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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

For the quarterly period ended September 30, 2014

 

or

 

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

For the transition period from ___________to __________

 

Commission File No. 000-54998

 

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.)

 

 100 Park Avenue, 16th Floor, New York 10017

(Address of principal executive offices)(Zip code)

 

(212) 984 - 1869

(Registrant’s telephone number, including area code)    

 

 Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

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 registrant had 19,234,386 shares of common stock, par value $0.0001 per share, outstanding as of November 19, 2014. 

 
 

CONSUMER CAPITAL GROUP INC.

 

QUARTERLY REPORT ON FORM 10-Q

 

September 30, 2014

 

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION    
     
Item 1. Financial Statements   1
     
Consolidated Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013   1
     
Consolidated Statement of Operations and Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and 2013 (Unaudited)   2
     
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (Unaudited)   3
     
Notes to Consolidated Financial Statements (Unaudited)   4-15
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   16-21
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk   21
     
Item 4. Controls and Procedures   21-22
     
PART II — OTHER INFORMATION   23
     
Item 1. Legal Proceedings   23
     
Item 1A. Risk Factors   23
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   23
     
Item 3. Defaults Upon Senior Securities   23
     
Item 4. Mine Safety Disclosures   23
     
Item 5. Other Information   23
     
Item 6. Exhibits   23
     
SIGNATURES   24

 
 

CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

 

This Quarterly Report on Form 10-Q contains “forward-looking statements”. Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.

 

We cannot predict all of the risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this Quarterly Report on Form 10-Q and include information concerning possible or assumed future results of our operations, including statements about potential acquisition or merger targets; business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts.

 

These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of the Quarterly Report on Form 10-Q. All subsequent written and oral forward-looking statements concerning other matters addressed in this Quarterly Report on Form 10-Q and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Quarterly Report on Form 10-Q.

 

Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise. 

 
 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

 

CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
  September 30,  December 31,
   2014  2013
  (Unaudited)   
ASSETS          
Cash  $11,507   $101,685 
Accounts receivable   —      363,622 
Inventories   —      762,462 
Advance to suppliers   —      915,748 
Prepaid expenses   24,160    107,144 
Other receivables   43,574    10,598 
    Total current assets   79,241    2,261,259 
           
Property and equipment, net   16,920    30,588 
Other assets   100,539    132,445 
    Total noncurrent assets   117,459    163,033 
           
Total assets  $196,700   $2,424,292 
           
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)          
Accounts payable  $106,938   $660,581 
Accrued liabilities   66,096    29,278 
Taxes payable   3,174    13,253 
Other payables   179,935    88,537 
Payable to Caesar Capital Management Ltd.   83,966    79,038 
Convertible note, net of $0 debt discount as of September 30, 2014 and December 31, 2013   94,000    121,000 
Short term debt   277,241    189,451 
Related party payables   1,114,214    2,395,520 
Derivative liability   3,125,041    —   
    Total current liabilities  $5,050,605   $3,576,658 
           
Stockholders' equity (deficit)          
Common stock, $0.0001 par value, 100,000,000 shares authorized, 19,085,929 and 19,068,889 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively  $1,907   $1,907 
Discount on common stock issued to founders   (130,741)   (130,741)
Additional paid-in capital (1)   3,034,041    2,973,225 
Accumulated other comprehensive income   56,875    62,539 
Accumulated deficit   (7,815,987)   (4,069,486)
Total Consumer Capital Group, Inc. stockholders' deficit   (4,853,905)   (1,162,556)
Non-controlling interest in subsidiary   —      10,190 
    Total stockholders' equity  (deficit)   (4,853,905)   (1,152,366)
Total liabilities and stockholders' equity  (deficit)  $196,700   $2,424,292 
           
(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.
The accompanying notes are an integral part of these unaudited consolidated financial statements

 

CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
   For The Nine Months Ended September 30,  For The Three Months Ended September 30,
   2014  2013  2014  2013
Net revenues - ecommerce  $—     $11,488   $—     $9,260 
Total revenue   —      11,488    —      9,260 
Gross profit   —      11,488    —      9,260 
                     
Operating expenses:                    
Selling expenses   19,371    58,133    9,266    17,487 
General & administrative expenses   553,503    755,058    87,797    218,568 
Loss from disposal of subsidiary   6,842    —      —      —   
Total operating expenses   579,716    813,191    97,063    236,055 
Operating loss   (579,716)   (801,703)   (97,063)   (226,795)
                     
Other income   180    273,988    —      50,515 
Other expense   (700)   (1,621)   (88)   (5)
Change in fair value of derivative liabilities   (3,085,366)   —      (2,914,550)   —   
Interest expense (income)   (80,935)   3,271    (10,521)   5,352 
Total other income (expenses)   (3,166,821)   275,638    (2,925,159)   55,862 
Loss from continuing operations before taxes   (3,746,537)   (526,065)   (3,022,222)   (170,933)
Provision for income taxes   —      —      —      —   
Net loss from continuing operations   (3,746,537)   (526,065)   (3,022,222)   (170,933)
Discontinued operations, net of income taxes   70    2,582    —      399 
Net loss   (3,746,467)   (523,483)   (3,022,222)   (170,534)
Less: Net income attributable to Non-controlling interest   34    1,264    —      195 
Net loss attributable to Consumer Capital Group, Inc.  $(3,746,501)  $(524,747)  $(3,022,222)  $(170,729)
                     
Amounts attributable to Consumer Capital Group, Inc.                    
Continuing operations, net of income taxes   (3,746,571)   (527,329)   (3,022,222)   (171,128)
Discontinued operations, net of income taxes   70    2,582    —      399 
Net loss attributable to Consumer Capital Group, Inc.  $(3,746,501)  $(524,747)  $(3,022,222)  $(170,729)
                     
Basic and diluted loss per common share attributable to Consumer Capital Group, Inc.:                    
Continuing operations  $(0.20)  $(0.03)  $(0.16)  $(0.01)
Discontinued operations   —      —      —      —   
Net loss attributable to Consumer Capital Group, Inc., stockholders   (0.20)   (0.03)   (0.16)   (0.01)
                     
Weighted average number of common shares outstanding - basic and diluted (1)   19,074,401    19,068,889    19,077,629    19,068,889 
                     
Net loss  $(3,746,467)  $(523,483)  $(3,022,222)  $(170,534)
Other comprehensive income (loss), before tax                    
Foreign currency translation adjustment   9,278    (4,010)   481    (2,905)
Other comprehensive income (loss), net of tax  $9,278   $(4,010)  $481   $(2,905)
Comprehensive loss, net of tax   (3,737,189)   (527,493)   (3,021,741)   (173,439)
Comprehensive income (loss) attributable to non-controlling interest   10,190    1,264    —      (218)
Comprehensive loss attributable to Consumer Capital Group, Inc.  $(3,747,379)  $(528,757)  $(3,021,741)  $(173,221)
                     
