may increase further in the future. Due to our limited operating history, the seasonal trends that we have experienced in the past may not apply to, or be indicative of, our future operating results.
PRC Regulations
Online commerce in China is subject to a number of laws and regulations. This section summarizes all material PRC laws and regulations relevant to our business and operations in China and the key provisions of such regulations.
Corporate Laws and Industry Catalogue Relating to Foreign Investment
The establishment, operation, and management of corporate entities in China are governed by the Company Law of the PRC, or the Company Law, effective in 1994, as amended in 1999, 2004, and 2005, respectively. The Company Law is applicable to our PRC subsidiaries and affiliated PRC entity unless the PRC laws on foreign investment have stipulated otherwise.
The establishment, approval, registered capital requirement, and day-to-day operational matters of wholly foreign-owned enterprises (“WFOE”), such as our PRC subsidiary, Arki Network, are regulated by the WFOE Law of the PRC effective in 1986, as amended in 2000, and the Implementation Rules of the WFOE Law of the PRC effective in 1990, as amended in 2001.
Investment activities in the PRC by foreign investors are principally governed by the Guidance Catalogue of Industries for Foreign Investment, or the Catalogue, which was promulgated and is amended from time to time by the Ministry of Commerce and the National Development and Reform Commission. The Catalogue divides industries into three categories: encouraged, restricted, and prohibited. Industries not listed in the Catalogue are generally open to foreign investment unless specifically restricted by other PRC regulations.
Establishment of WFOEs is generally permitted in encouraged industries. Some restricted industries are limited to equity or contractual joint ventures, while in some cases Chinese partners are required to hold the majority interests in such joint ventures.
For example, sales and distribution of audio and video products are among the restricted categories, and only contractual joint ventures in which Chinese partners holding majority interests can engage in the distribution of audio and video products in China.
In addition, restricted category projects are also subject to higher-level government approvals. Foreign investors are not allowed to invest in industries in the prohibited category.
Regulations Relating to Telecommunications Services
In September 2000, the State Council issued the Regulations on Telecommunications of China (“the Telecommunications Regulations”), to regulate telecommunications activities in China. The telecommunications industry in China is governed by a licensing system based on the classifications of the telecommunications services set forth under the Telecommunications Regulations.
The Ministry of Industry and Information Technology (“MIIT”) together with the provincial-level communications administrative bureaus, supervises and regulates the telecommunications industry in China. The Telecommunications Regulations divide the telecommunications services into two categories: infrastructure telecommunications services and value-added telecommunications services. The operation of value-added telecommunications services is subject to the examination, approval, and the granting of licenses by MIIT or the provincial-level communications administrative bureaus. According to the Catalogue of Classification of Telecommunications Businesses effective in April 2003, provision of information services through the internet, such as the operation of our website, is classified as value-added telecommunications services.
Regulations Relating to Foreign Investment in Value-added Telecommunications Industry
According to the Administrative Rules for Foreign Investment in Telecommunications Enterprises issued by the State Council effective in January 2002, as amended in September 2008, a foreign investor may hold no more than a 50% equity interest in a value-added telecommunications services provider in China, and such foreign investor must have experience in providing value-added telecommunications services overseas and maintain a good track record.
The Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunications Business (“the Circular”), issued by the former Ministry of Information Industry (“MII”) in July 2006, reiterated the regulations on foreign investment in telecommunications businesses, which require foreign investors to set up foreign-invested enterprises and obtain an internet content provider, or ICP, license to conduct any value-added telecommunications business in China. Under the Circular, a domestic company that holds an ICP license is prohibited from leasing, transferring, or selling the license to foreign investors in any form, and from providing any assistance, including providing resources, sites, or facilities, to foreign investors that conduct value-added telecommunications business illegally in China. Furthermore, certain relevant assets, such as the relevant trademarks and domain names that are used in the value-added telecommunications business must be owned by the local ICP license holder or its shareholders. The Circular further requires each ICP license holder to have the necessary facilities for its approved business operations and to maintain such facilities in the regions covered by its license. In addition, all value-added telecommunications service providers are required to maintain network and information security in accordance with the standards set forth under relevant PRC regulations. If an ICP license holder fails to comply with the requirements in the Circular and also fails to remedy such non-compliance within a specified period of time, MII or its local counterparts have the discretion to take administrative measures against such license holder, including revoking its ICP license. We believe Arki Network is in compliance with the Circular.
Regulations Relating to Internet Information Services and Content of Internet Information
In September 2000, the State Council issued the Administrative Measures on Internet Information Services (“the Internet Measures”), to regulate the provision of information services to online users through the internet. According to the Internet Measures, internet information services are divided into two categories: services of an operative nature and services of a non-operative nature. Our business conducted through our website involves operating internet information services, which requires us to obtain an ICP license. If an internet information service provider fails to obtain an ICP license, the relevant local branch of MII may levy fines, confiscate its income, or even block its website. Due to the PRC law restriction that foreign investors cannot hold more than a 50% equity interest in a value-added telecommunications services provider, we hold our ICP license through Arki Network. Arki Network currently holds an ICP license issued by Beijing Communications Administration, a local branch of MII.
The Internet Measures further specify that the internet information services regarding, among others, news, publication, education, medical and health care, and pharmacy and medical appliances are required to be examined, approved, and regulated by the relevant authorities. Internet content providers are prohibited from providing services beyond that included in the scope of their business license or other required licenses or permits. Furthermore, the Internet Measures clearly specify a list of prohibited content. Internet content providers must monitor and control the information posted on their websites. We are subject to this rule as a result of our operation of our online marketplace program.
Regulations Relating to Privacy Protection
As an internet content provider, we are subject to regulations relating to protection of privacy. Under the Internet Measures, internet content providers are prohibited from producing, copying, publishing or distributing information that is humiliating or defamatory to others or that infringes the lawful rights and interests of others. Internet content providers that violate the prohibition may face criminal charges or administrative sanctions by PRC security authorities. In addition, relevant authorities may suspend their services, revoke their licenses or temporarily suspend or close down their websites. Furthermore, under the Administration of Internet Bulletin Board Services issued by the MII in November 2000, internet content providers that provide electronic bulletin board services must keep users’ personal information confidential and are prohibited from disclosing such personal information to any third party without the consent of the users, unless otherwise required by law. The regulation further authorizes relevant telecommunication authorities to order internet content providers to rectify any unauthorized disclosure. Internet content providers could be subject to legal liabilities if unauthorized disclosure causes damages or losses to internet users. However, the PRC government retains the power and authority to order internet content providers to provide the personal information of internet users if the users post any prohibited content or engage in illegal activities through the internet. We believe that we are currently in compliance with these regulations in all material aspects.
Regulations Relating to Taxation
In January 2008, the PRC Enterprise Income Tax Law (The “EIT” Law) took effect. The EIT applies a uniform 25% enterprise income tax rate to both foreign-invested enterprises and domestic enterprises, unless where tax incentives are granted to special industries and projects. Under the EIT Law and its implementation regulations, dividends generated from the business of a PRC subsidiary after January 1, 2008 and payable to its foreign investor may be subject to a withholding tax rate of 10% if the PRC tax authorities determine that the foreign investor is a non-resident enterprise, unless there is a tax treaty with China that provides for a preferential withholding tax rate. Distributions of earnings generated before January 1, 2008 are exempt from PRC withholding tax.
Under the EIT Law, an enterprise established outside China with “de facto management bodies” within China is considered a “resident enterprise” for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. A circular issued by the State Administration of Taxation in April 2009 regarding the standards used to classify certain Chinese-invested enterprises controlled by Chinese enterprises or Chinese enterprise groups and established outside of China as “resident enterprises” clarified that dividends and other income paid by such PRC “resident enterprises” will be considered PRC-source income and subject to PRC withholding tax, currently at a rate of 10%, when paid to non-PRC enterprise shareholders. This circular also subjects such PRC “resident enterprises” to various reporting requirements with the PRC tax authorities.
Under the implementation regulations to the EIT Law, a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances, and properties of an enterprise. In addition, the tax circular mentioned above specifies that certain PRC-invested overseas enterprises controlled by a Chinese enterprise or a Chinese enterprise group in the PRC will be classified as PRC resident enterprises if the following are located or residence in the PRC: senior management personnel and departments that are responsible for daily production, operation, and management; financial and personnel decision making bodies; key properties, accounting books, the company seal, and minutes of board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights.
Regulations Relating to Foreign Exchange
Pursuant to the Regulations on the Administration of Foreign Exchange issued by the State Council and effective in 1996, as amended in January 1997 and August 2008, current account transactions, such as sale or purchase of goods, are not subject to PRC governmental control or restrictions. Certain organizations in the PRC, including foreign-invested enterprises, may purchase, sell, and/or remit foreign currencies at certain banks authorized to conduct foreign exchange business upon providing valid commercial documents. Approval of the PRC State Administration of Foreign Exchange (“SAFE”), however, is required for capital account transactions.
In August 2008, SAFE issued a circular on the conversion of foreign currency into Renminbi by a foreign-invested company that regulates how the converted Renminbi may be used. The circular requires that the registered capital of a foreign-invested enterprise converted into Renminbi from foreign currencies may only be utilized for purposes within its business scope. For example, such converted amounts may not be used for investments in or acquisitions of other PRC companies, unless specifically provided otherwise, which can inhibit the ability of companies to consummate such transactions. In addition, SAFE strengthened its oversight of the flow and use of the Renminbi registered capital of foreign-invested enterprises converted from foreign currencies. The use of such Renminbi capital may not be changed without SAFE’s approval, and may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been utilized. Violations may result in severe penalties, such as heavy fines.
Regulations Relating to Labor
Pursuant to the PRC Labor Law effective in 1995 and the PRC Labor Contract Law effective in 2008, a written labor contract is required when an employment relationship is established between an employer and an employee. Other labor-related regulations and rules of the PRC stipulate the maximum number of working hours per day and per week as well as the minimum wages. An employer is required to set up occupational safety and sanitation systems, implement the national occupational safety and sanitation rules and standards, educate employees on occupational safety and sanitation, prevent accidents at work, and reduce occupational hazards.
In the PRC, workers dispatched by an employment agency are normally engaged in temporary, auxiliary, or substitute work. Pursuant to the PRC Labor Contract Law, an employment agency is the employer for workers dispatched by it and must perform an employer’s obligations toward them. The employment contract between the employment agency and the dispatched workers, and the placement agreement between the employment agency and the company that receives the dispatched workers must be in writing. Also, the company that accepts the dispatched workers must bear joint and several liabilities for any violation of the Labor Contract Law by the employment agencies arising from their contracts with dispatched workers. An employer is obligated to sign an indefinite term labor contract with an employee if the employer continues to employ the employee after two consecutive fixed-term labor contracts. The employer also has to pay compensation to the employee if the employer terminates an indefinite term labor contract. Except where the employer proposes to renew a labor contract by maintaining or raising the conditions of the labor contract and the employee is not agreeable to the renewal, an employer is required to compensate the employee when a definite term labor contract expires. Furthermore, under the Regulations on Paid Annual Leave for Employees issued by the State Council in December 2007 and effective as of January 2008, employees who have served an employer for more than one (1) year and less than ten years are entitled to a 5-day paid vacation, those whose service period ranges from 10 to 20 years are entitled to a 10-day paid vacation, and those who have served for more than 20 years are entitled to a 15-day paid vacation. An employee who does not use such vacation time at the request of the employer shall be compensated at three times their normal salaries for each waived vacation day.
Pursuant to the Regulations on Occupational Injury Insurance effective in 2004 and the Interim Measures concerning the Maternity Insurance for Enterprise Employees effective in 1995, PRC companies must pay occupational injury insurance premiums and maternity insurance premiums for their employees. Pursuant to the Interim Regulations on the Collection and Payment of Social Insurance Premiums effective in 1999 and the Interim Measures concerning the Administration of the Registration of Social Insurance effective in 1999, basic pension insurance, medical insurance, and unemployment insurance are collectively referred to as social insurance. Both PRC companies and their employees are required to contribute to the social insurance plans. Pursuant to the Regulations on the Administration of Housing Fund effective in 1999, as amended in 2002, PRC companies must register with applicable housing fund management centers and establish a special housing fund account in an entrusted bank. Both PRC companies and their employees are required to contribute to the housing funds. The PRC Subsidiaries and Arki Network are in process of applying for registration for social insurance and opening a housing fund account.
Regulations on Dividend Distribution
Wholly foreign-owned companies in the PRC may pay dividends only out of their accumulated profits after tax as determined in accordance with PRC accounting standards. Remittance of dividends by a wholly foreign-owned enterprise out of China is subject to examination by the banks designated by SAFE. Wholly foreign-owned companies may not pay dividends unless they set aside at least 10% of their respective accumulated profits after tax each year, if any, to fund certain reserve funds, until such time as the accumulative amount of such fund reaches 50% of the wholly foreign-owned company’s registered capital. In addition, these companies also may allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds at their discretion. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.
