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EX-32.1 - EXHIBIT 32.1 - Consumer Capital Group, Inc.v312876_ex32-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

 

(Mark One)

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

 

For the quarterly period ended March 31, 2012

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

For the transition period from              to           

 

Commission File No. 333-152330

 

Consumer Capital Group Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   26-2517432

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

35 North Lake Avenue, Suite 280, Pasadena, CA
91101
  (626) 568-3368
(Address of Principal Executive Offices)   (Issuer’s Telephone Number)

 

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

 

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

 

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

 

Large accelerated filer ¨ Accelerated filer ¨
       
Non-accelerated filer ¨ Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   £   No   x

 

The number of shares outstanding of the Issuer’s Common Stock as of May 9, 2012 was 18,888,889 shares.

 

 
 

 

CONSUMER CAPITAL GROUP INC.

 

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION 3
   
Item 1. Financial Statements (unaudited) 3
Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011 3
Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2012 and 2011 4
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 5
Notes to Condensed Consolidated Financial Statements 6
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
   
Item 4. Controls and Procedures 31
   
PART II — OTHER INFORMATION 32
   
Item 1. Legal Proceedings 32
   
Item 1A. Risk Factors 32
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
   
Item 3. Defaults Upon Senior Securities 32
   
Item 4. Mine Safety Disclosures 32
   
Item 5. Other Information 32
   
Item 6. Exhibits 32
   
SIGNATURES 33

 

2
 

 

PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

CONSUMER CAPITAL GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   March 31,   December 31, 
   2012   2011 
   (Unaudited)     
ASSETS          
           
Cash & cash equivalents  $880,266   $619,812 
Restricted cash   -    827,000 
Accounts receivable   601,013    214,744 
Inventories   902,718    1,167,447 
Prepaid expenses   210,235    336,144 
Other receivables   65,417    30,037 
Total current assets   2,659,649    3,195,184 
           
Property and equipment, net   84,580    100,978 
Other assets   435,384    580,395 
Total noncurrent assets   519,964    681,373 
           
Total assets  $3,179,613   $3,876,557 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
Accounts payable  $1,201,015   $1,344,866 
Accrued liabilities   23,996    24,827 
Deferred revenue   50,991    113,403 
Taxes payable   13,666    40,814 
Other payables   546,003    1,030,224 
Related party payables   797,254    474,607 
Total current liabilities   2,632,925    3,028,741 
           
Stockholders' equity          
Common stock, $0.0001 par value, 100,000,000 shares authorized 19,068,889 and 19,068,889 shares issued and outstanding as of March 31, 2012 and December 31, 2011, respectively   1,907    1,907 
Discount on common stock issued to founders   (130,741)   (130,741)
Additional paid-in capital   2,973,225    2,973,225 
Noncontrolling interest in subsidiary   4,418    4,240 
Accumulated other comprehensive income   73,194    80,901 
Accumulated deficit   (2,375,315)   (2,081,716)
Total stockholders' equity   546,688    847,816 
           
Total liabilities and stockholders' equity  $3,179,613   $3,876,557 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

3
 

 

CONSUMER CAPITAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

 

   For The Three Months Ended March
31,
 
   2012   2011 
         
Net revenues - ecommerce  $1,007,756   $606,791 
Net revenues - distribution   562,405    1,340,413 
Total revenue   1,570,161    1,947,204 
Cost of sales - distribution   545,558    1,326,158 
Gross profit   1,024,603    621,046 
           
Operating expenses:          
Selling expenses   856,823    503,400 
General & administrative expenses   497,353    872,472 
Total operating expenses   1,354,176    1,375,872 
           
Operating loss   (329,573)   (754,826)
           
Other income   36,298    80,958 
Other (expense)   -    (335,000)
Total other income (expense)   36,298    (254,042)
           
Loss before taxes   (293,275)   (1,008,868)
           
Provision for income taxes   131    56,544 
           
Net loss   (293,406)   (1,065,412)
Less: Net income attributable to noncontrolling interest   193    543 
Net loss attributable to Consumer Capital Group, Inc.  $(293,599)  $(1,065,955)
           
Loss per share - basic and diluted  $(0.02)  $(0.06)
           
Weighted average number of common shares outstanding - basic and diluted (1)   19,068,888    18,456,790 
Net loss   (293,406)   (1,065,412)
Other comprehensive loss, before tax          
Foreign currency translation adjustment   (7,707)   702 
Other comprehensive loss, net of tax  $(7,707)  $702 
           
Comprehensive loss, net of tax   (301,113)   (1,064,710)
Attribute to:           
Non-controlling interest   178    - 
Consumer Capital Group, Inc.  $(300,935)  $(1,064,710)

 