(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.
The accompanying notes are an integral part of these unaudited consolidated financial statements

 

CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
   For The Nine Months Ended September 30,
   2014  2013
Operating Activities          
Net loss  $(3,746,467)  $(523,483)
Adjustments to reconcile net loss to cash flows from operating activities:          
Depreciation expense   10,025    19,394 
Amortization of debt discount   73,491    —   
Change in fair value of derivative liabilities   3,085,366    —   
Loss on disposal of subsidiary   6,841    —   
Change in operating assets and liabilities:          
Accounts receivable   10,829    52,038 
Other assets   (1,528)   (33,784)
Other receivables   (237)   (2,499)
Inventories   (137,994)   (145,483)
Prepaid expenses   60,167    80,836 
Advance to suppliers   366,747    178,685 
Accounts payable   (17,785)   (24,958)
Accrued liabilities   37,011    33,171 
Deferred revenue   —      (749)
Taxes payable   (9,488)   (6,147)
Payable to Caesar Capital Management Ltd.   4,467    (41,343)
Other payables   91,627    47,216 
Cash flows used in operating activities   (166,928)   (367,106)
           
Investing Activities          
Cash paid on disposal of subsidiary   (2,506)   —   
Cash flows used in investing activities   (2,506)   —   
           
Financing Activities          
Proceeds from related parties   1,162,415    3,614,004 
Payments to related parties   (1,162,395)   (3,299,713)
Proceeds from third party debt   154,048    163,070 
Payments to third party debt   (64,852)   —   
Cash flows provided by financing activities   89,216    477,361 
           
Effect of exchange rate on cash and cash equivalents   (9,961)   3,124 
Change in cash and cash equivalents during the period   (90,179)   113,379 
Cash and cash equivalents at beginning of the period   101,686    174,247 
Cash and cash equivalents at end of the period  $11,507   $287,626 
          
Supplemental disclosure of non-cash financing activity:          
Debt discount from derivative liabilities  $73,491   $—   
Conversion of convertible note  $27,000   $—   
Settlement of derivative liabilities into additional paid-in capital  $33,816   $—   
           
Supplemental disclosure of cash flow information          
 Income taxes paid  $23   $2,112 
 Interest expense paid  $—     $—   
The accompanying notes are an integral part of these unaudited consolidated financial statements

 

CONSUMER CAPITAL GROUP, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

(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 unaudited consolidated financial statements include the financial statements of the Company, its wholly owned subsidiaries, and an affiliated PRC entity (“Affiliated PRC Entity”) that is controlled through contractual arrangements.

 

Details of the Company’s wholly owned subsidiaries and its Affiliated PRC Entity as of September 30, 2014 are as follows:

 

Company

Date of

Establishment

Place of Establishment Percentage of Ownership by the Company Principal Activities
         
Consumer Capital Group Inc. (“CCG California”) October 14, 2009 California USA 100% U.S. holding company and headquarters of the consolidated entities. Commencing in July 2011, CCG performs the U.S. e-commerce operations
Arki Beijing E-commerce Technology Corp. (“Arki Beijing”) March 6, 2008 PRC 100%   (1) 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%   (1) Import and sales of healthcare products from the PRC. This operation ceased February 5, 2010. It currently assists in payment collection for our e-commerce business
America Arki Fuxin Network Management Co. Ltd. (“Arki Fuxin”) November 26, 2010 PRC 100%   (1) Commencing in December 2010, performs the principal daily e-commerce operations, transactions and management of the “consumer market network”
America Arki Network Service Beijing Co. Ltd. (“Arki Network Contractual Service” and Affiliated PRC Entity”) November 26, 2010 PRC 0%   (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

(1) Wholly foreign owned entities (WFOE)

(2) VIE

 

On April 1, 2014, the Company sold its entire 51% equity of Beijing Beitun Trading Co. Ltd. (“Beitun”) to Yifan Zhang for $41,030 (RMB255,000). Yifan Zhang is the daughter of Ms. Wei Guo, the stockholder and managing director of Beitun.

 

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% PRC 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.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

BASIS OF PRESENTATION AND CONSOLIDATION

 

The accompanying unaudited consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) including the instructions to Form 10-Q and Regulation S-X. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been or omitted from these statements pursuant to such rules and regulations and, accordingly, they do not include all the information and notes necessary for comprehensive consolidated financial statements and should be read in conjunction with the Company’s consolidated financial statements and accompanying notes thereto for the year ended December 31, 2013 filed with the SEC in the Company’s Form 10-K on March 31, 2014.

 

In the opinion of the management of the Company, all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the nine month period have been made. Results for the interim periods presented are not necessarily indicative of the results that might be expected for the entire fiscal year.

 

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., America Arki (Fuxin) Network Management Co. Ltd., and 51% majority ownership in Beijing Beitun Trading Co. Ltd, prior to April 1, 2014, the disposal date. As a result of contractual arrangements with Arki Network Service, the Company consolidates Arki Network Service. All intercompany balances and transactions have been eliminated in consolidation.

 

GOING CONCERN

 

The Company incurred net loss of approximately $3.75 million for the nine months ended September 30, 2014 and had an accumulated deficit of approximately $7.82 million as of September 30, 2014. The Company had a cash balance of $11,507 as of September 30, 2014. The Company financed its operations mainly through borrowings from directors and officers and from a shareholder. Payables to related parties amounted to $1,114,214 as of September 30, 2014. Payables to a shareholder Caesar Capital Management Ltd. amounted to $83,966 as of September 30, 2014. 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 continue to control its administrative expenses in the coming years as well as further develop its sales from its main business.

 

RECLASSIFICATION 

 

Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on net earnings and financial position.

 

USE OF ESTIMATES

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

FOREIGN CURRENCY TRANSLATION

 

The Company’s reporting currency is the U.S. dollar. The Company’s functional currency is the local currency in the PRC, the Chinese Yuan (RMB). The financial statements of the Company are translated into United States dollars in accordance with ASC 830, FOREIGN CURRENCY MATTERS, using 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 September 30, 2014 and December 31, 2013, the cumulative translation adjustment of $56,875 and $62,539, respectively, was classified as an item accumulated of other comprehensive income in the stockholders’ equity (deficit) section of the consolidated balance sheets. For the nine months ended September 30, 2014 and 2013, the foreign currency translation adjustment to accumulated other comprehensive deficit was $9,278 and $(4,010), respectively. For the three months ended September 30, 2014 and 2013, the foreign currency translation adjustment to accumulated other comprehensive deficit was $481 and $(2,905), respectively.

 

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.

