ITEM 1. BUSINESS.
CORPORATE BACKGROUND
Consumer Capital Group, Inc. ("CCG" or the "Company") was originally incorporated as "Mondas Minerals Corp." ("Mondas") 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 $25,000 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 closed 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, the Company changed its fiscal year end from June 30 to December 31.
On February 4, 2011, the Company 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 the Company, the Company's 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 CCG’s California subsidiaries, including America Pine (Beijing) Bio-Tech, Inc., a People's Republic of China ("PRC") corporation; Arki (Beijing) E-Commerce Technology Corp., a PRC corporation; Beijing Beitun Trading Co., Ltd., a PRC corporation; and America Arki (Fuxin) Network Management Co. Ltd., a PRC corporation (together, the "PRC Subsidiaries"), became Mondas’s indirect subsidiaries. Arki (Beijing) E-Commerce Technology Corp. has a contractual relationship with America Arki Network Service Beijing Co., Ltd. ("Arki Network Service"), a PRC limited liability company, which is under common control and 100% owned by two of CCG California's former major shareholders and officers. CCG California, the PRC Subsidiaries, and Arki Network Service are collectively referred to as the "CCG Group."
On January 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 Certificate of Ownership filed with the Secretary of State of Delaware by merging CCG Name Sub into the Company with the Company surviving and 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.
Under the Merger Agreement, the Company issued an aggregate of 17,777,778 shares of its 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 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 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 the Company's common stock directly held by him, constituting 92.6% of his pre-Merger holdings of the Company’s common stock.
In connection with the Merger, the mining rights held by the Company were assigned to Mr. Bengfort, and in turn, Mr. Bengfort personally assumed all liabilities of the Company existing immediately prior to the closing, under the terms of an Assignment and Assumption Agreement between the 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 the Company owed to him immediately prior to the closing of the Merger, along with all other claims against the Company, 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 the CCG California shareholders to indemnify them for any breach of the Merger Agreement or unpaid or unresolved liabilities of the 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 as the Company's sole officer and director, and designees of CCG California were appointed as new directors of the Company. These new directors took office, and appointed new officers of the Company promptly following the closing of the Merger.
There was no trading of our shares prior to the Merger. Since the Merger, there has been limited trading of our shares. From and after the closing of the Merger, our primary operations now consist of the business and operations of the CCG Group, which are conducted in the PRC.
Our current principal offices are located at 35 North Lake Avenue, Suite 280, Pasadena, CA 91101. Our trading symbol on the Over-the-Counter Bulletin Board (the "OTCBB") is CCGN. Our website address is www.ccmus.com.
BUSINESS OF CCG
E-commerce
From and after the closing of the Merger, our primary operations now consist of the business and operations of the CCG Group, which are conducted in the PRC. CCG is a holding company that, prior to December 2010, through Arki (Beijing) E-Commerce Technology Corp. ("Arki Beijing") and its entity under common control, Arki Network Service, operated a consumer e-commerce business in the PRC. Beginning in December 2010, the e-commerce business operations are being conducted through America Arki (Fuxin) Network Management Co. Ltd., a PRC corporation ("Arki Fuxin"), Arki Network Service, and Arki Beijing through respective contractual arrangements among those parties. These contractual arrangements are necessary to comply with laws of the PRC limiting foreign ownership of companies that operate in the e-commerce space. Through such contractual arrangements, we have the ability to substantially influence Arki Network Service's daily business operations and financial affairs, appoint its management, and approve all matters requiring stockholder approval.
CCG also owns 100% of the capital stock of America Pine (Beijing) Bio-Tech, Inc., a PRC corporation ("America Pine Beijing"), which does not currently conduct material operations.
CCG headquarters are located in Pasadena, California, and our PRC operations are headquartered in Beijing.
Distribution business
We own a 51% majority interest in an operating subsidiary, Beijing Beitun Trading Co., Ltd. ("Beitun Trading") Beitun Trading, a PRC trade and distribution company, engages in the wholesale distribution of various food and meat products. It was established in April 24, 2000 and operates in the PRC. Its customers consist of retail restaurants and food producers located through the PRC.
Debit Card Program
In addition, the Company is collaborating with a Chinese bank named Fuxin bank in China to issue cobranded debit cards. Retail store vendors throughout China are signed up to the Company’s debit card program. The Company charges each participating vendor a percentage (1-5%) of transactions with that vendor. Each vendor will receive a percentage of future transactions of the cards issued by the vendor. Cardholders will receive certain amounts of cash refund from participating vendors and earn points to be spent on www.ccmus.com. For the year ended December 31, 2011, no revenue from this business model has been realized. In order to promote distribution of these cards, the Company has signed a dealer agreement with China Unionpay, which is a card management company similar to Visa and Master Card. China Unionpay has POS machines all over China. The Company believes that with the cooperation of China Unionpay and other potential dealers, the Company will be able to grow the debit card program. No revenue was generated from this initiative in 2011.
CCG HISTORY AND ORGANIZATION
The founders of the CCG Group are Jianmin Gao, Lingling Zhang, and Fei Gao. The founders formed America Pine Group Inc. ("America Pine California") in California on November 27, 2006. America Pine California was in the business of selling healthcare products from the U.S. in the PRC. The founders formed America Pine Beijing 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 Beijing in the PRC on March 6, 2008 as a wholly owned subsidiary of America Pine with an intention to develop the CCG Group's current consumer e-commerce business.
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”), which was formed in California on October 14, 2009
On November 26, 2010, CCG California formed Arki Fuxin as its wholly owned subsidiary.
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. Beitun Trading has a registered capital of 500,000 RMB (approximately $75,069), of which 255,000 RMB (approximately $38,285) was contributed by CCG and 245,000 RMB (approximately $36,784) was contributed by Wei Guo. CCG currently owns 51% of Beitun Trading, and Wei Guo owns 49% of Beitun Trading.
On November 26, 2010, Arki Beijing, Arki Network Service, and its shareholders entered into contractual arrangements, and effective December 2010, Arki Fuxin, Arki Network Service, and its shareholders entered into contractual arrangements, to operate the consumer e-commerce website. Arki Network Service is owned by CCG's two largest shareholders. These arrangements are more fully described below.
Contractual Arrangements with Arki Beijing, Arki Network Service, and Arki Fuxin
Our relationships with Arki Network Service, its stockholders, and Arki Beijing 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 Service. PRC law currently has limits on foreign ownership of certain companies. To comply with these restrictions, Arki Network Service and its shareholders entered into two sets of contractual arrangements with Arki Beijing and Arki Fuxin in November 2010:
Powers of Attorney. The equity owners 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.
Share Pledge Agreements. The equity owners 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 Beijing and Arki Fuxin provide the entity with technical support, consulting services, and other commercial services. The initial term of these agreements is ten years. In consideration for those services, the entity agrees to pay Arki Beijing and Arki Fuxin service fees. The service fees are eliminated upon consolidation.
Loan Agreements. Loans were granted to the equity owners of the entity with the sole and exclusive purpose of providing funds necessary for its capitalization as required by the laws of the PRC.
Exclusive Option Agreements. The equity owners of the entity granted an option contract to Arki Beijing and Arki Fuxin to purchase their respective equity interests in the entity.
As of December 31, 2011, we conduct substantially all of our e-commerce business operations through Arki Fuxin, which holds substantial control over Arki Network Service's operations through their contractual arrangements. Chinese laws and regulations currently have limits on foreign ownership of certain businesses that prohibit non-Chinese persons from having direct ownership interests. To comply with these foreign ownership restrictions, we do not own any equity interests in Arki Network Service, but it is an entity under common control through contractual arrangements. Arki Network Service holds the licenses and approvals necessary to operate its e-commerce business in China. Arki Fuxin and Arki Beijing entered into respective contractual arrangements with Arki Network Service' stockholders, pursuant to which we provide technical support and consulting and commercial services to Arki Network Service. Through these contractual arrangements, we also have the ability to substantially influence Arki Network Service's daily operations and financial affairs, appoint its senior members of management, and approve all matters requiring stockholder approval.
Current Corporate Structure
The following diagram illustrates our corporate structure:
Our Consumer E-Commerce Website
In 2010, we launched our PRC-based nationwide online retailing platform at www.ccmus.comfor Chinese consumers. The Company, through Arki (Beijing) E-Commerce Technology Corp., is primarily engaged in the development and operation of its nationwide online retailing platform “Chinese Consumer Market Network” at www.ccmus.com. The website provides an online marketing and retail platform for a wide variety of manufacturers and distributors to promote and sell products and services directly to consumers in the PRC at a substantial discount through our rewards and incentive programs. This platform eliminates the extended network of intermediaries in the manufacturing-distribution-retail chain by providing direct access to our members. Our website also provides access to certain Western products that are generally unavailable in the PRC such as handbags and eyewear made by U.S. companies and food and beverage products from Spain, Germany, and France.
Our website provides consumer goods and services in the following 19 major categories:
1. Nutrition and health supplements;
2. Toys and games;
3. Cosmetics and beauty;
4. Consumer electronics;
5. Culture and sports;
6. Consumer services;
7. Maternity and baby products;
8. Clothes and shoes;
9. Jewelry and accessories;
10. Travel and tickets;
11. Foreign goods;
12. Office supplies;
13. Household appliances;
14. Luxury products;
15. Home furnishings;
16. Organic products;
17. Education products;
18. Kitchen appliances;
19. Crystal products;
How the Website Works
Sellers use our website to advertise and sell their goods, manage customer data, and track orders and shipments. Consumers shop online and pay for products and services through the system. Thus, we do not buy, hold, or sell any inventory. The system escrows payments for the goods until the consumer uses the system to indicate that the order was satisfactorily fulfilled. The sellers set the price of their products and services offered through our website. The sellers, however, must include within their selling price a service fee for CCG and money for our points and reward program.
As of December 31, 2011, through our China website we offer products from 233 vendors and from our U.S. website we offer products and services from 56 vendors. We also have over 32,000 members in China and over 300 members in the US. These members purchase products and services offered through our website.
Members
Consumers who purchase products and services offered through our website are automatically enrolled as members. Retail prices for goods and services in China are generally uniform throughout the country, and, outside of the largest cities, retailers generally do not compete on the basis of price. Instead, some retailers in China offer customers the chance to win prize money by conducting sweepstakes. Similarly, we offer our members in China a daily "Lucky Drawing" sweepstakes and members who purchase products or services are automatically enrolled in that day’s drawing.. The amount of the Lucky Drawing prize is based on the volume of purchases made on that day up to a maximum prize of RMB5,000. This reward program motivates consumers to encourage their family and friends to purchase products and services through our website. This reward program is limited to our members in China.
In addition to this sweepstakes feature, we attract customers, build loyalty, and encourage repeat business by establishing membership levels that correspond to the total amount spent on goods and services by each member. As members purchase more goods and services through the website, they attain higher levels of membership that entitle them to "bonus points" that can be applied toward future purchases. Earning additional points and attaining higher levels of membership also entitle members to additional sweepstakes opportunities. Again, this feature is limited to our members in China.
Vendors/Sellers
Our website provides business-to-consumer e-commerce technologies to manufacturers and distributors throughout the PRC and Asia who wish to sell directly to Chinese consumers. Our platform eliminates most intermediate links and results in substantial channel cost savings. By providing direct access to our members, sellers attain an immediate and dramatic expansion of their retail exposure throughout the PRC. Sellers benefit from the online nature of business-to-consumer e-commerce transactions that facilitate fast and immediate receipt of orders, shorten accounts receivable periods, enhance cash flow, reduce cost of sales, and increase a seller's operational capacity.
An important feature of our system is that, in addition to the Company managed sweepstakes and bonus points features, the platform allows sellers to offer incentive points that accrue to consumers who purchase the sellers' goods. Sellers may set the amount of the purchase price that consumers receive back as incentive points based on the consumer's membership level and purchasing history with the seller. These incentive points constitute a strong marketing mechanism for the seller and an indirect discount to consumers.
Debit Card
On March 28, 2011, we launched a debit bank card marketing program that puts CCG debit cards in the hands of Chinese consumers by entering into a cooperation agreement with Fuxin City Bank (“Fuxin”) to issue co-branded bank debit cards with our Company's logo. These debit cards issued by Fuxin have all the financial functions of traditional bank cards. The cardholder may use the debit card to make electronic payments on our website and provides discounts for retail transactions outside of our website with certain vendors that have signed up with our program.
The Company authorizes certain vendors the right to issue cobranded debit cards. The Company charges each participating vendor a percentage of transactions with that vendor. Each vendor will receive a percentage of future transactions of the cards issued by the vendor. Cardholders will receive certain amounts of cash refund from participating vendors and earn points to be spent on the Company’s ecommerce website www.ccmus.com. Further, the Company hires dealers to develop a vendor’s network as well as manage the issuance of the cobranded debit cards. For the year ended December 31, 2011, no revenue from this business model has been realized. In order to promote distribution of these cards, the Company has signed a dealer agreement with China Unionpay, which is a card management company similar to Visa and Master Card. China Unionpay has POS machines all over China. The Company believes that with the cooperation of China Unionpay and other current and potential dealers, the Company will be able to rapidly develop its vendor system. The Company believes that the debit card business will grow to generate revenue and become the Company’s main business in 2012.
Technology
Our website is built on the latest e-commerce technologies. Its major modules and functionalities include:
*A front-end web application built on Microsoft ASP.NET technology, including the most advanced .NET 4.0 framework.
·Support for Memberships, User Profiles, Security, and Encryption.
·Integrated performance enhancement, database, XML, and RSS.
·Support for real-time authentication, authorization, and validation.
Shopping cart built on Microsoft ASP.NET technology using C# libraries with .NET user profiles, LINQ, and SQL Server database
*Transaction engine built on Microsoft SQL Server and ASP.NET 4.0 technology with support for parallel computing and load balancing for enhanced efficient real-time transaction performances.
*Secured order handling via https, authentication, authorization, and transaction logging.
*Vendor interface web platform that enables vendors to share and route information through different departments, execute business transactions, and obtain real-time reports.
*SQL Server Reporting Services.
*Scalability. The system is designed to support very large numbers of concurrent transactions based on its .NET 4.0 parallel computing, load balancing, and SQL Server Enterprise capabilities, and grow well ahead of the transaction volume curve.
*Lucky Drawing sweepstakes. The daily sweepstakes are conducted on the web platform by means of application features that promote user awareness, create program documentation, drive promotions, perform record reconciliations, and generate reporting and acknowledgment.
*Bonus point incentive program. The system's knowledge management module and a content management module are designed to support this and other incentive programs based on corporate strategic planning and marketing schedules.
*Interface with banking and financial partners. The system fully integrates with our financial institution partners.
Security
Our platform provides both vendors and members with complete financial, identity, authenticity, and delivery security. We hold payment for goods ordered through the system until the consumer confirms receipt and satisfaction with the goods received. Security is ensured by means of a multifactor account password and authentication system, multiple password-protected login protocols, and dynamic passwords, digital certificates, and other authentication mechanisms. The transaction security system further guarantees that both buyers and sellers are certified and registered on file in order to ensure the true identity of the parties. Each transaction is subject to verification by industry-leading proprietary monitoring algorithms to detect and eliminate fraudulent activities.
Industry Overview
China's Economy
Chinese consumers are experiencing a rapid increase in per capita income and household consumption. This is fueled, in part, by an active array of policies on the part of the Chinese government oriented toward increasing disposable income and shifting growth away from industrial development and toward domestic demand. Both international and domestic retailers are turning their attention to China's smaller cities. Beijing's determination to boost rural consumption is also expected to increase competition among retailers that have previously focused on the country's big cities. Through rapid expansion of networks of retail chain stores, supply and marketing cooperatives are rising as major players in China's "brick and mortar" rural retail market.
Internet Use and E-commerce in China
China's population of internet users was 500million in 2011, according to the state China Internet Network Information Center (CNNIC). According to Reuters, the number of Chinese using the internet to book travel, bank, and carry out other commerce grew by 68% year-over-year.