(1) 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 condensed consolidated financial statements

 

4
 

 

CONSUMER CAPITAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   For The Three Months Ended
March 31,
 
   2012   2011 
Operating Activities          
Net loss  $(293,406)  $(1,065,412)
Adjustments to reconcile net loss to cash flows from operating activities:          
Depreciation expense   16,309    3,504 
Common stock issued to service providers   144,951    24,973 
Change in operating assets and liabilities:          
Restricted cash   827,000    - 
Accounts receivable   (385,674)   (91,302)
Other assets   (5,091)   36,959 
Other receivables   (35,327)   63,549 
Inventories   263,495    (185,848)
Prepaid expenses   130,780    143,934 
Accounts payable   (142,737)   (214,519)
Accrued liabilities   (814)   (657,707)
Deferred revenue   (62,223)   (92,617)
Taxes payable   (27,071)   (405,408)
Other payables   (484,725)   75,679 
           
Cash flows used in operating activities   (54,533)   (2,364,215)
           
Investing Activities          
Acquisition of property and equipment   -    (6,117)
Cash flows used in investing activities   -    (6,117)
           
Financing Activities          
Proceeds from issuing common stock   -    (34,038)
Proceeds from related parties   363,020    474,408 
Payments to related parties   (40,844)      
Cash flows provided by financing activities   322,176    443,370 
           
Effect of exchange rate on cash and cash equivalents   (7,189)   702 
           
Change in cash and cash equivalent during period   260,454    (1,926,260)
           
Cash and cash equivalents at beginning of period   619,812    3,015,219 
           
Cash and cash equivalents at end of period  $880,266   $1,088,959 
           
Supplemental disclosure of cash flow information          
Income taxes paid  $131   $56,544 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

5
 

 

CONSUMER CAPITAL GROUP, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

 

(Unaudited)

 

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 condensed consolidated interim 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 March 31, 2012 are as follows:

 

6
 

 

 

 

            Percentage of    
    Date of   Place of   Ownership by   Principal
Company   Establishment   Establishment   the Company   Activities
                 
Consumer Capital Group Inc. ("CCG California")   October 14, 2009   California USA   100 % US holding company and headquarters of the consolidated entities. Commencing in July 2011, CCG performs the US e-commerce operations
                 
Arki Beijing E-commerce Technology Corp. ("Arki Beijing")   March 6, 2008   PRC   100 %(2) Maintains the various computer systems, software and data. Owns the intellectual property rights of  the "consumer market network". Performed principal e-commerce operations prior to December 2010
                 
America Pine Beijing Bio-Tech, Inc. ("America Pine Beijing")   March 21, 2007   PRC   100 %(2) Import and sales of healthcare products from the PRC. This operation ceased February 5, 2010. It currently assists in payment collection for the Company’s e-commerce business
                 
America Arki Fuxin Network Management Co. Ltd. ("Arki Fuxin")   November 26, 2010   PRC   100 %(2) Commencing in December 2010, performs the principal daily e-commerce operations, transactions and management of the "consumer market network"
                 
Beijing Beitun Trading Co. Ltd. ("Beitun")   November 29, 2010   PRC   51 %(2)(2) Wholesale distribution and import/export of domestic food and meat products. Separate business segment of the Company
                 
America Arki Network Service Beijing Co. Ltd. ("Arki Network contractual Service" and "Affiliated PRC Entity")   November 26, 2010   PRC   0 %(2)(2)(2) Entity under common control through relationships between Fei Gao and the Company. Holds the business license and permits necessary to conduct e-commerce operations in the PRC and maintains compliance with applicable PRC laws

 

(2) Wholly foreign owned entities (WFOE)

 

(2)(2) Joint venture

 

(2)(2)(2) VIE

 

7
 

 

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.

 

8
 

 

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 and are eliminated upon consolidation. Arki Fuxin shall exclusively own any intellectual property arising from the performance of this agreement. This agreement has a term of ten years from the effective date and can only be terminated mutually by the parties in a written agreement. During the term of the agreement, Arki Network Service may not enter into any agreement with third parties for the provision of identical or similar service without the prior consent of Arki Fuxin.

 

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. For the three months ended March 31, 2012 and 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 on April 24, 2000 and operates in the PRC. Its customers consist of retail restaurants and food producers located through the PRC.

 

9
 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

GOING CONCERN

 

The Company incurred a net comprehensive loss of approximately $301,000 for the three months ended March 31, 2012 and had an accumulated deficit of approximately $2.4 million as of March 31, 2012. The Company has a cash balance of $880,266 as of March 31, 2012. In both 2012 and 2011, the Company financed its operations through borrowings from directors and officers. Payables to related parties amounted to $797,254 as of March 31, 2012. 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 are no assurances 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 plans to control its administrative expenses in 2012 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 CCG California, CCG California 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 condensed consolidated financial statements reflect the historical results of CCG California 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.