 

We have determined that certain convertible note covered by these financial statements qualifies as derivative financial instruments under the provisions of FASB ASC Topic No. 815-40, “ Derivatives and Hedging – Contracts in an Entity’s Own Stock  ”. See Note 10 for more details.

 

Estimating the fair value of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. The assumptions used to value the Company’s derivatives will have a direct effect on the fair values. In addition, valuation techniques are sensitive to changes in the trading market price of the our Common Stock and its estimated volatility interest rate changes and other variables or market conditions not within the Company’s control that can significantly affect management’s estimates of fair value and changes in fair value. Because derivative financial instruments are initially and subsequently carried at fair value, the Company’s net income may include significant charges or credits as these estimates and assumptions change. 

 

The fair value of the derivative liability was determined using the Black-Scholes Model with any change in fair value during the period recorded in earnings as “Change in fair value of derivative liability”. Significant inputs used to calculate the fair value of the derivative liability include expected volatility, risk-free interest rate and dividend yield.

 

The carrying value of cash and cash equivalents, accounts receivable, account payable and accrued liabilities approximates their fair value due to their short-term maturities.

 

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

 

DISCONTINUED OPERATIONS

 

On April 1, 2014, the Company sold its entire 51% equity of Beijing Beitun Trading Co. Ltd. (“Beitun”) to Yifan Zhang for $41,030 (RMB 255,000). Yifan Zhang is the daughter of Ms. Wei Guo, the shareholder and managing director of Beitun. See Note 16 — Discontinued Operations for additional information.

 

NOTE 3 - RECENTLY ISSUED AND ADOPTED ACCOUNTING PRONOUNCEMENTS

 

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. The amendments in the ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance in U.S. GAAP. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted. The Company does not expect the adoption to have a significant impact on its consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from contracts with Customers (Topic 606)”. This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets. This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchanged for those goods or services. The standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

 

In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. The amendment in the ASU provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. Earlier adoption is permitted. The Company does not expect the adoption to have a significant impact on its consolidated financial statements.

 

NOTE 4 — ACCOUNTS RECEIVABLE

 

Accounts receivable consisted of the following as of September 30, 2014 and December 31, 2013:

 

   September 30, 2014  December 31, 2013
           
Accounts receivable  $—     $363,622 
 Less: allowance for doubtful accounts   —      —   
 Total accounts receivable  $—     $363,622 

 

NOTE 5 - INVENTORIES

 

Inventories consisted of the following at September 30, 2014 and December 31, 2013:

  

   September 30, 2014  December 31, 2013
           
Finished goods - packaged food  $—     $762,462 
Less: reserve for inventory   —      —   
Total inventories  $—     $762,462 

  

NOTE 6 – ADVANCES TO SUPPLIERS    

 

As of September 30, 2014 and December 31, 2013, advances to suppliers consisted of the following:

 

   September 30, 2014  December 31, 2013
           
  Advances to suppliers  $—     $915,748 

 

Advances to suppliers represent interest-free cash paid in advance to suppliers for purchases of inventories. No allowance was provided for the prepayments balance at September 30, 2014 and December 31, 2013.

 

NOTE 7 – SHORT-TERM DEBT

 

During the nine months ended September 30, 2014, the Company borrowed $154,048 from two third party individuals and repaid $64,852 to two third party individuals. The borrowings bear no interest and are due on demand. As of September 30, 2014 and December 31, 2013, the balance of the short-term debt was $277,241 and $189,451, respectively.

 

NOTE 8 - PAYABLE TO CAESAR CAPITAL MANAGEMENT LTD.

 

Caesar Capital Management Ltd. a shareholder of the Company, advanced $83,966 and $79,038 to the Company as of September 30, 2014 and December 31, 2013, respectively. The payable to Caesar Capital Management Ltd. included loan payables of $116,691 and money owed by Caesar of $32,725 as of September 30, 2014. The loan payables were borrowed by the Company for operating purposes, without collateral, and are due between July 2013 to November 2013, and with an annual interest rate of 6%. On July 1, 2013, the Company entered into an agreement with Caesar Capital Management Ltd. which extended or amended the maturity date for all the existing loans between the Company and Caesar Capital Management Ltd. The loans became due on demand and the Company was not charged any late payment penalty. Interest expenses of $3,193 and $3,193 have been accrued for the nine months ended September 30, 2014 and 2013, respectively. Interest expenses of $1,076 and $1,146 have been accrued for the three months ended September 30, 2014 and 2013, respectively.

 

NOTE 9 – CONVERTIBLE NOTES

 

On June 14, 2013, the Company entered into a Securities Purchase Agreement with Asher Enterprises, Inc. (“Asher Enterprises”) pursuant to which the Company sold and issued to Asher Enterprises a promissory note with a principal amount of $78,500 (the “Asher Note 1”). The cash proceeds of the promissory note were received on July 9, 2013.

 

The Asher Note 1 matured on April 10, 2014 and compounds annually and accrues at 8% per annum from the issue date through the maturity date or upon acceleration or prepayment. The holder is entitled to convert any portion of the outstanding and unpaid amount at any time on or after 180 days following the issuance date into the Company’s common stock, par value, $0.0001 per share, at an initial conversation price equal to 61% of the average of the three (3) lowest closing bid price for the Company’s common stock, during the ten (10) trading days ending on the latest trading day prior to the date a conversion notice delivered to the Company by the holder. The Note is not convertible by the holder if upon the conversion the holder and its affiliates would own in excess of 9.99% of our outstanding common stock.

 

On October 14, 2013, the Company entered into a Securities Purchase Agreement with Asher Enterprises, Inc. (“Asher Enterprises”) pursuant to which the Company sold and issued to Asher Enterprises a promissory note with a principal amount of $42,500 (the “Asher Note 2”). The cash proceeds of the promissory note were received on November 14, 2013.

 

The Asher Note 2 matured on July 16, 2014 and compounds annually and accrues at 8% per annum from the issue date through the maturity date or upon acceleration or prepayment. The holder is entitled to convert any portion of the outstanding and unpaid amount at any time on or after 180 days following the issuance date into the Company’s common stock, par value, $0.0001 per share, at an initial conversation price equal to 58% of the average of the three (3) lowest closing bid price for the Company’s common stock, during the ten (10) trading days ending on the latest trading day prior to the date a conversion notice delivered to the Company by the holder. The Note is not convertible by the holder if upon the conversion the holder and its affiliates would own in excess of 9.99% of our outstanding common stock.

 

According to the agreements, upon default and the receipt of default notice from the debt holder, each note shall become immediately payable for an amount which is the greater of 1) 150% times the sum of the then outstanding principal amount of the note, plus accrued and unpaid interest on the unpaid amount to the date of payment, plus default interest or 2) the "parity value" of the default sum to be paid, where parity value means (a) the highest number of shares of common stock issuable upon conversion treating the trading day immediately preceding the payment date as the conversion date, multiplied by (b) the highest closing price for the common stock during the period beginning on the date of first occurrence of the event of default and the ending one day prior to the payment.