E-commerce activity in China has risen dramatically in the past couple of years. According to International Data Company (“IDC”), China's online shopping sales rose to $127 billion in 2011, an increase of 66% compared to 2010 and will reach an estimated $160 billion in 2011.
Future Growth in Consumer Spending
China's government remains focused on continued gains in the development of the country's consumer market. At the 2010 Economic Work Conference, the government stressed the need to further expand consumption demand and consumption capacity. China's well-established policy to stimulate consumption includes extending the availability of consumer credit and enhancing the country's retail and distribution systems.
Since 2010, the Chinese government has spent efforts to step up stimulus of the domestic consumption market and expand imports. According to CHINA DAILY, China also plans to continue to boost domestic consumption as a priority in its 12th Five-Year Plan (2011-2015). Boosting domestic consumption is a key theme in the five year plan and is likely to improve the outlook for consumer markets. According to Credit Suisse, China’s household income is expected to rise to $9 trillion in 2015, up from $4 trillion in 2010.
COMPETITION
Our website operates in a rapidly growing consumer, retail, and e-commerce market across the PRC. According to Goldman Sachs, e-commerce sales in China could grow 275% over five years to reach an estimated $300 billion in 2015.
We compete against both domestic and international e-commerce businesses as well as traditional retailers that are expanding into e-commerce, we believe our major competitors include the following:
*TAOBAO.COM is China's biggest online retailer. It follows the eBay model by facilitating consumer-to-consumer retail by means of a platform for businesses and individuals to open online retail stores. Taobao caters to bargain-hunting consumers. Most of their users are teenagers, college students, and white collar workers in big cities in the age group 20-35.
*E-COMMERCE CHINA DANGDANG INC. is another big online retailer in China. It sells books and other media products and general merchandise that it sources from publishers, manufacturers, and distributors in China. It also has a marketplace program in which third-party merchants can sell general merchandise products alongside its products, and customers can purchase these products through the same checkout process.
*PAIPAI.COM consists of a number of major channels, including women, men, online games, digital products, mobile phone, life, sports, students, special offers, mothers and babies, toys, superior quality products, and hotels. Its business model centers on fashionable and trendy brand offerings.
*EACHNET.COM is eBay's China e-commerce platform.
Competitive Advantages and Disadvantages
Our e-commerce business model possesses a number of strategically significant strengths. Significant competitors such as Taobao and Paipai cater predominantly to consumer-to-consumer transactions. In contrast, we focus on the full range of consumer goods and services, from clothing and consumer electronics to household appliances and home furnishings, in a full business-to-consumer modality. We believe our sweepstakes and incentive programs are an unmatched innovation among China's competing e-commerce offerings. The group-buying dynamic programs harness results in an unusually low-cost and effective method of attracting consumers to the website. For manufacturers and distributors, the platform provides comprehensive retail channel benefits and geographical breadth while permitting autonomy and flexibility in how sellers fulfill and ship goods to consumers. By concentrating our development of core competencies on e-commerce technology, we avoid the overhead and operational difficulties of logistics and supply chains.
Our website is presently disadvantaged by its limited time in the marketplace and our need to recruit and train experienced personnel. In addition to the competition we face from other e-commerce businesses, we require time and resources to further integrate our banking, merchant, and consumer partners. At present, consumer-to-consumer represents the largest segment of China's e-commerce market. Business-to-consumer is in its infancy, and our website is, thus, one of the first-to-market players in this space.
MARKETING AND SALES
We have also developed a marketing program in conjunction with the China Education Foundation to promote our business during televised national graduation ceremonies of the PRC's millions of college students.
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 Service, 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 Service 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 Service. Arki Network Service currently holds an ICP license issued by Beijing Communications Administration, a local branch of MII. Our ICP license will expire in August 2015, and we will renew such license prior to its expiration date.
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 Service 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 Service and Arki Beijing and between Arki Network Service and Arki Fuxin 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 March 20, 2012, we had 43 full-time employees.
BANKRUPTCY OR SIMILAR PROCEEDINGS
There has been no bankruptcy, receivership or similar proceeding.
ITEM 1A.
ITEM 1A. RISK FACTORS.
RISKS RELATING TO OUR BUSINESS
GOING CONCERN
The Company incurred a net loss of approximately $2 million for the year ended December 31, 2011. The Company has a cash balance of $619,812 as of December 31, 2011. In 2011, the Company has financed its operations through loans from directors and officers. Amounts owed to related parties were $474,607 at December 31, 2011. There are no formal agreements between the Company and the directors and officers with respect to these loans. If the Company cannot generate enough cash flow from its operating activities, it will need to consider other financing methods such as borrowing from banking institutions or raising additional capital through new equity issuances. There can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to us. The Company incurred substantial professional expenses as a result of becoming a public company in 2011. The Company plans to control its administrative expenses in the coming year as well as further develop its sales from its main business.
The Company incurred a net loss of approximately $2 million for the year ended December 31, 2011. The Company has a cash balance of $619,812 as of December 31, 2011. In 2011, the Company has financed its operations through loansfrom directors and officers . Amounts owed to related parties were $474,607 at December 31, 2011. There are no formal agreements between the Company and the directors and officers with respect to these loans and these related parties could demand repayment of their loans at any time. If the Company cannot generate enough cash flow from its operating activities, it will need to consider other financing methods such as borrowing from banking institutions or raising additional capital through new equity issuances. There can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to us. The Company incurred substantial professional expenses as a result of becoming a public company in 2011. The Company plans to control its administrative expenses in the coming year as well as further develop its sales from its main business.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR FUTURE PROSPECTS AND RESULTS OF OPERATIONS.
We launched our e-commerce business and our online retailing platform and we acquired a majority interest in Beitun Trading, a meat distribution business, in 2010. As a result, we have a limited operating history with respect to these lines of business. Our limited operating history makes it difficult to evaluate our business. In addition, the limited performance history of our management and sales team and the uncertainty of our future performance and ability to maintain or improve our financial, sales, and operating systems, procedures, and controls increase the risk that we may be unable to continue to successfully operate our business. In the event that we are not able to manage our growth and operate as a public company due to our limited experience, our business may suffer uncertainty and failures, which makes it difficult to evaluate our business.
WE ARE HIGHLY DEPENDENT ON SENIOR MANAGEMENT AND KEY SALES AND TECHNICAL PERSONNEL.
We are highly dependent on our senior management to manage our business and operations. In particular, we rely substantially on Jianmin Gao, our Chief Executive Officer, to manage our operations. The loss of Mr. Gao, or any other member of our senior management, would have a material adverse effect on our business and operations. Competition for senior management is intense, and the pool of suitable candidates is limited. We may be unable to locate a suitable replacement for any member of our senior management that we lose. In addition, if any member of our senior management joins a competitor or forms a competing company, they may compete with us for customers, business partners, and other key professionals and staff members of the Company.
THE SHAREHOLDERS OF OUR AFFILIATED PRC ENTITY HAVE POTENTIAL CONFLICTS OF INTEREST WITH US, WHICH MAY ADVERSELY AFFECT OUR BUSINESS.
Jianmin Gao and Fei Gao are father and son, respectively, and officers and directors of the Company. They are also the two (2) shareholders of our affiliated PRC entity, Arki Network Service, each holding 50% in such entity. Thus, conflicts of interest between their duties to the Company and their interests as the controlling shareholders of our affiliated PRC entity may arise. We cannot assure you that they will act entirely in our interests when conflicts of interest arise or that conflicts of interest will be resolved in our favor. If we are unable to resolve any such conflicts, or if we significant delays or other obstacles as a result of such conflicts, our business and operations could be severely disrupted, which could materially and adversely affect our results of operations and damage our reputation.
IF WE FAIL TO MANAGE OUR RELATIONSHIPS WITH OUR VENDORS, OUR BUSINESS AND PROSPECTS MAY SUFFER.
Our website provides products and services from domestic Chinese and other Asian manufacturers and distributors. Maintaining good relationships with suppliers of products and services that are offered through our website that compete with each other can be difficult. For example, suppliers of similar products may compete for desirable virtual shelf space or priority exposure of their products on our website to our customer base. There can be no assurance that our current vendors will continue to offer their products and services through our website, or that we will be able to establish new or extend current vendor relationships to ensure a steady supply to our members in a timely and cost-efficient manner. If we are unable to develop and maintain good relationships with these manufacturers and distributors, it may inhibit our ability to offer products and services demanded by our customers, or to offer them in sufficient quantities and at prices acceptable to them. In addition, if our vendors cease to provide us with favorable pricing or payment terms or return policies, our working capital requirements may increase and our operations may be materially and adversely affected. Any breakdown in our relationships with the manufacturers and distributors, or a failure to timely resolve disputes with or complaints from our vendors, could materially and adversely affect our business, prospects, and results of operations.
WE MAY INCUR LIABILITY FOR COUNTERFEIT PRODUCTS SOLD AT OUR WEBSITE.
Our website offers products from over 233 manufacturers and distributors across China and 56 manufacturers and distributors across US. Those manufacturers and distributors are separately responsible for sourcing the products they sell on our website. Although we have adopted measures to verify the authenticity of products sold on our website and minimize potential infringement of third-party intellectual property rights in the course of sourcing and selling products, we may not always be successful. In the event that counterfeit or infringing products are sold on our website, we could face claims that we should be held liable for selling counterfeit products or infringing on others' intellectual property rights. If there is a successful claim against us, we might be required to pay substantial damages or refrain from further sale of the relevant products. Moreover, regardless of whether we successfully defend against such claims, our reputation could be severely damaged. Successful claims of infringement of third-party intellectual property rights against us is a violation by the sellers of products and services on our website of agreements we have with such sellers, which automatically terminates such agreement, and any damages obtained against us may be deducted from sales by such sellers. Any of these events could have a material adverse effect on our business, results of operations, or financial condition.
WE MAY BE REQUIRED TO OBTAIN A PAYMENT SERVICE PERMIT
Pursuant to the "Measures for the Administration of Payment Services of Non-Financial Institutions" (the "Measures") promulgated by the People's Bank of China and effective on September 1, 2010, and its Detailed Implementation Rules effective on December 1, 2010, a Payment Business Permit is required for the non-financial institutions that serve as intermediary agencies between the payer and the beneficiary to provide partial or all of the monetary funds transfer services in the form of a) online payment; b) issuance and acceptance of prepaid cards; c) bill collection via bankcards; and d) other payment services determined by the People's Bank of China. In terms of online payment, it refers to an act of transferring money between the payer and the beneficiary through a public network or special network, including currency exchange, online payment, mobile phone payment, telephone payment, and digital TV payment. In addition, the Measures set forth certain conditions that an applicant for a Payment Business Permit must meet in terms of registered capital amount, qualifications of the main capital contributors and so on. Accordingly, we may be required to apply for a Payment Business Permit. Prior to receipt of a Payment Business Permit, we may not be able to provide money escrow services for our clients, which may impair our competitiveness and adversely affect our operation.
OUR INABILITY TO OBTAIN CAPITAL, USE INTERNALLY GENERATED CASH, OR USE SHARES OF OUR COMMON STOCK OR DEBT TO FINANCE FUTURE EXPANSION EFFORTS COULD IMPAIR THE GROWTH AND EXPANSION OF OUR BUSINESS.
Reliance on internally generated cash or debt to finance our operations or complete business expansion efforts could substantially limit our operational and financial flexibility. The extent to which we will be able or willing to use shares of common stock to consummate expansions will depend on our market value from time to time and the willingness of potential sellers to accept it as full or partial payment. Using shares of common stock for this purpose also may result in significant dilution to our then existing stockholders. To the extent that we are unable to use common stock to make future expansions, our ability to grow through expansions may be limited by the extent to which we are able to raise capital for this purpose through debt or equity financings. No assurance can be given that we will be able to obtain the necessary capital to finance a successful expansion program or our other cash needs. If we are unable to obtain additional capital on acceptable terms, we may be required to reduce the scope of any expansion. In addition to requiring funding for expansions, we may need additional funds to implement our internal growth and operating strategies or to finance other aspects of our operations. Our failure to (i) obtain additional capital on acceptable terms, (ii) use internally generated cash or debt to complete expansions because it significantly limits our operational or financial flexibility, or (iii) use shares of common stock to make future expansions may hinder our ability to actively pursue any expansion program we may decide to implement and negatively impact our stock price.
OUR SUCCESS MAY DEPEND IN PART ON OUR ABILITY TO MAKE SUCCESSFUL ACQUISITIONS.
As part of our business strategy, we may plan to expand our operations through strategic acquisitions in our current markets and in new markets. We cannot accurately predict the timing, size, and success of our acquisition efforts. Our acquisition strategy involves significant risks, including the following:
*our ability to identify suitable acquisition candidates at acceptable prices;
*our ability to successfully complete acquisitions of identified candidates;
*our ability to compete effectively for available acquisition opportunities;
*increases in asking prices by acquisition candidates to levels beyond our financial capability or to levels that would not result in the returns required by our acquisition criteria;
*diversion of management's attention to expansion efforts;
*unanticipated costs and contingent liabilities associated with acquisitions;
*failure of acquired businesses to achieve expected results;
*our failure to retain key customers or personnel of acquired businesses; and
*difficulties entering markets in which we have no or limited experience.
These risks, as well as other circumstances that often accompany expansion through acquisitions, could inhibit our growth and negatively impact our operating results. In addition, the size, timing, and success of any future acquisitions may cause substantial fluctuations in our operating results from quarter to quarter. Consequently, our operating results for any quarter may not be indicative of the results that may be achieved for any subsequent quarter or for a full fiscal year. These fluctuations could adversely affect the market price of our common stock.
COSTS INCURRED BECAUSE WE ARE A PUBLIC COMPANY MAY AFFECT OUR PROFITABILITY
As a public company, we incur significant legal, accounting, and other expenses, and we are subject to the SEC's rules and regulations relating to public disclosure that generally involve a substantial expenditure of financial resources. In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC, requires changes in corporate governance practices of public companies. We expect that full compliance with such rules and regulations will significantly increase our legal and financial compliance costs and make some activities more time-consuming and costly, which may negatively impact our financial results. To the extent our earnings suffer as a result of the financial impact of our SEC reporting or compliance costs, our ability to develop an active trading market for our securities could be harmed.
It may be time-consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley Act, when applicable to us. Our members of management have no experience operating a public company. We may need to recruit, hire, train, and retain additional financial reporting, internal controls, and other personnel in order to develop and implement appropriate internal controls and reporting procedures both domestically and internationally. If we are unable to comply with the internal controls requirements of the Sarbanes-Oxley Act, when applicable, we may have material weaknesses reported in our independent accountant's attestation report on our internal control over financial reporting required by the Sarbanes-Oxley Act.
RISKS RELATING TO OUR INDUSTRY
OUR SUCCESS DEPENDS ON OUR ABILITY TO IDENTIFY AND RESPOND TO CONSTANTLY CHANGING CONSUMER PREFERENCES.
The e-commerce and retail industries are subject to changing consumer preferences. Consequently, we must stay abreast of emerging lifestyle and consumer trends and anticipate trends that will appeal to existing and potential customers. If our members cannot find their desired products on our website, they may stop purchasing products and services on our website, stop visiting our website, or visit less often. If we do not anticipate, identify, and respond effectively to consumer preferences or changes in consumer trends at an early stage, we may not be able to generate our desired level of sales. Such circumstances could materially and adversely affect our business, financial condition, and results of operations.
ANY UNPLANNED INTERRUPTION IN THE FUNCTIONING OF OUR NETWORK OR SERVICES COULD LEAD TO SIGNIFICANT COSTS AND DISRUPTIONS.