 

BASIS OF PRESENTATION

 

The accompanying condensed consolidated interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. All references to Generally Accepted Accounting Principles (“GAAP”) are in accordance with The FASB Accounting Standards Codification (“ASC”) and the Hierarchy of Generally Accepted Accounting Principles.

 

The unaudited condensed interim financial statements have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited financial statements and notes for the year ended December 31, 2011 included in our Annual Report on Form 10-K. The results of the three month periods ended March 31, 2012 are not necessarily indicative of the results to be expected for the full year ending December 31, 2012.

 

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. All intercompany balances and transactions have been eliminated in consolidation.

 

10
 

 

USE OF ESTIMATES

 

The preparation of condensed consolidated interim 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. As of March 31, 2012 and December 31, 2011, the cumulative translation adjustment of $73,194 and $80,901, respectively, was classified as an item of other comprehensive income in the stockholders' equity (deficit) section of the consolidated balance sheets. For the three months ended March 31, 2012 and 2011, the foreign currency translation adjustment to accumulated other comprehensive income was $(7,706) and $702, 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.

 

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 $50,991 and $113,403 as of March 31, 2012 and December 31, 2011, respectively.

 

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.

 

11
 

 

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 three months ended March 31, 2012 and 2011 were $571,864 and $351,970, 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 statement of comprehensive income 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)

 

On January 1, 2012, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2011-05, an amendment to Accounting Standards Codification (ASC) 220, Comprehensive Income . ASU 2011-05 introduces a new statement, the Consolidated Statement of Comprehensive Income, which begins with net loss and adds or deducts other recognized changes in assets and liabilities that are not included in net earnings, but are reported directly to equity, under GAAP.  For example, unrealized changes in currency translation adjustments are included in the measure of comprehensive loss but are excluded from net loss. The amendments became effective for the first quarter 2012 financial statements.  The amendments affect only the display of those components of equity categorized as other comprehensive loss and do not change existing recognition and measurement requirements that determine net loss.

 

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.

 

12
 

 

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 2012 and 2011 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 March 31, 2012 and December 31, 2011 were $13,666 and $40,814, respectively.

 

LOSS PER SHARE

 

We calculate basic loss per share ("EPS") by dividing our net 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 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 March 31, 2012 and December 31, 2011.

 

RESTRICTED CASH

 

As of March 31, 2012 and December 31, 2011, the Company held cash in escrow on behalf of an unrelated third party of zero and $827,000, respectively. The restricted cash 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 three months ended March 31, 2012 and 2011 was zero and there was no allowance for doubtful accounts as of March 31, 2012 and December 31, 2011.

 

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 March 31, 2012 and December 31, 2011, the Company determined that no reserves were necessary.

 

13
 

 

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, other assets, and other payables approximates their fair value due to their short-term maturities.

 

Management believes it is not practical to estimate the fair value of advances to stockholder because the transactions cannot be assumed to have been consummated at arm’s length, the terms are not deemed to be market terms, there are no quoted values available for these instruments, and an independent valuation would not be practical due to the lack of data regarding similar instruments, if any, and the associated potential costs.

 

14
 

 

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 ratably 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 $144,951 and $24,951 for the three months ended March 31, 2012 and 2011, 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 March 31, 2012 and December 31, 2011, 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 March 31, 2012, there are no U.S. bank accounts 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. As of March 31, 2012 and December 31, 2011, the Company’s bank balances with the banks in U.S. exceeded the insured amount by zero and $587,183, respectively. As of March 31, 2012 and December 31, 2011, the Company’s bank balances with the Banks in PRC amounted $877,933 and $609,629, 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 three months ended March 31, 2012 and 2011, respectively. There were no customers that accounts for over 10% of accounts receivable as of March 31, 2012 and December 31, 2011, respectively. Qinhuangdao Diguang Trade Ltd. Qinhuangdao Dealer, Beijing Dealer, and DalianHuihaijia Ocean Biology Ltd. each comprised 16.8% or $41,565, 52.5% or $130,066, 18.9% or $46,970, and 13.7% or $34,000 of accounts payable as of March 31, 2012, respectively. There were no vendors that accounted for over 10% of accounts payable as of December 31, 2011.

 

Distribution Segment

 

Shanghai Hormel Ltd. comprised of 99.8% or $561,449 of total revenues for Beitun for the three months ended March 31, 2012. Shanghai Hormel Ltd. comprised 94.7% or $569,443 of accounts receivable as of March 31, 2012.