 

The Company analyzed the conversion option for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the instrument should be classified as liabilities once the conversion option becomes effective after 180 days of debt issuance debt due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options.

 

On January 10, 2014, Asher Note 1 of $78,500 became convertible. On the same day, Asher Enterprises converted $15,000 of convertible loan Asher Note 1 into 4,098 shares of common stock at conversion price of $3.66 per share. On August 28, 2014, Asher Enterprises converted $12,000 of convertible loan Asher Note 1 into 12,942 shares of common stock at conversion price of $0.9272 per share. Asher Note 1 principal amounted $51,500 as of September 30, 2014.

 

On May 5, 2014, Asher Note 2 of $42,500 became convertible.

 

As described in Note 10, the embedded conversion feature qualified for liability classification at fair value. As a result, the Company recorded debt discounts of $30,991 to Asher Note 1 and $42,500 to Asher Note 2 at the dates the notes became convertible. Amortization of the discount was recorded as a component of interest expense in the accompanying unaudited statements of operations and comprehensive income. Amortization of debt discount amounted to $73,491 and $0 for the nine months ended September 30, 2014 and 2013, respectively. Contractual interest expense for the two Asher convertible notes amounted to $6,432 and $0 for the nine months ended September 30, 2014 and 2013, respectively. Amortization of debt discount amounted to $9,444 and $0 for the three months ended September 30, 2014 and 2013, respectively. Contractual interest expense for the two Asher convertible notes amounted to $1,102 and $0 for the three months ended September 30, 2014 and 2013, respectively.

 

As of the date of the report, the remaining balances of Asher Note 1 and Asher Note 2 are unpaid and the Company has not received the default notice for both notes. Upon the receipt of default notice, the Company will be subject to 22% default interest rate from the date of default and all the default interest will be subject to conversion at the debt holder's request.

 

NOTE 10 – DERIVATIVE INSTRUMENTS AND THE FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company issued convertible notes with certain reset provisions (See Note 9). The Company accounted for the reset provisions in accordance with ASC 815-40, which requires the Company to bifurcate the embedded conversion options as liability at the date the note becomes convertible and to record changes in fair value relating to the conversion option liability in the statement of operations and comprehensive income as of each subsequent balance sheet date. The debt discount related to the convertible note is amortized over the life of the note using the effective interest method.

 

The conversion option embedded in the convertible debt contains no explicit limit to the number of shares to be issued upon settlement and as a result is classified as a liability under ASC 815. The following table sets forth the Company’s consolidated financial assets and liabilities measured at fair value by level within the fair value hierarchy as of September 30, 2014. Assets and liabilities are classified in their entirety based on the lowest level of inputs that is significant to the fair value measurement.

  

   Total  Level 1  Level 2  Level 3
LIABILITIES:                    
Conversion option liability  $3,125,041    —      —     $3,125,041 

 

The following is a reconciliation of the conversion option liability for which Level 3 inputs were used in determining the fair value:

 

Beginning balance as of January 1, 2014  $—   
Fair value of embedded conversion derivative liability at issuance charged to debt discount - Asher Note 1 and 2   73,491 
Reclassification of derivative liability to additional paid-in capital due to conversion of Asher Note 1   (33,816)
Change in fair value of derivative liability   3,085,366 
   $3,125,041 

 

The Company’s conversion option liabilities are valued using pricing models and the Company generally uses similar models to value similar instruments. Where possible, the Company verifies the values produced by its pricing models to market prices. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads, measures of volatility and correlations of such inputs. These consolidated financial liabilities do not trade in liquid markets, and as such, model inputs cannot generally be verified and do involve significant management judgment. Such instruments are typically classified within Level 3 of the fair value hierarchy.

 

The table below shows the Black Scholes Option Pricing Model inputs used by the Company to value the derivative liability, as well as the determined value of the option liability at each measurement date:

 

Asher Note 1

Date   Shares   Debt Principal   Volatility   Dividend Yield   Risk Free Rate   Expected Term  
(in years)
  Fair Value of Conversion Option Liability
                             
1/10/2014       21,448       78,500       119.33 %     0.00 %     0.06 %     0.75       30,991  
8/28/2014       68,486       63,500       253.54 %     0.00 %     0.03 %     0.75       147,605  
9/30/2014       835,903       51,500       254.85 %     0.00 %     0.03 %     0.75       1,672,188  

 

Asher Note 2

 

Date  Shares  Debt Principal  Volatility  Dividend Yield  Risk Free Rate  Expected Term  
(in years)
  Fair Value of Conversion Option Liability
 5/5/20104   40,709    42,500    141.10%   0.00%   0.05%   0.75    113,343 
 9/30/2014   725,504    42,500    254.85%   0.00%   0.03%   0.75    1,452,855 

 

NOTE 11 – STOCKHOLDERS’ EQUITY

 

As described in Note 9 and Note 10, on January 10, 2014, Asher Note I was converted into 4,098 shares of common stock at conversion price of $3.66 per share. Due to this conversion of debt, $5,922 derivative liability was reclassified into additional paid-in capital. On August 28, 2014, Asher Note I was converted into 12,942 shares of common stock at conversion price of $0.9272 per share. Due to this conversion of debt, $27,894 derivative liability was reclassified into additional paid-in capital.

 

As of September 30, 2014 and December 31, 2013, 19,085,929 and 19,068,889 shares were issued and outstanding, respectively.

 

NOTE 12 - RELATED PARTY TRANSACTIONS

 

a) Related parties:

 

Name of related parties  Relationship with the Company
    
Mr. Jianmin Gao  Stockholder, Chief Executive Officer, Chief Financial Officer and Chairman of the Board of the Company
Ms. Lingling Zhang  Stockholder, Director and Corporate Secretary
Mr. Fei Gao  Stockholder, Director and Chief Operating Officer
Ms. Fanfei Liu  Daughter of Lingling Zhang *
Ms. Wei Guo  Stockholder and Managing Director of Beitun**

* Fenfei Liu changed her name from Shasha Liu to Fanfei Liu in December 2013.

**Beitun was sold on April 1, 2014 and Ms. Wei Guo was no longer a member of the management team since then. See Note 16 for additional information.