Safe Regulations on Offshore Special Purpose Companies Held by PRC Residents or Citizens
Pursuant to the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Inbound Investment via Overseas Special Purpose Vehicles, or Circular No. 75, issued in October 2005 by SAFE and its supplemental notices, PRC citizens or residents are required to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas equity financing involving a roundtrip investment whereby the offshore entity acquires or controls onshore assets or equity interests held by the PRC citizens or residents. In addition, such PRC citizens or residents must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to increases or decreases in investment amount, transfers or exchanges of shares, mergers or divisions, long-term equity or debt investments, external guarantees, or other material events that do not involve roundtrip investments. Subsequent regulations further clarified that PRC subsidiaries of an offshore company governed by the SAFE regulations are required to coordinate and supervise the filing of SAFE registrations in a timely manner by the offshore holding company’s shareholders who are PRC citizens or residents. If these shareholders fail to comply, the PRC subsidiaries are required to report to the local SAFE branches. If the shareholders of the offshore holding company who are PRC citizens or residents do not complete their registration with the local SAFE branches, the PRC subsidiaries may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to the offshore company, and the offshore company may be restricted in its ability to contribute additional capital to its PRC subsidiaries. Moreover, failure to comply with the SAFE registration and amendment requirements described above could result in liability under PRC law for evasion of applicable foreign exchange restrictions.
M&A Rules
On August 8, 2006, six PRC regulatory agencies, including China Securities Regulatory Commission (“CSRC”), promulgated a rule entitled Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (“the M&A Rules”) to regulate foreign investment in PRC domestic enterprises. The M&A rules, among other things, requires an overseas special purpose vehicle (“SPV”), formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals, to obtain the approval of CSRC prior to publicly listing their securities on an overseas stock exchange. We believe that while the CSRC generally has jurisdiction over overseas listings of SPVs like us, CSRC’s approval is not required for this offering given the fact that no provision in the M&A Rules classifies the respective contractual arrangements between Arki Network and Arki E-Commerce and between Arki Network and America Arki as a type of acquisition transaction falling under the M&A Rules. There remains some uncertainty as to how this regulation will be interpreted or implemented in the context of an overseas offering. If the CSRC or another PRC regulatory agency subsequently determines that approval is required for this offering, we may face sanctions by the CSRC or another PRC regulatory agency.
The M&A Rules also establish procedures and requirements that could make some acquisitions of Chinese companies by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a Chinese domestic enterprise.
Safe Regulations on Employee Share Options
On March 28, 2007, SAFE promulgated the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Share Holding Plan or Share Option Plan of Overseas Listed Company, or the Share Option Rule. Pursuant to the Share Option Rule, Chinese citizens who are granted share options by an overseas publicly listed company are required to register with SAFE through a Chinese agent or Chinese subsidiary of the overseas publicly listed company and complete certain other procedures. Our PRC employees who have been granted share options will be subject to these regulations. Failure of our PRC share option holders to complete their SAFE registrations may subject these PRC employees to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to us.
Employees
As of May 17, 2018, we had we have 18 employees. The following table sets forth the number of our employees by function as of the same date:
Item 1A.
Item 1A. Risk Factors.
Not applicable because we are a smaller reporting company.
Item 1B.
Item 1B. Unresolved Staff Comments.
Smaller reporting companies are not required to provide the information required by this item.
Item 2.
Item 2. Properties.
Our corporate headquarter is located at 136-82 39th Ave, 4th Floor, Unit B, Flushing, NY 11354. On December 21, 2014, we entered into a one-year lease agreement (the “Lease”) with Days Service Group, LLC, a New York limited liability company (“Days Service”) for our principal executive office. The Lease started on January 1, 2015 and expired on December 31, 2015. We have subsequently renewed the Lease year to year until the fiscal year end of 2018. Pursuant to the current terms of the Lease, we have agreed to pay a monthly rent of $1200.00.
We operate our business in China in an office located on a premise leased by Arki Network in Beijing. On January 3, 2017, Arki Network entered into a Lease Transfer Agreement pursuant to which Arki Network became the lease of an office located at Gaopidian Section 1, Unit 7-2, Chaoyang District, Beijing, China. Pursuant to the terms of the Lease Transfer Agreement, Arki Network has agreed to pay an annual rent of RMB 350,000 (approximately US$50,000) for 450 square meters of office space. The Lease Transfer Agreement became effective on January 16, 2017 and will expire on January 15, 2022.
All of the above leases are for commercial use. We believe that our existing facilities are adequate for our current requirements and we will be able to enter into lease arrangements on commercially reasonable terms for future expansion.
Item 3.
Item 3. Legal Proceedings.
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.
Item 4.
Item 4. Mine Safety Disclosures
Not Applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock trades on the OTCQB Market under the symbol “CCGN”. The OTCQB Market is a quotation service that displays real-time quotes, last-sale prices, and volume information in over-the-counter (“OTC”) equity securities. An OTCQB equity security generally is any equity that is not listed or traded on a national securities exchange.
Price Range of Common Stock
The following table shows, for the periods indicated, the high and low bid prices per share of our common stock as reported by the OTCQB’s quotation service. These bid prices represent prices quoted by broker-dealers on the OTCQB quotation service. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not represent actual transactions.
The following table sets forth, for the periods indicated, the high and low bid prices of our common stock.
The market price of our common stock is subject to significant fluctuations in response to variations in our quarterly operating results, general trends in the market, and other factors, over many of which we have little or no control. In addition, broad market fluctuations, as well as general economic, business and political conditions, may adversely affect the market for our common stock, regardless of our actual or projected performance.
Holders of Our Common Stock
As of May 10, 2018, we had approximately 6,605 shareholders of record of our common stock. This number does not include shares held by brokerage clearing houses, depositories or others in unregistered form.
Dividends
Under applicable PRC regulations, foreign-invested enterprises in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in the PRC is required to set aside at least 10% of its after-tax profit (determined in accordance with PRC accounting standards) each year to its general reserves until the accumulative amount of such reserves reach 50% of its registered capital. These reserves are not distributable as cash dividends.
We have not paid dividends on our common stock and do not anticipate paying such dividends in the foreseeable future. We will rely on dividends from our PRC Operating Entities for our funds and PRC regulations (described above) may limit the amount of funds distributable to us from our PRC Operating Entities, which will affect our ability to declare any dividends.
Securities Authorized for Issuance under Equity Compensation Plans
We do not have in effect any compensation plans under which our equity securities are authorized for issuance.
Recent Sales of Unregistered Securities
On September 24, 2015, pursuant to certain Share Exchange Agreement between the Company and Zhong Hui, the Company acquired 51% of the capital stock of Zhong Hui by issuing an aggregate of 10,000,000 shares of Company’s common stock to shareholders of Zhong Hui, valued at $1.00 per share. The issuance of the common stock has been determined to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act of 1933, as amended.
On December 31, 2015, Company issued an aggregate of 1,357,300 shares of common stock to 28 investors pursuant to a Regulation S offering at a purchase price of $2.50 per share, or an aggregate offering price of $3,382,500. The common stocks issued in this offering were issued in a transaction not involving a public offering in reliance upon an exemption from registration provided by provisions of the Regulation S of the Securities Act of 1933, as amended.
On July 28, 2016, the Company issued an aggregate of 187,929 shares of the Company’s common stock as equity awards to employees calculated through the application of an income approach to evaluate the future value of the operation into a present market value. The issuance of such securities was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
On July 28, 2016, the Company issued an aggregate of 825,180 shares of the Company’s common stock pursuant to a Regulation S offering and stock purchase agreements entered into with various investors. The Company issued 825,180 shares of the Company’s common stock, for an aggregate purchase price of $1,790,640, or $2.17 per share. The common stocks issued in this offering were issued in a transaction not involving a public offering in reliance upon an exemption from registration provided by provisions of the Regulation S of the Securities Act of 1933, as amended.
In August 2017, the Company issue an aggregate of 824,583 shares of common stock to certain consultant group for services rendered in connection with its uplisting to the Nasdaq Capital Market. The issuance of the shares has been determined to be exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act.
On November 17, 2017, the Company issued an aggregate of 4,175,417 shares of common stock to shareholders of Beijing Shenzhou Rongtong Investment Management Co. Ltd. (“Shenzhou Rongtong”). The issuance of the shares has been determined to be exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act. The shares were subsequently returned to the Company pursuant to a termination agreement dated March 29, 2018 among the parties.
Item 6.
Item 6. Selected Financial Data.
Smaller reporting companies are not required to provide the information required by this item.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations.
The following discussion and analysis of the results of operations and financial condition for the fiscal years ended December 31, 2017 and 2016 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this Report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors.
Overview
We strive to become a one-stop shop that focuses on microfinancing service for micro, small-to-medium sized enterprises (“SMEs”). We are primarily engaged in the businesses of microfinancing. We operate our direct microfinancing business through our subsidiary, Arki E-Commerce, and variable interest entity, Arki Network. With the increased difficulty of obtaining sufficient financing through traditional channels by SMEs, we offer SMEs alternative financing means through risk-controlled private lending to meet their capital needs and develop their business. It is our belief that the growth of SMEs will become an important factor of China’s economic growth in the next decade. We believe that our expertise in streamlining microfinancing process will place our company in a unique position in the marketplace.
Microfinancing
Currently, we engage in microfinancing business through our subsidiary, Arki E-Commerce and VIE, Arki Network, to provide direct loans to SMEs and sole proprietors based in Liaoning Province. Through Arki Network’s collaboration with China UnionPay Merchant Service (Liaoning) Co. Ltd (“UnionPay Liaoning”), Arki E-Commerce provides private loans for borrowers and Arki Network and UnionPay act as intermediary to facilitate the loan transactions for a 5% service fee. Arki E-Commerce’s practice of microfinancing has been limited to certain businesses and sole proprietors pre-screened and recommended by UnionPay Liaoning based on historical sales volume generated through credit card transactions using UnionPay’s system.
Wealth Management
Arki Network through its 51%-owned subsidiary, America Arki (Tianjin) Capital Management Partnership (“Capital”), engages wealth management business. Arki Capital operates its business on its financial advisory platform “Bangnitou”, which translates to “Help You Invest” in English and attracts capital from investors to invest in fixed income opportunities such as inter-bank loans, currency exchange products and other equity investment opportunities to help investor obtain return on their investment. Still at its development stage, Bangnitou will have a number of financial products that aims to generate annual return ranging from 8-12%. The platform will allow retail investors to invest in products for as little as RMB 100 (or approximately US$15). Once each product reaches its maximum subscription or the end of its offering period, the investments are held for a period of time before being redeemable by the investors, along with the return.
Recent Development
On November 17, 2017, Arki Network, Beijing Shenzhou Rongtong Investment Management Co. Ltd. (“Shenzhou Rongtong”), a company organized under the law of People’s Republic of China, and all the shareholders of Shenzhou Rongtong entered into an equity transfer agreement, pursuant to which Arki Network agreed to acquire 100% of the issued and outstanding equity securities of Shenzhou Rongtong from its shareholders, in exchange for the issuance of an aggregate of 4,175,417 shares of common stock of the Company, to the shareholders of Shenzhou Rongtong within 15 days of the closing of the transaction. The transaction failed to go through as at December 31, 2017.
On March 29, 2018, all shareholders of Shenzhou signed agreement to return all shares of CCGN to the Company. On April 13, 2018, the shareholders of Shenzhou returned all the shares to the Company.
Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with US GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Foreign Currency Translation
The Company’s reporting currency is the U.S. dollar. The Company’s functional currency is the local currency in the PRC, the Chinese Yuan (RMB). The financial statements of the Company are translated into United States dollars in accordance with ASC 830, Foreign Currency Matters, using yearend rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses and historical rates for equity. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income.
In accordance with ASC 830, Foreign Currency Matters, the Company translated the assets and liabilities into US $ using the rate of exchange prevailing at the applicable balance sheet date and the statements of income and cash flows are translated at an average rate during the reporting period. Adjustments resulting from the translation are recorded in investors’ equity as part of accumulated other comprehensive income.
Revenue Recognition
We recognize revenue from product sales or services rendered when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectability is reasonably assured.
E-commerce Revenue Recognition
We evaluate whether it is appropriate to record the net amount of sales earned as commissions. We are not the primary obligor nor are we subject to inventory risk as the agreements with our suppliers specify that they have the responsibility to provide the product or service to the customer. Also, the amounts we earn from our vendors/suppliers is based on a fixed percentage and bound contractually. Additionally, the Company does not have any obligation to resolve disputes between the vendors and the customers that purchase the products on our website. Any disputes involving damaged, non-functional, product returns, and/or warranty defects are resolved between the customer and the vendor. The Company has no obligation for right of return and/or warranty for any of the sales completed using its website. Since we are not primarily obligated and amounts earned are determined using a fixed percentage, a fixed-payment schedule, or a combination of the two, we record our revenues as commissions earned on a net basis.
Our sales are net of promotional discounts and rebates and are recorded when the products are shipped and title passes to customers. Revenues are recorded net of sales and consumption taxes. We periodically provide incentive offers to our customers to encourage purchases. Such offers include current discount offers, such as percentage discounts off current purchases, inducement offers, such as daily sweepstakes reward opportunities that is based on volume of purchases, and other similar offers. Current discount offers and inducement offers are presented as a net amount in “Net revenues.”
We record deferred revenue when cash is received in advance of the performance of services or delivery of goods. Deferred revenue is also recorded to account for the seven-day grace period offered to customers for potential product disputes, if any.
Because of the lack of sales generated on our online retail platforms, we ceased our E-commerce business in first quarter of 2015.