 

Shanghai Hormel Ltd., Shuanghui Company and Shanghai Fuxin Company comprised of 45.4% or $687,442, 27.7% or $419,524, and 26.9% or $407,720 of total revenues for Beitun for the three months ended March 31, 2011. 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..

 

Shuanghui Company comprised of 100.0% or $318,731 of total purchases for the distribution business for the three months ended March 31, 2012. Shunxinpengcheng Food Company, Changxinchang Food Inc. and Xileng Inc. each comprised 10.2% or $100,891, 45.0% or $443,842, and 37.7% or $372,074 of accounts payable as of March 31, 2012.

 

Shuanghui Group, Xileng Inc. and Shunxinpengcheng Inc., each comprised of 37.0% or $566,642, 30.3% or $464,085, and 32.8% or $502,583 of total purchases for the distribution business for the three months ended March 31, 2011. 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.

 

15
 

 

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 0.06% and 0.92% for the three months ended March 31, 2012 and 2011, 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 ACCOUNTING PRONOUCEMENTS

 

Adopted

 

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 March 31, 2012 and adoption of this new guidance did not have a material impact on our consolidated financial statements and related disclosures.

 

16
 

 

In June 2011, the FASB issued ASU 2011-05, “Comprehensive income”. The new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders’ equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income from that of current accounting guidance. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The Company has adopted this new guidance as of and for the interim period ended March 31, 2012.

 

Not adopted

 

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 - ACCOUNTS RECEIVABLES

 

Accounts receivable consisted of the following at March 31, 2012 and December 31, 2011:

 

   March 31,
2012
   December 31,
2011
 
Accounts receivable  $601,013   $214,744 

 

NOTE 5 - INVENTORIES

 

Inventories consisted of the following at March 31, 2012 and December 31, 2011:

 

   March 31,
2012
   December
31, 2011
 
Finished goods - packaged food  $902,718   $1,167,447 
Less: reserve for inventory   -    - 
Total inventories  $902,718   $1,167,447 

 

NOTE 6 - PREPAID EXPENSES

 

Prepaid expenses consisted of the following at March 31, 2012 and December 31, 2011:

 

   March 31,
2012
   December
31, 2011
 
Prepaid professional fees and salaries  $5,092   $93,600 
Prepaid services   52,573    50,644 
Prepaid taxes   121,302    158,047 
Prepaid rent   31,268    33,854 
Total prepaid expenses  $210,235   $336,144 

 

17
 

 

NOTE 7 – PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following at March 31, 2012 and December 31, 2011:

 

   March 31,
2012
   December
31, 2011
 
Office equipment & computers  $20,498   $20,518 
Leasehold improvement   86,675    86,730 
Equipment   9,271    9,277 
Vehicles   17,433    17,433 
Office furniture & fixtures   40,992    41,015 
    174,869    174,973 
Less: Accumulated depreciation   90,289    73,995 
Total property & equipment, net  $84,580   $100,978 

 

For the three months ended March 31, 2012 and 2011, depreciation expense was $16,309 and $3,504, respectively.

 

NOTE 8 - OTHER ASSETS

 

Other assets consisted of the following at March 31, 2012 and December 31, 2011:

 

   March 31,
2012
   December
31, 2011
 
Common stock issued for services  $341,582   $486,533 
Deposit for office   93,802    93,862 
Total other assets  $435,384   $580,395 

 

Common stock issued for prepaid consulting services amounted to $341,582 and $486,533 as of March 31, 2012 and December 31, 2011, respectively. As of December 31, 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. As of March 31, 2012, it includes $300,000 prepaid consulting services to the Company’s public relationship service provider and $41,582 prepaid consulting fee to two consultants. Amortization for the three months ended March 31, 2012 and 2011 was $144,951 and $24,973, respectively.

 

NOTE 9 - ACCRUED LIABILITIES

 

Accrued liabilities consisted of the following at March 31, 2012 and December 31, 2011:

 

   March 31,
2012
   December
31, 2011
 
Accrued payroll  $23,996   $22,652 
Other   -    2,175 
Total accrued liabilities  $23,996   $24,827 

 

NOTE 10 – OTHER PAYABLES

 

Other payables amounted $546,003 and $1,030,224 at March 31, 2012 and December 31, 2011, 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 March 31, 2012.

 

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.

 

18
 

 

NOTE 12 - 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 $144,951 and $24,951 for the three months ended March 31, 2012 and 2011, respectively.   