 

b) The Company had the following related party balances at September 30, 2014 and December 31, 2013:

 

   September 30, 2014  December 31, 2013
           
Loan from Mr. Jianmin Gao  $370,540   $362,472 
Loan from Ms. Fanfei Liu  $15,980   $15,980 
Loan from Mr. Fei Gao  $719,864   $512,258 
Loan from Ms. Wei Guo  $—     $1,496,980 
Loan from Ms. Lingling Zhang  $7,830   $7,830 
Total related party payables  $1,114,214   $2,395,520 

 

The related party payables are non-interest bearing and have no specified maturity date. Mr. Jianmin Gao is the CEO of the Company. The Company obtained these loans to fund operations when the Company or one of the subsidiaries was in need of cash. For the nine months ended September 30, 2014 and 2013, the Company borrowed $8,068 and $20,792 from Mr. Jianmin Gao and made payments of $0 and $0 back to him, respectively. For the nine months ended September 30, 2014 and 2013, the Company borrowed $207,604 and $351,727 from Mr. Fei Gao and made payments of $0 and $4,575 back to him, respectively. For the nine months ended September 30, 2014 and 2013, the Company did not make any borrowing from or repayment to Ms. Fanfei Liu. For the nine months ended September 30, 2014 and 2013, the Company borrowed approximately $0 and $3,000 from Ms. Lingling Zhang and made repayments of $0 and $0, respectively. The loan borrowed from Ms. Wei Guo was no longer a liability of the Company from April 1, 2014 due to the disposal of Beitun.

 

NOTE 13 - COMMITMENTS AND CONTINGENCIES

 

LEASE COMMITMENTS

 

On October 21, 2010, Arki (Beijing) E-commerce Technology Corp. (Arki Beijing), our wholly-owned subsidiary, entered into a lease agreement for an office facility expansion in the Beijing Chaoyang District, Hua Mao Center. The straight-line monthly gross rental rate was $30,831 with a 36-month term. This lease expired on October 20, 2013. On February 2, 2011, the Company entered into an amendment agreement that changed the lessee to be America Arki Network Service Beijing Co. Ltd., our wholly-owned subsidiary. In addition, Arki (Beijing) E-commerce Technology Corp. sublet a portion of the office facility expansion where Arki (Beijing) E-commerce Technology Corp shared $6,259 of the monthly rent with a 33-month term. The sublease agreement expired on October 20, 2013. In the meantime, America Arki Network Service Beijing Co. Ltd. was obligated to pay for the remaining monthly rent of $24,572. On July 1, 2012, the two entities entered into an amendment agreement with the lessor, which increased the total monthly gross rental rate to approximately $31,670. In October 2013, the lease was renewed. The new lease started on October 21, 2013 and will expire on October 20, 2016. The new monthly rent is approximately $45,048 (“RMB276,971”). Rent expenses totaled $315,336 and $285,030 for the nine months ended September 30, 2014 and 2013, respectively. Rent expenses totaled $45,048 and $95,010 for the three months ended September 30, 2014 and 2013, respectively.  The Company stopped renting HuaMao Center in August 2014.

 

On August 20, 2014, America Arki Network Service Beijing Co. Ltd. entered into a lease agreement for an office facility in Beijing Chaoyang District, Wanda Center. The straight-line monthly gross rental rate is $1,540 under a 12-month term. The Company put a deposit of $3,095. Rent expenses related to this facility totaled $3,095 for the three and nine months ended September 30, 2014.

 

On November 1, 2012, the Company entered into a lease agreement with a third party for the New York office. This lease expired on October 31, 2013. Our monthly rental is $1,923. In August 2013, the Company renewed the lease. The new lease started on November 1, 2013 and will expire on October 31, 2014. The new monthly rent is $2,845. Rent expense for the facility totaled $25,605 and $17,307 for the nine months ended September 30, 2014 and 2013, respectively. Rent expense for the facility totaled $8,535 and $5,769 for the three months ended September 30, 2014 and 2013, respectively.

 

NOTE 14 - INCOME TAX EXPENSE

 

United States

 

The Company is incorporated in United States, and is subject to corporate income tax rate of 34%.

 

The People's Republic of China (PRC)

 

Beginning January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the old laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”). The new standard EIT rate of 25% replaces the 33% rate applicable to both DES and FIEs.

 

The new EIT Law also imposes a withholding income tax of 10% on dividends distributed by a foreign invested enterprise to its immediate holding company outside of China, if such immediate holding company is considered as a non-resident enterprise without any establishment or place within China or if the received dividends have no connection with the establishment or place of such immediate holding company within China, unless such immediate holding company’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. Such withholding income tax was exempted under the previous income tax regulations.

 

Loss from continuing operations before income taxes consists of:

 

   For the nine months ended September 30,
   2014  2013
             
 Non-PRC   $(3,284,600)  $(162,556)
 PRC   $(461,937)  $(363,509)
     $(3,746,537)  $(526,065)

 

The income tax expenses amounted to $23 and $947 for the nine months ended September 30, 2014 and 2013, respectively. The income tax expenses amounted to $0 and $133 for the three months ended September 30, 2014 and 2013, respectively.

 

The Company has provided full valuation allowance for the deferred tax assets on the expected future tax benefits from the net operating loss carry forwards as the management believes it is more likely than not that these assets will not be realized in the future.

 

There is no need for the Company to accrue interest or penalty associated with the uncertain tax positions, and, accordingly, no such accruals have been made in the Company’s account.

 

The PRC tax law provides a (3-5 years) statute of limitation and the Company’s income tax returns are subject to examination by tax authorities during that period. All penalties and interest are expensed as incurred. For the nine months ended September 30, 2014 and 2013, there were no penalties and interest.

 

NOTE 15 - LOSS PER SHARE

 

Basic and diluted loss per share for each of the periods presented are calculated as follows:

 

   For the three months ended September 30,  For the nine months ended September 30,
   2014  2013  2014  2013
                     
Numerator:    

            
Net loss  $(3,022,222)  $(170,534)  $(3,746,467)  $(523,483)
Net loss attributable to common stockholders for computing basic and diluted loss per common share   (3,022,222)   (170,729)   (3,746,501)   (524,747)
Denominator:                    
Weighted average number of common shares outstanding for computing basic and diluted loss per common share   19,077,629    19,068,889    19,074,401    19,068,889 
Basic and diluted loss per share  $(0.16)  $(0.01)  $(0.20)  $(0.03)

  

For the nine months ended September 30, 2014 and 2013, there were no common stock equivalents  for computing diluted earnings per share.

 

NOTE 16 - DISCONTINUED OPERATIONS

 

On April 1, 2014, the Company entered into a definitive agreement to sell and transfer its entire 51% equity interests in Beijing Beitun Trading Co. Ltd. (“Beitun”). Under the term of the agreement to dispose Beitun, the Company agreed to receive $41,030 (RMB 255,000) in cash consideration from Yifan Zhang for the sale of its 51% equity interest in Beitun. Yifan Zhang is the daughter of Ms. Wei Guo, the shareholder and managing director of Beitun.

