NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2017 AND 2016 (UNAUDITED)
Note
1 –
ORGANIZATION
Yosen
Group, Inc. (the “Company” or “Yosen”) was incorporated on August 20, 1998 under the laws of the State
of Nevada. Capital Future Developments Limited (“Capital”) was incorporated on July 22, 2004 under the laws of the
British Virgin Islands. Zhejiang YongXin Digital Technology Company Limited (“Zhejiang”), Yiwu YongXin Communication
Limited (“Yiwu”), Hangzhou Wang Da Electronics Company Limited (“Wang Da”) were incorporated under the
laws of the Peoples Republic of China (“PRC” or “China”) on July 11, 2005, July 18, 1997, March 30, 1998,
respectively. Zhejiang set up a new operating entity, Hangzhou Letong Digital Technology Co., Ltd. (“Letong”) on March
10, 2009. On January 6, 2014 the Company established Yosen Trading Inc. (“Yosen Trading”), its wholly owned US based
subsidiary in New York. On April 23, 2015, the Company established a wholly owned subsidiary Hangzhou Yongxin Lamapai E-commerce
Co., Ltd (“Hangzhou Lamapai”). On September 24, 2015, Hangzhou Lamapai established a new company Zhejiang Yongxin
Lamapai E-commerce Co., Ltd (“Zhejiang Lamapai”). In 2016, Zhejiang Lamapai established Ningbo Yongxin Lamapai E-commerce
Co. Ltd ("Ningbo") and Hangzhou Saizhuo brand management Co., Ltd ("Saizhuo"). The Company invested RMB 6,193,541(USD
934,620) to Zhejiang Lamapai. As a result of the investment, the Company owns 63.9% of Zhejiang Lamapai as of June 30, 2017.
On
December 21, 2005, Capital became a wholly owned subsidiary of Yosen through a reverse merger (“Merger Transaction”).
Yosen acquired all of the issued and outstanding capital stock of Capital pursuant to a Merger Agreement dated December 21, 2005
by and among Yosen, XY Acquisition Corporation, Capital and the shareholders of Capital (the “Merger Agreement”).
Pursuant to the Merger Agreement, Capital became a wholly owned subsidiary of Yosen and, in exchange for the Capital shares, Yosen
issued 7,000,000 shares of its common stock to the shareholders of Capital, representing 93% of the issued and outstanding capital
stock of Yosen at that time and cash of $500,000.
On
August 15, 2007, we executed a series of contractual agreements between Capital and Zhejiang. The contractual agreements give
Capital and its equity owners an obligation, and having ability to absorb, any losses, and rights to receive returns; however,
these contractual agreements did not change the equity ownership of Zhejiang. We did not dispose Capital’s actual equity
ownership of Zhejiang when we executed the contractual agreements. Capital entered into share-holding entrustment agreements with
five individuals - Zhenggang Wang, Yimin Zhang, Huiyi Lv, Xiaochun Wang and Zhongsheng Bao to hold 35%, 20%, 20%, 15% and 10%,
respectively, of the equity interest of Zhejiang on behalf of Capital on November 21, 2005. The entrustment agreements confirm
that Capital is the actual owner of Zhejiang. Capital enjoys the actual shareholder’s rights and has the right to obtain
any benefits received by the nominal holders. Zhenggang Wang is the CEO and shareholder of Yosen. Yimin Zhang, Huiyi Lv, Xiaochun
Wang and Zhongsheng Bao have no other relationship with Yosen. No consideration was given to these individuals who held the equity
of Zhejiang on behalf of Capital.
Letong
ceased operations in 2011. Yiwu closed all its stores in stores locations in 2012. Wang Da closed all its stores in the second
quarter 2014. Yosen Trading ceased operation in 2015. Saizhuo ceased operation in March 2017. Zhejiang ceased operation in June
2017.
Zhejiang
Lamapai disposed 91% of equity interest in Ningbo in June 2017. As a result of the disposal, Zhejiang Lamapai owns 9% of equity
interest in Ningbo.
ORGANIZATIONAL
CHART
Our
corporate structure as of June 30, 2017 is as follows:
ORGANIZATIONAL
CHART
*
These entities ceased operation in 2011.
**
The entity ceased operation in 2014.
***
The entity ceased operation in 2015.
****
The entity ceased operation in 2017.