  

A summary of share-based compensation activity for the three months ended March 31, 2012 is as follows:

 

   Number of
Shares
   Weighted
Average
Fair Value
   Prepaid
Amount
 
Share-based compensation outstanding at January 1, 2011   910,644   $0.22   $166,333 
Granted   180,000    4.00    720,000 
Cancelled   -    -    - 
Forfeited/Amortized   -    -    (399,800)
Share-based compensation outstanding at January 1, 2012   1,090,644    0.84    486,533 
Granted   -    -    - 
Cancelled   -    -    - 
Forfeited/Amortized   -    -    (144,951)
Share-based compensation outstanding at March 31, 2012   910,644   $0.84   $341,582 

  

19
 

 

For the three months ended March 31, 2012 and 2011, $24,951 and $18,700, 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 share issuance date is different than the service date is due to some administrative processes that delayed the issuance date. The shares were recorded at their market value of $720,000 and are being amortized over the service period. For the three months ended March 31, 2012, $120,000 was amortized to general and administrative expense. The remaining $300,000 balance is reflected in prepaid expenses as of March 31, 2012.

 

The future amortization expense as of March 31, 2012 is as follows:

 

2012  $341,582 
Total  $341,582 

 

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. FeiGao   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 March 31, 2012 and December 31, 2011:

 

   March 31,
2012
   December 31,
2011
 
Loan from Mr. Jack Gao  $213,890   $223,930 
Loan from Ms. Wei Guo   583,364    250,677 
Total related party payables  $797,254   $474,607 

 

The related party payable 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 obtained these loans to fund operations when the Company or one of the subsidiaries was in need of cash. For the three months ended March 31, 2012, the Company borrowed zero from Mr. Jack Gao and made payments of approximately $10,040 back to him. For the three months ended March 31, 2012, the Company borrowed approximately $365,500 from Ms. Wei Guo and made repayments of approximately $33,285.

 

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 totaled $7,701 for the three months ended March 31, 2012 and March 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 totaled $92,493 for the three months ended March 31, 2012 and March 31, 2011. This lease expires on October 20, 2013.

 

20
 

 

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 totaled $18,777 and $6,259 for the three months ended March 31, 2012 and March 31, 2011, respectively.  This lease expires on October 20, 2013.

 

Total future minimum rental lease commitments as of March 31, 2012 are as follows:

 

2012  $354,346 
2013   370,900 
Total  $725,246 

 

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 March 31, 2012 and December31, 2011, 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 three months ended March 31, 2012 
   E-Commerce   Food Distribution   Consolidated 
Net revenues  $1,007,756   $562,405   $1,570,161 
Cost of sales   -    545,558    545,558 
                
Gross profit   1,007,756    16,847    1,024,603 
                
Operating expenses:               
Selling expenses   841,543    15,280    856,823 
General and administrative   496,312    1,041    497,353 
   Total operating expenses   1,337,855    16,321    1,354,176 
                
Operating income (loss)   (330,099)   526    (329,573)
Other income (expense)   36,298    -    36,298 
                
Income (loss) before taxes   (293,801)   526    (293,275)
Provision for income taxes   -    131    131 
Net income (loss)   (293,801)   395    (293,406)
Net income attributable to non controlling interest   -    193    193 
Net income (loss) attributable to Consumer Capital Group, Inc.   (293,801)   202    (293,599)
Net income (loss)   (293,801)   395     (293,406)
Other comprehensive loss, net of tax               
Foreign currency translation adjustment   (7,707)   -    (7,707)
Less: Foreign currency translation adjustment attributable to noncontrolling interest   -    (15)   (15)
Other comprehensive loss attributable to Consumer Capital Group, Inc.   (7,707)   (15)   (7,692)
                
Comprehensive income (loss), net of tax   (301,508)   395    (301,113)
Less: Comprehensive income attributable to noncontrolling interest   178    -    178 
Comprehensive income (loss) attributable to Consumer Capital Group, Inc.  $(301,686)  $395   $(301,291)

  

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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.

 

Loss before income taxes consists of:

 

   For the three months ended
March 31,
 
   2012   2011 
Non-PRC  $(274,954)  $(733,186)
PRC   (18,321)   (275,682)
   $(293,275)  $(1,008,868)

 

There was no deferred tax expense for the three months ended March 31, 2012 and 2011. The income tax expenses amounted $131 and $56,544 for the three months ended March 31, 2012 and 2011, 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 at March 31, 2012 and December 31, 2011

 

   March 31,
2012
   December 31,
2011
 
         
Deferred tax assets, current portion          
Amortization of fair value of stock for services  $28,990   $131,934 
Deferred revenue   10,198    28,351 
Total deferred tax assets, current portion   39,188    160,285 
Valuation allowance   (39,188)   (160,285)
Deferred tax assets, current portion, net  $-   $- 
           
Deferred tax assets, non-current portion          
Fixed assets  $3,262   $14,473 
Net operating losses   684,486    553,475 
Total deferred tax assets, non-current portion   687,748    567,948 
Valuation allowance   (687,748)   (567,948)
Deferred tax assets, non-current portion, net  $-   $- 

 

As of March 31, 2012, the Company had an accumulated deficit of $2,375,316 that can be carried forward to offset future net profit for income tax purposes. The net operating loss carry forwards as of March 31, 2012 will expire in years 2012 to 2016 if not utilized.