 

The results of operations of Beitun, for all periods, were separately reported as “discontinued operations”. The loss on disposal of Beitun totaled $6,842, which was reported as “Loss from disposal of subsidiary” for the nine months ended September 30, 2014.

 

The operating results of Beitun for the three and nine months ended September 30, 2014 and 2013 classified as discontinued operations are summarized below:

  

Three Months Ended

September 30,

 

Nine months Ended

September 30,

   2014  2013  2014  2013
                     
Sales  $—     $1,418,835   $1,142,840   $4,558,040 
Cost of Goods Sold   —      1,401,248    1,127,786    4,506,053 
Gross Profit   —      17,587    15,054    51,987 
Operating Expenses   —      17,053    14,941    48,431 
Other Income (Expense)   —      —      (20)   —   
Income Tax Expense   —      133    23    974 
Net loss  $—     $401   $70   $2,582 

 

NOTE 17 – SUBSEQUENT EVENTS 

 

On October 1, 2014, Asher Enterprises converted $2,000 of Asher Note 1 into 32,468 shares of common stock at a conversion price of $0.06 per share. On October 15, 2014, Asher Enterprises converted $15,000 of Asher Note 1 into 72,886 shares of common stock at a conversion price of $0.21 per share. On October 20, 2014, Asher Enterprises converted $15,000 of Asher Note 1 into 43,103 shares of common stock at a conversion price of $0.35 per share.

 

On July 18, 2014, the Company and Shenzhen Zhongying Yunshang Techonology Company Limited, a company established under the laws of People’s Republic of China (“Zhongying Yunshang”), entered into a letter of intent to conduct a Share Exchange Agreement (the “Agreement”), pursuant to which the Company will acquire 51% of the capital stock of Zhongying Yunshang from its stockholder LV Yong (the “Merger”). Under the Agreement, the Company shall issue a total of 3,150,000 shares (the “Shares”) of the Company’s common stock to LV Yong, evaluated at $2.6 per share for a total of $8,190,000 or approximately RMB 51,000,000. In addition, the Company may issue 1,810,000 shares of common stock and certain three-year stock options at an exercise price of $2.00 per share to LV Yong as management incentives after the closing of the Merger.

 

Currently the Company and Zhongying Yunshang applied to have the Merger approved by Shenzhen City Longhua District Commerce Committee and registration modified by Administration for Industry and Commerce. The Company shall issue the Shares to LV Yong within twenty-five (25) business days, upon the Merger transaction is approved by relevant Chinese government agencies and registration modification is completed, as well as the audit of Zhongying Yunshang is completed by the Company’s independent registered public accountant. The Agreement shall become effective after LV Yong receives the Shares.

 

In addition, the Company is committed to raising $30,000,000 capital within ninety (90) days from the effective date of the Agreement and reaching certain milestones for its stock price. If the Company cannot complete the financing or reach the milestones for its stock price within twelve (12) months from the effective date of the Agreement, the Agreement will be deemed null and void since inception and any share transfer or issuance shall be returned. As of the report date, the Company has not merged with Zhongying YunShang.

 

Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

 

The following discussion provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto contained elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ significantly from the results, expectations and plans discussed in these forward-looking statements.

 

Overview

 

We are primarily engaged in e-commerce services. We operate an online retail platform in China at www.ccmus.com through Arki (Beijing) E-Commerce Technology Corp., our wholly owned subsidiary, and an online retail platform at www.ccgusa.com in the United States. In addition to e-commerce services, we have been working to develop a debit card business, through America Arki Fuxin Network Management Co. Ltd., our wholly owned subsidiary.

 

Our online retail platforms allow third-party merchants to sell their general merchandise products directly to consumers in China and the United States. We charge third-party merchants a service fee of approximately 5% of the total purchase price with respect to their general merchandise sold through our website. We also receive advertising fees from third-party merchants if they advertise products through our website. To incentivize our customers, we give our member customers bonus points for each purchase, to be used for cash value in their next purchase. As our customers accumulate bonus points, they receive membership upgrade, special discounts and additional bonus points. Our member customers may also receive awards from our daily sweepstakes program.

 

We collaborate with Bank of Fuxin to issue cobranded debit cards. We plan to charge participating merchants a transaction fee of 1% to 5% for each purchase using our cobranded debit cards. We intend to give our cardholders cash rewards with their purchases through our online retail platform. As of September 30, 2014, our cooperation with Fuxin was very minimum. We are seeking to collaborate with other banks for debit card business cooperation. We have not realized any revenue from this segment of business. We do not expect to start our debit card operation in 2014.

 

Prior to April 2014, through Beijing Beitun Trading Co., Ltd. (“Beitun Trading”), we purchased meats from suppliers and distributed them to restaurants and food producers in China. On April 1, 2014, the Company sold its entire 51% equity of Beijing Beitun Trading Co. Ltd. (“Beitun”) to Yifan Zhang for $41,030 (RMB255,000). Yifan Zhang is the daughter of Ms. Wei Guo, the stockholder and managing director of Beitun. As a result of the sale of our equity in Beitun Trading, we no longer operate in the distribution of meat products.

 

Letter of Intent with Zhongying Yunshang Technology Company Limited

 

On July 18, 2014, the Company and Shenzhen Zhongying Yunshang Techonology Company Limited, a company established under the laws of People’s Republic of China (“Zhongying Yunshang”), entered into a letter of intent to conduct a Share Exchange Agreement (the “Agreement”), pursuant to which the Company will acquire 51% of the capital stock of Zhongying Yunshang from its stockholder LV Yong (the “Merger”). Under the Agreement, the Company shall issue a total of 3,150,000 shares (the “Shares”) of the Company’s common stock to LV Yong, evaluated at $2.6 per share for a total of $8,190,000 or approximately RMB 51,000,000. In addition, the Company may issue 1,810,000 shares of common stock and certain three-year stock options at an exercise price of $2.00 per share to LV Yong as management incentives after the closing of the Merger.

 

Currently the Company and Zhongying Yunshang applied to have the Merger approved by Shenzhen City Longhua District Commerce Committee and registration modification by Administration for Industry and Commerce. The Company shall issue the Shares to LV Yong within twenty-five (25) business days, upon the Merger transaction is approved by relevant Chinese government agencies and registration modification is completed, as well as the audit of Zhongying Yunshang is completed by the Company’s independent registered public accountant. The Agreement shall become effective after LV Yong receives the Shares.

 

In addition, the Company is committed to raise $30,000,000 capital within ninety (90) days of the effectiveness of the Agreement and reach certain milestones for its stock price. If the Company cannot complete the financing or reach the milestones for its stock price within twelve (12) months of the effectiveness of the Agreement, the Agreement will be deemed null and void since inception and any share transfer or issuance shall be returned. As of the report date, the Company has not merged with Zhongying YunShang.