Note
2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying consolidated financial statements (“CFS”) were prepared in conformity with accounting principles generally
accepted in the United States of America (“US GAAP”). The Company’s subsidiaries – Wang Da, Yiwu,
Zhejiang, Hangzhou Lamapai and Zhejiang Lamapai’s functional currency is the Chinese Renminbi (“RMB”), however,
the accompanying CFS were translated and presented in United States Dollars (“$”, or “USD”). Yosen is
the parent company incorporated on August 20, 1998 under the laws of the State of Nevada. The parent company does not have operations.
Its main activities were incurring public company expenses. Yosen pays all its expenses in USD, its functional currency. Capital
was incorporated on July 22, 2004 under the laws of the BVI. Capital is a holding company and does not have operations. As a result,
we determined its functional currency is USD.
Going
Concern
The
accompanying CFS were prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The Company realized net loss of $818,986 for the six months ended June 30, 2017. The Company
had accumulated deficit of $51,521,674 as of June 30, 2017. There can be no assurance that the Company will become profitable
or that it will survive as a public company. These issues raise substantial doubt regarding the Company’s ability to continue
as a going concern.
In
June 2017, we closed all remaining stores of Zhejiang. It represents the discontinuation of Yosen’s traditional electronics
retail and wholesale business. The Company now focuses on selling imported goods through online platform and customer experience
store.
Principles
of Consolidation
The
CFS include the accounts of Yosen and its wholly owned subsidiaries Capital, Wang Da, Yiwu, Zhejiang, Lamapai, Ningbo and Saizhuo
collectively referred to as the Company. All material intercompany accounts, transactions and profits were eliminated in consolidation.
Noncontrolling
Interest
As
of June 30, 2017, the Company invested RMB 6,193,541($898,852) in Zhejiang Lamapai and owns 63.9% interest in Zhejiang Lamapai.
The 36.1% owned by the third parties is presented as noncontrolling interest.
The
Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
Topic 810, “
Consolidation
,” which governs the accounting for and reporting of non-controlling interests (“NCIs”)
in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate,
among other things, that NCIs be treated as a separate component of equity, not as a liability, that increases and decreases in
the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions
or dilution gains or losses, and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such
allocation might result in a deficit balance. This standard also required changes to certain presentation and disclosure requirements.
The
net income attributed to the NCI is separately designated in the accompanying consolidated statements of income and other comprehensive
income (loss). Losses attributable to the NCI in a subsidiary may exceed the NCI’s interests in the subsidiary’s equity.
The excess attributable to the NCI is attributed to those interests. The NCI shall continue to attribute its share of losses even
if that attribution results in a deficit NCI balance.
Currency
Translation
The
accounts of Zhejiang, Wang Da, Yiwu, Lamapai entities were maintained, and its financial statements were expressed RMB. Such financial
statements were translated into USD in accordance with FASB ASC Topic 830-10,
“Foreign Currency Translation,”
with the RMB as the functional currency. According to FASB ASC Topic 830-10, assets and liabilities were translated at the ending
exchange rate, stockholders’ equity is translated at the historical rates and income statement items are translated
at the average exchange rate for the year. The resulting translation adjustments are reported as other comprehensive income in
accordance with FASB ASC Topic 220,
“Reporting Comprehensive Income,”
as a component of shareholders’
equity. Transaction gains and losses are reflected in the consolidated statements of operations and comprehensive loss.
Use
of Estimates
The
preparation of financial statements in conformity with US GAAP requires 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.
Risks
and Uncertainties
The
Company is subject to risks from, among other things, intense competition associated with the industry in general, other risks
associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, foreign
currency exchange rates and the volatility of public markets.
Contingencies
Certain
conditions may exist as of the date the CFS are issued, which could result in a loss to the Company but which will only be resolved
when one or more future events occur or fail to occur. The Company’s management assesses such contingent liabilities, and
such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that
are pending against the Company or unasserted claims that may result in such proceedings, the Company’s management evaluates
the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought
or expected to be sought.
If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, then the estimated liability is accrued in the Company’s CFS. If the assessment indicates that a potential
material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature
of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed.
Loss
contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case
the guarantee would be disclosed.