Servicing fee income
Borrowers typically pay us a servicing fee on each payment received. The service fees compensate us for the costs we incur in servicing the related loan, including managing funding from investors, payments to investors and maintaining borrower’ account portfolios. We record servicing fees paid by borrower as a component of operating revenue when received.
Yin Hang provided credit risks assessment services to the borrowers and lenders on a third party P2P online lending platform. The service fees calculated based on complexity, required time, contents and commercial value of the coordination services between borrowers and lenders and are collected when the loan agreements are signed completely by all parties but before releasing the money to the borrowers.
The service fees are paid typically by borrowers as a one time payment for each loan. The service fees compensate for the costs that incurred in servicing the related loan, including managing funding from investors, payments to investors and maintaining borrowers’ account portfolios. Arki E-Commerce record service fees paid by borrower as a component of operating revenue when received. Arki E-Commerce provides funding of the private loans for borrowers and Arki Network and UnionPay collectively act as intermediary to facilitate the loan transactions. UnionPay Liaoning provides the qualified borrowers (based on historical sales volume generated through credit card transactions using UnionPay’s system). Arki Network would receive a one-time service fee for each loan when the clients receive the loan.
Arki E-commerce only receives interest income and Arki Network receives service fee from the transactions. We further clarify for the Staff that we previously engaged in the peer to peer internet business model through Shanghai Zhonghui and is no longer engaging the business as a result of the business sale in 2016.
Interest income on loans
Interest on loan receivables is accrued monthly in accordance with their contractual terms and recorded in accrued interest receivable. The Company does not charge prepayment penalty from customers.
Distribution Revenue Recognition
We record product sales and shipping revenues, net of return allowances, when the products are shipped and title passes to customers. Return allowances, which reduce product revenue, are estimated using historical experience. Revenue from product sales and services rendered is recorded net of sales and consumption taxes.
Discontinued Operations
See “Note 11 - DISCONTINUED OPERATIONS” to the consolidated financial statements for additional information.
Cash and Cash Equivalents
We consider all investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents primarily represent funds invested in bank checking accounts, money market funds and domestic Chinese bank certificates of deposit. At December 31, 2017 and 2016, the Company had no cash equivalents.
Fair Value of Financial Instruments
The Company’s financial instruments include cash and cash equivalents, accounts receivable, prepaid expenses, other receivables, other assets, accounts payable, accrued liabilities, other payables, related party payables, short term debt and derivative liabilities. These financial instruments are measured at their respective fair values. For fair value measurement, US GAAP establishes a three-tier hierarchy which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 include other inputs that are directly or indirectly observable in the marketplace.
Level 3 unobservable inputs which are supported by little or no market activity.
Fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The carrying value of cash and cash equivalents, accounts receivable, advance to suppliers, prepaid expenses, other receivables, other assets, account payable, accrued liabilities, other payables, and short term debt approximates their fair value due to their short-term maturities.
The Company has determined the estimated fair value amounts presented in these financial statements using available market information and appropriate methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. The estimates presented in the financial statements are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Management believes it is not practical to estimate the fair value of related party payables because the transactions cannot be assumed to have been consummated at arm’s length, the terms are not deemed to be market terms, there are no quoted values available for these instruments, and an independent valuation would not be practical due to the lack of data regarding similar instruments, if any, and the associated potential costs.
Recent Accounting Pronouncements
In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, Intangibles - Goodwill and Other (Topic 350). The amendments in this update simplify the test for goodwill impairment by eliminating Step 2 from the impairment test, which required the entity to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in determining fair value of assets acquired and liabilities assumed in a business combination. The amendments in this update are effective for public companies for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We are evaluating the impact of adopting this guidance on our Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805); Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business to help companies evaluate whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The amendments in this update are effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company does not anticipate that this adoption will have a significant impact on its financial position, results of operations, or cash flows.
In July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments.
As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt-Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception.
Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently reviewing the impact of adoption of ASU 2017-11on its financial statements. The Company does not anticipate that this adoption will have a significant impact on its financial position, results of operations, or cash flows.
The Company has considered all new accounting pronouncements and has concluded that there are no new pronouncements that may have a material impact on results of operations, financial condition, or cash flows, based on current information.
Results of Operations - Comparison of the Years Ended December 31, 2017 and 2016
The following table sets forth the results of our operations for the periods indicated in U.S. dollars.
Revenue.
During the year ended December 31, 2017, we had revenue of $48,388, comparing to revenue of $213,873 for the year ended December 31, 2016, a decrease of $165,485. The significant revenue decrease was mainly caused by less volume of microfinancing business we did in 2017 than in 2016.
Revenue from Shanghai Zhonghui (discontinued business) for the years ended December 31, 2017 and 2016 were Nil and $1,303,968, respectively and were included in net loss from discontinued operations.
Revenue from Yin Hang (discontinued business) for the years ended December 31, 2017 and 2016 were $2,246,767 and $47,402, respectively and were included in the net loss from discontinued operations.
Cost of Revenue.
We did not have incur any cost of revenue for the years ended December 31, 2017 and 2016, respectively.
Cost of goods sold from Shanghai Zhonghui (discontinued business in 2016) for the years ended December 31, 2017 and 2016 were $0 and $369,269, respectively and were included in net loss from discontinued operations.
Cost of goods sold from Yin Hang (discontinued business in 2017) for the years ended December 31, 2017 and 2016 were $0 and $0, respectively and were included in net loss from discontinued operations.
Gross Profit
As a result of our revenue and cost of revenue described above, we had gross profit of $48,388 for the year ended December 31, 2017, comparing to gross profit of $213,873 for the year ended December 31, 2016.
Gross profit from Shanghai Zhonghui (our discontinued business) for the fiscal years ended December 31, 2017 and 2016 were of $0 and $934,699, respectively, and were included in net loss from discontinued operations.
Selling, general and administrative expenses.
Selling expenses from Shanghai Zhonghui (discontinued business) for the fiscal year ended December 31, 2017 and 2016 were $0 and $1,147,350, respectively and were included in net loss from discontinued operations.
Selling expenses from Yin Hang (discontinued business) for the fiscal year ended December 31, 2017 and 2016 were $348,454 and $42,795, respectively and were included in net loss from discontinued operations.
General and administrative expenses consist of salaries, professional fees, office expenses, utilities, business travel, amortization expenses, public company expenses (including legal expenses, accounting expenses and investor relations expenses). General and administrative expenses were $1,939,290 for the year ended December 31, 2017, compared to $782,000 for the year ended December 31, 2016, an increase of $1,157,290. The increase is mainly attributed to the increase in public company expenses, including filing of S-1 and Nasdaq application expenses, legal and accounting expense, and other professional fees.
General and administrative expenses from Shanghai Zhonghui (discontinued business) for the year ended December 31, 2017 and 2016 were $0 and $2,308,629, respectively and were included in net loss from discontinued operations.
General and administrative expenses from Yin Hang (discontinued business) for the years ended December 31, 2017 and 2016 were $496,966 and $64,926, respectively and were included in net loss from discontinued operations.
Loss from operations.
As a result of the factors described above, operating loss was $1,890,902 for the year ended December 31, 2017, comparing to operating loss of $568,127 for the fiscal year ended December 31, 2016. The increase of $1,322,775 was mainly due to we reduced both the microfinancing business and financial innovation in 2017 than in 2016.
The loan from individuals primarily represent the principal of lending funds received by America Arki (Tianjin) Capital Management Partnership from the limited partners. Arki Capital’s core business is wealth management and has establishes a limited liability partnership with investors. The provision of contracts specified the period of investment, fixed interest return and crudely plans of use funds. The fixed interest return rate was based on the amount of investment, which ranged from 8% to 100% per annum with a term of 6 months, one year or two years. The amount of loan from individuals are $4,099,312 and $2,332,330 respectively as of December 31, 2017 and 2016. Total interest accrued was $3,459,950 and $163,951 respectively in 2017 and 2016. Among the total $4,099,312 as of December 31, 2017, $1,192,751 has a term of 1 year and $2,906,562 has a term of 2 years. Among the total $2,332,330 as of December 31, 2016, $480,863 is due within the next 3 months, $1,271,264 is due within 3-6 months, $580,203 is due 6-12 months and none is due more than 12 months.
Other income and expenses.
We generated other income of $1,155,815 for the year ended December 31, 2017, comparing to $8,152 for the year ended December 31, 2016. Other income in 2017 was mainly caused by the relief of debt from Yin Hang. We incurred $0 and $171,978 respectively in other expense for the year ended December 31, 2017 and 2016, Other expense in 2016 is primarily due to the increase of assets management service by the Company. Interest income was $6,312 and $63,530 respectively for the year ended December 31, 2017 and 2016.
A bargain purchase gain from Yin Hang (discontinued business) of $0 and $1,593,719 respectively for the year ended December 31, 2017 and 2016 is primarily due to acquisition of Yin Hang in 2016.
Total other expenses from Shanghai Zhonghui (discontinued business) for the fiscal years ended December 31, 2017 and 2016 were $0 and $1,012, respectively and were included in net loss from discontinued operations.
Income tax.
We had tax expense of $0 and $78,199 respectively for the year ended December 31, 2017 and 2016. The decrease of income tax expense is primarily due to the operating loss in 2017 compared to the income brought by launching of microfinancing business in 2016.
Net loss from continuing operations.
As a result of the factors described above, our net loss of $2,545,589 and $746,622 respectively from continuing operations for the year ended December 31,2017 and 2016, an increase in loss of $1,798,967.
Net (loss) income from discontinued operations.
Net loss from Shanghai Zhonghui (discontinued business) for the years ended December 31, 2017 and 2016 was $0 and $2,100,193, respectively and were included in net loss from discontinued operations.
Net (loss) income from Yin Hang (discontinued business) for the years ended December 31, 2017 and 2016 was gain of $(4,082,238) and $1,532,238, respectively and were included in net loss from discontinued operations.
Net loss.
As a result of the factors above, our net loss for the year ended December 31, 2017 was $6,627,827, comparing to net loss of $1,314,577 for the fiscal year ended December 31, 2016, an increase of net loss of $5,313,250.
Net (loss) income attributable to the company.
Net loss attributable to our company was $5,588,291, or losses of $0.17 per share (basic and diluted), for the year ended December 31, 2017, comparing to a net income of $493,870, or earnings of $0.02 per share (basic and diluted), for the fiscal year ended December 31, 2016.
Foreign currency translation.
Our consolidated financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is RMB. Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the financial statements denominated in RMB into U.S. dollars are included in determining comprehensive income. Our foreign currency translation loss for the year ended December 31, 2017 was $64,466, comparing to translation gain of 143,943 for the fiscal year ended December 31, 2016. The gain and loss is primarily due to the fluctuation of the exchange rate.
Liquidity and Capital Resources
All of our business operations are carried out by our PRC subsidiaries or variable interest entities, and all of the cash generated by our operations has been held by those entity. In order to transfer such cash to our parent entity, Consumer Capital Group, Inc., which is a Delaware corporation, we would need to rely on dividends, loans or advances made by our PRC subsidiaries. Such transfers may be subject to certain regulations or risks. To date, our parent entity has paid its expenses by raising capital through private placement transactions. In the future, in the event that our parent entity is unable to raise needed funds from private investors, our PRC subsidiaries or variable interest entities would have to transfer funds to our parent entity.
As shown in our financial statements, we have negative cash flows from operations. Over the past years, we have been funded through advances from related parties, including our CEO Jianmin Gao and COO Fei Gao. These advances are non-interest bearing and have no specified maturity date. Because these individuals are also shareholders of the company, they are willing to provide continuing funding on an as-needed basis. However, as of the date of hereof, such related parties do not have any existing obligation to advance funds or working capital to support our business, nor can our company rely on any advance funds from such related parties. In the event that we do not have sufficient working capital to fund the expansion of our operations and to provide working capital necessary for our ongoing operations and obligations, we may need to raise additional capital to fund our operating expenses, pay our obligations and grow our company. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. In addition, a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. We may incur additional interest expense on new external debt due to paying market rates of interest if we decided to fund the operation through external debt. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital will restrict our ability to grow and may reduce our ability to continue to conduct business operations.
The RMB cannot be freely exchanged into Dollars. The State Administration of Foreign Exchange (“SAFE”) administers foreign exchange dealings and requires that they be conducted though designated financial institutions.
These factors will limit the amount of funds that we can transfer from our PRC Subsidiaries to our parent entity and may delay any such transfer. In addition, upon repatriation of earnings of PRC Subsidiaries to the United States, those earnings may become subject to United States federal and state income taxes. We have not accrued any U.S. federal or state tax liability on the undistributed earnings of our foreign subsidiary because those funds are intended to be indefinitely reinvested in our international operations. Accordingly, taxes imposed upon repatriation of those earnings to the U.S. would reduce the net worth of the Company.
During 2017 the Company issued a total of 30,000 shares to various shareholders for the amount of $3. During, 2016, the Company issued a total of 1,013,109 shares to various shareholders for the amount of USD $1,169,503. A portion of the capital raised was used for working capital purpose and the remaining portion of the capital was used to fund our microfinancing operation.
As of December 31, 2017, cash and cash equivalents were $725,774, compared to $724,492 at December 31, 2016.