 

Results of Operations

 

Comparison of Results of Operations for the three months ended September 30, 2014 and September 30, 2013

 

Revenues

 

We derive our revenues from our e-commerce business. We have not generated any revenue from our debit card business historically. Our net revenues for the three months ended September 30, 2014 decreased to $0 from $9,260 for the three months ended September 30, 2013, a decrease of $9,260 or 100.0%.

 

The following table sets forth a breakdown of our revenues for the periods indicated:

 

   Three months ended   
September 30,
  Increase (decrease) in  Increase (decrease) in
   2014  2013  dollar amount  percentage
                     
Net revenue – e-commerce business  $—     $9,260   $(9,260)   (100.0)%
Net revenue – debit card business  —     —     —      —   
Total Revenue  $—     $9,260   $(9,260)   (100.0)%

 

E-commerce Business

 

Our net revenues from e-commerce business for the three months ended September 30, 2014 decreased to $0 from $9,260 for the three months ended September 30, 2013, a decrease of $9,260 or 100.0%. The decrease was primarily due to the diversion of attention of management from the existing operation of this segment as the Company is making changes to its current e-commerce business model. The Company is working to re-focus its e-commerce business on selling collections in the future.

  

Debit Card Business

 

Our debit card business has not generated any revenue as of September 30, 2014.

 

Cost of Sales

 

Cost and expenses associated with our e-commerce business, such as processing costs and transaction costs, are recognized as our selling expenses in our consolidated statements of operations and comprehensive income. Our cost of sales for the three months ended September 30, 2014 and 2013 were $nil.

 

Gross Profit

 

Our gross profit for the three months ended September 30, 2014 decreased to $0 from $9,260 for the three months ended September 30, 2013, a decrease of $9,260 or 100.0%. The decrease was primarily due to a decrease in sales from e-commerce business. Our gross profit margin for the three months ended September 30, 2014 decreased to 0.0% from 100.0% for the three months ended September 30, 2013. Gross profit from the E-Commerce business amounted to $0 and $9,260 for the three months ended September 30, 2014 and 2013, respectively.

 

Operating Expenses

 

Our operating expenses consist of selling expenses, and general and administrative expenses. Our total operating expenses for the three months ended September 30, 2014 decreased to $97,063 from $236,055 for the three months ended September 30, 2013, a decrease of $138,992 or 58.9%.

 

Selling expenses for the three months ended September 30, 2014 decreased to $9,266 from $17,487 for the three months ended September 30, 2013, a decrease of $8,221 or 47.0%. The decrease was in line with the decrease in sales in our e-commerce business.

 

General and administrative expenses for the three months ended September 30, 2014 decreased to $87,797 from $218,568 for the three months ended September 30, 2013, a decrease of $130,771, or 59.8%. The decrease was primarily due to decreased professional expenses.

 

No loss from divestment of business was recorded for the three months ended September 30, 2014 and 2013.

 

Comparison of Results of Operations for the nine months ended September 30, 2014 and September 30, 2013

 

Revenues

 

We derive our revenues from our e-commerce business. We have not generated any revenue from our debit card business historically. Our net revenues for the nine months ended September 30, 2014 decreased to $0 from $11,488 for the nine months ended September 30, 2013, a decrease of $11,488 or 100.0%.

 

The following table sets forth a breakdown of our revenues for the periods indicated:

 

   Nine months ended   
September 30,
  Increase (decrease) in  Increase (decrease) in
   2014  2013  dollar amount  percentage
                     
Net revenue – e-commerce business  $—     $11,488   $(11,488)   (100.0)%
Net revenue – debit card business  —     —     —      —   
Total Revenue  $—     $11,488   $(11,488)   (100.0)%

 

E-commerce Business

 

Our net revenues from e-commerce business for the nine months ended September 30, 2014 decreased to $0 from $11,488 for the nine months ended September 30, 2013, a decrease of $11,488 or 100.0%. The decrease was primarily due to the diversion of attention of management from the existing operation of this segment as the Company is making changes to its current e-commerce business model. The Company is working to re-focus its e-commerce business on selling collections in the future.

 

Debit Card Business

 

Our debit card business has not generated any revenue as of September 30, 2014.

 

Cost of Sales

 

Cost and expenses associated with our e-commerce business, such as processing costs and transaction costs, are recognized as our selling expenses in our consolidated statements of operations and comprehensive income. Our cost of sales for the nine months ended September 30, 2014 and 2013 were both $0.

 

Gross Profit

 

Our gross profit for the nine months ended September 30, 2014 decreased to $0 from $11,488 for the nine months ended September 30, 2013, a decrease of $11,488 or 100.0%. The decrease was primarily due to a decrease in sales from e-commerce business. Our gross profit margin for the nine months ended September 30, 2014 decreased to 0% from 100.0% for the nine months ended September 30, 2013.

 

Operating Expenses

 

Our operating expenses consist of selling expenses, and general and administrative expenses. Our total operating expenses for the nine months ended September 30, 2014 decreased to $579,716 from $813,191 for the nine months ended September 30, 2013, a decrease of $233,475 or 28.7%.

 

Selling expenses for the nine months ended September 30, 2014 decreased to $19,371 from $58,133 for the nine months ended September 30, 2013, a decrease of $38,762 or 66.7%. The decrease was in line with the decrease in sales in our e-commerce business.

 

General and administrative expenses for the nine months ended September 30, 2014 decreased to $553,503 from $755,058 for the nine months ended September 30, 2013, a decrease of $201,555, or 26.7%. The decrease was primarily due to decreased operating expenses from decreased operating.

 

During the nine months ended September 30, 2014 and 2013, loss from divestment of business in the amounts of $6,842and $0 were recorded as operating expenses.

 

Liquidity and Capital Resources

 

Cash Flows

 

   Nine months ended September 30,
Net cash generated from /(used in)  2014  2013
           
Operating activities  $(166,928)  $(367,106)
Investing activities  $(2,506)  $—   
Financing activities  $89,216   $477,361 
Net increase (decrease) in cash  $(90,179)  $113,379 

 

Operating Activities

 

The net cash used in operating activities was $166,928 for the nine months ended September 30, 2014, which was primarily due to our net loss of $3,746,467, increase of other receivables of $237, more purchase of inventories of $137,994, offset by decrease of advance to suppliers of $366,747, increase in change in fair value of derivative liabilities of $3,085,366, and increase in accrued expenses of $37,011.

  

The net cash used in operating activities was $367,106 for the nine months ended September 30, 2013, which was primarily due to our net loss of $523,483, increase of inventories of $145,483, decrease in accounts payable of $24,958, and decrease in payable to Caesar Capital Management Ltd. of $41,343, partially offset by decrease of advance to suppliers of $178,685, decrease of prepaid expenses of $80,836, and decrease of accounts receivable of $52,038.