Accounts
Receivable, net
The
Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts
receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and
changes in customer payment patterns to evaluate the adequacy of these reserves. Terms of the sales vary. Reserves are recorded
primarily on a specific identification basis. Allowance for doubtful accounts was $1,005,085 (unaudited) and $1,005,085 as of
June 30, 2017 and December 31, 2016, respectively.
Inventories,
net
Inventories
are valued at the lower of cost (determined on a weighted average basis) or market. Management compares the cost of
inventories with the market value and allowance is made for writing down their inventories to market value, if lower. As of June
30, 2017 and December 31, 2016, inventory consisted entirely of finished goods.
Property
and Equipment, net
Property
and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals
and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property
and equipment is provided using the straight-line method for substantially all assets with estimated lives of:
Automotive
|
5
years
|
Office Equipment
|
5
years
|
As
of June 30, 2017 and December 31, 2016, property and equipment consisted of the following:
|
|
June
30,
2017
|
|
December
31,
2016
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Automotive
|
|
$
|
40,830
|
|
|
$
|
39,870
|
|
Office
equipment
|
|
|
141,482
|
|
|
|
153,372
|
|
Plant
and equipment
|
|
|
189,611
|
|
|
|
168,212
|
|
Construction
in progress
|
|
|
332,159
|
|
|
|
328,103
|
|
Subtotal
|
|
|
704,082
|
|
|
|
689,557
|
|
Less:
accumulated depreciation
|
|
|
(222,976
|
)
|
|
|
(187,942
|
)
|
Total
|
|
$
|
481,106
|
|
|
$
|
501,615
|
|
Long-Lived
Assets
The
Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with FASB ASC 360,
“Property,
Plant and Equipment,”
which requires impairment losses to be recorded on long-lived assets used in operations when indicators
of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’
carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market
value of the long-lived assets. Losses on long-lived assets to be disposed of are determined in a similar manner, except that
fair market values are reduced for the cost of disposal. Based on its review, the Company believes that, as of June 30, 2017 (unaudited)
and December 31, 2016, there were no significant impairments of its long-lived assets.
Fair
Value of Financial Instruments
FASB
ASC Topic 825,
“Financial Instruments”
, requires the Company disclose estimated fair values (“FVs”)
of financial instruments. The carrying amounts reported in the statements of financial position for current assets and current
liabilities qualifying as financial instruments are a reasonable estimate of FV.
Short-term
Loans
As
of June 30, 2017 and December 31, 2016, short-term loans consisted of the following:
|
|
June
30,
2017
|
|
December
31,
2016
|
Line
of credit from China Construction Bank , dated May 27, 2017, due on May 26, 2018
|
|
|
27,579
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Short
term loan dated June 1, 2016, due on August 28, 2017, with interest payable monthly, personally guaranteed by the CEO
|
|
|
442,446
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
From
Bank of Hangzhou, dated July 13, 2016, due on July 12, 2017, with interest of 6.96% payable monthly
|
|
|
—
|
|
|
|
360,039
|
|
|
|
|
|
|
|
|
|
|
From
Bank of Chouzhou, dated July 9, 2016, due on July 10, 2017, with interest 6.00% payable monthly, personally guaranteed by
the CEO
|
|
|
—
|
|
|
|
720,077
|
|
|
|
|
|
|
|
|
|
|
From
Bank of Chouzhou, dated July16, 2016, due on July 10, 2017 with interest of 6.0625% payable monthly, personally guaranteed
by the CEO
|
|
|
—
|
|
|
|
1,440,154
|
|
|
|
|
|
|
|
|
|
|
Short
term loan dated June 1, 2016, due on February 28, 2017, with interest payable monthly, personally guaranteed by the CEO
|
|
|
—
|
|
|
|
432,046
|
|
|
|
$
|
470,025
|
|
|
$
|
2,952,316
|
|
As
of June 30, 2017, long-term loans consisted of the following:
|
|
June
30,
2017
|
|
December
31,
2016
|
|
|
|
|
|
From
Bank of Chouzhou, dated July 10, 2017, due on August 10, 2018, with interest 6.00% payable monthly, personally guaranteed
by the CEO
|
|
$
|
737,409
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
From
Bank of Chouzhou, dated July 11, 2017, due on July 10, 2018 with interest of 6.00% payable monthly, personally guaranteed
by the CEO
|
|
|
1,474,817
|
|
|
|
—
|
|
|
|
$
|
2,212,226
|
|
|
$
|
2,952,316
|
|
Revenue
Recognition
In
accordance with FASB ASC Topic 605,
“Revenue Recognition,”
the Company recognizes revenues when there
is persuasive evidence of an arrangement, product delivery and acceptance have occurred, the sales price is fixed and determinable,
and collectability of the resulting receivable is reasonably assured.