The following table sets forth information about our net cash flow for the years indicated:
Cash Flows Data:
Net cash flow used in operating activities was $2,659,222 for the year ended December 31, 2017, comparing to $5,534,304 used in operating activities for the year ended December 31, 2016, a decrease in usage of $2,875,082. The decrease in net cash flow used in operating activities was mainly due to the increased expenses relating to the shift of our core business.
Net cash flow provided by (used in) investing activities was $934,651 for the year ended December 31, 2017, comparing to $(6,190,581) used in investing activities for the year ended December 31, 2016, a net increase of $7,125,232. The increase is mainly due to the repayment of loans from customers and the redemption of short-term investments in 2017. Another main reason is the Company spun off Shanghai Zhonghui in December 2016 and Yin Hang in August 2017.
Net cash flow provided by financing activities was $1,640,331 for the year ended December 31, 2017, comparing to $9,910,158 for the fiscal year ended December 31, 2016, a decrease of $8,269,827. $7,383,417 of the total amount is caused by the discontinued operations. Other part is due to the repayment of loan from individuals in 2017.
Concentration of Credit Risk
Assets that potentially subject our Company to significant concentration of credit risk primarily consist of cash and cash equivalents, and accounts receivable. The maximum exposure of such assets to credit risk is our carrying amounts as of the balance sheet dates. As of December 31, 2017 and 2016, substantially all of our cash and cash equivalents were deposited in financial institutions located in the PRC, which management believes are of high credit quality. We believe the credit risk on bank deposits is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies, or state-owned banks in China. Cash includes cash on hand and demand deposits in accounts maintained with state-owned banks within the PRC and the United States of America. Balances at financial institutions or state-owned banks within the PRC are not covered by insurance. Nonperformance by these institutions could expose our Company to losses for amounts in excess of insured balances. As of December 31, 2017 and 2016, no bank balances with the banks in U.S. exceeded the insured amount. As of December 31, 2017 and 2016, our bank balances with the Banks in the PRC amounted to $725,774 and $724,492, respectively, which are uninsured and subject to credit risk. We have not experienced nonperformance by these institutions.
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents, loan receivable from borrowers and the related accrued interest receivable. As of December 31, 2016, we have three significant borrowers, which accounted for 63% of total loan receivable balance. The aforementioned borrowers paid service fee and interest regularly according to the contract during the reporting period, and the Company believed that the default risk from this borrower is low in the foreseeable future.
Arki E-Commerce generally provide loans in the amount of RMB 300,000. However, under limited circumstances with the qualified borrowers, Arki E-Commerce, based on its business needs at the time, provided three companies with loan amount of RMB 1,000,000 each in December 2016. These three loans were paid off during the first quarter of 2017. The three loans that initiated in December, total of which is RMB 3,000,000 counted 63% of the total RMB4,747,455. Detail of the loans is set forth below:
We had no bad debt from the loans since we started the micro-financing business in 2016. We increase individual loan amount on a case by case basis.
No single borrower has loan balance over 10% of the total loan outstanding as of December 31, 2017.
Lease commitments
Our corporate headquarter is located at 136-82 39th Ave, 4th Floor, Unit B, Flushing, NY 11354. On December 21, 2014, we entered into a one-year lease agreement (the “Lease”) with Days Service Group, LLC, a New York limited liability company (“Days Service”) for our principal executive office. The Lease started on January 1, 2015 and expired on December 31, 2015. We subsequently renewed the Lease for the fiscal year ended December 31, 2016 and then again for the fiscal years ended December 31, 2017 and 2018. Pursuant to the current terms of the Lease, we have agreed to pay a monthly basic rent of $1200.00 plus CAM fees.
We operate our business in China in an office located on a premise leased by Arki Network in Beijing. On January 3, 2017, Arki Network entered into a Lease Transfer Agreement pursuant to which Arki Network became the leasee of an office located at Gaopidian Section 1, Unit 7-2, Chaoyang District, Beijing, China. Pursuant to the terms of the Lease Transfer Agreement, Arki Network has agreed to pay an annual rent of RMB 350,000 (approximately US$50,000) for 450 square meters of office space. The Lease Transfer Agreement became effective on January 16, 2017 and will expire on January 15, 2022.
Other Receivables
Amount of $31,136 in total other receivables consists of:
a) $11,557 belongs to Arki Network. It represents amount paid by Arki Network for other parties. Arki Network received all amount subsequently after the end of the year.
b) $332 belongs to Arki Capital.
c) $16,795 belongs to American Pine, which is the amount paid for others and will get paid back after the year end.
d)
$2,400 belongs to Consumer Capital Group Inc. in U.S. which represent refundable rent deposit.
e)
$52 belongs to Arki E-commerce.
Prepaid Expenses
Amount of $58,225 in total prepaid expense consists of $ $57,025 prepaid expense in Arki Network and $1,200 prepaid rent in Consumer Capital Group Inc.
Short-term investment
Short-term investment of $461,115 as of December 31, 2017 is an available-for-sale investment of RMB3,000,000 for Arki E-Commerce, comparing to $719,855, an available-for-sale investment of RMB 5,000,000 as of December 31, 2016, a decrease of $258,740 or RMB 2,000,000.
Off-Balance Sheet Arrangements
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholders’ equity or that are not reflected in our financial statements. Furthermore, we do not have any retained or contingent interests in assets transferred to an unconsolidated entity that serves as credit, liquidity, or market risk support to such entity. We do not have any variable interests in any unconsolidated entity that provides financing, liquidity, market risk, or credit support to us or engages in leasing, hedging, or research and development services with us.
Subsequent Events
On November 17, 2017, the Company signed an Equity Transfer Agreement with Shenzhou Rongtong Investment Management Co, Ltd. (thereafter “Shenzhou Rongtong”) a local company in Beijing China, which was established on June 4, 2014. Based on the agreement, all shareholders in Shenzhou Rongtong will transfer 100% of the equities in Shenzhou Rongtong to Arki Network within 45 days of signing the agreement, in exchange for the Company’s equities of 4,175,417 shares that will be transferred to all shareholders within 15 working days after the changing of equity by Shenzhou Rongtong’s shareholders. The transaction failed to go through as at December 31, 2017 and therefore on March 29, 2018, all shareholders of Shenzhou signed agreement to return all shares of CCGN to the Company. On April 13, 2018, all shareholders of Shenzhou returned all the shares to the Company.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Smaller reporting companies are not required to provide the information required by this item.
Item 8.
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Consumer Capital Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Consumer Capital Group, Inc. (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Centurion ZD CPA Ltd.
Centurion ZD CPA Ltd.
Hong Kong
May 17, 2018
We have served as the Company’s auditor since 2016
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN U.S. $)
See accompanying notes to the consolidated financial statements.
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN U.S. $)
See accompanying notes to the consolidated financial statement
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31, 2017 AND 2016
(IN U.S. $)
See accompanying notes to the consolidated financial statements.
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2017
(IN U.S. $)
See accompanying notes to the consolidated financial statements.
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(IN U.S. $)
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(IN U.S. $)
See accompanying notes to the consolidated financial statements.
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(IN U.S. $)
1.ORGANIZATION
Consumer Capital Group, Inc. (“CCG” or the “Company”) was incorporated in Delaware on April 25, 2008. The accompanying consolidated financial statements include the financial statements of the Company, its wholly owned subsidiaries, and an affiliated PRC entity (“Affiliated PRC Entity”) that is controlled through contractual arrangements. On February 5, 2010, in connection with the execution of a Stock Right Transfer Agreement, America Pine Group Inc. transferred both 100% of the stock rights of its wholly owned subsidiary Arki (Beijing) E-commerce Technology Co., Ltd. and 100% of its stock rights of America Pine (Beijing) Bio-Tech to Consumer Capital Group, Inc., a California corporation and wholly owned subsidiary of the Company (“CCG California”).
On February 4, 2011, pursuant to a Plan and Agreement of Merger by and among Mondas Minerals Corp., its wholly owned subsidiary, CCG Acquisition Corp., a Delaware corporation (“CCG Delaware”), CCG California, and Scott D. Bengfort, Mondas Minerals Corp. merged its wholly-owned subsidiary CCG Delaware into CCG California, with CCG California surviving and CCG Delaware ceasing to exist. On February 7, 2011, the Company formed a new wholly-owned subsidiary by the name of “Consumer Capital Group Inc.” (“CCG Name Sub”) in Delaware solely for purposes of changing its corporate name to “Consumer Capital Group Inc.” in conjunction with the closing of the Merger. On February 17, 2011, the Company changed its name to Consumer Capital Group Inc. pursuant to a Certificate of Ownership filed with the Secretary of State of Delaware by merging CCG Name Sub into the Company with the Company surviving and the CCG Name Sub ceasing to exist. Unless the context specifies otherwise, references to the “Company” refers to CCG California prior to the Merger and the Company, its subsidiaries and Affiliated PRC Entity combined after the Merger.
Consumer Capital Group Inc. is authorized to issue up to 100,000,000 shares of common stock, par value $0.0001 per share. On February 4, 2011, Consumer Capital Group Inc. effected a reverse stock split (the “Stock Split”), as a result of which each 21.96 shares of Consumer Capital Group’s common stock then issued and outstanding was converted into one share of Mondas Minerals’ common stock.
Immediately prior to the merger, Consumer Capital Group, Inc. had 390,444,109 shares of its common stock issued and outstanding. In connection with the merger, Mondas Minerals issued 17,777,778 shares of its common stock in exchange for the issued and outstanding shares of common stock of CCG California. Immediately prior to the closing of the merger, there were 2,500,000 issued and outstanding shares of the Company’s common stock, 60% of which were held by the then principal stockholder, CEO, and sole director of the Company, Mr. Bengfort. As a part of the merger, CCG paid $335,000 in cash to Mr. Bengfort in exchange for his agreement to enter into various transaction agreements relating to the merger, as well as the cancellation of 1,388,889 shares of the Company’s common stock directly held by him, constituting 92.6% of his pre-merger holdings of Company common stock.
SHANGHAI ZHONGHUI FINANCIAL INFORMATION SERVICES CORP.
Established on May 26, 2014, under PRC laws, Shanghai Zhonghui Financial Information Services Corp. (“Shanghai Zhonghui”) offers financing and investment opportunities for small to medium sized business and investors, including outsource of financial information technologies, investment management, investment consulting, as well as other related asset management services in China.
On December 23, 2014, the Company and Shanghai Zhonghui entered into a Share Exchange Agreement (the “Agreement”), pursuant to which the Company agreed to acquire 51% of the capital stock of Shanghai Zhonghui (the “Acquisition”). Pursuant to the terms of the Agreement, the Company agreed to issue 5,000,000 shares of the Company’s common stock, to certain individuals affiliated with Shanghai Zhonghui (the “Affiliates”), valued at $1.00 per share for a total of $5,000,000 or approximately 31,000,000 RMB, to exchange 51% of the capital stock of Shanghai Zhonghui.
On December 28, 2016, the Company and Yanbian Yaotian Gas Group Co., Ltd, (the “Purchaser”) a company incorporated under the laws of the People’s Republic of China, entered into a definitive agreement to sell all of its interests in Shanghai Zhonghui for nil consideration. As of December 31, 2016, the results of operations of Shanghai Zhonghui business are reflected in the Company’s consolidated financial statements as discontinued operations.
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(IN U.S. $)
1.ORGANIZATION (continued)
YIN HANG FINANCIAL INFORMATION SERVICE (SHANGHAI) CO., LIMITED
Yin Hang Financial Information Service (Shanghai) Co., Limited ("Yin Hang") was incorporated on November 22, 2013 under the laws of the People’s Republic of China (“PRC” or “China”). The Company collects service fees calculated based on the complexity, required time, contents and commercial value of the credit risk assessment services provided to lenders and borrowers on a third party peer to peer (“P2P”) online lending platform. On December 1, 2016, the Company through its variable interest entity, America Arki Network Service Beijing Co., Ltd entered into a Share Exchange Agreement with Yin Hang, pursuant to the Agreement, the Company agreed to acquire 100% of the capital stock of Yin Hang in exchange for the issuance of 4,680,000 shares of Company’s common stock. The shares are locked up for one year upon issuance and Yin Hang’s investor may sell up to 2% of the shares after such lock-up period. Further to a supplementary agreement dated March 28, 2017, as a payment for assisting in the acquisition, the Company also agreed to issue 320,000 shares of Common Stock to a third party.
On August 31, 2017, Arki and Yin Hang entered into a Supplementary Agreement and mutually agreed to terminate the Share Exchange Agreement, effective immediately, because companies in the financial information industry are not permitted to be controlled by foreign companies outside of China. As a result of the termination, Yin Hang is no longer be consolidated in the Company’s financial statements as of September 1, 2017 and its operations are reflected in discontinued operations.