 

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CCG and CCG California are both subject to United States of America tax law. As of March 31, 2012, the operations in the United States of America incurred $1,531,773 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 $505,485 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.

  

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 the three months ended March 31, 2012 and 2011, there were no penalties and interest.

 

NOTE 17 - LOSS PER SHARE

 

Basic and diluted earnings (loss) per share for each of the years presented are calculated as follows:

 

   For the three months ended March 31, 
   2012   2011 
Numerator:          
Net loss  $(293,406)  $(1,065,412)
Net loss attributable to common stockholders for computing basic and diluted loss per common share   (293,599)   (1,065,953)
Denominator:          
Weighted average number of common shares outstanding for computing basic and diluted loss per common share   19,068,888    18,456,790 
Basic and diluted earnings (loss) per share  $(0.02)  $(0.06)

 

For the three months ended March 31, 2012 and 2011, there were no common stock equivalents for computing diluted earnings per share.

 

NOTE 18 - SUBSEQUENT EVENTS

  

On April 30, 2012, China UMS, Liaoning Branch (“Party A”), Bank of Fuxin (“Party B”), and America Arki Fuxin Network Management Co. Ltd. (“Party C”) entered into a Cooperation Contract (the “Contract”). Pursuant to the Contract, Party A, Party B, and Party C will work together to promote Consumer Capital Market (“CCM”) Joint Consumption Card (the “Card”), which is jointly issued by Party B and Party C.

 

Pursuant to the terms and conditions of the Contract, Party A, as Party B’s agent, shall be responsible for developing CCM merchants, negotiating service fees with CCM merchants according to the market development requirements of Party C. Party A shall provide training and consultation on issues that CCM merchants may have while managing card consumption of CCM members. Pursuant to the Contract, the Card is the property of Party B. The management and usage of the Card shall comply with the relevant provisions in Terms for Jintong Card of Bank of Fuxin and debit card business of Party B. If Party C and its branches violate the provisions of the Contract or the bank card-related laws, regulations, or management systems, Party B shall have the right to suspend or terminate the joint card business cooperation. Party B shall have the right to share CCM merchants’ information with Party C. Party B shall have the right to supervise and guide the distribution work concerning the CCM joint consumption card of Party C, and regulate the issuance process to avoid business risks. Pursuant to the Contract, Party C shall be responsible for the establishment of the management system, regulations and service processes for CCM members, and bear the relevant legal responsibilities that may arise from its service. Party C shall be responsible for R & D management and technical support associated with CCM consumption value-added distribution systems, CCM members’ consumption-related advice and after-sales service. Party C shall have the right to entrust a third party to expand CCM contracted merchants, and to establish the management system, regulations and service processes associated with the CCM merchants, and have the right to terminate the cooperation with CCM merchants upon breach of the agreement.

  

Pursuant to the Contract, Party A shall be entitled to a merchants-developing service fee, which is 15% of the service charge of the CCM merchants that Party A has developed as Party B’s agent. Party A shall also be entitled to a fee for settling capital, which is 5% of the service charge of other CCM merchants.

 

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

  

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission on March 31, 2012. Those statements in the following discussion that are not historical in nature should be considered to be forward looking statements that are inherently uncertain.

 

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.

 

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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 the three months ended March 31, 2012, net revenues derived from our e-commerce business increased by approximately 66% to $1,007,756 compared to the same period of $606,791 in 2011. The increase is due to increased sales activities caused by the successful marketing by our dealers.

 

Distribution Segment

 

We own a 51% 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 $562,405 for the three months ended March 31, 2012, compared to $1,340,413 for the same period of 2011, a decrease of $778,008. The decrease was due to a decrease in our sales which was caused by our temporary shortage of sales staff during part of January and February 2012.  Beitun Trading had limited operations for most of January and February of 2012 because the main sales person was absent due to a family emergency and many sales staff were on vacation for Spring festival.

 

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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.  The Company has signed dealer agreements with large companies like China Unionpay (“China UMS”) during the year ended December 31, 2011. China UMS 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 UMS 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 in 2012. No revenues were generated from this line of business in the first quarter of 2012 and 2011.