We conduct all of our e-commerce transactions through our website, and the proper functioning of our website is essential to our business. Our website is subject to unanticipated interruptions through failures of our software or network or virus attacks. The satisfactory performance, reliability, and availability of our website, our transaction-processing systems, and our network infrastructure are critical to our success and our ability to attract and retain customers. Any system interruptions caused by telecommunications failures, computer viruses, hacking or other attempts to harm our systems that result in the unavailability or slowdown of our website or reduced order fulfillment performance would reduce the volume of products and services sold and the attractiveness of offerings at our website. Our servers may also be vulnerable to computer viruses, physical or electronic break-ins, and similar disruptions, which could lead to interruptions, delays, loss of data, or the inability to accept and fulfill customer orders. We may also experience interruptions caused by reasons beyond our control. There can be no assurance that such unexpected interruptions will not happen and occurrences could damage our reputation and result in a material decrease in our revenues.
THE INTERNET AND INTERNET-BASED SERVICES IN THE PRC MAY FAIL TO GROW AS QUICKLY AS EXPECTED, AND LIMITED USE OF PERSONAL COMPUTERS IN THE PRC AND THE RELATIVELY HIGH COST OF INTERNET ACCESS MAY LIMIT THE DEVELOPMENT OF THE INTERNET IN THE PRC AND THUS IMPEDE OUR GROWTH.
Our future success depends on the growth of the internet in the PRC. In particular, our business strategy and growth assumptions depend on the continued development and utilization of internet-based services such as e-commerce. While business-to-consumer ecommerce has existed in China since the 1990s, only recently have certain companies, such as our company, become profitable, and, thus, the viability and prospects of various business-to-consumer ecommerce business models, and e-commerce generally, in China remain relatively untested. Our business prospects and future growth could suffer if the internet or the markets for internet-based services in the PRC fail to grow as quickly as anticipated, which could have a material adverse impact over our business prospects, results of operations, and financial condition.
Further, although the use of personal computers in the PRC has increased in recent years, the penetration rate of personal computers in the PRC is still much lower than that in the United States. In addition, despite a decrease in the cost of internet access in the PRC due to a decrease in the cost of personal computers and the greater availability of broadband internet access, the cost of personal internet access, in contrast with internet access through internet cafes, remains relatively high in comparison to the average per capita income in the PRC. These factors may limit the growth of membership to our website and our business overall.
WE FACE SIGNIFICANT COMPETITION, WHICH COULD REDUCE OUR MARKET SHARE AND MATERIALLY AND ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE.
The internet market in the PRC is relatively new and rapidly evolving. Yet, the online retail environment in the PRC is intensely competitive, and we face competition from both domestic and international e-commerce businesses as well as traditional retailers that are expanding into e-commerce.
We compete with our competitors in the PRC primarily on technological advancements, attractiveness of products and services, volume of traffic and users, quality of website and content, strategic relationships, quality of services, effectiveness of sales and marketing efforts, talented staff, and pricing. We believe our particular disadvantages are the limited time of our website’s presence in the marketplace and we must recruit and our needs to train experienced personnel. Over time, our competitors may gradually build certain competitive advantages over us in terms of greater brand recognition among internet users, better products and services, larger customer and vendor bases, more extensive and well-developed marketing and sales networks, and substantially greater financial and technical resources.
RISKS RELATED TO DOING BUSINESS IN CHINA
OUR GROWTH AND PROFITABILITY DEPEND ON THE LEVEL OF ECONOMIC CONDITIONS AND OTHER FACTORS IN CHINA.
We currently derive all of our revenue from the PRC. This geographic concentration exposes us to consumer confidence, spending, growth rates, and other factors that may be specific to that territory to which we would be less subject if we were more geographically diversified. The retail industry, in particular, is very sensitive to broad economic changes. The domestic and international political environments, including military conflicts and political turmoil and social instability, may also adversely affect consumer confidence and reduce spending, which could in turn materially and adversely affect our growth and profitability. Any geographic expansion efforts that we undertake may not be successful, which, in turn, would limit our growth opportunities.
IF THE PRC GOVERNMENT FINDS THAT THE ARRANGEMENTS THAT ESTABLISH THE STRUCTURE FOR OPERATING OUR BUSINESS DO NOT COMPLY WITH PRC GOVERNMENT RESTRICTIONS ON FOREIGN INVESTMENT IN THE TELECOMMUNICATIONS BUSINESS, WE COULD BE SUBJECT TO SEVERE PENALTIES.
The PRC government regulates telecommunications-related businesses through strict business licensing requirements and other government regulations. These laws and regulations also include limitations on foreign ownership of PRC companies that engage in telecommunications-related business. Specifically, foreign investors are not allowed to own more than a 50% equity interest in any PRC company engaging in value-added telecommunications business.
MIIT issued a circular in July 2006 requiring a foreign investor to set up a foreign-invested enterprise and obtain a value-added telecommunications business operating license, or VAT license, in order to conduct any value-added telecommunications business in China. Pursuant to this circular, a domestic VAT license holder 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, the relevant trademarks and domain names that are used in the value-added telecommunications business must be owned by the local VAT license holder or its shareholder. The circular further requires each VAT 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. We believe Arki Network Service is in compliance with the Circular. Due to a lack of interpretations from the regulator, it is unclear what impact this circular will have on us or other similarly situated companies.
The relevant PRC regulatory authorities have broad discretion in determining whether a particular contractual structure is in violation of PRC laws and regulations. If our corporate and contractual structure is deemed by the MIIT to be illegal, either in whole or in part, we may have to modify such structure to comply with regulatory requirements. However, we cannot assure you that we can achieve this without material disruption to our business. Further, if our corporate and contractual structure is found to be in violation of any existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violations, including:
*revoking our business and operating licenses;
*levying fines on us;
*confiscating any of our income that they deem to be obtained through illegal operations;
*shutting down a portion or all of our networks and servers;
*discontinuing or restricting our operations in China;
*requiring us to restructure our corporate and contractual structure;
*restricting or prohibiting our use of the proceeds from future offering to finance our PRC affiliated entity business and operations; and
*taking other regulatory or enforcement actions that could be harmful to our business.
Occurrence of any of these events could materially and adversely affect our business, financial condition and results of operations.
WE RELY ON CONTRACTUAL ARRANGEMENTS WITH ARKI NETWORK SERVICE IN CHINA AND ITS RESPECTIVE SHAREHOLDERS FOR OUR BUSINESS OPERATIONS, WHICH MAY NOT BE AS EFFECTIVE IN PROVIDING OPERATIONAL CONTROL OR ENABLING US TO DERIVE ECONOMIC BENEFITS AS OWNERSHIP OF CONTROLLING EQUITY INTERESTS.
We rely on and expect to continue to rely on contractual arrangements with Arki Network Service in China and its respective shareholders to operate our e-commerce platform. These contractual arrangements may not be as effective in providing us with control over Arki Network Service and enabling us to derive economic benefits from the operations of Arki Network Service as ownership of controlling equity interests would be. If we had direct ownership of Arki Network Service, we would be able to exercise our rights as a shareholder to (i) effect changes in the board of directors of Arki Network Service, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level, and (ii) derive economic benefits from the operations of those entities by causing them to declare and pay dividends. However, under the current contractual arrangements, as a legal matter, if Arki Network Service or any of its shareholders fails to perform its or his respective obligations under these contractual arrangements, we may have to incur substantial costs and resources to enforce such arrangements, and rely on legal remedies available under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective. For example, if shareholders of Arki Network Service were to refuse to transfer their equity interests therein to us or our designated persons when we exercise the purchase option pursuant to these contractual arrangements, we may have to take a legal action to compel them to fulfill their contractual obligations.
If (i) the relevant PRC authorities invalidate these contractual arrangements for violation of PRC laws, rules and regulations, (ii) Arki Network Service or its shareholders terminate the contractual arrangements or (iii) Arki Network Service or its shareholders fail to perform their obligations under these contractual arrangements, our business operations in China would be adversely and materially affected, and the value of your shares would substantially decrease. Further, if we fail to renew these contractual arrangements upon their expiration, we would not be able to continue our business operations unless the then-current PRC law allowed us to directly operate the relevant businesses in China.
In addition, if Arki Network Service or all or part of their assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. If Arki Network Service undergoes a voluntary or involuntary liquidation proceeding, its shareholders or unrelated third-party creditors may claim rights to some or all of its assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, our ability to generate revenue and the market price of your shares.
All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. The legal environment in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. In the event we are unable to enforce these contractual arrangements, we may not be able to exert effective control over Arki Network Service, and our ability to conduct our business may be negatively affected.
OUR CONTRACTUAL ARRANGEMENTS WITH OUR AFFILIATED PRC ENTITY MAY RESULT IN ADVERSE TAX CONSEQUENCES TO US.
As a result of our corporate structure and the contractual arrangements between us and our affiliated PRC entity, we are effectively subject to the 5% PRC business tax on net revenues derived from our contractual arrangements with our affiliated PRC entity. We may be subject to adverse tax consequences if the PRC tax authorities were to determine that the contracts between us and our affiliated PRC entity were not on an arm's length basis and constitute a favorable transfer pricing arrangements. If this occurs, the PRC tax authorities could request that our affiliated PRC entity adjust its taxable income, if any, upward for PRC tax purposes. Such a pricing adjustment could adversely affect us by increasing our affiliated PRC entity's tax expenses without reducing our tax expenses, which could subject our affiliated PRC entity to late payment fees and other penalties for underpayment of taxes. The PRC enterprise income tax law requires every enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its related parties to the relevant tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related party transactions that are inconsistent with arm's length principles. As a result, our contractual arrangements with our affiliated PRC entity may result in adverse tax consequences to us. As our affiliated PRC e-commerce entities suffered accumulated loss in 2011, they did not pay any PRC income tax in 2011. If its ecommerce segment generates net income in the future and the PRC tax authorities decide to make transfer pricing adjustments on its net income, our consolidated net income may be adversely affected.
IF OUR AFFILIATED PRC ENTITY FAILS TO OBTAIN AND MAINTAIN THE REQUISITE ASSETS, LICENSES, AND APPROVALS REQUIRED UNDER THE COMPLEX REGULATORY ENVIRONMENT FOR INTERNET-BASED BUSINESSES IN CHINA, OUR BUSINESS, FINANCIAL CONDITION, AND RESULTS OF OPERATIONS MAY BE MATERIALLY AND ADVERSELY AFFECTED.
The internet industry in China is highly regulated by the PRC government and numerous regulatory authorities of the central PRC government are empowered to issue and implement regulations governing various aspects of the internet industry. Our affiliated PRC entity is required to obtain and maintain certain assets relevant to its business as well as applicable licenses or approvals from different regulatory authorities in order to provide its current services. These assets and licenses are essential to the operation of our business and are generally subject to annual review by the relevant governmental authorities. Furthermore, our affiliated PRC entity may be required to obtain additional licenses. If it fails to obtain or maintain any of the required, assets, licenses, or approvals, its continued business operations in the internet industry may subject it to various penalties, such as confiscation of illegal net revenues, fines, and the discontinuation or restriction of its operations. Any such disruption in the business operations of our affiliated PRC entity will materially and adversely affect our business, financial condition and results of operations.
REGULATION AND CENSORSHIP OF INFORMATION DISTRIBUTION OVER THE INTERNET IN CHINA MAY ADVERSELY AFFECT OUR BUSINESS, AND WE MAY BE LIABLE FOR INFORMATION DISPLAYED ON, RETRIEVED FROM, OR LINKED TO OUR WEBSITE.
China has enacted laws and regulations governing internet access and the distribution of products, services, news, information, audio-video programs, and other content through the internet. In the past, the PRC government has prohibited the distribution of information through the internet that it deems to be in violation of PRC laws and regulations. If any of our internet content were deemed by the PRC government to violate any content restrictions, we would not be able to continue to display such content and could become subject to penalties, including confiscation of income, fines, suspension of business, and revocation of required licenses, which could materially and adversely affect our business, financial condition, and results of operations. We may also be subject to potential liability for any unlawful actions of our customers or users of our website or for content we distribute that is deemed inappropriate. It may be difficult to determine the type of content that may result in liability to us, and if we are found to be liable, we may be prevented from operating our website in China.
OUR ONLINE BUSINESS RELIES ON THE TELECOMMUNICATIONS INFRASTRUCTURE OF CHINA'S INTERNET.
Most access to the internet in China is maintained through a network owned by the local Chinese telecommunications carriers (E.G. China Unicom and China Telecom) under the regulatory supervision of China's Ministry of Industry and Information Technology ("MIIT"). In addition, networks in China connect to the internet through a government-controlled international gateway, which is the only channel through which domestic Chinese users connect to the international internet network. We rely on this infrastructure and China Unicom and China Telecom to provide data communications capacity, primarily through local telecommunications lines. We would have no access to alternative networks and services, on a timely basis, if at all, in the event of any infrastructure disruption or failure.
THE PRC LEGAL SYSTEM EMBODIES UNCERTAINTIES THAT COULD LIMIT THE LEGAL PROTECTIONS AVAILABLE TO US.
The PRC legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing general economic and business matters. The overall effect of legislation since 1979 has been a significant enhancement of the protections afforded to various forms of foreign-invested enterprises in China. Our PRC subsidiaries - America Pine Beijing, Arki Beijing, Arki Fuxin, and Beitun Trading - are WFOEs; a WFOE is an enterprise incorporated in China and capitalized by foreign funds. Our PRC subsidiaries are subject to laws and regulations applicable to foreign investment in China in general and laws and regulations applicable to WFOEs in particular. These laws, regulations, and legal requirements, however, are constantly changing, and their interpretation and enforcement involve uncertainties, which could limit the legal protections available to us. In addition, we cannot predict the effect of future developments in the PRC legal system, particularly with regard to the internet, including the promulgation of new laws, changes to existing laws, or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. Furthermore, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
REGULATIONS RELATING TO OFFSHORE INVESTMENT ACTIVITIES BY PRC RESIDENTS MAY SUBJECT OUR STOCKHOLDERS TO FINES AND LEGAL SANCTIONS AND MAY ADVERSELY AFFECT OUR BUSINESS.
The PRC State Administration of Foreign Exchange ("SAFE") issued a public notice in October 2005 (the SAFE notice), requiring PRC residents to register with the local SAFE branch before establishing or controlling any company outside of China for the purpose of capital financing with assets or equities of PRC companies, referred to in the notice as an "offshore special purpose company." SAFE has further issued a series of implementation guidance, including the most recent Notice of SAFE on Printing and Distributing the Rules for the Implementation of the Operating Procedure of Foreign Exchange in Fund-Raising and Round-trip Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, which has come into effect as of July 1, 2011. These regulations require PRC residents deemed by SAFE to register with competent local branches of SAFE in connection with their direct or indirect offshore investment in offshore special purpose companies. In addition, PRC residents that are shareholders of offshore special purpose companies established before November 1, 2005 were required to register with the local SAFE branch before March 31, 2006. Further, PRC residents are required to file amendments to their registrations with the local SAFE branch if their special purpose companies undergo material events involving changes in capital, such as changes in share capital, mergers and acquisitions, share transfers or exchanges, spin-off transactions, or long-term equity or debt investments. We have urged our beneficial owners that are PRC residents to complete their registration with local SAFE branch as required under the SAFE notice in connection with the transactions contemplated by the Merger Agreement, but cannot assure you that they have completed such registrations at the time of filing. The failure of these beneficial owners to timely complete their SAFE registrations pursuant to the SAFE notice or the failure of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in the SAFE notice may subject such beneficial owners to fines and legal sanctions and may also limit our ability to contribute additional capital into our WFOEs, limit our WFOEs' ability to distribute dividends to us or the offshore entities set up by our beneficial owners, or otherwise materially and adversely affect our business.
RESTRICTIONS ON CURRENCY EXCHANGE MAY LIMIT OUR ABILITY TO UTILIZE OUR CAPITAL EFFECTIVELY.
All of our revenues and operating expenses are denominated in Renminbi. The Renminbi is currently freely convertible under the "current account", which includes dividends, trade, and service-related foreign exchange transactions, but not under the "capital account," which includes foreign direct investment and loans.