The
Company records revenues when title and the risk of loss pass to the customer. Generally, these conditions occur on
the date the customer takes delivery of the product. Revenue generated is solely from retail of Yosen products .
Cost
of Sales
Cost
of sales (“COS”) consists of actual product cost, which is the purchase price of the product less any discounts. COS
excludes freight charges, purchase and delivery costs, internal transfer, freight charges and the other costs of the Company’s
distribution network, which are identified in general and administrative expenses.
General
and Administrative Expenses
General
and administrative (“G&A”) expenses are comprised principally of payroll and benefits costs for retail and corporate
employees, occupancy costs of corporate facilities, lease expenses, management fees, traveling expenses and other operating and
administrative expenses, including freight charges, purchase and delivery costs, internal transfer freight charges and other distribution
costs.
Shipping
and Handling Fees
The
Company follows FASB ASC Sub-topic 605-45,
“Handling Costs, Shipping Costs”
. The Company does not
charge its customers for shipping and handling. The Company classifies shipping and handling fees as part of G&A expenses
which were $7,592 and $3,071 for the six months ended June 30, 2017 and 2016, respectively. Shipping and handling fees for the
three months ended June 30, 2017 were $4,185 and $3,071, respectively.
Vendor
Discounts
The
Company has negotiated preferred pricing arrangements with certain vendors on certain products. These arrangements are not contingent
on any levels of volume and are considered vendor discounts as opposed to rebates. The Company records these discounts along with
the purchase of the discounted items, resulting in lower inventory cost and a corresponding lower COS as the products are sold.
Share
Based Payment
The
Company follows FASB ASC Sub-topic 718-10,
“Compensation-Stock Compensation,”
which addresses the accounting
for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions
in which an entity obtains employee services in share-based payment transactions. FASB ASC Sub-topic 718-10 requires measurement
of the cost of employee services received in exchange for an award of equity instruments based on the grant-date FV of the award
(with limited exceptions). Incremental compensation costs arising from subsequent modifications of awards after the grant date
must be recognized.
Advertising
Advertising
expenses consist primarily of costs of promotion for corporate image and product marketing and costs of direct advertising. The
Company expenses all advertising costs as incurred. There was $5,855 and $3,194 advertising expense for the six and three months
ended June 30, 2017, respectively, and $9,557 and $9,557 for the six and three months ended June 30, 2016.
Income
Taxes
The
Company utilizes FASB ASC Topic 740,
“Income Taxes.”
ASC Topic 740 requires a company to use the asset and
liability method of accounting for income taxes, whereby deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end
based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable
income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
Under
FASB Sub-topic ASC 740-10-25, evaluation of a tax position is a two-step process. The first step is to determine whether it is
more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not
threshold to determine the amount of benefit to be recognized in the financial statements.
Basic
and Diluted Earnings (Loss) per Share
Loss
per share is calculated in accordance with FASB ASC Topic 260,
“Earnings per Share.”
Basic earnings (loss)
per share is based upon the weighted average number of common shares outstanding. Diluted earnings (losses) per share is based
on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by
applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the
period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average
market price during the period. If convertible shares and stock options are anti-dilutive, the impact of conversion is not included
in the diluted net income (loss) per share.
Statement
of Cash Flows
In
accordance with FASB ASC Topic 230,
“Statement of Cash Flows,”
cash flows from the Company’s operations
are calculated based upon the functional currency, in our case the RMB. As a result, amounts related to changes in assets and
liabilities reported on the statement of cash flows will not necessarily agree with the changes in the corresponding balances
on the balance sheet.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable, advances to suppliers
and other receivables arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy
financial institutions. The Company has a diversified customer base. The Company controls credit risk related to accounts receivable
through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its
customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts
and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.
Segment
Reporting
FASB
ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting.
The management approach model is based on the way a company’s management organizes segments within the company for making
operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure,
management structure, or any other manner in which management disaggregates a company. The Company operated E-commerce business
only in the first six months of 2017 through Zhejiang Lamapai.