Details of the Company’s wholly owned subsidiaries and its Affiliated PRC Entity as of December 31, 2017 are as follows:
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(IN U.S. $)
1.ORGANIZATION (continued)
(1) Wholly foreign owned entities (WFOE)
(2) VIE
(3) Arki Network Service owned entities
(4) Discontinued operation sold on December 28, 2016
(5) Discontinued operation on August 31, 2017
In order to comply with PRC laws and regulations which prohibit foreign control of companies involved in internet content, the Company operates its website using the licenses and permits held by Arki Network Service, a 100% PRC owned entity. The equity interests of Arki Network Service are legally held directly by Mr. Jianmin Gao and Mr. Fei Gao, shareholders and directors of the Company. The effective control of Arki Network Service is held by Arki Beijing and Arki Fuxin through a series of contractual arrangements (the “Contractual Agreements”). As a result of the Contractual Agreements, Arki Beijing and Arki Fuxin maintain the ability to control Arki Network Service, and are entitled to substantially all of its economic benefits and are obligated to absorb all of its losses. Therefore, the Company consolidates Arki Network Service as a variable interest entity (“VIE”) in accordance with SEC Regulation SX-3A-02 and the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation in accounting for a variable interest entity (“VIE”).”
The following is a summary of the Contractual Agreements of the Company’s VIE structure:
The shareholders of Arki Network Service, namely Mr. Jianmin Gao and Mr. Fei Gao, entered into a loan agreement with Arki Fuxin on February 3, 2011. Under this loan agreement, Arki Fuxin granted an interest-free loan of RMB 1.0 million to Mr. Jianmin Gao and Mr. Fei Gao, collectively, for their capital contributions to Arki Network Service, as required by the PRC. The term of the loan is for ten years from the date of execution until the date when Arki Fuxin requests repayment. Arki Fuxin may request repayment of the loan with 30 days’ advance notice. The loan is not repayable at the discretion of the shareholders and is eliminated upon consolidation.
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(IN U.S. $)
1.ORGANIZATION (continued)
The shareholders of Arki Network Service entered into an option agreement with Arki Fuxin on February 3, 2011, under which the shareholders of Arki Network Service jointly and severally granted to Arki Fuxin an option to purchase their equity interests in Arki Network Service. The purchase price will be set off against the loan repayment under the loan agreement. Arki Fuxin may exercise such option at any time until it has acquired all equity interests of Arki Network Service or freely transferred the option to any third party and such third party assumes the rights and obligations of the option agreement.
Arki Fuxin and Arki Network Service entered into an exclusive business cooperation agreement deemed effective on November 26, 2010, under which Arki Network Service engaged Arki Fuxin as its exclusive provider of technical support, consulting services, maintenance and other commercial services. Arki Network Service shall pay to Arki Fuxin service fees determined based on the net income of Arki Network Service and which are eliminated in consolidation. Arki Fuxin shall exclusively own any intellectual property arising from the performance of this agreement. This agreement has a term of ten years from the effective date and can only be terminated mutually by the parties in a written agreement. During the term of the agreement, Arki Network Service may not enter into any agreement with third parties for the provision of identical or similar service without the prior consent of Arki Fuxin.
The shareholders of Arki Network Service entered into a share pledge agreement with Arki Fuxin on February 3, 2011 under which the shareholders pledged all of their equity interests in Arki Network Service to Arki Fuxin as collateral for all of the payments due to Arki Fuxin and to secure their obligations under the above agreements. The shareholders of Arki Network Service may not transfer or assign the shares or the rights and obligations in the share pledge agreement or create or permit any pledges which may have an adverse effect on the rights or benefits of Arki Fuxin without Arki Fuxin’s preapproval. Arki Fuxin is entitled to transfer or assign in full or in part the shares pledged. In the event of default, Arki Fuxin, will be entitled to request immediate repayment of the loan or to dispose of the pledged equity interests through transfer or assignment.
The shareholders of Arki Network Service entered into a power of attorney agreement with Arki Fuxin effective on November 26, 2010 under which the shareholders irrevocably appointed Arki Beijing and Arki Fuxin to vote on their behalf on all matters they are entitled to vote on, including matters relating to the transfer of any or all of their respective equity interests in the entity and the appointment of the chief executive officer and other senior management members.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of accounting and presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The consolidated financial statements include those of the Company and its wholly-owned subsidiaries based in the PRC, which include America Pine Beijing, Arki Beijing, Arki Fuxin, 51% majority ownership in Arki Tianjin, and the discontinued operations of Shanghai Zhonghui and Yin Hang. As a result of contractual arrangements, the Company consolidates Arki Network Service in accordance with SEC Regulation SX-3A-02 and Accounting Standards Codification (“ASC”) 810, Consolidation. All significant intercompany accounts and transactions have been eliminated in consolidation.
The audited consolidated financial statements of the Company as of December 31, 2017, and 2016 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”) which apply to financial statements. Accordingly, they do not include all of the information and footnotes normally required by accounting principles generally accepted in the United States of America for annual financial statements. The consolidated financial information should be read in conjunction with the consolidated financial statements and the notes thereto, included in the Company’s Form 10-K filed with the SEC. In the opinion of management, such information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. The results of operations for the years ended December 31, 2017 are not necessarily indicative of the results to be expected for future years ending December 31, 2018.
All consolidated financial statements and notes to the consolidated financial statements are presented in United States dollars (“US Dollar” or “US$” or “$”).
Variable interest entity
Pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Section 810, “Consolidation” (“ASC 810”), the Company is required to include in its consolidated financial statements, the financial statements of its variable interest entities (“VIEs”). ASC 810 requires a VIE to be consolidated if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which a company, through contractual arrangements, bears the risk of, and enjoys the rewards normally associated with ownership of the entity, and therefore the company is the primary beneficiary of the entity.
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(IN U.S. $)
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Under ASC 810, a reporting entity has a controlling financial interest in a VIE, and must consolidate that VIE, if the reporting entity has both of the following characteristics: (a) the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance; and (b) the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the VIE. The reporting entity’s determination of whether it has this power is not affected by the existence of kick-out rights or participating rights, unless a single enterprise, including its related parties and de - facto agents, have the unilateral ability to exercise those rights. Arki Network Service’s actual stockholders do not hold any kick-out rights that affect the consolidation determination.
Through the VIE agreements disclosed in Note 1, the Company is deemed the primary beneficiary of Arki Network Service. Accordingly, the results of Arki Network Service have been included in the accompanying consolidated financial statements. Arki Network Service has no assets that are collateral for or restricted solely to settle their obligations. The creditors of Arki Network Service do not have recourse to the Company’s general credit.
The following financial statement amounts and balances of Arki Network Service have been included in the accompanying consolidated financial statements:
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(IN U.S. $)
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Foreign currency translations
Almost all of the Company assets are located in the PRC. The functional currency for the Company’s operations is the Renminbi (“RMB”). The Company uses the United States Dollar (“US Dollar” or “US$” or “$”) for financial reporting purposes. The financial statements of the Company have been translated into US Dollars in accordance with FASB ASC Section 830, “Foreign Currency Matters.”
All asset and liability accounts have been translated using the exchange rate in effect at the balance sheet date. Equity accounts have been translated at their historical exchange rates when the capital transactions occurred. Statements of operations and comprehensive income (loss) and cash flows have been translated using the average exchange rate for the periods presented. Adjustments resulting from the translation of the Company’s financial statements are recorded as other comprehensive income (loss).
The exchange rates used to translate amounts in RMB into US Dollars for the purposes of preparing the financial statements are as follows:
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(IN U.S. $)
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign currency translations (continued)
Foreign currency translation adjustments of $(246,478) and $355,888 for the years ended December 31, 2017 and 2016, respectively, have been reported as other comprehensive (loss) income. Other comprehensive (loss) income of the Company consists entirely of foreign currency translation adjustments.
Although PRC government regulations now allow convertibility of the RMB for current account transactions, significant restrictions still remain. Hence, such translations should not be construed as representations that the RMB could be converted into US Dollars at that rate or any other rate.
The value of the RMB against the US Dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions. Any significant revaluation of the RMB may materially affect the Company’s financial condition in terms of US Dollar reporting.
Revenue recognition
We recognize revenue from services rendered when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectability is reasonably assured.
E-commerce Revenue Recognition
The Company evaluates whether it is appropriate to record the net amount of sales earned as commissions. The Company is not the primary obligor nor is it subject to inventory risk as the agreements with its suppliers specify that they have the responsibility to provide the product or service to the customer. Also, the amounts it earns from its vendors/suppliers is based on a fixed percentage and bound contractually. Additionally, the Company does not have any obligation to resolve disputes between the vendors and the customers that purchase the products on its website. Any disputes involving damaged, non-functional, product returns, and/or warranty defects are resolved between the customer and the vendor.
The Company has no obligation for right of return and/or warranty for any of the sales completed using its website. Since the Company is not primarily obligated and amounts earned are determined using a fixed percentage, a fixed-payment schedule, or a combination of the two, it records its revenues as commissions earned on a net basis.
The Company records deferred revenue when cash is received in advance of the performance of services or delivery of goods. Deferred revenue is also recorded to account for the seven-day grace period offered to customers for potential product disputes, if any.
Servicing fee income
Borrowers typically pay the Company a servicing fee on each payment received. The service fees compensate the Company for the costs it incurs in servicing the related loan, including managing funding from investors, payments to investors and maintaining borrower’ account portfolios. The Company records servicing fees paid by borrower as a component of operating revenue when received.
Yin Hang provided credit risks assessment services to the borrowers and lenders on a third party P2P online lending platform. The service fees are calculated based on complexity, required time, contents and commercial value of the coordination services between borrowers and lenders and are collected when the loan agreements are signed by all parties but before releasing the money to the borrowers.
Interest income on loans
Interest on loan receivables is accrued monthly in accordance with their contractual terms and recorded in accrued interest receivable. The Company does not charge a prepayment penalty if they repay the loans in advance with or without notice.
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(IN U.S. $)
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Discontinued Operations
“Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” is utilized by the Company to present the operations of Shanghai Zhonghui and Yin Hang which have been disposed of. The amendments contained in this update change the criteria for reporting discontinued operations and enhance the reporting requirements for discontinued operations. Under the revised standard, a discontinued operation must represent a strategic shift that has or will have a major effect on an entity’s operations and financial results. Examples could include a disposal of a major line of business, a major geographical area, a major equity method investment, or other major parts of an entity. The revised standard also allows an entity to have certain continuing cash flows or involvement with the component after the disposal. Additionally, the standard requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The Company accounted for the sales of Shanghai Zhonghui and Yin Hang as discontinued operations pursuant to this standard. Refer to Note 11 for additional details. The Company accounted for the disposal of Shanghai Yin Hang during 2017 as a discontinued operation pursuant to this standard. Refer to Note 11 for additional details.
Non-controlling interest
Noncontrolling interests held 49% shares of one of subsidiary is recorded as a component of our equity, separate from the Company’s equity. Purchase or sales of equity interests that do not result in a change of control are accounted for as equity transactions. Results of operations attributable to the non-controlling interest are included in our consolidated results of operations and, upon loss of control, the interest sold, as well as interest retained, if any, will be reported at fair value with any gain or loss recognized in earnings.
Comprehensive income (loss)
Comprehensive income (loss) includes all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, Accounting Standards Codification (ASC) 220, Comprehensive Income, requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. For the periods presented, the Company’s comprehensive income (loss) includes net income (loss) and foreign currency translation adjustments and is presented in the consolidated statements of operations and comprehensive income (loss).
Earnings per share
The Company calculates basic earnings per share by dividing its net income (loss) by the weighted average number of common shares outstanding for the period, without considering common stock equivalents.
Diluted EPS is computed by dividing net income by the weighted average number of common shares outstanding for the period and the weighted average number of dilutive common stock equivalents, such as options and warrants.
Options and warrants are only included in the calculation of diluted EPS when their effect is not anti-dilutive or the Company has a loss.
Cash and cash equivalents
The Company considers all demand and time deposits and all highly liquid investments with an original maturity of three months or less to be cash equivalents.
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(IN U.S. $)
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Loans receivable
Loans receivable primarily represents the principle lent to the borrowers. Management regularly reviews the aging of the loans receivable and changes in payment trends and records an allowance when management believes collection of amounts due are at risk. Loans receivable considered uncollectible are written off after exhaustive efforts at collection.
Allowance for loan losses
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss history, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.
The Company calculates the provision amount as below:
1. General Reserve - is based on the total loan receivable balance and to be used to cover unidentified probable loan loss. The General Reserve is required to be no less than 1% of total loans receivable.
2. Specific Reserve - is an allowance set aside covering losses due to risks related to a particular country, region, industry, borrower or type of loan. The reserve rate can also be decided based on management’s estimate of loan collectability.
Interest receivable
Interest receivable represents the amount of interest that has been earned as of the balance sheet date, but which has not yet been received in cash. Management regularly reviews the aging of interest receivable and changes in payment trends and records an allowance when management believes collection of amounts due are at risk. Interest receivable considered uncollectible is written off after exhaustive efforts at collection.
Loans payable
Loans from individuals primarily represent the principle of lending funds received from the individuals through the Company’s internet platform. The interest rates of such loans are 10% - 100% per annum with a term lasting from 6 months to two years.
Property and equipment, net
Property and equipment is recorded at cost and consists of computer equipment, office equipment and furniture and is depreciated using the straight-line method over the estimated useful lives of the related assets (generally three years or less). Costs incurred for maintenance and repairs are expensed as incurred and expenditures for major replacements and improvements are capitalized and depreciated over their estimated remaining useful lives.