   

On April 30, 2012, China UMS, Liaoning Branch (“Party A”), Bank of Fuxin (“Party B”), and America Arki Fuxin Network Management Co. Ltd. (“Party C”) entered into a Cooperation Contract (the “Contract”). Pursuant to the Contract, Party A, Party B, and Party C will work together to promote Consumer Capital Market (“CCM”) Joint Consumption Card (the “Card”), which is jointly issued by Party B and Party C.

 

Pursuant to the terms and conditions of the Contract, Party A, as Party B’s agent, shall be responsible for developing CCM merchants, negotiating service fees with CCM merchants according to the market development requirements of Party C. Party A shall provide training and consultation on issues that CCM merchants may have while managing card consumption of CCM members. Pursuant to the Contract, the Card is the property of Party B. The management and usage of the Card shall comply with the relevant provisions in Terms for Jintong Card of Bank of Fuxin and debit card business of Party B. If Party C and its branches violate the provisions of the Contract or the bank card-related laws, regulations, or management systems, Party B shall have the right to suspend or terminate the joint card business cooperation. Party B shall have the right to share CCM merchants’ information with Party C. Party B shall have the right to supervise and guide the distribution work concerning the CCM joint consumption card of Party C, and regulate the issuance process to avoid business risks. Pursuant to the Contract, Party C shall be responsible for the establishment of the management system, regulations and service processes for CCM members, and bear the relevant legal responsibilities that may arise from its service. Party C shall be responsible for R & D management and technical support associated with CCM consumption value-added distribution systems, CCM members’ consumption-related advice and after-sales service. Party C shall have the right to entrust a third party to expand CCM contracted merchants, and to establish the management system, regulations and service processes associated with the CCM merchants, and have the right to terminate the cooperation with CCM merchants upon breach of the agreement.

 

Pursuant to the Contract, Party A shall be entitled to a merchants-developing service fee, which is 15% of the service charge of the CCM merchants that Party A has developed as Party B’s agent. Party A shall also be entitled to a fee for settling capital, which is 5% of the service charge of other CCM merchants.

 

 

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:

 

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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 $50,991 and $113,403 as of March 31, 2012 and December 31, 2011, respectively.

 

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 three months ended March 31, 2012 and 2011 were $571,864 and $351,970, respectively

 

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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 three months ended March 31, 2012 and 2011 was zero, and there was no allowance for doubtful accounts for accounts receivable at March 31, 2012 and December 31, 2011.

 

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 $144,951 and $24,951 for the three months ended March 31, 2012 and 2011, respectively.   

 

RESULTS OF OPERATIONS

 

COMPARISON OF THREE MONTHS ENDED MARCH 31, 2012 AND MARCH31, 2011

 

The following table presents certain consolidated statement of operations information. The financial information is presented for the three months ended as of March 31, 2012 and March 31, 2011.

 

   2012   2011 
   E-commerce   Distribution   E-commerce   Distribution 
Revenues, net  $1,007,756    562,405   $606,791   $1,340,413 
Selling Expenses  $841,543   $15,280   $492,056   $11,344 
General and Administrative Expenses  $496,312   $1,041   $871,038   $1,434 
Total Operating Expenses  $1,337,855   $16,321   $1,363,094   $12,778 

 

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REVENUES

 

E-commerce Business

 

Net revenues were $1,007,756 in the current period, compared to $606,791 for the prior period, an increase of $400,965 or 66.08%. The Company began its principal operations in 2010 with the launch of the e-commerce website. The increase is the result of promotion and marketing efforts by our dealers.

 

Distribution Business

 

Net revenues were $562,405 in the current period, compared to $1,340,413 for the prior period, a decrease of $778,008. The decrease was due to a decrease in our sales which was caused by our temporary shortage of sales staff during part of January and February 2012. Beitun Trading had limited operations for most of January and February of 2012 because the main sales person was absent due to a family emergency and many sales staff were on vacation for Spring festival. 

 

Cost of sales associated with distribution was $545,558 compared to $1,326,158 for the prior period, a decrease of $780,600 or 58.86%. 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 decrease is in line with the decrease of revenues.

 

TOTAL OPERATING EXPENSES

 

Total operating expenses consist of selling expenses, general and general and administrative expenses.  Total operating expenses were $1,354,176 compared to $1,375,872 for the prior period, a decrease of $21,696, or 1.58%. The decrease was due to the decreased in professional expenses offset by an increase in selling expenses.

 

 

Total selling expenses were $856,823 compared to $503,400 for the prior period, an increase of $353,423, or 70.21%. The increase was primarily due to an increased commission resulted from increased sales generated from the e-commerce business. Selling expenses for the e-commerce business were $841,542 compared to $492,056 for the prior period. Selling expenses for the distribution business increased to $15,280 in the current period from $11,344 for the prior period. This increase was mainly due to increased storage expenses. 