Currently, our PRC subsidiaries may purchase foreign exchange for settlement of "current account transactions," and retain foreign exchange in its current account, subject to a ceiling approved by the SAFE, to satisfy foreign exchange liabilities or to pay dividends. We cannot, however, assure you that the relevant PRC governmental authorities will not limit or eliminate our PRC subsidiaries' abilities to purchase and retain foreign currencies in the future.
Since a significant amount of our future revenues will be denominated in Renminbi, the existing and any future restrictions on currency exchange may limit our ability to utilize capital generated in Renminbi to fund our business activities outside of China, if any, or expenditures denominated in foreign currencies.
Foreign exchange transactions under the capital account are subject to limitations and require registration with or approval by the relevant PRC governmental authorities. In particular, if we finance our PRC subsidiaries by foreign currency loans, those loans cannot exceed certain statutory limits and must be registered with the SAFE, and if we finance our PRC subsidiaries by capital contributions, then those capital contributions must be approved by the Ministry Of Commerce or its local agency. In addition, because of the regulatory issues related to foreign currency loans to, and foreign investment in, domestic PRC enterprises, we may not be able to finance Arki Network Service's operations by loans or capital contributions. We cannot assure you that we can obtain these governmental registrations or approvals on a timely basis, if at all. These limitations could affect the ability of these entities to obtain foreign exchange through debt or equity financing, and could adversely affect our business and financial conditions.
FLUCTUATION IN THE VALUE OF THE RENMINBI MAY REDUCE THE VALUE OF YOUR INVESTMENT
The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China's political and economic conditions and China's foreign exchange policies. The conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on exchange rates set by the People's Bank of China. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi solely to the U.S. dollar. Under this revised policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. Following the removal of the U.S. dollar peg, the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. The People's Bank of China, however, regularly intervenes in the foreign exchange market to limit fluctuations in Renminbi exchange rates and achieve policy goals. For almost two years after July 2008, the Renminbi traded within a narrow range against the U.S. dollar. As a consequence, the Renminbi fluctuated significantly during that period against other freely traded currencies, in tandem with the U.S. dollar.
In June 2010, the PRC government announced that it would increase Renminbi exchange rate flexibility. It remains unclear, though, how this flexibility might be implemented. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in a further and more significant appreciation of the Renminbi against the U.S. dollar.
Because all of our revenues and expenditures are denominated in Renminbi, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue that will be exchanged into U.S. dollars and earnings from and the value of any U.S. dollar-denominated investments we make in the future.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedging transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our currency exchange losses may be magnified by Chinese exchange control regulations that restrict our ability to convert Renminbi into foreign currency.
RISK RELATING TO OUR SECURITIES
TO DATE, WE HAVE NOT PAID ANY CASH DIVIDENDS, AND NO CASH DIVIDENDS ARE EXPECTED TO BE PAID IN THE FORESEEABLE FUTURE
We do not anticipate paying cash dividends on our common stock in the foreseeable future, and we may not have sufficient funds legally available to pay dividends. Even if the funds are legally available for distribution, we may nevertheless decide not to pay any dividends. We intend to retain all earnings for our operations.
WE MAY NEED ADDITIONAL CAPITAL, AND THE SALE OF ADDITIONAL SHARES OR OTHER EQUITY SECURITIES COULD RESULT IN DILUTION TO OUR STOCKHOLDERS.
We may require additional cash resources due to changed business conditions or other future developments, including any investments we may decide to pursue. If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of additional indebtedness would result in increased debt service obligations and could result in further operating and financing covenants that would further restrict our operations. We cannot provide assurances that financing will be available in amounts or on terms acceptable to us, if at all.
THERE HAS BEEN A LIMITED TRADING MARKET FOR OUR COMMON STOCK, AND OUR STOCKHOLDERS MAY BE UNABLE TO LIQUIDATE THEIR SHARES.
There was no trading of our common stock prior to our acquisition of the business and operations of the CCG Group in February 2011. Since that time, there has been a very limited trading market for our common stock. An active trading market for our common stock may not develop due to a number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors, and others in the investment community that generate or influence sales volume. Even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. We cannot give you any assurance that an active public trading market for our common stock will develop or be sustained. You may not be able to liquidate your stock quickly or at the market price if trading in our common stock is not active.
IF AN ACTIVE TRADING MARKET FOR OUR COMMON STOCK DEVELOPS, WE EXPECT TO EXPERIENCE VOLATILITY IN THE PRICE OF OUR COMMON STOCK, WHICH MAY RESULT IN SUBSTANTIAL LOSSES TO OUR STOCKHOLDERS IF THEY ARE UNABLE TO SELL THEIR SHARESAT OR ABOVE THEIR PURCHASE PRICE.
If an active trading market for our common stock develops, we expect the market price of our common stock to fluctuate substantially for the indefinite future due to a number of factors, including general and industry-specific economic conditions, actual or anticipated fluctuations in our operating results, our capital commitments, and the loss of any of our key management personnel.
PAST ACTIVITIES OF OUR COMPANY AND AFFILIATES MAY LEAD TO FUTURE LIABILITY FOR OUR COMPANY.
Prior to the reverse triangular merger with CCG, we were engaged in the acquisition and exploration of mining properties, a business unrelated to our current operations. Any liabilities relating to such prior business against which we are not completely indemnified will be borne by us and may result in substantial costs to the Company and could divert management's attention and resources that otherwise could have been focused on our business operations.
A LARGE MAJORITY OF OUR SHARES ARE HELD BY A FEW STOCKHOLDERS, SOME OF WHOM ARE MEMBERS OF OUR MANAGEMENT. AS THESE PRINCIPAL STOCKHOLDERS SUBSTANTIALLY CONTROL OUR CORPORATE ACTIONS, OUR OTHER STOCKHOLDERS MAY FACE DIFFICULTY IN EXERTING ANY INFLUENCE OVER MATTERS NOT SUPPORTED BY THESE PRINCIPAL STOCKHOLDERS.
Our principal stockholders are Jianmin Gao, our Chairman of the Board, Chief Executive Officer, and Chief Financial Officer, Lingling Zhang, our Corporate Secretary and a member of the Board, and Fei Gao, our Chief Operating Officer and a member of the Board. These principal stockholders own approximately 67% of our outstanding shares of common stock. These stockholders, acting individually or as a group, could exert control over matters such as electing directors, amending our certificate of incorporation or bylaws, and approving mergers or other business combinations or transactions. In addition, because of the percentage of ownership and voting concentration in these principal stockholders, elections of our board of directors will generally be within the control of these stockholders. While all of our stockholders are entitled to vote on matters submitted to our stockholders for approval, the concentration of shares and voting control presently lies with these principal stockholders. As such, it would be difficult for stockholders to propose and have approved proposals not supported by these principal stockholders. There can be no assurance that matters voted upon by our officers and directors in their capacity as stockholders will be viewed favorably by all stockholders of our company. The stock ownership of our principal stockholders may discourage a potential acquirer from seeking to acquire shares of our common stock that, in turn, could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
ITEM 2.
ITEM 2. PROPERTIES.
Our current principal executive offices are located at 35 North Lake Avenue, Suite 280, Pasadena, CA 91101. The table below provides a general description of our offices and facilities, including those for our international operations:
Location
Principal Activities
Area (sq. ft.)
Lease Expiration Date
35 North Lake Avenue, Suite 280
Pasadena, CA 91101
Company headquarters
1,252
November 30, 2012
No. 3B & 5, Floor 25, Unit 2503
No. 77, Jianguo Road
Chaoyang District, Beijing
People's Republic of China
PRC operations headquarter
Arki Beijing's office
7,065
October 20, 2013
The minimum future commitments under lease agreements payable as of December 31, 2011 are as follows:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which the Company, any executive officer, any owner of record or beneficially of more than five percent of any class of voting securities is a party or as to which any of its property is subject, and no such proceedings are known to the Company to be threatened or contemplated against it.
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 shares were approved for quotation on the OTCBB under the symbol MNDM on April 1, 2010. As a result of the Merger, our symbol was changed to CCGN on February 25, 2011. There was no trading of our shares prior to the Merger. Since the Merger, there has been very limited trading of our shares.
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.
The following table sets forth the high and low bid quotations per share of our common stock as reported on the OTC Bulletin Board for the periods indicated. The high and low bid quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
*We have been unable to locate any quotations for our common stock prior to March 11, 2011.
Holders of Our Common Stock
As of March 27, 2012, we had 6,580 shareholders of record our common stock. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of the common stock have no preemptive rights and no right to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stock.
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.
Stock Option Grants
To date, we have not granted any stock options.
Registration Rights
We have not granted registration rights to any person.
Securities authorized for issuance under equity compensation plans
As of the date of this Report, we do not have any securities authorized for issuance under any equity compensation plans and we do not have any equity compensation plans.
Penny Stock Regulations
Our shares of common stock are subject to the “penny stock” rules of the Securities Exchange Act of 1934 and various rules under this Act. In general terms, “penny stock” is defined as any equity security that has a market price less than $5.00 per share, subject to certain exceptions. The rules provide that any equity security is considered to be a penny stock unless that security is registered and traded on a national securities exchange meeting specified criteria set by the SEC, issued by a registered investment company, and excluded from the definition on the basis of price (at least $5.00 per share), or based on the issuer's net tangible assets or revenues. In the last case, the issuer must meet one of the following requirements: (i) net tangible assets must exceed $3,000,000 if the issuer has been in continuous operation for at least three years; or (ii) net tangible assets must exceed $5,000,000 if the issuer has been in operation for less than three years, or (iii) the issuer's average revenues for each of the past three years must exceed $6,000,000.
Trading in shares of penny stock is subject to additional sales practice requirements for broker-dealers who sell penny stocks to persons other than established customers and accredited investors. Accredited investors, in general, include individuals with assets in excess of $1,000,000 or annual income exceeding $200,000 (or $300,000 together with their spouse), and certain institutional investors. For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of the security and must have received the purchaser's written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, the rules require the delivery, prior to the first transaction, of a risk disclosure document relating to the penny stock. A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, and current quotations for the security. Finally, monthly statements must be sent disclosing recent price information for the penny stocks. These rules may restrict the ability of broker-dealers to trade or maintain a market in our common stock, to the extent it is penny stock, and may affect the ability of shareholders to sell their shares.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the audited condensed consolidated financial statements of the Company for the fiscal year ended December 31, 2011 and 2010, and should be read in conjunction with such financial statements and related notes included in this report. Those statements in the following discussion that are not historical in nature should be considered to be forward looking statements that are inherently uncertain. Actual results and the timing of the events may differ materially from those contained in these forward looking statements due to a number of factors, including those discussed in the “Cautionary Note on Forward Looking Statements” set forth elsewhere in this Annual Report.
FORWARD-LOOKING STATEMENTS:
Certain statements made in this Report are "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995) regarding the plans and objectives of management for future operations. Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements of Consumer Capital Group Inc. ("we", "us", "our," or the "Company") to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. The forward-looking statements included herein are based on our current beliefs, assumptions, and expectations, and are subject to numerous risks and uncertainties. The Company's plans and objectives are based, in part, on assumptions of the continuing expansion of business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately, and many of which are beyond the control of the Company. Although the Company believes its assumptions underlying the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. These forward-looking statements are made as of the date of this report, and we assume no obligation to update these forward-looking statements whether as a result of new information, future events, or otherwise, other than as required by law. In light of these assumptions, risks, and uncertainties, the forward-looking events discussed in this report might not occur and actual results and events may vary significantly from those discussed in the forward-looking statements.
OVERVIEW
Consumer Capital Group Inc. was originally incorporated in Delaware as "Mondas Minerals Corp." ("Mondas", “the Company”, “we”, “us”, “our”) on April 25, 2008, and was engaged in the acquisition, and exploration, and development of natural resource properties. 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 February 4, 2011, the Company 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 the Company, the Company's wholly owned subsidiary CCG Acquisition Corp., a Delaware corporation ("CCG Delaware"), CCG California, and Scott D. Bengfort.
In connection with the Merger, the mining rights held by the Company were assigned to Mr. Bengfort, and in turn, Mr. Bengfort personally assumed all liabilities of the Company existing immediately prior to the closing, under the terms of an Assignment and Assumption Agreement between the 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 the Company owed to him immediately prior to the closing of the Merger, along with all other claims against the Company, 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 the CCG California shareholders to indemnify them for any breach of the Merger Agreement or unpaid or unresolved liabilities of the 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 as the Company's sole officer and director, and designees of CCG California were appointed as new directors of the Company. These new directors took office, and appointed new officers of the Company promptly following the closing of the Merger.
In the Merger, CCG Delaware merged into CCG California with CCG California as the surviving corporation. As a result of the Merger, CCG California became our wholly-owned subsidiary, and CCG’s California subsidiaries, including America Pine (Beijing) Bio-Tech, Inc., a People's Republic of China ("PRC") corporation; Arki (Beijing) E-Commerce Technology Corp., a PRC corporation; Beijing Beitun Trading Co., Ltd., a PRC corporation; and America Arki (Fuxin) Network Management Co. Ltd., a PRC corporation (together, the "PRC Subsidiaries"), became Mondas’s indirect subsidiaries. Arki (Beijing) E-Commerce Technology Corp. has a contractual relationship with America Arki Network Service Beijing Co., Ltd. ("Arki Network Service"), a PRC limited liability company, which is under common control and 100% owned by two of CCG California's former major shareholders and officers. CCG California, the PRC Subsidiaries, and Arki Network Service are collectively referred to as the "CCG Group."
On January 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 Certificate of Ownership filed with the Secretary of State of Delaware by merging CCG Name Sub into the Company with the Company surviving and CCG Name Sub ceasing to exist. Our current principal offices are located at 35 North Lake Avenue, Suite 280, Pasadena, CA 91101. Our trading symbol on the Over-the-Counter Bulletin Board (the "OTCBB") is CCGN.
From and after the closing of the Merger, our primary operations now consist of the business and operations of the CCG Group, which are conducted in the PRC.
Lines of Business
We have two operating segments, our e-commerce segment and our distribution segment.
E-Commerce Segment
The Company, through Arki (Beijing) E-Commerce Technology Corp., is primarily engaged in the development and operation of its nationwide online retailing platform "Chinese Consumer Market Network" at www.ccmus.com. The website provides an online marketing and retail platform for a wide variety of manufacturers and distributors, who promote and sell products and services directly to consumers in the PRC, at a substantial discount through our rewards and incentive programs. This platform eliminates the extended network of intermediaries in the manufacturing-distribution-retail chain by providing direct access to our members. Our website also provides access to certain Western products that are generally unavailable in the PRC, for examples, handbags and eyewear made by U.S. companies and food and beverage products from Spain, Germany, and France. In 2011 net revenues derived from our e-commerce business declined by approximately 82% to $2,155,027.
Distribution Segment
We own a 51% majority interest in an operating subsidiary, Beijing Beitun Trading Co., Ltd. ("Beitun Trading") Beitun Trading, a PRC trade and distribution company, which engages in wholesale distribution and import/export of various food and meat products. Through Beitun Trading, we also operate a meat distribution business in the PRC. Net revenues derived from our distribution business were $5,628,692 and $384,053 for the years ended December 31, 2011 and 2010, respectively. The increase is due to our acquisition of Beitun Trading, a meat distribution business on November 29, 2010.