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(IN U.S. $)
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Impairment of long-lived assets
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances (such as a significant adverse change in market conditions that will impact the future use of the assets) indicate its net book value may not be recoverable. When these events occur, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over its estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. The Company’s management currently believes there is no impairment of its long-lived assets. There can be no assurance, however, that market conditions will not change or demand for the Company’s services will continue. Either of these could result in the future impairment of long-lived assets. As of December 31, 2017 and 2016, the Company has not experienced impairment losses on its long-lived assets for both the continuing and discontinued operations. However, there can be no assurances that demand for the Company’s products or services will continue, which could result in an impairment of long-lived assets in the future.
Short-term investments
The Company's short-term investments are classified as available-for-sale investments. The available-for-sale investments are reported at fair values with the unrealized gains or losses recorded as accumulated other comprehensive income in equity. The changes in fair values of those derivative instruments are recognized as gain or loss in the consolidated statements of operations.
The Company reviews its available-for-sale short-term investments for other-than-temporary impairment ("OTTI") based on the specific identification method. The Company considers available quantitative and qualitative evidence in evaluating the potential impairment of its short-term investments. The Company did not recognize any other-than-temporary impairment charges on its available-for-sale investments during the years ended December 31, 2017 and 2016.
Fair value of financial instruments
FASB ASC 820, “Fair Value Measurement” specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs). In accordance with ASC 820, the following summarizes the fair value hierarchy:
Level 1 Inputs - Unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has the ability to access.
Level 2 Inputs - Inputs other than the quoted prices in active markets that are observable either directly or indirectly.
Level 3 Inputs -Inputs based on valuation techniques that are both unobservable and significant to the overall fair value measurements.
ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
The tables below present information at the end of 2017 and 2016, respectively, regarding the Company’s financial assets and financial liabilities that are measured at fair value on a recurring basis and indicate the level within the fair value hierarchy reflecting the valuation techniques utilized to determine such fair value.
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(IN U.S. $)
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes
The Company accounts for income taxes in accordance with FASB ASC 740, “Income Taxes”, which requires the recognition of deferred income taxes for differences between the basis of assets and liabilities for financial statement and income tax purposes. Deferred tax assets and liabilities represent the future tax consequences for those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.
ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position would be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties associated with tax positions. As of September 30, 2017 and December 31, 2016, the Company does not have a liability for any unrecognized tax benefits. The Company’s tax filings are subject to examination by the tax authorities. The tax years of 2013 and 2014 and 2015 remain open to examination by tax authorities in the PRC.
Generally, the Company remains subject to PRC examination of its income tax returns annually. It believes that its income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change to our financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740. Its tax provision for interim periods is determined using an estimate of our annual effective tax rate based on rates established within the PRC and, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter the Company updates its estimate of the annual effective tax rate, and if the estimated tax rate changes, the Company makes a cumulative adjustment.
Going Concern
As shown in the consolidated financial statements, the Company has generated a net loss of $6,627,827 for the year ended December 31, 2017 and an accumulated deficit of $10,264,149 as of December 31, 2017. The Company also experienced insufficient cash flows from operations and will be required continuous financial support from the shareholder. The Company will need to raise capital to fund its operations until it is able to generate sufficient revenue to support the future development. Moreover, the Company may be continuously raising capital through the sale of debt and equity securities.
The Company’s ability to achieve these objectives cannot be determined at this stage. If the Company is unsuccessful in its endeavors, it may be forced to cease operations. These consolidated financial statements do not include any adjustments that might result from this uncertainty which may include adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
These factors have raised substantial doubt about the Company’s ability to continue as a going concern. There can be no assurances that the Company will be able to obtain adequate financing or achieve profitability. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.
3.RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, Intangibles - Goodwill and Other (Topic 350). The amendments in this update simplify the test for goodwill impairment by eliminating Step 2 from the impairment test, which required the entity to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in determining fair value of assets acquired and liabilities assumed in a business combination. The amendments in this update are effective for public companies for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We are evaluating the impact of adopting this guidance on our Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805); Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business to help companies evaluate whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The amendments in this update are effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company does not anticipate that this adoption will have a significant impact on its financial position, results of operations, or cash flows.
In July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments.
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(IN U.S. $)
3.RECENTLY ISSUED ACCOUNTING STANDARDS (continued)
As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt-Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception.
Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently reviewing the impact of adoption of ASU 2017-11on its financial statements. The Company does not anticipate that this adoption will have a significant impact on its financial position, results of operations, or cash flows.
The Company has considered all new accounting pronouncements and has concluded that there are no new pronouncements that may have a material impact on results of operations, financial condition, or cash flows, based on current information.
4.PREPAID EXPENSES
Prepaid expenses consisted of prepaid rent for our US company and other prepaid expenses for Arki Network as of December 31, 2017 and 2016.
5.LOANS RECEIVABLE, NET
The monthly interest rates on loan issued range from 8% to 30% for the years ended December 31, 2017.
As of December 31, 2017 and 2016, the total loan receivables balance was $0 and $683,496.
Loan receivables consisted of the following as of December 31, 2017 and 2016:
The loans primarily consist of factoring loans. According to the outstanding contracts during the reporting period, the maturity terms ranged from 3 to 6 months.
The following table represents the aging of loan receivables as of December 31, 2016:
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.
Finally, as appropriate, the Company also considers individual borrower circumstances and the condition and fair value of the loan collateral, if any.
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(IN U.S. $)
5.LOANS RECEIVABLE, NET (continued)
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.
For the years ended December 31, 2017 and 2016, the Company believes that all loans can be collected and allowance for loan losses were nil and nil.
Loans with modified terms are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary below market rate reduction in interest rate or an extension of a loan’s stated maturity date. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired. There were no loans considered impaired at December 31, 2017 and 2016.
6.OTHER RECEIVABLES
Other receivables consist of the following as of December 31, 2017 and 2016:
7.PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following as of December 31, 2017 and 2016:
For the years ended December 31, 2017 and 2016, depreciation expense from the continuing operations was $17,828 and $5,472, respectively.
8.SHORT-TERM INVESTMENT
Short-term investment is highly liquid available-for-sale investment in accounts maintained with Industrial and Commercial Bank of China within the PRC.
Interest income earned from the short-term investments for the years ended December 31, 2017 and 2016 was $4,509 and $2,024, respectively. Nil and nil unrealized gain were recognized for the years ended December 31, 2017 and 2016, respectively.
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(IN U.S. $)
9.LOANS PAYABLE
Individuals can invest in loans that are offered through the Company’s marketplace and network. All the loans have maturities from six months to two years with interest rates varying from 10% to 100%.
Loans payable consisted of the following as of December 31, 2017 and 2016:
As of December 31, 2017 and 2016, the Company has loans payable amount of $4,099,312 and $2,332,330, and for the years ended December 31, 2017 and 2016, the Company recorded $1,801,986 and $171,978 on the interest, respectively.
10.PAYABLE TO SHAREHOLDER
Caesar Capital Management Ltd. (“Caesar”) a shareholder of the Company, advanced $117,767 and $ 102,035 to the Company as of December 31, 2017 and December 31, 2016, respectively. The loans were borrowed by the Company for operating purposes, without collateral, and were due between July 2013 to November 2013, with an annual interest rate of 6%. On July 1, 2013, the Company entered into an agreement with Caesar Capital Management Ltd. which amended the maturity date for all the existing loans between the Company and Caesar Capital Management Ltd. The loans became due on demand and are non-interest bearing.
11.DISCONTINUED OPERATIONS
In accordance with ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meets the criteria in paragraph 205-20-45-1E to be classified as held for sale. When all of the criteria to be classified as held for sale are met, including management, having the authority to approve the action, commits to a plan to sell the entity, the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations, less applicable income taxes (benefit), shall be reported as a component of net income (loss) separate from the net income (loss) of continued operations in accordance with ASC 205-20-45.
On December 28, 2016, the Company and Yanbian Yaotian Gas Group Co., Ltd, (the “Purchaser”) a company incorporated under the laws of the People’s Republic of China, entered into a definitive agreement to sell all of its interests in Shanghai Zhonghui for no consideration. As of December 31, 2016, the results of operations of Shanghai Zhonghui are reflected in the Company’s consolidated financial statements as “discontinued operations.”
The disposal represents a strategic shift and has a major effect on the Company’s results of operations. The disposed entities are accounted as discontinued operations in the consolidated financial statements for the year ended December 31, 2016. A gain of $1,355,432 was recognized on the disposal, which is determined based on the excess of liabilities over assets in the same amount.
On December 1, 2016, the Company through its variable interest entity, America Arki Network Service Beijing Co., Ltd entered into certain Share Exchange Agreement with Yin Hang Financial Information Service (Shanghai) Co., Ltd, a company established under the laws of People’s Republic of China. Pursuant to the Agreement, the Company agreed to acquire 100% of the capital stock of Yin Hang in exchange for the issuance of 4,680,000 shares of Company’s common stock. Pursuant to the terms of the Agreement, all Acquisition Shares shall be locked up for one year upon issuance and Yin Hang’s investor may sell up to 2% of the Acquisition Shares after such lock-up period. Further to the supplementary agreement dated March 28, 2017, as a payment for the assisting with the acquisition, the Company also issued 320,000 additional shares of the Common Stock to a third party, Yu Yang.
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(IN U.S. $)
11.DISCONTINUED OPERATIONS (continued)
On August 31, 2017, Arki and Yin Hang entered into a Supplementary Agreement and mutually agreed to terminate the Share Exchange Agreement, effective immediately, because companies in the financial information industry are not permitted to be controlled by foreign companies outside of China. As a result of the termination, Yin Hang shall no longer be consolidated in the Company’s financial statements as of September 1, 2017. As of December 31 2017, the results of operations of Shanghai Yin Hang are reflected in the Company’s consolidated financial statements as “discontinued operations.”
The disposal represents a strategic shift and has a major effect on the Company’s results of operations. The disposed entities are accounted as discontinued operations in the consolidated financial statements for the year ended December 31, 2017. A loss of $5,127,174 was recognized on the disposal, which is determined based on the excess of assets over liabilities in the same amount.
The significant items included discontinued operations are as follow:
Assets and liabilities of discontinued operations are comprised of the following:
Related party transactions from discontinued operations
a)Related parties:
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(IN U.S. $)
11.DISCONTINUED OPERATIONS (continued)
b)The Company had the following related party balances at of December 31, 2017 and 2016:
During the year ended December 31, 2016, Zhongxin Credit borrowed $418,041 from Yin Hang, and repaid $212,450. On December 31, 2016, Zhongxin Credit entered into a loan agreement whereby Zhongxin Credit agreed to repay the outstanding receivable balance by scheduled payment within six months. As of December 31, 2017, the outstanding receivable balance was fully repaid.
12.NONCONTROLLING INTEREST
As of December 31, 2017 and 2016, noncontrolling interest of Arki Tianjin of $(1,260,676) and $(183,071), respectively, was recognized in the Company’s consolidated balance sheets, representing Arki Tianjin’s cumulative results of operations attributable to shareholders other than CCG Group.
For the years ended December 31, 2017 and 2016, respectively, a $1,039,536 and a $109,317 net loss, respectively, attributable to the noncontrolling interest of Arki Tianjin was recognized in the Company’s consolidated statements of comprehensive loss, representing Arki Tianjin’s net income attributable to shareholders other than CCG Group.
13.INCOME TAXES
The income tax laws of various jurisdictions in which the Company and its subsidiaries operate are summarized as follows:
United States
Consumer Capital Group Inc. was incorporated in United States, and is subject to corporate income tax rate of 15% - 39%.
The People's Republic of China (PRC)
Arki Beijing E-commerce Technology Corp., America Pine Beijing Bio-Tech, Inc., America Arki (Fuxin) Network Management Co. Ltd., America Arki Network Service Beijing Co. Ltd. and America Arki (Tianjin) Capital Management Partnership were incorporated in the People’s Republic of China and subject to PRC income tax at 25%. The Company did not generate taxable income in the People’s Republic of China for the years ended December 31, 2017 and 2016 respectively.
Yin Hang Financial Information Service (Shanghai) Co., Limited was incorporated in the People’s Republic of China and subject to PRC income tax at 25%.
The new EIT Law also imposes a withholding income tax of 10% on dividends distributed by a foreign invested enterprise to its immediate holding company outside of China, if such immediate holding company is considered as a non-resident enterprise without any establishment or place within China or if the received dividends have no connection with the establishment or place of such immediate holding company within China, unless such immediate holding company’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. Such withholding income tax was exempted under the previous income tax regulations.
The income tax laws of various jurisdictions in which the Company and its subsidiaries operate are summarized as follows:
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(IN U.S. $)
13.INCOME TAXES (continued)
Income (Loss) before income taxes from continuing operations consists of:
The components of the income tax provision from continuing operations are as follows:
The principal components of the Company’s deferred income tax assets and liabilities are as follows:
As of December 31, 2017 and December 31, 2016, the Company has a deferred tax asset of $0 and $57,498, and a deferred tax liability of $83,507 and $135,717 resulting from certain net operating losses in the PRC, respectively. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those net operating losses are available. The Company considers projected future taxable income and tax planning strategies in making its assessment. As of December 31, 2017, the Company does not have sufficient operations to generate taxable income in Arki Beijing, America Pine Beijing, Arki Fuxin, Arki Network Service and Arki Tianjin to conclude that it is more-likely-than-not that the Company will be able to realize all of its tax benefits in the near future and therefore a valuation allowance has been provided for the full value of the deferred tax asset. A valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of any portion or all of the valuation allowance. Should Arki Beijing, America Pine Beijing, Arki Fuxin, Arki Network Service, Arki Tianjin and Yin Hang have sufficient operation to generate taxable income in future periods with a supportable trend; the valuation allowance will be reduced accordingly. As of December 31, 2017 and December 31, 2016, the valuation allowance was $57,498 and $15,374, respectively. $42,124 and nil of increase in the valuation allowance for each of the years ended December 31, 2017 and 2016, respectively.