Recent
Accounting Pronouncements
In
January 2017, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”)
2017-01,
Business Combinations (Topic 805) Clarifying the Definition of a Business
. The amendments in this update
clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions
should be accounted for as acquisitions or disposals of assets or businesses. The definition of a business affects many areas
of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for interim and annual
periods beginning after December 15, 2017 and should be applied prospectively on or after the effective date. The Company
is in the process of evaluating the impact of this ASU.
In
November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires restricted
cash to be presented with cash and cash equivalents on the statement of cash flows and disclosure of how the statement of cash
flows reconciles to the balance sheet if restricted cash is shown separately from cash and cash equivalents on the balance sheet.
ASU 2016-18 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. The
Company is in the process of evaluating the impact of this ASU on its CFS.
In
November 2015, the FASB issued an ASU on the balance sheet classification of deferred taxes, which would require that deferred
tax assets and liabilities be classified as non-current in the balance sheet. Current GAAP requires the presentation of deferred
tax assets and liabilities as either current or non-current in the balance sheet. This ASU is effective for annual reporting periods
beginning after December 15, 2016, including interim reporting periods within those annual reporting periods. Earlier adoption
is permitted. The guidance may be applied either prospectively or retrospectively. The Company does not believe adoption of any
such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.
In
October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory
,
which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when
the transfer occurs. ASU 2016-16 is effective for interim and annual periods beginning after December 15, 2018, with early
adoption permitted. The Company is in the process of evaluating the impact of this ASU on its CFS.
In
August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230), Classification of Certain Cash
Receipts and Cash Payments
. ASU 2016-15 provides guidance for targeted changes with respect to how cash receipts and cash
payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. ASU 2016-15 is
effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. The Company is
in the process of evaluating the impact of this ASU on its CFS.
In
March 2016, the FASB issued ASU 2016-09,
Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting
.
ASU 2016-09, which amends several aspects of accounting for employee share-based payment transactions including the accounting
for income taxes, forfeitures, and statutory tax withholding requirements, and classification in the statement of cash flows.
ASU 2016-09 is effective for fiscal years beginning after December 15, 2016 and interim periods within annual periods beginning
after December 15, 2016, with early adoption permitted. The Company does not believe adoption of any such pronouncements
may be expected to cause a material impact on CFS.
In
February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
ASU 2016-02 requires lessees to recognize lease assets
and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. ASU 2016-02 is effective
for fiscal years beginning after December 15, 2018 and interim periods in fiscal years beginning after December 15, 2018,
with early adoption permitted. The Company is in the process of evaluating the impact of this ASU on its CFS.
Management
does not believe that any recently issued, but not yet effective, accounting standards could have a material effect on the accompanying
CFS. As new accounting pronouncements are issued, we will adopt those that are applicable under the circumstances.
Other
recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the Securities
Exchange Commission (the “SEC”) did not or are not believed by management to have a material impact on the Company’s
present or future CFS.
Note
3 –
ADVANCES TO SUPPLIERS
Advances
to suppliers represent advance payments to suppliers for the purchase of inventory.
Note
4 –
COMMON STOCK
On
March 18, 2016, the Company sold 190,532 Units to two investors with each Unit consisting of: (i) one share of common stock, $0.001
par value per share and (ii) a three-year warrant to purchase one share of Common Stock of the Company at $0.75, for $142,898.
Pursuant to the agreement, 190,532 shares of Common Stock and 190,532 Warrant were issued in 2016. The Proceeds from the issuance
of shares and warrants were assigned to the respective securities based on relative fair values.
On
May 19, 2016, the board approved an amendment to Yosen’s Certificate of Incorporation effecting a one-for-three reverse
split of Yosen’s common stock. The reverse split was effective as of September 30, 2016. The accompanying CFS and notes
to the CFS give retroactive effect to the reverse stock split for all periods presented. In addition, the reverse stock split
resulted in an adjustment in the number of shares of common stock issuable upon conversion of our warrants to a 3:1 ratio.