Other Activities
The Company cooperates with a Chinese bank named Fuxin bank in China to issue cobranded debit cards. The Company then authorizes certain vendors the right to issue cobranded debit cards. The Company charges each participating vendor a percentage of transactions with the vendor. Each vendor will receive a percentage of future transactions of the cards issued by the vendor. Cardholders will receive certain amounts of cash refund from participating vendors and certain virtue money to be spent on the Company’s ecommerce website www.ccmus.com. Further, the Company hires dealers to develop vendor’s network as well as manage the issuance of the cobranded debit cards. For the year ended December 31, 2011, no revenue from this business model has been realized. The Company has signed dealer agreements with large companies like China Unionpay during the year ended December 31, 2011. China Unionpay is the only card management company like Visa and Master Card in China. It has installed millions of POS machines all over China. The Company believes that with the cooperation of China Unionpay and other dealers, the Company will be able to rapidly develop its vendor system. The Company believes that the debit card business will grow to generate revenue and become the Company’s main business in 2012. No revenues were generated from this line of business in 2011.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our management's discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 2 to our financial statements under the Financial Statements section “Note 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES”, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this discussion and analysis:
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 risks as the agreements with our suppliers specify that they have the responsibility to provide the products or services to the customers. Also, the amounts we earn from our vendors/suppliers are based on a fixed percentage and bound contractually. Further, the Company does not have any obligations to resolve disputes between the vendors and customers who purchase products on our website. Specifically, any disputes involving damaged, non-functional, or defective products, product returns, and product warranty issues are resolved between the customer and vendor, and the Company has no obligation on right of return or product warranty for any of the sales completed on its website. Since we are not primarily obligated and amounts earned are determined by 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 by our vendors and titles are passed to the customers. Revenues are recorded net of sales and consumption taxes. We periodically provide incentive offers to our customers to encourage purchases. For example, we have current discount offers, including percentage discounts off current purchases, inducement offers, such as daily sweepstakes reward opportunities which are based on the volume of purchases, and other similar offers. Current discount offers and inducement offers are presented as net amounts in "Net revenues." 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. Deferred revenues totaled $113,403 and $125,455 as of December 31, 2011 and December 31, 2010, respectively. In addition, in 2010 we recognized $301,462 as contra revenue on a "net" basis in connection with promotional activities. The promotional activities were terminated and no promotional expenses were incurred in 2011.
DISTRIBUTION REVENUE RECOGNITION
Product sales, shipping revenues, and net of return allowances are recorded when the products are shipped and titles are passed to the customers. Return allowances, which reduce product revenue, are estimated by using historical experience. Revenues from product sales and services rendered are recorded net of sales and consumption taxes.
REWARD PROGRAMS
The Reward Programs are limited to customers residing in China. Customers may earn reward points by purchasing products and services from the Company. Points are earned based on the amounts and types of merchandise and services purchased. Customers residing in China may redeem the reward points for drawings in the Company's daily “Lucky Drawing” for chances to win cash prizes. In addition, customers who reside in China may attain a tiered membership status based on the value of merchandise and services purchased over the past twelve months. The membership status entitles the holder to certain discounts on future purchases of selected items on the Company's website. The Company accrues for the estimated cost of redeeming the benefits at the time the benefits are earned by the customer. The Company accrues for the estimated cost of redeeming the benefits at the time the benefits are earned by the customer. These benefit expenses for the years ended December 31, 2011 and 2010 were $1,123,655 and $7,919,649, respectively
COST OF SALES
Cost of sales consists of the purchase price of consumer products and content sold by us, inbound and outbound shipping charges, and packaging supplies. Shipping charges to receive products from our suppliers are included in inventory cost, and recognized as "Cost of sales" upon the sale of products to our customers. Payment processing and related transaction costs, including those associated with seller transactions, are classified in "Selling Expenses" on our consolidated statements of operations.
SHIPPING ACTIVITIES
Outbound shipping charges to customers are included in "Net sales." Outbound shipping-related costs are included in "Cost of sales."
ACCOUNTS RECEIVABLE
Accounts receivable are carried at realizable value. The Company considers many factors in assessing the collectability of its receivables, such as the age of the amounts due and the customer's payment history and creditworthiness. An allowance for doubtful accounts is recorded in the period in which a loss is determined to be probable. Accounts receivable balances are written off after all collection efforts have been exhausted. Bad debt expense for accounts receivable for the years ended December 31, 2011 and 2010 was zero, and there was no allowance for doubtful accounts for accounts receivable at December 31, 2011 and 2010.
INVENTORIES
Inventories, consisting of food products available for sale, are accounted for using the weighted average method, and are valued at the lower of cost or market. This valuation requires the Company to make judgments, based on currently available information, about the likely method of disposition, such as through sales to individual customers, returns to product vendors or liquidations, and expected recoverable values of each disposition category.
SHARE-BASED COMPENSATION
The Company applies ASC 718, Compensation-Stock Compensation, to account for its service providers' share-based payments. Common stock of the Company was issued to various service providers in connection with the Reverse Merger, and in connection with ongoing services associated with being a public company, including investors' communications and public relations.
In accordance with ASC 718, the Company determines whether a share payment should be classified and accounted for as a liability award or equity award. All grants of share-based payments to the service providers classified as equity awards are recognized in the financial statements based on their grant date fair value which is calculated using an option pricing model. The Company has elected to recognize compensation expense using the straight-line method for all equity awards granted with graded vesting based on service conditions provided that the amount of compensation cost recognized at any date is at least equal to the portion of the grant-date value of the options that are vested at that date. To the extent the required vesting conditions are not met resulting in the forfeiture of the share-based awards, previously recognized compensation expense relating to those awards are reversed. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent period if actual forfeitures differ from initial estimates. Share-based compensation expense was recorded net of estimated forfeitures such that expense was recorded only for those share-based awards that are expected to vest. Share-based compensation expenses amounted to $399,800 and $33,267 for the years ended December 31, 2011 and 2010, respectively.
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 2011 AND DECEMBER 31, 2010
The following table presents certain consolidated statement of operations information. Financial information is presented for the 12-month period ended as of December 31, 2011 and December 31, 2010.
(A) REVENUES
E-commerce Business
Net revenues derived from our e-commerce business were $2,155,027 and $11,668,827 for the years ended December 31, 2011 and 2010, respectively, a decrease of $9,513,800 or 81.53%. The Company began its principal operations during 2010 with the launch of the e-commerce website. The decrease is the result of our failure to continue to attract more members and grow our membership base, as well as our failure to achieve repeat purchases from our existing customers. Such decrease is caused by competition from our competitors, change of our key personnel in our internet sales team, and less attractive promotions. The Company is focused on developing a broader sales network in order to attract more customers.
Distribution Business
Net revenues derived from our distribution business were $5,628,692 and $384,053 for the years ended December 31, 2011 and 2010, respectively. The increase is due to our acquisition of Beitun Trading, a meat distribution business on November 29, 2010.
Cost of sales associated with distribution was $5,564,088 and $378,569 for the years ended December 31, 2011 and 2010, respectively, an increase of $5,185,519 or 1,369.77%. Cost of sales consists of the purchase price of consumer products and content sold by us, inbound and outbound shipping charges, and packing supplies. The increase is due to our acquisition of Beitun Trading on November 29, 2010.
(B) TOTAL OPERATING EXPENSES
Total operating expenses consist of selling expenses, general and general and administrative expenses. Total operating expenses were $4,433,532 and $10,177,932 for the years ended December 31, 2011 and 2010, respectively, a decrease of $5,744,401, or 56.44%. The decrease is due to a significant decrease of selling expenses.
Selling Expenses
Total selling expenses were $1,894,933 and $8,861,285 for the years ended December 31, 2011 and 2010, respectively, a decrease of $6,966,353, or 78.62%. The decrease was primarily due to decreased commissions caused by decreased sales generated from the e-commerce business and cancellation of the promotional program. Selling expenses for the e-commerce business were $1,845,979 and $8,861,028 for the years ended December 31, 2011 and 2010, respectively. However, selling expenses for the distribution business increased from $257 for the year ended December 31, 2010 to $48,954 for the same period of 2011. This increase was mainly due to the fact that the Company acquired Beitun Trading, a meat distribution business on November 29, 2010.
Total general and administrative expenses were $2,538,599 and $1,316,647 for the years ended December 31, 2011 and 2010, respectively, an increase of $1,221,952, or 92.81%. The increase was primarily due to increased professional expenses including legal and accounting expenses as a result of being a public company since February 2011. General and administrative expenses for the e-commerce business amounted to $2,530,872 and $1,311,593 for the years ended December 31, 2011 and 2010, respectively. General and administrative expenses for the distribution business amounted to $7,727 and $5,054 for the years ended December 31, 2011 and 2010, respectively. Stock compensation expenses amounted to $399,800 and $33,267 for the years ended December 31, 2011 and 2010, respectively. The increase is due to the fact that the Company issued more shares of stock as compensation to its service provider during 2011 and the market value for such shares was higher in 2011 compared to 2010.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents were $619,812 as of December 31, 2011, compared to $3,015,219 as of December 31, 2010, a decrease of $2,395,407 or 79%. The decrease was mainly due to decreased sales from our e-commerce business. Our restricted cash was $827,000 as of December 31, 2011, compared to zero for the same period of 2010. The increase in our restricted cash is due to an escrow deposit of $827,000 from an unrelated party in December 2011. The deposit is interest free and was returned per the instruction of the unrelated party in January 2012. We had net working capital of $166,442 at December 31, 2011, compared to $1,919,816 at December 31, 2010, a decrease of $1,753,374. The decrease was mainly due to a decrease in cash and cash equivalent and an increase in accounts payable during 2011.
Cash flow information is as follows:
Cash used in operating activities was $2,748,043 for the year ended December 31, 2011, compared to cash provided by operating activities of $1,486,934 for the same period of 2010. Cash used in operating activities increased significantly during the period primarily due to the increased loss from operations, more payments made for tax payable and accrued liabilities, and additional expenditures for the acquisition of inventory for its distribution business acquired on November 29, 2010, offset by an increased other payable and stock compensation expenses, compared to the same period of 2010.
Cash used in investing activities was $107,843 for the year ended December 31, 2011, compared to $38,624 for the same period of 2010. The increase was due to the facts that we invested more in leasehold improvements and office equipment during the year ended December 31, 2011 compared to the same period of 2010.
Cash provided by financing activities was $343,936 for the year ended December 31, 2011, compared to $1,184,984 provided by financing activities for the same period of 2010. The Company raised $1.5 million in fiscal 2010 through the sale of shares of its common stock. No financing transactions occurred during 2011.
CAPITAL RESOURCES
At December 31, 2011, cash and cash equivalents totaled $619,812. Although cash flows from operations during 2011 were negative, we were able to finance our operations with cash balances carried over from December 31, 2010. During 2011, the Company relied on loans of $223,952 from Jack Gao, our director and officer and $250,667 from a stockholder and director and officer of Beitun Wei Guo.
However, we may require additional cash due to changes in business conditions or other future developments, including any investments we may decide to pursue. To the extent it becomes necessary to raise additional cash in the future, we may seek to raise it through the sale of debt or equity securities, funding from joint-ventures or strategic partners, debt financing or loans, issuance of common stock, or a combination of the foregoing. We cannot provide any assurances that we would be able to secure the additional cash or working capital we may require to continue our operations.
(A) LEASE COMMITMENTS
On August 1, 2010 our Company entered into a sub-lease agreement with a third party for its Pasadena office facility. This sub-lease expires on November 30, 2012. Our full service gross monthly rental rate is $2,567. Rent expense for this facility (including related common area maintenance charges) totaled $30,804 for the year ended December 31, 2011.
In China, on June 7, 2010 Arki (Beijing) E-commerce Technology Co., our wholly-owned subsidiary entered into a lease agreement for its facility located in the Beijing Chaoyang District. The lease expires on May 30, 2012. Our full service gross monthly rental rate is $3,400. Rent expense for this facility (including related common area maintenance charges) totaled $40,800 for the year ended December 31, 2011.
On October 21, 2010, Arki (Beijing) E-commerce Technology Co., our wholly-owned subsidiary entered into a new lease agreement for an office facility expansion in the Beijing Chaoyang District, Hua Mao Center. The straight-line monthly gross rental rate is $30,831 with a 36-month term. Rent expenses (including related common area maintenance charges) totaled $375,264 for the year ended December 31, 2011. This lease expires on October 20, 2013.
On March 1, 2011, we entered into a new lease agreement for another office facility expansion in the Beijing Chaoyang District, Hua Mao Center. The straight-line monthly gross rental rate is $6,259 with a 33-month term. Rent expenses (including related common area maintenance charges) totaled $62,590 for the year ended December 31, 2011. This lease expires on October 20, 2013.
Total future minimum rental lease commitments as of December 31, 2011 are as follows:
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
CONTRACTUAL OBLIGATIONS
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.
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.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The audited consolidated financial statements of Consumer Capital Group Inc. as of December 31, 2011 and 2010 are appended to this report beginning on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes of accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives. In evaluating the effectiveness of our internal control over financial reporting, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control - Integrated Framework.
Based upon our assessment and the COSO criteria, management concluded that our internal control over financial reporting was not effective as of December 31, 2011 due to a material weakness. 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 our annual or interim financial statements will not be prevented or detected on a timely basis.
More specifically, the material weakness related to a lack of sufficient personnel with appropriate knowledge, experience and training in U.S. GAAP resulting in a lack of sufficient analysis and documentation of the application of U.S. GAAP to transactions, including but not limited to accounting for modification of debt.
Due to our small size, limited financial resources, and the fact that we had only one officer and director, who had been the only individual involved in our accounting and financial reporting, there had been no segregation of duties within the accounting function. This lack of segregation of duties represented a material weakness.
In efforts to address this material weakness, we were planning to add additional personnel to the internal accounting operation once we had sufficient revenues to warrant the expense.
There were no significant changes in our internal controls over financial reporting that occurred for the year ended December 31, 2011, that have materially affected, or are reasonably like to materially affect, our internal controls over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Prior to the Merger, Scott D. Bengfort was the Company's sole officer and director. In connection with the Merger and promptly following the closing of the Merger, Jianmin Gao, Hui Chen, Lingling Zhang, Fei Gao, and Dong Yao were appointed as members of our board of directors, and Scott D. Bengfort resigned as the sole member of our board of directors. Hui Chen resigned from our board in August 2011.
OUR BOARD OF DIRECTORS
The following table sets forth certain information concerning our directors:
Name Age Position Director Since
Jianmin ("Jack") Gao Chairman of the Board, Chief Executive Officer, and Chief Financial Officer
Lingling Zhang Corporate Secretary, Director
Fei Gao Chief Operating Officer, Director
Dong Yao Director
BUSINESS EXPERIENCE DESCRIPTIONS
Set forth below is a summary of our executive officers' and directors' business experience for the past 5 years. The experience and background of each of the directors, as summarized below, were significant factors in their previously being nominated as directors of the Company.
JIANMIN ("JACK") GAO, 58, Chairman of the Board, Chief Executive Officer, and Chief Financial 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.
HUI ("PETER") CHEN, Vice President and Director. Concurrent to his position with the Company, Mr. Chen was also the Vice President and a director of CCG, and he was the Managing Director of Beijing Hanrong Capital Management Ltd. He has held positions with CCG since January 8, 2011, and he has held a position with Beijing Hanrong Capital Management since November 2008. From October 2005to September 2008, Mr. Chen was the Chief Executive Officer of Beijing You Ai Xun Tech Ltd., which was founded by him. Mr. Chen graduated from Jiangsu Changzhou Industrial Technology University with a B.A. in accounting and from Stockholm University in Sweden with a Masters degree in business. Hui Chen resigned in August, 2011.
LINGLING ZHANG, 51, Corporate Secretary and Director. Ms. Zhang is a co-founder of our holding company, CCG. In addition to her positions with the Company, Ms. Zhang has been serving as the Corporate Secretary and a Director of CCG since it was founded in 2009. From 2007 to 2009, she was the President and Secretary of America Pine Group Inc. (formerly known as America Pine Bio-tech Inc.). From 2005 to 2007, Ms. Zhang worked at Mei Ya Securities as an analyst. Ms. Zhang graduated from the Business Management University of Heibei Province with a degree in business administration.
FEI GAO, 31, Chief Operating Officer and Director. Mr. Gao is a co-founder and the Chief Operating Officer of our holding company, CCG. 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 Masters of Business Administration from Tsinghua University in 2007.
DONG YAO, 33, Director. Concurrent to his position with the Company, Mr. Yao is also the Chief Technology Officer of our holding company, CCG. From 2008 to 2010, Mr. Yao was the Network Director of Beichen Tianjin, a network technology company. From 2007 to 2008, he was the manager of the Technology Department at Beichen Tianjin. From 2005 to 2007, he was the Network Director at TianJian Technology Company.