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(IN U.S. $)
13.INCOME TAXES (continued)
The components of deferred taxes are as follows from continuing operations at December 31, 2017 and December 31, 2016:
14.RELATED PARTY TRANSACTIONS
a)Related parties:
b)The Company had the following related party balances at December 31, 2017 and December 31, 2016
As of December 31, 2016, the Company was owed from Mr. Dong Yao $49,814 without interest and due on demand, respectively.
As of December 31, 2016, the Company was owed from Ms. Lihua Xiao $64,339 without interest and due on demand, respectively.
As of December 31, 2016, the Company was owed from Mr. Siheng Hao $62,771 for procurement activities without interest and due on demand, respectively.
As of December 31, 2016, the Company was owed from Ms. Juan Li of $36,453 for procurement activities without interest and due on demand, respectively.
As of December 31, 2017 and December 31, 2016, the amounts owed to Mr. Jianmin Gao and Mr. Fei Gao are without interest and due on demand.
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(IN U.S. $)
15.COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has entered into lease agreements with various third parties. The terms of such non-cancellable operating leases are one to five years. As of December 31, 2017, the Company was obligated under non-cancellable operating leases minimum rentals as follows:
Year Ended December 31,
The rent expense for the years ended December 31, 2017 and 2016 was $41,358 and $113,340 respectively.
Legal Proceedings
The Company is not currently a party to any legal proceeding, investigation or claim which, in the opinion of the management, is likely to have a material adverse effect on the business, financial condition or results of operations.
16.CONCENTRATION OF CREDIT AND BUSINESS RISKS
Assets that potentially subject the Company to significant concentration of credit risk primarily consist of cash and cash equivalents, loans receivable and other receivables. The maximum exposure of such assets to credit risk is their carrying amounts as of the balance sheet dates.
As of December 31, 2017 and 2016, substantially all of the Company’s cash and cash equivalents were deposited in financial institutions located in the PRC, which management believes are of high credit quality. Management believes the credit risk on bank deposits is limited because the counterparties are banks with high credit-ratings assigned by international credit rating agencies, or state-owned banks in China.
Cash includes cash on hand and demand deposits in accounts maintained with state-owned banks within the PRC and the United States of America. Balances at financial institutions or state owned banks within the PRC are not covered by insurance.
Non-performance by these institutions could expose the Company to losses for amounts in excess of insured balances. As of December 31, 2017 and 2016, we had no uninsured balances with the banks in U.S. As of December 31, 2017 and 2016, our bank balances in the PRC were $706,771 and $723,956, respectively, which are uninsured and subject to credit risk. We have not experienced nonperformance by these institutions.
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of loans receivable from borrowers and the related accrued interest receivable. The aforementioned borrowers paid service fees and interest regularly according to the contract during the reporting period, and the Company believes that the default risk from these borrowers is low in the foreseeable future.
The Company’s operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than twenty years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC’s political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective. The economy in the PRC has recently started to narrow.
On December 15, 2014, the Company entered into six year agreements with the Chief Operating Officer, Mr. Fei Gao, for total compensation of approximately $2,655 (RMB 18,000) per month.
17.SUBSEQUENT EVENT
On November 17, 2017, the Company signed an Equity Transfer Agreement with Shenzhou Rongtong Investment Management Co, Ltd. (thereafter “Shenzhou Rongtong”) a local company in Beijing China, which was established on June 4, 2014. Based on the agreement, all shareholders in Shenzhou Rongtong will transfer 100% of the equities in Shenzhou Rongtong to Arki Network within 45 days of signing the agreement, in exchange for the Company’s equities of 4,175,417 shares that will be transferred to all shareholders within 15 working days after the changing of equity by Shenzhou Rongtong’s shareholders. The transaction failed to go through as at December 31, 2017 and therefore on March 29, 2018, all shareholders of Shenzhou signed agreement to return all shares of CCGN to the Company. On April 13, 2018, all shareholders of Shenzhou returned all the shares to the Company.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Dismissal of MaloneBailey and Engagement of Centurion ZD CPA Ltd., formerly Dominic KF Chan & Co.
On January 22, 2016, Company dismissed its previous independent registered public accounting firm, MaloneBailey, LLP (“MaloneBailey”). The audit report of MaloneBailey on the financial statements of the Company as of and for the fiscal years ended December 31, 2013 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. The decision to change the independent registered public accounting firm was recommended and approved by the Board of Directors of the Company. During the fiscal year ended December 31, 2013 and through September 30, 2014, (a) there were no disagreements with MaloneBailey on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of MaloneBailey, would have caused it to make reference thereto in its reports on the financial statements for such years and (b) there were no “reportable events” as described in Item 304(a)(1)(v) of Regulation S-K except for the following:
In April 2015, MaloneBailey received information that could potentially affect the audit report during the fiscal year ended December 31, 2013 and financial statements through December 31, 2014 (the “Information”). The Information is in connection with the allegations disclosed in the Current Report on Form 8-K filed on May 29, 2015 and incorporated herein by reference. MaloneBailey requested documentations from the Company to address the Information and allegations but to date has been unsatisfied with the Company’s response and considers the matter unresolved and therefore is unable to complete the audit of the Company for the year ended December 31, 2014.
Concurrently on January 22, 2016, the Board of Directors of the Company appointed Dominic KF Chan & Co. (“Chan”) as its new independent registered public accounting firm to audit and review the Company’s financial statements. During the two most recent fiscal years ended December 31, 2016 and December 31, 2015 and any subsequent interim periods through the date hereof prior to the engagement of Chan, neither the Company, nor someone on its behalf, has consulted Chan regarding: either: the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s consolidated financial statements, and either a written report was provided to the Company or oral advice was provided that the new independent registered public accounting firm concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or any matter that was either the subject of a disagreement as defined in paragraph 304(a)(1)(iv) of Regulation S-K or a reportable event as described in paragraph 304(a)(1)(v) of Regulation S-K.
On May 10, 2016, Company was informed by its independent registered accountants, Dominic K.F. Chan & Co. ("DKFC"), that DCAW (CPA) Ltd. (“DCAW”) has succeeded from DKFC, the license to audit U.S. public company regulated by PCAOB, effective from May 1, 2016. The principals and staff of DCAW are the same auditors and staff who were engaged on the audit of the Company while at DKFC. The engagement of DCAW was approved by the Company’s Board of Directors on May 13, 2016.
The reports of DKFC on the Company’s financial statements as of and for the years ended December 31, 2015 and December 31, 2014, contained no adverse opinion or disclaimer of opinion nor was qualified or modified as to uncertainty, audit scope, or accounting principle.
During the recent fiscal years ending ended December 31, 2015 and December 31, 2014 and the subsequent period through March 31, 2016, there have been no (i) disagreements with DKFC, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to DKFC, satisfaction, would have caused DKFC, to make reference to the subject matter of the disagreement(s) in connection with its reports; or (ii) reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
Neither the Company nor anyone on behalf of the Company consulted DCAW regarding either (a) the application of accounting principles to a specified transaction, either completed or contemplated, or the type of audit opinion that might be rendered on the financial statements of the Company, and no written or oral advice of DCAW was provided with respect to any accounting, auditing, or financial reporting issue, or (b) any matter that was either the subject of a disagreement of the type described in Item 304(a)(iv) of Regulation S-K or any “reportable event described in Item 304(a)(1)(v) of Regulation S-K.
On November 14, 2016, Consumer Capital Group, Inc. (the “Company”) was informed by its independent registered accountants, Centurion ZD CPA Limited, or formerly known as DCAW (CPA) Limited (“DCAW”) that the firm has changed the name to “Centurion ZD CPA Limited”, effective November 14, 2016. The office addresses and telephone numbers of the firm remain unchanged.
Dismissal of Centurion ZD CPA Ltd. and Engagement of Wei, Wei & Co., LLP.
O June 12, 2017, the Board of Directors formally approved the engagement of Wei, Wei & Co., LLP. (“Wei, Wei & Co.”) as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2017. On June 15, the Company informed Centurion ZD CPA Ltd. (“Centurion ZD”) (fka DCAW (CPA) Ltd. as successor to Dominic K.F. Chan & Co.) that it has been dismissed as the Company’s independent registered public accounting firm based on the Board of Directors’ decision. On June 12, the Company signed an engagement letter with Wei, Wei & Co.
The reports of Centurion ZD on the Company’s financial statements as of and for the years ended December 31, 2016, December 31, 2015 and December 31, 2014, contained no adverse opinion or disclaimer of opinion nor was qualified or modified as to uncertainty, audit scope, or accounting principle.
During the recent fiscal years ending ended December 31, 2016, December 31, 2015 and December 31, 2014 and the subsequent period through June 13, 2017, the date of dismissal, there have been no (i) disagreements with Centurion ZD, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to Centurion ZD, satisfaction, would have caused Centurion ZD, to make reference to the subject matter of the disagreement(s) in connection with its reports; or (ii) “reportable events” as defined in Item 304(a)(1)(v) of Regulation S-K.
As set forth about, concurrent with the decision to dismiss Centurion ZD as the Company’s independent registered public accounting firm, the Board of Directors approved the engagement of Wei, Wei & Co. as the Company’s new independent registered public accounting firm.
During the Company’s recent fiscal years ended December 31, 2016, December 31, 2015 and December 31, 2014, and during the subsequent interim period through the date of the engagement, neither the Company nor anyone on behalf of the Company consulted Wei, Wei & Co. regarding either (a) the application of accounting principles to a specified transaction, either completed or contemplated, or the type of audit opinion that might be rendered on the financial statements of the Company, and no written or oral advice of Wei, Wei & Co. was provided with respect to any accounting, auditing, or financial reporting issue, or (b) any matter that was either the subject of a disagreement of the type described in Item 304(a)(iv) of Regulation S-K or any “reportable event” described in Item 304(a)(1)(v) of Regulation S-K.
Dismissal of Wei, Wei & Co., LLP. and engagement of Centurion ZD CPA Ltd.
On March 15, 2018, the Board of Directors formally approved the engagement of Centurion ZD CPA Ltd. (“Centurion ZD”) (fka DCAW (CPA) Ltd. as successor to Dominic K.F. Chan & Co.) as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2017. Centurion ZD was the Company’s independent registered public accounting firms for the fiscal years ended December 31, 2016, December 31, 2015 and December 31, 2014. On June 12, 2017, the Company engaged Wei, Wei & Co., LLP. (“Wei, Wei & Co.”) as the independent registered public accounting firm for the fiscal year ended December 31, 2017, and dismissed Centurion ZD on June 15, 2017. On March 12, 2018, the Company informed Wei, Wei & Co. that it has been dismissed as the Company’s independent registered public accounting firm based on the Board of Directors’ decision. On March 9, 2018, the Company signed an engagement letter with Centurion ZD.
Wei, Wei & Co. has not completed any audits or issued any reports on the consolidated financial statements of the company for any period.
During the period from June 12, 2017, the date of appointment, through March 12, 2018, the date of dismissal, there have been no (i) disagreements with Wei, Wei & Co., on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to Wei, Wei & Co., satisfaction, would have caused Wei, Wei & Co., to make reference to the subject matter of the disagreement(s) in connection with its reports; or (ii) “reportable events” as defined in Item 304(a)(1)(v) of Regulation S-K.
As set forth about, concurrent with the decision to dismiss Wei, Wei & Co. as the Company’s independent registered public accounting firm, the Board of Directors approved the engagement of Centurion ZD as the Company’s new independent registered public accounting firm.
During the period from June 12, 2017 through March 9, 2018, neither the Company nor anyone on behalf of the Company consulted Centurion ZD regarding either (a) the application of accounting principles to a specified transaction, either completed or contemplated, or the type of audit opinion that might be rendered on the financial statements of the Company, and no written or oral advice of Centurion ZD was provided with respect to any accounting, auditing, or financial reporting issue, or (b) any matter that was either the subject of a disagreement of the type described in Item 304(a)(iv) of Regulation S-K or any “reportable event” described in Item 304(a)(1)(v) of Regulation S-K.
Item 9A.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, including our chief executive officer and chief financial officer (our principal executive officer and principal accounting officer), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act as of the end of the period covered by this report. Our management does not expect that our disclosure controls and procedures will prevent all error and all fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Based on the evaluation as of December 31, 2017, for the reasons set forth below, our chief executive officer and chief financial officer (our principal executive officer and principal accounting officer) concluded that our disclosure controls and procedures were not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Management's Annual Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to, in general, provide reasonable assurance to our management and the Board of Directors regarding the preparation and fair presentation of published financial statements, but because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. The framework used by management in making that assessment was the criteria set forth in the document entitled “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
In its assessment of the effectiveness of internal control our financial reporting as of December 31, 2017, the Company determined that the following item constituted a material weakness:
a) Inadequate segregation of duties. In various accounting processes, applications and systems we did not design, establish and maintain procedures and controls to adequately segregate job responsibilities for initiating, authorizing and recording transactions, nor were there adequate mitigating or monitoring controls in place.
b) Inadequate policies and procedures. We did not design, establish and maintain effective GAAP compliant financial accounting policies and procedures.
c) Inadequate personnel. We had a lack of experienced personnel with relevant accounting experience, due in part to our limited financial resources.