   

Total general and administrative expenses were $497,353 compared to $872,472 for the prior period, a decrease of $375,119, or 42.99%. The decrease was primarily due to decreased professional expenses including legal and accounting expenses. The Company had more professional fees for the prior period than the current period because the Company incurred extra expenses associated with going public in February 2011. Stock compensation expenses amounted to $144,951compared to $24,951 for the prior period. The increase is due to increased stock compensation for one of our vendors for the quarter ended March 31, 2012. There was no such compensation for the same period last year.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our cash and cash equivalents were $880,266 as of March 31, 2012, compared to $619,812 as of December 31, 2011, an increase of $260,454 or 42%. The increase was mainly due to increased loans from related parties. Our restricted cash was zero as of March 31, 2012, compared to $827,000 as of December 31, 2011. The decrease in our restricted cash was due to an escrow deposit of $827,000 from an unrelated party in December 2011 and there were no such deposits in the current period. We had a net working capital of $26,724 at March 31, 2012, compared to $166,443at December 31, 2011, a decrease of $139,719. The decrease was due to the net loss offset by the related party loans.

 

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Cash flow information is as follows:

 

   Three months ended March 31, 
   2012   2011 
Operating activities  $(54,533)  $(2,364,215)
Investing activities  $-   $(6,117)
Financing activities  $322,176   $443,370 

 

Cash used in operating activities was $54,533 in the current period, compared to $2,364,215 for the prior period, a decrease of $2,280,612. The decrease was primarily due to a decreased loss from operations, decreased restricted cash, and decreased inventories, offset by the increased other payables.

 

Cash provided by investing activities was zero compared to $6,117 for the prior period. The decrease was due to the fact that we invested more in leasehold improvements and office equipment during the three months ended March 31, 2012 compared to the same period of 2011.

 

Cash provided by financing activities was $322,176 compared to $443,370 for the prior period. The decrease was due to the less net proceeds from related parties.

 

CAPITAL RESOURCES

 

At March 31, 2012, cash and cash equivalents totaled $880,266. Although cash flows from operations during the three months ended March 31, 2012 were negative, we were able to finance our operations with cash balances carried over and related party loans. For the three months ended March 31, 2012, the Company borrowed zero from Mr. Jack Gao and made payments of approximately $10,040 back to him. For the three months ended March 31, 2012, the Company borrowed approximately $365,500 from Ms. Wei Guo and made repayments of approximately $33,285. As of March 31, 2012, the balance of loans from them amounted to $213,890 and $583,364 from Jack Gao and Wei Guo, respectively. During the three months ended March 31, 2012, the Company relied on loans from Jack Gao, our director and officer and Wei Guo, a stockholder, director and officer of Beitun.

 

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.

   

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. 

   

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. 

 

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. 

 

Total future minimum rental lease commitments as of March 31, 2012 are as follows:

 

 2012   $354,346 
 2013    370,900 
 Total   $725,246 

 

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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 3. 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 information required by this Item.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules, regulations and related forms, and that such information is accumulated and communicated to our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

As of March 31, 2012, we carried out an evaluation, under the supervision, and with the participation of our principal executive officer and our principal financial officer on the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms because of the lack of finance and accounting personnel with an appropriate level of knowledge, experience, and training in the application of U.S. GAAP.

 

We are in the process of implementing the following measures to remediate these material weaknesses: (a) hire additional financial reporting and accounting personnel with relevant account experience, skills, and knowledge in the preparation of financial statements under the requirements of U.S.GAAP and financial reporting disclosure pursuant to SEC rules; and (b) continue to work with internal and external consultants to improve the process for collecting and reviewing information required for the preparation of financial statements. We plan on continuing to identify and implement remedial measures.

 

CHANGES IN INTERNAL CONTROLS

 

There have been no changes in our internal controls over financial reporting during the quarter ended March 31, 2012 that have materially affected or are reasonably likely to materially affect our internal controls.

 

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PART II OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

There are presently no material pending legal proceedings to which the Company, any of its subsidiaries, 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 Registrant to be threatened or contemplated against it.

 

ITEM 1A. RISK FACTORS.

 

As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6. EXHIBITS.

 

      EXHIBIT INDEX  

Exhibit

No.

 

   

 

Description

 

 
31.1     Certification of Chief Executive Officer and Chief Financial Officer of Periodic Report pursuant to Rule 13a-14a and Rule 14d-14(a).*  
32.1     Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.*  
         
         
* Filed herewith.
           

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

DATE: May 15, 2012

 

  Consumer Capital Group, Inc.  
       
  By: /s/ Jianmin Gao  
      Jianmin Gao   
      President and Chief Executive Officer   
      Principal Executive and Financial Officer   

  

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