On
December 23, 2016, the Company’s BOD adopted the Yosen Group 2016 Restricted Stock Plan (the “2016 Plan”). The
2016 Plan provides for the granting of restricted stock awards to employees, directors and consultants of the Company and the
employees, directors and consultants of the Company’s affiliates. Under the 2016 Plan, 1,360,000 shares of the Company’s
common stock were initially available for issuance for awards. As of December 31, 2016, 1,150,000 of the shares available
for issuance under the 2016 Plan were issued. In January 2017, 210,000 shares available for issuance were issued. The common stock
was valued at grant date with a FV of $476,000. During the three and six months ended June 30, 2017, $39,666 and $79,333 was recognized
as stock based compensation expense, respectively.
N
ote
5 –
STOCK WARRANTS, OPTIONS, AND COMPENSATION
Stock
options - Options issued have a 10-year life and were vested upon issuance. The option holder has no voting or dividend rights.
The grant price was the market price at the date of grant. The Company records the expense of the stock options over the related
vesting period. The options were valued using the Black-Scholes option-pricing model at the date of grant stock option pricing.
Outstanding
options and warrants by exercise price consisted of the following as of June 30, 2017:
Outstanding
|
|
Exercisable
|
Exercise Price
|
|
Number of
Shares
|
|
Weighted
Average
Remaining
Life (Years)
|
|
Weighted
Average
Exercise Price
|
|
Number
of Shares
|
|
Weighted
Average
Exercise
Price
|
Warrants:
|
|
|
|
|
|
|
|
|
|
|
$
|
0.75
|
|
|
|
1,218,076
(1)
|
|
|
|
1.25
|
|
|
$
|
0.75
|
|
|
|
1,218,076
|
|
|
$
|
0.75
|
|
$
|
0.75
|
|
|
|
66,975
(2)
|
|
|
|
1.40
|
|
|
$
|
0.75
|
|
|
|
66,975
|
|
|
$
|
0.75
|
|
$
|
0.75
|
|
|
|
190,532
(3)
|
|
|
|
1.60
|
|
|
$
|
0.75
|
|
|
|
190,532
|
|
|
$
|
0.75
|
|
(1)
On September 1, 2015, the Company issued stock warrants to purchase 1,218,076 shares of common stock at $0.75. The stock warrants
expire on August 31, 2018. Stock warrants were valued using the Black-Scholes option pricing model. Assumptions used to value
the warrants are similar to those used in valuing the stock options as described below.
Term
|
|
3 years
|
Expected
volatility
|
|
|
196
|
%
|
Risk – free interest
rate
|
|
|
1.1
|
%
|
Dividend yield
|
|
|
0
|
%
|
Weighted-average grant
date FV
|
|
$
|
0.972
|
|
The
Company determined the FV of the 1,218,076 warrants was $1,183,970. As of June 30, 2017, warrants to purchase 1,218,076 shares
of common stock remained outstanding. These warrants were plain vanilla warrants and were classified as equity.
(2)
On November 16, 2015, the Company issued stock warrants to purchase 66,975 shares of common stock at $0.75. The stock warrants
expire on November 15, 2018. Stock warrants were valued using the Black-Scholes option pricing model. Assumptions used to value
the warrants are similar to those used in valuing the stock options as described below.
Term
|
|
3 years
|
Expected
volatility
|
|
|
203
|
%
|
Risk – free interest
rate
|
|
|
1.2
|
%
|
Dividend yield
|
|
|
0
|
%
|
Weighted-average grant
date FV
|
|
$
|
1.215
|
|
The
Company determined the FV of the 66,975 warrants was $81,375. As of June 30, 2017, warrants to purchase 66,975 shares of common
stock remained outstanding. These warrants were plain vanilla warrants and were classified as equity.
(3)
On March 18, 2016, the Company issued stock warrants to purchase 190,532 shares of common stock at $0.75 in conjunction with the
common stock offering (See Note 5). The stock warrants expire on March 17, 2019. Stock warrants were valued using the Black-Scholes
option pricing model. Assumptions used to value the warrants are similar to those used in valuing the stock options as described
below.
Term
|
|
3 years
|
Expected
volatility
|
|
|
178
|
%
|
Risk – free interest
rate
|
|
|
1.0
|
%
|
Dividend yield
|
|
|
0
|
%
|
Weighted-average grant
date FV
|
|
$
|
1.086
|
|
The
Company determined the FV of the 190,532 warrants was $206,917. As of June 30, 2017, warrants to purchase 190,532 shares of common
stock remained outstanding. These warrants were plain vanilla warrants and were classified as equity.