OUR EXECUTIVE OFFICERS
Jianmin Gao currently serves as both our Chief Executive Officer and Chief Financial Officer.
FAMILY RELATIONSHIPS
Jianmin Gao is the husband of Lingling Zhang, Lingling Zhang is the wife of Jianmin Gao, Jianmin Gao is the father of Fei Gao, and Fei Gao is the son of Jianmin Gao.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
*None of our directors or executive officers has, during the past ten years: Had any petition under the federal bankruptcy laws or any state
*insolvency law filed by or against, or had a receiver, fiscal agent, or similar officer appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing;
*Been convicted in a criminal proceeding or a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);
*Been the subject of any order, judgment, or decree, not subsequently reversed, suspended, or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities:
(i)Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;
(ii)Engaging in any type of business practice; or
(iii)Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws;
*Been the subject of any order, judgment, or decree, not subsequently reversed, suspended, or vacated, of any federal or state authority barring, suspending, or otherwise limiting for more than 60 days the right of such person to engage in any activity described in (i) above, 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 SEC to have violated any federal or state securities law, where the judgment in such civil action or finding by the SEC has not been subsequently reversed, suspended, or vacated;
*Been found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any federal commodities law, where the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently 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, relating to an alleged violation of:
(i)Any federal or state securities or commodities law or regulation;
(ii)Any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or
(iii)Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
*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 Securities Exchange Act of 1934), 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.
BOARD COMMITTEES; DIRECTOR INDEPENDENCE
As of December 31, 2011, our board of directors has not established an audit committee, compensation committee, or nominating committee. The functions ordinarily handled by these committees were handled by our entire board of directors. Our board of directors intends to review our governance structure and institute board committees as necessary and advisable in the future to facilitate the management of our business.
None of the members of our board of directors is independent in accordance with the definitions and criteria applicable under NASDAQ rules.
CODE OF ETHICS
Our Board of Directors has not yet adopted a written Code of Business Conduct and Ethics.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between our board of directors and the board of directors or compensation committee of any other company, nor has any interlocking relationship existed in the past.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTVE OFFICER COMPENSATION
The following is a summary of the compensation we paid to the Chief Executive Officer for the fiscal years ended December 31, 2011 and 2010. This includes all compensation, including any compensation paid to the officer by any of our subsidiaries. No executive officer received compensation in excess of $100,000 in 2010 or 2011.
Summary Compensation Table
(1) The amounts shown in this column indicate the grant date fair value of stock awards granted in the subject year computed in accordance with FASB ASC Topic 718 (formerly FAS 123R).
(2) The amounts shown in this column indicate the grant date fair value of option awards granted in the subject year computed in accordance with FASB ASC Topic 718 (formerly FAS 123R).
DIRECTOR COMPENSATION
We do not have any agreements for compensating our directors for their service in their capacity as directors.
EMPLOYMENT AGREEMENTS
Arki Beijing has an employment agreement with Fei Gao for his service as Chief Executive Officer. The term of the agreement is from March 1, 2008 through March 1, 2013. Mr. Gao's base salary is 5,000RMB per month (approximately $760).
Arki Beijing has an employment agreement with Dong Yao for his service as Network Director. The term of the agreement is from March 1, 2008 through March 1, 2013. Mr. Gao's base salary is 5,000RMB per month (approximately $760).
OPTION PLAN
There were no stock options and no common shares set aside for any stock option plan as of December 31, 2011.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
There were no stock options exercised during the fiscal year ended December 31, 2011, by the executive officer named in the Executive Compensation Table.
LONG-TERM INCENTIVE PLAN (“LTIP”) AWARDS TABLE
There were no awards made to a named executive officer in the last completed fiscal year under any LTIP.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth information regarding beneficial ownership of our common stock as of March 26, 2012 (i) by each person who is known by us to beneficially own more than 5% of our common stock; (ii) by each of our officers and directors; and (iii) by all of our officers and directors as a group. Unless otherwise indicated, the stockholder listed possesses sole voting and investment power with respect to the shares shown, and the address of each listed stockholder is c/o Consumer Capital Group Inc.
(1)A beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person's actual ownership or voting power with respect to the number of shares of common stock actually outstanding on March 30, 2012. As of March 30, 2012, there were 19,068,889 shares of our common stock issued and outstanding.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
Except for the ownership of our securities, and except as set forth below, none of directors, executive officers, holders of more than five percent of our outstanding common stock, or any member of the immediate family of any such person have, to our knowledge, had a material interest, direct or indirect, in any transaction or proposed transaction which may materially affect our company.
RELATED PARTY TRANSACTIONS OF THE COMPANY
The Company had the following related party balances at December 31, 2011 and 2010:
Transaction with Scott D. Bengfort In Connection With the Merger
On February 4, 2011, the Company 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 the Company, the Company's wholly owned subsidiary CCG Acquisition Corp., a Delaware corporation ("CCG Delaware"), CCG California, and Scott D. Bengfort.
In connection with the Merger, the mining rights held by the Company were assigned to Mr. Bengfort, and in turn, Mr. Bengfort personally assumed all liabilities of the Company existing immediately prior to the closing, under the terms of an Assignment and Assumption Agreement between the 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 the Company owed to him immediately prior to the closing of the Merger, along with all other claims against the Company, 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 the CCG California shareholders to indemnify them for any breach of the Merger Agreement or unpaid or unresolved liabilities of the 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 as the Company's sole officer and director. Prior to the Merger on February 4, 2011, Scott D. Bengfort was our sole officer/director. We were operating out of the premises of Mr. Bengfort on a rent-free basis for administrative purposes. There was no written agreement or other material terms or arrangements relating to said arrangement. Since January 1, 2009, Scott D. Bengfort loaned the Company an aggregate $13,000 to maintain the positive cash flow needed to pay for the Company's operating expenses. There were no formal commitments or arrangements with Mr. Bengfort relating to these loans, and there are no terms regarding repayment of any loan or capital contribution. This loan was repaid as of the closing of the Merger.
Transactions with Jianmin Gao (Mr. Gao), Fei Gao, Wei Guo, and Lingling Zhang
a) Related parties:
Name of related parties
Relationship with the Company
Mr. Jack Gao
Stockholder, Chief Executive Officer, Chief Financial Officer and Chairman of the Board of the Company
Ms. Lingling Zhang
Stockholder, director and Corporate Secretary
Mr. Fei Gao
Stockholder, director and Chief Operating Officer
Ms. Wei Guo
Stockholder and Managing Director of Beitun
b) The Company had the following related party balances at December 31, 2011 and 2010:
Prior to the Merger, CCG loaned Mr. Gao $33,911 during the year ended December 31, 2010. This loan was paid off in 2011. This loan was non-interest bearing and had no maturity date.
In June 2008, CCG issued 280,000,000 shares of common stock to its founders. Jianmin Gao was issued 200,000,000 shares, Fei Gao was issued 50,000,000 shares, and Lingling Zhang was issued 30,000,000 shares. The consideration was an aggregate subscription receivable of $506,630, or $300,000 for Jianmin Gao, $85,500 for Fei Gao, and $121,130 for Lingling Zhang. Each of these founders paid the subscription receivable between December 2009 and September 2010.
The related party payables and receivables are non-interest bearing and have no specified maturity date. Mr. Jack Gao is the CEO of the Company. Ms. Wei Guo is the CEO of Beitun. The Company obtains these payables for funding operation purposes when the Company or one of the subsidiaries is short of cash resources. For the year ended December 31, 2011, the Company borrowed approximately $650,856 from Mr. Jack Gao and made payments of approximately $352,823 back to him. The written description of the oral loan agreement between Jianmin Gao and the Company is attached hereto as Exhibit 10.31 to this annual report.For the year ended December 31, 2011, the Company borrowed approximately $2,871,000 from Ms. Wei Guo and made payments of approximately $2,825,097 back to her. The written description of the oral loan agreement between Ms. Wei Guo and Beitun Trading is attached as Exhibit 10.29 to this annual report.
On July 1, 2011, the Company entered into an agreement with Capitalco Corporation (“Capitalco”), a company previously owned by Lingling Zhang, the wife of Mr. Gao. Pursuant to the agreement, the Company pays Capitalco a commission for each customer referred by Capitalco to the Company’s US online store. Ms. Lingling Zhang sold all her shares in Capitalco in August, 2011. Though the agreement between Capitalco and the Company remains effective after Ms. Lingling Zhang sold Capitalco, in reality, there was no more business between Capitalco and the Company since October 2011. For the year ended December 31, 2011, the Company paid Capitalco commissions in the aggregate amount of $162,404. The summary of the Co-operative agreement between Capital Corporation and Consumer Capital Group is attached as Exhibit 10.30 to this Report.
DIRECTOR INDEPENDENCE
For a description of director independence, see "Board Committees; Director Independence" under the Item 10 above.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Anton & Chia, LLP ("Anton & Chia") is the Company's independent public accounting firm. Seale and Beers, CPAs ("Seale and Beers") was the Company's independent registered public accounting firm until February 4, 2011. On February 4, 2011, the Company dismissed Seale and Beers and engaged Anton & Chia as its independent registered public accounting firm.
AUDIT FEES
The aggregate fees billed by Seale and Beers for professional services rendered for the review of financial statements included in our quarterly reports on Form 10-Q were $1,750 for the six months ended December 31, 2011 and $1,500 for the six months ended December 31, 2009. Anton & Chia was not engaged as the Company's independent registered public accounting firm until February 4, 2011, and therefore there were no fees billed by Anton & Chia during the year ended December 31 2010. The aggregate fees billed by Anton & Chia for professional services rendered for the audit and review of our consolidated financial statements and for the 8-K filed in February 2011 were $264,116 during the year ended December 31, 2011.
AUDIT-RELATED FEES
There were no fees billed by Seale and Beers or by Anton & Chia for assurance and related services that are reasonably related to the performance of the audit or review of the Company's financial statements during the two years ended December 31, 2011 and 2010.
TAX FEES
The were no fees billed by Seale and Beers or by Anton & Chia for professional services for tax compliance, tax advice, and tax planning during the two years ended December 31, 2011 and 2010.
ALL OTHER FEES
There were no fees billed by Seale and Beers or by Anton & Chia for other products and services for fiscal years ended December 31, 2011 and 2010.
AUDIT COMMITTEE'S PRE-APPROVAL PROCESS
The Board of Directors acts as the audit committee of the Company, and accordingly, all services are approved by all the members of the Board of Directors.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Exhibit
Number
Description
2.1
Agreement and Plan of Merger(1)
3.1
Certificfate of Incorporation(2)
3.2
Bylaws(2)
3.1
Certificate of Ownership(6)
10.1
Loan Agreement (1)
10.2
Power of Attorney (1)
10.3
Share Pledge Agreement (1)
10.4
Exclusive Option Agreement (1)
10.5
Loan Agreement (1)
10.6
Power of Attorney (1)
10.7
Share Pledge Agreement (1)
10.8
Exclusive Option Agreement (1)
10.9
Exclusive Business Cooperation Agreement (1)
10.10
Standard Sublease Multi-Tenant Agreement (1)
10.11
Lease Contract between Beijing Guohua Real Estate Co. Ltd. And Arki (Beijing) E-Commerce Technology Co. Ltd. (1)
10.12
Supply Agreement, dated October 9, 2008, by and between Tianjin Daxing Import & Export Trade Co., Ltd. and Joway Shengshi(2)
10.13
Loan Agreement (1)
10.14
Agreement of Fuxin Bank & Amercia Arki Network Management Fuxin Co., Ltd. (1)
10.15
Assignment and Assumption Agreement (1)
10.16
Release Agreement (1)
10.17
Indemnification Agreement (1)
10.18
Employment Contract (Fixed Term) (1)
10.19
Employment Contract (Fixed Term) (1)
10.20
Loan Agreement (1)
10.21
Power of Attorney (1)
10.22
Share Pledge Agreement (1)
10.23
Exclusive Option Agreement (1)
10.24
Loan Agreement (1)
10.25
Power of Attorney (1)
10.26
Share Pledge Agreement (1)
10.27
Exclusive Option Agreement (1)
10.28
Exclusive Business Cooperation Agreement (1)
10.29
Written Description of Oral Loan Agreement between Ms. Wei Guo and Beitun Trading Co. Ltd.
10.30
Summary of Co-operative Agreement between Capitalco Corporation and Consumer Capital Group
16.1
Letter from Accountants(1)
16.1
Letter from Seale and Beers(4)
16.1
Letter from Former Accountant(5)
16.1
Letter from Accountants(7)
21.1
List of Subsidiaries
99.1
America Pine Bio-Tech, Inc. and Subsidiaries Consolidated Financial Statements December 31, 2009 and 2008(1)
99.2
Consumer Capital Group, Inc. and Subsidiaries Consolidated Financial Statements September 30, 2010(1)
99.1
Audited Financial Statements of Consumer Capital Group, Inc. as of December 21, 2010 and 2009(3)
23.1
Consent of Seale and Beers, CPA's dated March 31, 2011 (2)
31.1
Rule 13a-14a/15d-14(a) Certification by the Chief Executive Officer
31.2
Rule 13a-14a/15d-14(a) Certification by the Chief Financial Officer
32.1
Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(1) Incorporated by reference to the exhibits to our current report on Form 8-K filed with the SEC on February 10, 2011
(2) Incorporated by reference to the exhibits to the Company's registration statement on S-1 Filed on July 15, 2008.
(2) Incorporated by reference to the exhibits to our transition report on Form 10-K filed with the SEC on March 31, 2011.
(3) Incorporated by reference to the exhibit to our current report on Form 8-K/A filed with the SEC on March 31, 2011.
(4) Incorporated by reference to the exhibits to our current report on Form 8-K/A filed with the SEC on April 4, 2011.
(5) Incorporated by reference to the exhibits to our current report on Form 8-K/A filed with the SEC on February 16, 2011.
(6) Incorporated by reference to the exhibits to our current report on Form 8-K filed with the SEC on February 25, 2011.
(7) Incorporated by reference to the exhibits to our current report on Form 8-K/A filed with the SEC on March 25, 2011.
SIGNATURES
Pursuant to the requirements of Section 13(a) 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.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Title
Date
/s/ Jianmin Gao
Chairman of the Board,
March 30, 2012
Jianmin Gao
Chief Executive Officer,
And Chief Financial Officer
/s/ Lingling Zhang
Corporate Secretary and
March 30, 2012
Lingling Zhang
Director
/s/ Fei Gao
Chief Operating Officer
March 30, 2012
Fei Gao
and Director
/s/ Dong Yao
Director
March 30, 2012
Dong Yao
CONSUMER CAPITAL GROUP INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders’ of
Consumer Capital Group, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Consumer Capital Group, Inc. and Subsidiaries (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Consumer Capital Group, Inc. and Subsidiaries as of December 31, 2011 and 2010, and the results of their consolidated operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has a loss from operations of $2,106,457 for the year ended December 31, 2011 and an accumulated deficit of $2,081,716 at December 31, 2011. As discussed in Note 2 to the financial statements, the Company has negative cash flows from operations due to significantly lower sales demand of its online products and high operating costs. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters, which are further described in Note 2, are to borrow funds from its directors and officers. There are no guarantees this source of funds will be available to the Company. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 1, the consolidated financial statements were prepared in accordance with Financial Accounting Standards Board Accounting Standard Codification (ASC) Topic 810 and related subtopics related to the consolidation of variable interest entities.
/s/ Anton & Chia, LLP
Newport Beach, California
March 30, 2011
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(1) The December 31, 2010 capital accounts of the Company have been retroactively restated to reflect the equivalent number of common shares based on the exchange ratio of the merger transaction. See Note 2.
The accompanying notes are an integral part of these consolidated financial statements
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(2) The capital accounts of the Company have been retroactively restated to reflect the equivalent number of common shares based on the exchange ratio of the merger transaction in determining the basic and diluted weighted average shares. See Note 2.