 

Investing Activities

 

The net cash used in investing activities was $2,506 for the nine months ended September 30, 2014 and was cash decreased due to disposal of Beitun on April 1, 2014.

 

The net cash generated from or used in investing activities was zero for the nine months ended September 30, 2013.

 

Financing Activities

 

The net cash generated from financing activities was $89,216 for the nine months ended September 30, 2014, which was due to proceeds from related parties of $1,162,415, proceeds from third party debt of $154,048 and offset by payment to related parties of $1,162,395.

 

The net cash generated from financing activities was $477,361 for the nine months ended September 30, 2013, which was due to proceeds from related parties of $3,614,004 and proceeds from third party debt of $163,070, offset by payments to related parties of $3,299,713.

 

Capital Resources

 

As of September 30, 2014, we had cash of $11,507 on hand. We had negative cash flows from our operations for the nine months ended September 30, 2014. As of September 30, 2014, we had outstanding loans of $370,540 due to Mr. Jianmin Gao, our director and executive officer.

 

We have historically financed our operations through loans from our directors and officers and a major shareholder of the Company. We believe that our cash on hand will not provide sufficient working capital to fund our operations for the next twelve months. We intend to finance our operation and internal growth with cash on hand, cash provided from operations, loan from related parties, borrowings, or some combination thereof.

 

To the extent it becomes necessary to raise additional capital, we may seek to raise the fund by way of equity or debt offerings, or a combination thereof. We cannot guarantee that we will be able to raise the capital as needed in the future on terms acceptable to us, if at all. If adequate funds are not available, our business would be jeopardized and we may not be able to continue. If we ceased operations, it is likely that all of our investors would lose their investments.  

 

Lease Commitments

   

On October 21, 2010, Arki (Beijing) E-commerce Technology Corp. (Arki Beijing), our wholly-owned subsidiary, entered into a lease agreement for an office facility expansion in the Beijing Chaoyang District, Hua Mao Center. The straight-line monthly gross rental rate was $30,831 with a 36-month term. This lease expired on October 20, 2013. On February 2, 2011, the Company entered into an amendment agreement that changed the lessee to be America Arki Network Service Beijing Co. Ltd., our wholly-owned subsidiary. In addition, Arki (Beijing) E-commerce Technology Corp sublet a portion of the office facility expansion where Arki (Beijing) E-commerce Technology Corp shared $6,259 of the monthly rent with a 33-month term. The sublease agreement expired on October 20, 2013. In the meantime, America Arki Network Service Beijing Co. Ltd. was obligated to pay for the remaining monthly rent of $24,572. On July 1, 2012, the two entities entered into an amendment agreement with the lessor, which increased the total monthly gross rental rate to approximately $31,670. In October 2013, the lease was renewed. The new lease started on October 21, 2013 and will expire on October 20, 2016. The new monthly rent is approximately $45,048 (“RMB 276,971”). Rent expenses totaled $315,336 and $285,030 for the nine months ended September 30, 2014 and 2013, respectively. Rent expenses totaled $45,048 and $95,010 for the three months ended September 30, 2014 and 2013, respectively.  The Company stopped renting HuaMao Center in August 2014.

 

On August 20, 2014, America Arki Network Service Beijing Co. Ltd. entered into a lease agreement for an office facility in Beijing Chaoyang District, Wanda Center. The straight-line monthly gross rental rate is $1,540 under a 12-month-term. The Company put a deposit of $3,095. Rent expenses totaled $3,095 for the three and nine months ended September 30, 2014.

 

On November 1, 2012, the Company entered into a lease agreement with a third party for the New York office. This lease expired on October 31, 2013. Our monthly rental was $1,923. In August 2013, the Company renewed the lease. The new lease started on November 1, 2013 and will expire on October 31, 2014. The new monthly rent is $2,845. Rent expense for the facility totaled $25,605 and $17,307 for the nine months ended September 30, 2014 and 2013, respectively. Rent expense for the facility totaled $8,535 and $5,769 for the three months ended September 30, 2014 and 2013, respectively.

 

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.

 

There have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

 

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.

 

Smaller reporting companies are not required to provide the 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 the reports that we file or submit under the Securities Exchange Act 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules, regulations and 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.

 

During management’s evaluation of our disclosure controls and procedures as of September 30, 2014, our principal executive officer and principal financial officer concluded that we continued to have the following material weaknesses in our internal control over financial reporting as of September 30, 2014:

 

  The Company does not have sufficient number of personnel to provide segregation within the functions consistent with the objectives of internal control.
     
  The Company’s accounting personnel does not possess appropriate knowledge, experience and training in U.S. GAAP, and therefore faces significant difficulties in maintaining books and records and preparing financial statements in accordance with U.S. GAAP, including but not limited to accounting for equity transactions.

 

Based on their evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures at September 30, 2014 were not effective.

 

Our management team and other key personnel perform monitoring and other key control activities in an attempt to ensure the accuracy of the Company’s filings. Management intends to remediate these material weaknesses as soon as practicable after the Company’s financial position permits.

 

In addition, the Company continues to assess its internal controls and procedures in light of these recent events and determine additional appropriate actions to take to remediate these material weaknesses.

 

Changes in internal controls

 

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2014 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

 

PART II OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

There are presently no material pending legal proceedings to which the Company, any of our 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.

 

Smaller reporting companies are not required to provide the information required by this item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

On October 1, 2014, Asher Enterprises converted $2,000 of Asher Note 1 into 32,468 shares of common stock at a conversion price of $0.06 per share. On October 15, 2014, Asher Enterprises converted $15,000 of Asher Note 1 into 72,886 shares of common stock at a conversion price of $0.21 per share. On October 20, 2014, Asher Enterprises converted $15,000 of Asher Note 1 into 43,103 shares of common stock at a conversion price of $0.35 per share. The shares were issued in reliance upon exemptions from registration requirements pursuant to Section 4(2) of the Securities Act of 1933, as amended. 

 

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
  101. INS   XBRL Instance Document
  101. SCH   XBRL Taxonomy Extension Schema Document
  101. CAL   XBRL Taxonomy Extension Calculation Linkbase Document.
  101. LAB   XBRL Taxonomy Extension Label Linkbase Document.
  101. PRE   XBRL Taxonomy Extension Presentation Linkbase Document.
  101. DEF   XBRL Taxonomy Extension Definition Linkbase Document.
         
  +In accordance with the SEC Release 33-8238, deemed being furnished and not filed.

 

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: November 19, 2014 Consumer Capital Group, Inc.  
       
  By: /s/ Jianmin Gao  
    Jianmin Gao  
    Chief Executive Officer and Chief Financial Officer  
    (Principal Executive Officer and Principal Financial Officer)