No
te
6 –
INCOME TAXES
The
Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income
tax expense. The Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor were
any interest expense or penalties recognized during the three and six months ended June 30, 2017 and 2016.
Under
ASC 740-10-25, evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not
that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on
the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold
to determine the amount of benefit to be recognized in the financial statements.
The
US operating entity Yosen Group is subject to the US federal income tax at a rate of 34%. Yosen Group does not conduct any operations
and only incurs public company expenses, such as legal fees, accounting fees, investor relations expenses and filing fees. In
the six months ended June 30, 2017, the US operating subsidiaries incurred a net operating loss of $124,334. As a result, $42,274
of deferred tax assets and valuation allowance was recorded. In the six months ended June 30, 2016, the US operating subsidiaries
incurred a net operating loss of $49,960. As a result, $16,986 of deferred tax assets and valuation allowance was recorded.
In
the three months ended June 30, 2017, the US operating subsidiaries incurred a net operating loss of $62,634. As a result, $21,296
of deferred tax assets and valuation allowance was recorded. In the three months ended June 30, 2016, the US operating subsidiaries
incurred a net operating loss of $48,827. As a result, $16,601 of deferred tax assets and valuation allowance was recorded.
The
PRC operating subsidiary, Zhejiang Lamapai is subject to the PRC income tax at a rate of 25%. In the six months ended June 30,
2017, Zhejiang Lamapai incurred a net operating loss of $262,807. Management believes it is more likely than not that the subsidiary
will not be able to benefit from the deferred tax assets in association with the operating losses. As a result, $65,702 of deferred
tax assets and valuation allowance were recorded in the six months ended June 30, 2017. In the six months ended June 30,
2016, Zhejiang Lamapai incurred a net operating loss of $262,696, as a result, $65,674 of deferred tax assets and valuation allowance
were recorded in the six months ended June 30, 2016.
In
the three months ended June 30, 2017, Zhejiang Lamapai incurred a net operating loss of $189,478, as a result, $47,370 of deferred
tax assets and valuation allowance were recorded in the three months ended June 30, 2017. In the three months ended June 30, 2016,
Zhejiang Lamapai incurred a net operating loss of $168,211, as a result, $42,053 of deferred tax assets and valuation allowance
were recorded in the three months ended June 30, 2016.
The
components of deferred tax assets and liabilities as of June 30, 2017 (unaudited) and December 31, 2016 were as follows:
|
|
2017
|
|
2016
|
Deferred
tax assets:
|
|
|
(Unaudited)
|
|
|
|
|
|
U.S.
net operating losses
|
|
$
|
42,274
|
|
|
$
|
16,986
|
|
PRC
net operating losses
|
|
|
65,702
|
|
|
|
65,674
|
|
Discontinued
operation
|
|
|
107,962
|
|
|
|
81,071
|
|
Total
deferred tax assets
|
|
|
215,937
|
|
|
|
163,731
|
|
Less
valuation allowance
|
|
|
(215,937
|
)
|
|
|
(163,731
|
)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Reconciliation
of the differences between the statutory US Federal income tax rate and the effective rate for the six months ended June 30, 2017
and 2016 is as follows:
|
|
2017
|
|
2016
|
Tax (Credit)
at US Statutory Rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
Tax rate difference
|
|
|
7.6
|
%
|
|
|
8.3
|
%
|
Valuation
allowance
|
|
|
26.4
|
%
|
|
|
25.7
|
%
|
Effective
rate
|
|
|
—
|
%
|
|
|
—
|
%
|
Reconciliation
of the differences between the statutory US Federal income tax rate and the effective rate for the three months ended June 30,
2017 and 2016 is as follows:
|
|
2017
|
|
2016
|
Tax (Credit)
at US Statutory Rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
Tax rate difference
|
|
|
7.8
|
%
|
|
|
8.0
|
%
|
Valuation
allowance
|
|
|
26.2
|
%
|
|
|
26.0
|
%
|
Effective
rate
|
|
|
—
|
%
|
|
|
—
|
%
|
Note
7 –
COMMITMENTS
The
Company leases warehouse facilities under operating leases that terminated on June 9, 2017. There is no lease commitment as of
June 30, 2017.