The accompanying notes are an integral part of these consolidated financial statements
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these consolidated financial statements
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
Consolidated Statements of Cash Flows
The accompanying notes are an integral part of these consolidated financial statements
CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
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 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. The Company is principally engaged in the development and operation of its nationwide online retailing platform "Chinese Consumer Market Network" at www.ccmus.com, which provides a variety of manufacturers and distributors a platform to promote and sell products and services directly to consumers. The Company's principal operations and geographic markets are in the People's Republic of China ("PRC").
Post 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 17,777,777 shares of its common stock in exchange for the issued and outstanding shares of common stock of Subsidiary. 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 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 the Company's common stock directly held by him, constituting 92.6% of his pre-Merger holdings of Company common stock.
Details of the Company's wholly owned subsidiaries and its Affiliated PRC Entity as of December 31, 2011 are as follows:
(2) Wholly foreign owned entities (WFOE)
(2)(2) Joint venture
(2)(2)(2) VIE
In order to comply with the PRC law 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% domestically owned entity. The equity interests of Arki Network Service are legally held directly by Mr. Jian Min 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 the economic benefits from Arki Network Service and are obligated to absorb all of Arki Network Services' expected losses. Therefore, the Company consolidates Arki Network Service in accordance with SEC Regulation SX-3A-02 and Accounting Standards Codification ("ASC") 810, Consolidation.
The following is a summary of the Contractual Agreements:
LOAN AGREEMENT
The shareholders of Arki Network Service, namely Mr. Jian Min 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. Jian Min 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.
EXCLUSIVE CALL OPTION AGREEMENT
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.
EXCLUSIVE BUSINESS COOPERATION 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 engages 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. 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.
SHARE PLEDGE AGREEMENT
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 as the pledgee, will be entitled to request immediate repayment of the loan or to dispose of the pledged equity interests through transfer or assignment.
POWER OF ATTORNEY
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.
DEBIT CARD PROGRAM
The Company cooperates with a Chinese bank named Fuxin bank to issue cobranded debit cards. Retail store vendors throughout China are signed up to the Company’s debit card program. The Company charges each participating vendor a percentage of transactions with that vendor. Each vendor will receive a percentage of future transactions of the cards issued by the vendor. Cardholders will receive certain amounts of cash refund from participating vendors and earn points to be spent on www.ccmus.com. As of December 31, 2011, the Company, through Fuxin bank has issued over 600,000 cards and there are about 5,300 participating vendors. For the year ended December 31, 2011, no revenue from this business model has been realized. In order to promote distribution of these cards, the Company has signed a dealer agreement with China Unionpay, which is a card management company similar to Visa and Master Card. China Unionpay has POS machines all over China. The Company believes that with the cooperation of China Unionpay and other potential dealers, the Company will be able to grow the debit card program.
BEITUN
We own a 51% majority interest in an operating subsidiary, Beijing Beitun Trading Co., Ltd. ("Beitun Trading") Beitun Trading, a PRC trade and distribution company, engages in the wholesale distribution of various food and meat products. It was established in April 24, 2000 and operates in the PRC. Its customers consist of retail restaurants and food producers located through the PRC.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GOING CONCERN
The Company incurred a net loss of approximately $2 million for the year ended December 31, 2011. The Company has a cash balance of $619,812 as of December 31, 2011. In 2011, the Company financed its operations through borrowings from directors and officers. Payables to related parties amounted to $474,607 as of December 31, 2011. There are no formal agreements between the Company and the directors and officers. If the Company cannot generate enough cash flow from its operating activities, it will need to consider other financing methods such as borrowings from banking institutions or raising additional capital through new equity issuances. There can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to us. The Company incurred substantial professional expenses as a result of becoming a public company in 2011. The Company plans to control its administrative expenses in the coming year as well as further develop its sales from its main business.
REVERSE MERGER ACCOUNTING
Since former CCG California security holders owned, after the Merger, approximately 94% of Consumer Capital Group Inc. shares of common stock, and as a result of certain other factors, including that all members of the Company's executive management are from Subsidiary, Subsidiary is deemed to be the acquiring company for accounting purposes and the Merger was accounted for as a reverse merger and a recapitalization in accordance with generally accepted accounting principles in the United States ("GAAP"). These consolidated financial statements reflect the historical results of Subsidiary prior to the merger and that of the combined Company following the merger, and do not include the historical financial results of Consumer Capital Group Inc. prior to the completion of the merger. Common stock and the corresponding capital amounts of the Company pre-merger have been retroactively restated as capital stock shares reflecting the exchange ratio in the merger.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries based in the PRC, which include America Pine (Beijing), Bio-Tech, Inc., Arki (Beijing), E-Commerce Technology Corp., Beijing Beitun Trading Co., Ltd. and America Arki (Fuxin) Network Management Co. Ltd. As a result of contractual arrangements with Arki Network Service, the Company consolidates Arki Network Service in accordance with SEC Regulation SX-3A-02 and Accounting Standards Codification ("ASC") 810, Consolidation (see Note1). All intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("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 reporting currency is the U.S. dollar. The functional currency of the Company is the local currency, 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 year-end 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. At December 31, 2011 and 2010, the cumulative translation adjustment of $80,901 and $78,775, respectively, was classified as an item of other comprehensive income in the stockholders' equity (deficit) section of the consolidated balance sheets. For the years ended December 31, 2011 and 2010, the foreign currency translation adjustment to accumulated other comprehensive income was $2,126 and $69,967, respectively.
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 which 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."
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 7 day grace period offered to customers for potential product disputes, if any. Deferred revenues totaled $113,403 and $125,455 as of December 31, 2011 and 2010, respectively. For the year ended December 31, 2010, we recognized $301,462 as contra revenue on a "net" basis in connection with promotional activities. The promotional activities were terminated and no promotional expenses were incurred in 2011.
DISTRIBUTION REVENUE RECOGNITION
Product sales and shipping revenues, net of return allowances, are recorded 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.
REWARD PROGRAMS
Reward Programs are limited to customers residing in China. Customers may earn reward points from the purchase of merchandise and services from the Company. Points are earned based on the amount and types of merchandise and services purchased. Customers residing in China may redeem the reward points for drawings into the Company's daily “Lucky Drawing” sweepstakes for chances to win cash prizes. In addition, customers may attain a tiered membership status based on the value of merchandise and services purchased over the past twelve months. Membership status entitles the holder to certain discounts on future purchases of selected items on the Company's website. The Company accrues for the estimated cost of redeeming the benefits at the time the benefits are earned by the customer. These benefit expenses for the years ended December 31, 2011 and 2010 were $1,123,655 and $7,919,649, respectively.
COST OF SALES
Cost of sales consists of the purchase price of consumer products and content sold by us, inbound and outbound shipping charges, and packaging supplies. Shipping charges to receive products from our suppliers are included in inventory cost, and recognized as "Cost of sales" upon sale of products to our customers. Payment processing and related transaction costs, including those associated with seller transactions, are classified in "Selling Expenses" on our consolidated statements of operations.
SHIPPING ACTIVITIES
Outbound shipping charges to customers are included in "Net sales." Outbound shipping-related costs are included in "Cost of sales."
NONCONTROLLING INTEREST
Noncontrolling interests in our subsidiary is recorded as a component of our equity, separate from the parent'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 noncontrolling 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) is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, ASC 220, Comprehensive income (loss) 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 years presented, the Company's comprehensive income (loss) includes net income (loss) and foreign currency translation adjustments and is presented in the consolidated statements of changes in operations.
INCOME TAXES
Provisions for federal, state, and non-U.S. income taxes are calculated on reported Earnings before income taxes based on current tax law and also include, in the current period, the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Such provisions differ from the amounts currently receivable or payable because certain items of income and expense are recognized in different time periods for financial reporting purposes than for income tax purposes. Significant judgment is required in determining income tax provisions and evaluating tax positions.
The accounting for uncertainty in income taxes requires a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. We record a liability for the difference between the benefit recognized and measured for financial statement purposes and the tax position taken or expected to be taken on our tax return. To the extent that our assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. Tax-related interest and penalties are classified as a component of Income tax expense.
We have implemented certain provisions of ASC 740, Income Taxes ("ASC 740"), which clarifies the accounting and disclosure for uncertain in tax positions, as defined. ASC 740 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. We adopted the provisions of ASC 740 as of January 1, 2007, and have analyzed filing positions in each of the Peoples Republic of China ("PRC") jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. We have identified the PRC as our "major" tax jurisdiction. Generally, we remain subject to PRC examination of our income tax returns annually. We believe that our 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. In addition, we did not record a cumulative effect adjustment related to the adoption of ASC 740. Our policy for recording interest and penalties associated with income-based tax audits is to record such items as a component of income taxes. Our 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 we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment. The 2011 and 2010 annual effective tax rates are estimated to be the 25% PRC statutory rate primarily based on the expected taxable net income of our operating subsidiaries, Arki Beijing and Arki Fuxin. Taxes payable as of December 31, 2011 and 2010 were $40,814 and $494,057, respectively.
NET INCOME (LOSS) PER SHARE
We calculate basic earnings (loss) per share ("EPS") by dividing our 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 (loss) 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. The Company had no dilutive securities as of December 31, 2011 and 2010.
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, 2011 and 2010, the Company had invested cash of zero and $153,846 in a highly liquid investment instrument with a PRC bank, respectively.
RESTRICTED CASH
At December 31, 2011 and 2010, the Company held cash in escrow on behalf of an unrelated third party of $827,000 and zero, respectively. The restricted represents a one- time deposit into the Company’s operating account. The full amount in escrow was returned to the third party in January 2012.
ACCOUNTS RECEIVABLE
Accounts receivable are carried at realizable value. The Company considers many factors in assessing the collectability of its receivables, such as, the age of the amounts due, the customer's payment history and creditworthiness. An allowance for doubtful accounts is recorded in the period in which a loss is determined to be probable. Accounts receivable balances are written off after all collection efforts have been exhausted. Bad debt expense for accounts receivable for the years ended December 31, 2011 and 2010 was zero and there was no allowance for doubtful accounts as of December 31, 2011 and 2010.
INVENTORIES
Inventories, consisting of food products available for sale, are accounted for using the weighted average method, and are valued at the lower of cost or market. The Company reviews its inventory periodically for possible obsolescence or to determine if any reserves are necessary. As of December 31, 2011 and 2010, the Company determined that no reserves were necessary.
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.
IMPAIRMENT OF LONG-LIVED ASSETS
We evaluate long-lived assets for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate their net book value may not be recoverable. When these events occur, we compare the projected undiscounted future cash flows associated with the related asset or group of assets over their 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 products will continue. Either of these could result in the future impairment of long-lived assets.
SEGMENT REPORTING
The Company follows ASC 280, SEGMENT REPORTING. The Company's chief operating decision maker, who has been identified as the executive chairman of the board of directors and the chief executive officer, reviews the individual results of the e-commerce and distribution businesses when making decisions about allocating resources and assessing the performance of the Company as a whole and hence, the Company has two reportable segments. The Company's operating businesses are organized and based on the nature of markets and customers. As the Company's long-lived assets are substantially all located in the PRC and substantially all the Company's revenues are derived from within the PRC, no geographical segments are presented.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents, accounts receivable, other assets, and other payables. These financial instruments are measured at their respective fair values. For fair value measurement, U.S. 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.
Common stock was issued in exchange for consulting services to be provided to the Company over the next two years for the purpose of advising management on public company matters. As a result, the Company recorded an asset to be amortized over the term of the consulting contract, that was measured at its fair value on the date of grant based on Level 2 inputs reflecting market based and our own assumptions consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment. The calculated fair values of the stock-based payment are amortized to expense over the term of the contract. The carrying value of cash and cash equivalents, accounts receivable, account payable and accrued liabilities approximates their fair value due to their short-term maturities.
SHARE-BASED COMPENSATION
The Company applies ASC 505-50, Equity-Based Payments to Non-Employees to account for its service providers' share-based payments. Common stock of the Company was given to service providers to retain their assistance in becoming a U.S. public company, assistance with public company regulations, investors' communications and public relations with broker-dealers, market makers and other investment professionals. The contract period with these service providers is two years and the cost of the equity based payments are recognized ratbly over the service period. The Company has elected to recognize compensation expense using the straight-line method for all equity awards granted with graded vesting based on service conditions Share-based compensation expenses amounted to $399,800 and $33,267 for the years ended December 31, 2011 and 2010, respectively.
CONCENTRATION OF CREDIT RISK
Assets that potentially subject the Company to significant concentration of credit risk primarily consist of cash and cash equivalents, restricted cash, and inventory. The maximum exposure of such assets to credit risk is their carrying amounts as of the balance sheet dates. As of December 31, 2011 and 2010, 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. As of December 31, 2011, cash held in escrow on behalf of unrelated party was deposited in the U.S. The cash and cash equivalents and cash held in escrow on behalf of unrelated party in U.S. financial institutions exceed the amounts insured by the U.S. government. 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. At December 31, 2011 and 2010, the Company’s bank balances with the Banks in U.S. exceeded the insured amount $587,183 and zero respectively. At December 31, 2011 and 2010, the Company’s bank balances with the Banks in PRC amounted $609,629 and $ 2,999,164, respectively, which are uninsured and subject to credit risk. The Company has not experienced nonperformance by these institutions.
CONCENTRATION OF CUSTOMERS AND SUPPLIERS
E-commerce Segment
There were no revenues from customers or purchases from suppliers that individually represent greater than 10% of the total revenues or purchases for the e-commerce business for the years ended December 31, 2011 and 2010, respectively. There were no customers or vendors that accounts for over 10% of accounts receivable or accounts payable as of December 31, 2011 and 2010, respectively.
Distribution Segment
Shanghai Hormel Ltd. and Shanghai Fuxin Ltd., each comprised of 56.9% or $3,202,726 and 32.7% or $1,840,582 of total revenues for Beitun for the year ended December 31, 2011, respectively. Shanghai Hormel Ltd. and Fucheng Inc., each comprised 73.61% or $158,077 and 26.4% or $56,667 of accounts receivable as of December 31, 2011, respectively.
Shanghai Hormel Ltd. comprised of 87.0% or $334,126of total revenues for Beitun for the period acquired by the Company till the end of December 31, 2010. Shanghai Hormel Ltd. comprised 89.7% or $275,321of accounts receivable as of December 31, 2010.
Shuanghui Group and Xileng Inc., each comprised of 44.3% or $3,066,713 and 42.2% or $2,926,899 of total purchases for the distribution business for the year ended December 31, 2011, respectively. Xileng Inc. and Changxinchang Food Inc., each comprised 53.1% or $666,582 and 29.7% or $372,309 of accounts payable as of December 31, 2011, respectively.
Shuanghui Group and Shunxinpengcheng Inc., each comprised of 24.3% or $837,888 and 75.7% of $2,611,295 of total purchases for the distribution business for the period acquired by the Company till the end of December 31, 2010. Xileng Inc. comprised 71.6% or $380,718 of accounts payable as of December 31, 2010.
CURRENCY CONVERTIBILITY RISK
The Company transacts all of its business in RMB, which is not freely convertible into foreign currencies. On January 1, 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted daily by the People's Bank of China (the "PBOC"). However, the unification of the exchange rates does not imply that the RMB may be readily convertible into United States dollars or other foreign currencies. All foreign exchange transactions continue to take place either through the PBOC or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the PBOC.
Approval of foreign currency payments by the PBOC or other institutions requires submitting a payment application form together with suppliers' invoices, shipping documents and signed contracts.
Additionally, the value of the RMB is subject to changes in central government policies and international economic and political developments affecting supply and demand in the PRC foreign exchange trading system market.
FOREIGN CURRENCY EXCHANGE RATE RISK
From July 21, 2005, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. The depreciation of the U.S. dollar against RMB was approximately 4.75% and 3.41% for the years ended December 31, 2011 and 2010, respectively. While the international reaction to the RMB appreciation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the RMB against the U.S. dollar.