Due to the existence of the material weakness in our internal control over financial reporting that have been identified as of December 31, 2017, we believe that our internal control over financial reporting was also ineffective as of December 31, 2017.
Changes in Internal Control over Financial Reporting
There were no changes made to our internal control over financial reporting since our last filing for the quarterly period ended September 30, 2017 through December 31, 2017. We will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow we will remediate material weaknesses.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
Our directors and executive officers are listed below.
A brief description of the background and business experience of our directors and executive officers for the past five years is as follows:
Jianmin (“Jack”) Gao, 64, Chairman of the Board and Chief Executive Officer. Mr. Gao is a co-founder of our holding company, CCG. He has over 30 years of experience in credit markets, risk arbitrage, acquisitions, and venture capital as a commercial and investment banker. Mr. Gao has been the Chairman of the Board and Chief Executive Officer of CCG since he founded CCG in 2009. In 2008, Mr. Gao began development of the China-based e-commerce platform owned by CCG. He founded America Pine Group Inc. (formerly known as America Pine Bio-tech Inc.) in 2006. From 1997 to 2006, he was an investment banker with the U.S. firm Blackwater Capital Group. Mr. Gao earned a Master’s degree in Finance from Tsinghua University in 2002. We believe that Mr. Gao is qualified to serve on our Board of Directors because of his experience in co-founding the Company’s China-based e-commerce platform and his broad base of knowledge and experience in the commercial and investment banking industries.
Crystal L. Chen, 48, has been the Managing Director of United Int’l Solutions Group since 2016. From 2012 to 2016, Ms. Chen was the Partner at Liang & Company Accountancy Corp, where she focused on financial consulting and due diligence, tax consultation for international M&A cases, international assets allocation for large companies and individuals. She was also in charge of M&A projects, investment projects, and bringing overseas investors to invest in the United States. From 2010 to 2011, Ms. Chen was the CFO at H&H Store, Inc., where she helped filing a Registration Statement on Form S-1 with the SEC. From 2009 to 2010, Ms. Chen was the CFO and Vice President in Finance at QKL Stores, Inc. (NASDAQ: QKLS). While there, Ms. Chen was in charge of financing, forecasting, budgeting, accounting, internal control and investor relationship for the company. She successfully helped the company with a $55 million financing in 2009 and 2010. Prior to that, Ms. Chen was an Accountant at PricewaterhouseCoopers LLP from 2006 to 2007 and the Senior Accounting Manager at Simon & Edward LLP from 2000 to 2005. Ms. Chen received a Master of Business Administration from California State University, Los Angeles, finished the Master of Business and Taxation Program in University of Southern California and received a Doctor of Philosophy in Economics specializing in Finance from Renmin University of China. Ms. Chen is an active Certified Public Accountant (CPA) licensed in California. She has also obtained Real Estate License as well as Life Insurance and Property Casualty Insurance License in 2007 and 2006, respectively. Ms. Chen has worked closely with public companies in both U.S. and China. She is also experienced in providing consulting services to Financial Institutions, U.S. listing companies and subsidiaries of foreign public companies on a variety of matters, including finance and international trade, banking and finance, mergers and acquisitions, due diligence and taxation. In addition, Ms. Chen is fluent in both English and Chinese, and is familiar with both culture and business environment in U.S. and China. Ms. Chen also serves as the Young Member of All-China Federation of Returned Overseas Chinese and as the Vice Chairman of Chinese American Federation in U.S..
Fei Gao, 38, is the son of Jianmin (“Jack”) Gao, is a co-founder and our Chief Operating Officer. In 2008, Mr. Gao joined his father, Jianmin Gao, in the development of the China-based e-commerce platform owned by CCG. He received a Master’s degree in business administration from Tsinghua University in 2007 and experience in managing and developing e-commerce business. We believe that Mr. Gao’s training in business management and experience in e-commerce business qualifies him to serve on our Board of Directors.
Dong Yao, 40, Concurrent to his position with the Company, Mr. Yao is also the Chief Technology Officer of our holding company, CCG. Mr. Yao has been the general technology manager in Beijing Meihangkai Internet Information Service Co., Ltd. since 2008. Before that, he was the technology manager in Tianjin Dianji Technology Internet Co., Ltd. from 2004 to 2008. He received a diploma in computer science from Tianjin Polytechnic University in 2000. We believe that Mr. Yao’s extensive experience in database development and management qualifies him to serve on our Board of Directors.
Term of Office
Our directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the board.
Family Relationships
Mr. Jianmin Gao and Mr. Fei Gao are father and son.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has, during the past ten years:
● been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
● had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
● been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
● been found by a court of competent jurisdiction in a civil action or by the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
● been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
● been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Except as set forth in our discussion below in “Certain Relationships and Related Transactions,” none of our directors or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the Commission.
Code of Ethics
We current do not have a code of business conduct and ethics applicable to our directors, officers and employees, however, we intend to adopt one in the near future in connection with our application to list on the Nasdaq Capital Market.
Corporate Governance
The business and affairs of the company are managed under the direction of our board. In addition to the contact information in this annual report, each stockholder will be given specific information on how he/she can direct communications to the officers and directors of the corporation at our annual stockholder meetings. All communications from stockholders are relayed to the members of the board of directors.
Board Committees
We presently do not have an audit committee, compensation committee or nominating committee or committee performing similar functions, as our management believes that until this point it has been premature at the early stage of our management and business development to form an audit, compensation or nominating committee. Until these committees are established, these decisions will continue to be made by our Board of Directors. The Company expects to create committees which are compliant with the rules of Nasdaq in connection with its application to the Nasdaq Capital Market.
Board Leadership Structure and Role in Risk Oversight
Our Board is primarily responsible for overseeing our risk management processes. The Board receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s assessment of risks. The Board focuses on the most significant risks facing our company and our company’s general risk management strategy, and also ensures that risks undertaken by our company are consistent with the Board’s appetite for risk. While the Board oversees our company’s risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that our Board leadership structure supports this approach.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, officers and persons who beneficially own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC and are required to furnish us with copies of these reports. Based solely on our review of the reports filed with the SEC, we believe that our CEO Jianming Gao, COO Fei Gao and Director Dong Yao have not filed reports required under the Section 16(a) of the Exchange Act.
Item 11.
Item 11. Executive Compensation.
The Summary Compensation Table below sets forth information regarding the compensation awarded to or earned by the company’s executive officers for our fiscal years ended December 31, 2017 and 2016:
Employment Agreements
The Company the company has executive agreements with Crystal Lijie Chen, Fei Gao and Dong Yao.
Option Grants
We had no outstanding equity awards as of the end of fiscal years ended December 31, 2017 and 2016.
Option Exercises and Fiscal Year-End Option Value Table
There were no stock options exercised during fiscal years ended December 31, 2017 and 2016 by the executive officers.
Outstanding Equity Awards at Fiscal Year-End Table
We had no outstanding equity awards as of the end of fiscal years ended December 31, 2017 and 2016.
Long-Term Incentive Plans and Awards
There were no awards made to a named executive officer in fiscal 2017 and 2016 under any long-term incentive plan.
Employment Contracts, Termination of Employment, Change-in-Control Arrangements
Jianmin tendered his resignation as Chief Financial Officer on August 3, 2017. Crystal Lijie Chen was subsequently appointed as the CFO of the Company.
Director Compensation Table
Directors are permitted to receive fixed fees and other compensation for their services as directors. The Board of Directors has the authority to fix the compensation of directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding our shares of common stock beneficially owned as of May 10, 2018 for (i) each stockholder known to be the beneficial owner of 5% or more of the Company’s outstanding shares of common stock, (ii) each named executive officer and director, and (iii) all executive officers and directors as a group. A person is considered to beneficially own any shares: (i) over which such person, directly or indirectly, exercises sole or shared voting or investment power, or (ii) of which such person has the right to acquire beneficial ownership at any time within 60 days through an exercise of stock options or warrants. Unless otherwise indicated, voting and investment power relating to the shares shown in the table for our directors and executive officers is exercised solely by the beneficial owner or shared by the owner and the owner’s spouse or children.
For purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of common stock that such person has the right to acquire within 60 days of May 10, 2018. For purposes of computing the percentage of outstanding shares of our common stock held by each person or group of persons named above, any shares that such person or persons has the right to acquire within 60 days of May 10, 2018 is deemed to be outstanding but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The inclusion herein of any shares listed as beneficially owned does not constitute an admission of beneficial ownership.
Unless otherwise specified, the address of each of the persons set forth below is in care of the Company, at the address of: 136-82 39th Ave, 4th Floor, Unit B, Flushing, NY 11354.
____________
(1)Applicable percentages are based on 27,208,849 shares outstanding as of May 10, 2018.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Transactions with Related Persons
a) Related parties:
b) The Company had the following related party balances at December 31, 2017 and December 31, 2016
As of December 31, 2016, the Company was owed from Mr. Dong Yao $49,814 without interest and due on demand, respectively.
As of December 31, 2016, the Company was owed from Ms. Lihua Xiao $64,339 without interest and due on demand, respectively.
As of December 31, 2016, the Company was owed from Mr. Siheng Hao $62,771 for procurement activities without interest and due on demand, respectively.
As of December 31, 2016, the Company was owed from Ms. Juan Li of $36,453 for procurement activities without interest and due on demand, respectively.
As of December 31, 2017 and December 31, 2016, the amounts owed to Mr. Jianmin Gao and Mr. Fei Gao are without interest and due on demand.
Director Independence
Because our common stock is not currently listed on a national securities exchange, we have used the definition of “independence” of The NASDAQ Stock Market to make this determination. NASDAQ Listing Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the Company or any other individual having a relationship which, in the opinion of the Company’s Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The NASDAQ listing rules provide that a director cannot be considered independent if:
● the director is, or at any time during the past three years was, an employee of the company;
● the director or a family member of the director accepted any compensation from the company in excess of $120,000 during any period of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions, including, among other things, compensation for board or board committee service);
● a family member of the director is, or at any time during the past three years was, an executive officer of the company;
● the director or a family member of the director is a partner in, controlling stockholder of, or an executive officer of an entity to which the company made, or from which the company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions);
● the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of the company served on the compensation committee of such other entity; or the director or a family member of the director is a current partner of the company’s outside auditor, or at any time during the past three years was a partner or employee of the company’s outside auditor, and who worked on the company’s audit.
None of our directors is considered independent because each is an executive officer of the Company.
We do not currently have a separately designated audit, nominating or compensation committee.
Item 14.
Item 14. Principal Accounting Fees and Services.
Audit Fees
For the Company’s fiscal years ended December 31, 2017 and 2016, we incurred fees of $73,000 and $95,000, respectively, by Centurion ZD CPA Limited for professional services rendered for the audit and reviews of our financial statements.
In addition, for the year ended December 31, 2017, we were incurred fee of $221,000 by Wei Wei & Co., LLP for the quarterly review, the acquisition of Shenzhou Rongtong etc. For the year ended December 31, 2016, we were incurred fees of $35,000 by Centurion ZD CPA Limited for professional services rendered for the audit of financial statements of Yin Hang and $10,000 each for the review of unaudited proforma consolidated financial statements in connection with the acquisition of Yin Hang and disposal of Shanghai Zhonghui, respectively.
Audit Related Fees
The Company incurred [$nil] and [$nil] in addition to the fees discussed in Audit Fees above, for services related to our audit for the fiscal years ended December 31, 2017 and 2016, respectively.
Tax Fees
For the Company’s fiscal years ended December 31, 2017 and December 31, 2016, we were not billed for professional services rendered for tax compliance, tax advice, and tax planning.
All Other Fees
The Company did not incur any other fees related to services rendered by our principal accountant for the fiscal years ended December 31, 2017 and December 31, 2016.
Pre-Approval of Services
We do not have an audit committee. As a result, our Board of Directors performs the duties of an audit committee. Our Board of Directors evaluates and approves in advance the scope and cost of the engagement of an auditor before the auditor renders the audit and non-audit services. We do not rely on pre-approval policies and procedures.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules.
(a) The following documents are filed as part of this report:
(1) Financial Statements:
The audited balance sheets of the Company as of December 31, 2017, the related statements of operations and comprehensive income, changes in stockholders’ equity (deficit) and cash flows for the year then ended, the footnotes thereto, and the report of Centurion ZD CPA Limited, independent auditors, are filed herewith.
(2) Financial Schedules:
None. Financial statement schedules have been omitted because they are either not applicable or the required information is included in the financial statements or notes hereto.
(3) Exhibits:
The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Report.
(b) The following are exhibits to this Report and, if incorporated by reference, we have indicated the document previously filed with the SEC in which the exhibit was included.
* Filed herewith.
+ Furnished herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 17, 2018 By: /s/ Crystal L. Chen
Crystal L. Chen
Chief Financial Officer
(Principal Accounting Officer)