BUSINESS RISK
Foreign ownership of Internet-based businesses is subject to significant restrictions under current PRC laws and regulations. Foreign investors are not allowed to own more than a 50% equity interest in any entity with an Internet content distribution business. Currently, the Company conducts its operations in China through a series of contractual arrangements entered into among Arki (Beijing) E-Commerce Technology Corp., America Arki (Fuxin) Network Management Co. Ltd. and America Arki Network Service Beijing Co., Ltd. The relevant regulatory authorities may find the current ownership structure, contractual arrangements and businesses to be in violation of any existing or future PRC laws or regulations. If so, the relevant regulatory authorities would have broad discretion in dealing with such violations.
LITIGATION
From time to time, we may become involved in disputes, litigation and other legal actions. We estimate the range of liability related to any pending litigation where the amount and range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, we record a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated.
NOTE 3 - RECENTLY ISSUED AND ADOPTED ACCOUNTING PRONOUCEMENTS
In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”). In accordance with ASU 2011-05, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. ASU 2011-05 does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. We do not expect a material impact on our consolidated financial statements.
In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS” (“ASU 2011-04”). The amendments in ASU 2011-04 result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendments in ASU 2011-04 to result in a change in the application of the requirements in Topic 820. ASU 2011-04 is effective prospectively for interim and annual reporting periods beginning after December 15, 2011. This ASU will become effective for the company beginning in the quarter ended January 31, 2012 and we do not expect a material impact on our consolidated financial statements.
In September 2011, the FASB issued guidance on testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines that the fair value of a reporting unit is less than its carrying amount, the two-step goodwill impairment test is not required. The new guidance will be effective for us beginning July 1, 2012. We do not expect a material impact on our consolidated financial statements.
NOTE 4 - ACQUISITION
On November 29, 2010, CCG completed its acquisition of 51% of the then outstanding common stock of Beitun Trading Co. Ltd. ("Beitun"), which represented the majority voting and controlling interest of Beitun, in exchange for 45,532 common shares of the Company. This joint venture is expected to diversify the earnings of the Company by entering into the wholesale food distribution market. Beitun will be its own segment for reporting purposes. Beitun’s results of operations were included in CCG’s results beginning December 1, 2010.
The following table summarizes the consideration paid for Beitun Trading Co. Ltd. and the fair value amounts of assets acquired and liabilities assumed recognized at the acquisition date:
The following unaudited pro forma condensed combined statements of operations are presented to illustrate the estimated effects of the merger of Beitun by CCG (the "Transaction") on the historical results of operations of CCG. The unaudited pro forma condensed statements of operations for the year ended December 31, 2010 is based on the audited statements of operations of CCG and Beitun for the years ended December 31, 2010. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2010 assumes that the Transaction was consummated on January 1, 2009. The information presented in the unaudited pro forma condensed combined statements of operations does not purport to represent what the financial position or results of operations of CCG would have been had the Transaction occurred as of the dates indicated, nor is it indicative of the future results of operations for any period of CCG. The pro forma adjustments are based upon available information and certain assumptions that the management of CCG believes are reasonable under the circumstances. These unaudited pro forma condensed combined statements of operations should be read in conjunction with the accompanying notes and assumptions and the historical financial statements and related notes of CCG and Beitun.
The 2010 supplemental pro forma earnings were adjusted to include $31,777 of nonrecurring expense related to the fair value adjustments to the acquisition-date fixed and other assets.
NOTE 5 - INVENTORIES
Inventories consisted of the following at December 31, 2011 and 2010:
NOTE 6 - PREPAID EXPENSES
Prepaid expenses consisted of the following at December 31, 2011 and 2010:
NOTE 7 - PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following at December 31, 2011 and 2010:
For the years ended December 31, 2011 and 2010, depreciation expense was $57,892 and $6,914, respectively.
NOTE 8 - OTHER ASSETS
Other assets consisted of the following at December 31, 2011 and 2010:
Common stock issued for prepaid consulting services amounted to $486,533 and $166,333 as of December 31, 2011 and 2010, respectively. In 2010, it includes prepaid consulting services to two consultants. In 2011, it includes $420,000 prepaid consulting services to the Company’s public relationship service provider and $66,533 prepaid consulting fee to two consultants. Amortization for the years ended December 31, 2011 and 2010 was $99,800 and $33,267, respectively.
NOTE 9 - ACCRUED LIABILITIES
Accrued liabilities consisted of the following at December 31, 2011 and 2010:
NOTE 10 - OTHER PAYABLES
Other payables amounted $1,030,224 and $19,199 at December 31, 2011 and 2010, respectively. As of December 31, 2011, other payables include an escrow deposit of $827,000 from an unrelated party in December 2011. The deposit is interest free and was returned per the instruction of the unrelated party in January 2012. Other payables also include other payables to unrelated parties and are interest free.
NOTE 11 - STOCKHOLDERS' EQUITY
The Company's stockholder base consists of approximately 6,580 stockholders as of December 31, 2011.
COMMON STOCK ISSUED TO MEMBER CUSTOMERS
During 2010, Company management issued stock to customer members, which represented sales inducement incentives to make purchases through the Company's website. Certain service providers were also granted stock for the value of their services provided to the Company. Common stock issued to service providers and member customers throughout 2010 were measured at the date of grant, and based on Level 2 fair value measurements which uses observable inputs reflecting our own and market based assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment. The calculated fair values of the share-based sales inducement offers are deducted from revenues when granted. Share-based awards to service providers are expensed when services are incurred. The Company estimates the fair value of these share issuances using Level 2 inputs and determined that the value of each share is $0.01. For the year ended December 31, 2011, there were no incentives offered to member customers.
COMMON STOCK
Immediately prior to the closing of the Merger on February 4, 2011, 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 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 the Company's common stock directly held by him, constituting 92.6% of his pre-Merger holdings of Company common stock.
In August, September and December 2010, the Company issued 2,628,419 shares retroactively restated to reflect the recapitalization of common stock to related parties of the Company's founders and officer of the Company for no par value. As a result, the Company recorded a discount on common stock issued to the officer and relatives of the Company's founders of $26,284 due to issuance of the common stock below $0.01 par value.
In September 2010, the Company issued 910,644 shares retroactively restated to reflect the recapitalization of common stock as consideration for consulting services with a term of 24 months.
In December 2010, the Company issued 45,532 shares retroactively restated to reflect the recapitalization of common stock to the owners of Beitun as consideration for the Company's 51% ownership interest of Beitun. The fair value of the shares issued for the acquisition was $10,000.
NOTE 12 - SHARE BASED COMPENSATION
Stock-based compensation cost is measured at the date of grant, based on the calculated fair value of the stock-based award, and is recognized as expense over the service providers' requisite service period (generally the vesting period of the award). The Company estimates the fair value of stock for service granted using the Black-Scholes Option Pricing Model since the requisite service period and expected term of the contractual obligations with third parties is two years. Key assumptions used to estimate the fair value of stock options include the exercise price of the award, the fair value of the Company's common stock on the date of grant, the expected option term, the risk free interest rate at the date of grant, the expected volatility and the expected annual dividend yield on the Company's common stock.
The following weighted average assumptions were used in estimating the fair value of the share-based payment arrangements to the above mentioned service providers:
Since there is insufficient stock price history that is at least equal to the expected or contractual terms of the Company's share-based payments, the Company has calculated volatility using the historical volatility of similar public entities in the Company's industry. In making this determination and identifying a similar public company, the Company considered the industry, stage, life cycle, size and financial leverage of such other entities. This resulted in an expected volatility of 40% to 75%. The expected life of two years is based on the contractual requisite service period. The risk free interest rate is the rate on the U.S. Treasury securities 2-year constant maturity with a remaining term equal to the expected option term. The expected volatility is derived from an industry-based index, in accordance with the calculated value method.
The Company is required to estimate the number of forfeitures expected to occur and record expense based upon the number of awards expected to vest. The Company expects all remaining awards issued will be fully vested over the expected life of the awards. There were no forfeitures during the year ended December 31, 2011.
A summary of share-based compensation activity for the year ended December 31, 2011 is as follows:
For the years ended December 31, 2011 and 2010, $99,800 and $33,267, respectively was amortized to general and administrative expense to recognize the incurred cost of the above mentioned service providers.
On December 28, 2011, the Company issued 180,000 shares of common stock to one service provider. The service period is from April 11, 2011 to October 10, 2012. The shares were recorded at their market value of $720,000 and are being amortized over the service period. For the year ended December 31, 2011, $300,000 was amortized to general and administrative expense. The remaining $420,000 balance is reflected in prepaid expenses as of December 31, 2011.
The future amortization expense as of December 31, 2011 is as follows:
NOTE 13 - RELATED PARTIES
a) Related parties:
Name of related parties
Relationship with the Company
Mr. Jack Gao
Stockholder, Chief Executive Officer, Chief Financial Officer and Chairman of the Board of the Company
Ms. Lingling Zhang
Stockholder, director and Corporate Secretary
Mr. Fei Gao
Stockholder, director and Chief Operating Officer
Ms. Wei Guo
Stockholder and Managing Director of Beitun
b) The Company had the following related party balances at December 31, 2011 and 2010:
The related party payable and receivable are non-interest bearing and have no specified maturity date. Mr. Jack Gao is the CEO of the Company. Ms. Wei Guo is the CEO of Beitun. The Company obtains these loans to fund operations when the Company or one of the subsidiaries are in need of cash. For the year ended December 31, 2011, the Company borrowed approximately $650,856 from Mr. Jack Gao and made payments of approximately $352,823 back to him. The written description of the oral loan agreement between Jianmin Gao and the Company is attached hereto as Exhibit 10.31 to this Report. For the year ended December 31, 2011, the Company borrowed approximately $2,871,000 from Ms. Wei Guo and made payments of approximately $2,825,097 back to her. The written description of the oral loan agreement between Ms. Wei Guo and Beitun Trading is attached hereto as Exhibit 10.29 to this Report.
c) Starting from July 1, 2011, the Company entered into an agreement with Ms. Lingling Zhang’s company Capitalco Cooperation (“Capitalco”). Pursuant to the agreement, the Company has agreed that the Company will pay a certain percentage commission to Capitalco for each client referred. Ms. Zhang signed an agreement to sell her company to an unrelated party. Ms. Lingling Zhang, a related party, owned Capitalco Cooperation and sold all her shares in Capitalco in August, 2011. Though the agreement between Capitalco and the Company remains effective after Ms. Lingling Zhang sold Capitalco, in reality, there was no more business between Capitalco and the Company since October 2011. For the year ended December 31, 2011, the Company paid Capitalco commissions in the aggregate amount of $162,404. The summary of the Co-operative agreement between Capital Corporation and Consumer Capital Group is attached hereto as Exhibit 10.30 to this Report.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
On August 1, 2010 our Company entered into a sub-lease agreement with a third party for its Pasadena office facility. This sub-lease expires on November 30, 2012. Our full service gross monthly rental rate is $2,567. Rent expense for this facility (including related common area maintenance charges) totaled $30,804 for the year ended December 31, 2011.
In China, on June 7, 2010 Arki (Beijing) E-commerce Technology Co., our wholly-owned subsidiary entered into a lease agreement for its facility located in the Beijing Chaoyang District. The lease expires on May 30, 2012. Our full service gross monthly rental rate is $3,400. Rent expense for this facility (including related common area maintenance charges) totaled $40,800 for the year ended December 31, 2011.
On October 21, 2010, Arki (Beijing) E-commerce Technology Co., our wholly-owned subsidiary entered into a new lease agreement for an office facility expansion in the Beijing Chaoyang District, Hua Mao Center. The straight-line monthly gross rental rate is $30,831 with a 36-month term. Rent expenses (including related common area maintenance charges) totaled $375,264 for the year ended December 31, 2011. This lease expires on October 20, 2013.
On March 1, 2011, we entered into a new lease agreement for another office facility expansion in the Beijing Chaoyang District, Hua Mao Center. The straight-line monthly gross rental rate is $6,259 with a 33-month term. Rent expenses (including related common area maintenance charges) totaled $62,590 for the year ended December 31, 2011. This lease expires on Octorber 20, 2013.
Total future minimum rental lease commitments as of December 31, 2011 are as follows:
NOTE 15 - BUSINESS SEGMENT REPORTING
Our operating businesses are organized based on the nature of markets and customers. Segment accounting policies are the same as described in Note 2 - Summary of Significant Accounting Policies.
Effects of transactions between related companies are eliminated and consist primarily of inter-company transactions and transfers of cash or cash equivalents from corporate to support each business segment's payroll, inventory sourcing and overall operations when each segment has working capital requirements.
A description of our operating segments as of December 31, 2011 and 2010, can be found below.
E-COMMERCE PLATFORM (ARKI BEIJING, AMERICA PINE BEIJING, ARKI FUXIN, ARKI NETWORK SERVICE)
The website provides an online marketing and retail platform for a wide variety of manufacturers and distributors to promote and sell their products and services directly to consumers in the PRC. The website also provides access to certain Western products that are generally unavailable in the PRC such as handbags and eyewear made by U.S. companies and food and beverage products from Spain, Germany, and France.
FOOD PRODUCT DISTRIBUTION (BEITUN)
Beitun is principally engaged in the wholesale distribution and import/export of various food and meat products to businesses located throughout the PRC. All products are sold in the PRC and are considered finished goods.
For the year ended December 31, 2011, the Company did not invest in Beitun.
NOTE 16 - INCOME TAX EXPENSE
Prior to January 1, 2008, PRC enterprise income tax (EIT), was generally assessed at the rate of 33% of taxable income. In March 2007, a new enterprise income tax law (the "New EIT Law") in the PRC was enacted which was effective on January 1, 2008. The New EIT Law generally applies a uniform 25% EIT rate to both foreign invested enterprises and domestic enterprises.
Dividends paid by PRC subsidiaries of the Company out of the profits earned after December 31, 2007 to non-PRC tax resident investors would be subject to PRC withholding tax. The withholding tax is 10%, unless a foreign investor's tax jurisdiction has a tax treaty with China that provides for a lower withholding tax rate.
Income (loss) before income taxes consists of:
There was no deferred tax expense for the years ended December 31, 2011 and 2010. The income tax expenses amounted $2,054 and $678,827 for the years ended December 31, 2011 and 2010, respectively. The PRC income tax returns for fiscal year 2006 through fiscal year 2011 remain open for examination.
There was no deferred tax expense for the years ended December 31, 2011 and 2010. The income tax expenses amounted $2,054 and $678,827 for the years ended December 31, 2011 and 2010, respectively. The PRC income tax returns for fiscal year 2006 through fiscal year 2011 remain open for examination.
The components of deferred taxes are as follows:
As of December 31, 2011, the Company had an accumulated deficit of $2,081,716 that can be carried forward to offset future net profit for income tax purposes. The net operating loss carry forwards as of December 31, 2011 will expire in years 2011 to 2015 if not utilized.
CCG and CCG California are both subject to United States of America tax law. As of December 31, 2011, the operations in the United States of America incurred $1,376,819 of cumulative net operating losses which can be carried forward to offset future taxable income. The Company has provided for a full valuation allowance of $454,350 against the deferred tax assets on the expected future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.
There is no need for the Company to accrue interest or penalty associated with the uncertain tax positions, and, accordingly, no such accruals have been made in the Company's account.
The PRC tax law provides a (3-5 years) statute of limitation and the Company's income tax returns are subject to examination by tax authorities during that period. All penalties and interest are expensed as incurred. For years ended December 31, 2011 and 2010, there were no penalties and interest.
NOTE 17 - EARNINGS PER SHARE
Basic and diluted earnings (loss) per share for each of the years presented are calculated as follows:
For the years ended December 31, 2011 and 2010, there were no common stock equivalents for computing diluted earnings per share.
NOTE 18 - SUBSEQUENT EVENTS
In January 2012, the restricted cash held in escrow of $827,000 on behalf of an unrelated third party was returned to the same party.