Note
8 –
STATUTORY RESERVE
In
accordance with the laws and regulations of the PRC, a wholly-owned Foreign Invested Enterprise’s income, after the payment
of the PRC income taxes, shall be allocated to the statutory surplus reserves and statutory public welfare fund. Prior to January
1, 2006, the proportion of allocation for reserve was 10% of the profit after tax to the surplus reserve fund and additional 5-10
percent to the public affair fund. The public welfare fund reserve was limited to 50% of the registered capital. Effective January
1, 2006, there is now only one fund requirement. The reserve is 10% of income after tax, not to exceed 50% of registered capital.
Statutory
reserve funds are restricted to offset against losses, expansion of production and operation or increase in register capital of
the respective company. Statutory public welfare fund is restricted to the capital expenditures for the collective welfare of
employees. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves
are therefore not available for distribution except in liquidation. As of June 30, 2017, the Company had allocated $11,542,623
and $11,542,623 to these non-distributable reserve funds.
Note
14 –
DISCONTINUED OPERATIONS
Letong
ceased operations in 2011, Yiwu ceased operation in 2013. Wang Da ceased operation in 2014. Yosen Trading ceased operation in
2015. Saizhuo and Zhejiang ceased operation in 2017. As a result, Letong, Yiwu , Wang Da , Yosen Trading and Saizhuo and Zhejiang
met the conditions to be reported as discontinued operations in the CFS, and accordingly, the results of operations have been
reclassified for all periods to conform to the current period's presentation.
The
following table summarizes the assets and liabilities of the discontinued operations as of June 30, 2017 and December 31,
2016 included in the Consolidated Balance Sheets:
|
|
2017
|
|
2016
|
Cash
|
|
$
|
19,199
|
|
|
$
|
75,571
|
|
Accounts
receivable
|
|
|
4,617
|
|
|
|
10,460
|
|
Inventories
|
|
|
182,081
|
|
|
|
759,698
|
|
Advance
to suppliers
|
|
|
40,012
|
|
|
|
293,270
|
|
Prepaid
expenses and other receivables
|
|
|
42,869
|
|
|
|
41,123
|
|
Property,
plant and equipment
|
|
|
26,586
|
|
|
|
28,562
|
|
Other
noncurrent asset
|
|
|
—
|
|
|
|
5,251
|
|
Total
assets
|
|
|
315,364
|
|
|
|
1,213,935
|
|
|
|
|
|
|
|
|
|
|
Short-term
loans
|
|
|
2,212,226
|
|
|
|
2,716,243
|
|
Accounts
payable
|
|
|
218,624
|
|
|
|
443,635
|
|
Advance
from suppliers
|
|
|
38,687
|
|
|
|
22,241
|
|
Accrued
expenses and other payable
|
|
|
755,021
|
|
|
|
—
|
|
Advance
from related party
|
|
|
—
|
|
|
|
16,311
|
|
Income
tax payable
|
|
|
814,218
|
|
|
|
836,419
|
|
Total
liabilities
|
|
|
4,038,776
|
|
|
|
4,034,849
|
|
Net
assets
|
|
$
|
(3,723,412
|
)
|
|
$
|
(2,820,914
|
)
|
The
following table summarizes the operating results of the discontinued operations included in the Consolidated Statements of Operations
and Comprehensive Loss for the three months ended June 30, 2017 and 2016:
|
|
2017
|
|
2016
|
Sales,
net
|
|
$
|
156,412
|
|
|
$
|
1,059,923
|
|
Cost
of sales
|
|
|
146,195
|
|
|
|
1,042,381
|
|
Gross
profit
|
|
|
10,217
|
|
|
|
17,542
|
|
General
and administrative expenses
|
|
|
(54,852
|
)
|
|
|
(170,680
|
)
|
Loss
from discontinued operations
|
|
|
(44,635
|
)
|
|
|
(153,138
|
)
|
Other
expenses
|
|
|
(172,451
|
)
|
|
|
(52,042
|
)
|
Loss
before income taxes
|
|
|
(217,086
|
)
|
|
|
(205,180
|
)
|
Provision
for income taxes
|
|
|
—
|
|
|
|
—
|
|
Net
loss from discontinued operations, net of income tax
|
|
$
|
(217,086
|
)
|
|
$
|
(205,180
|
)
|
|
|
|
|
|
|
|
|
|
The
following table summarizes the operating results of the discontinued operations included in the Consolidated Statements of Operations
and Comprehensive Loss for the six months ended June 30, 2017 and 2016:
|
|
2017
|
|
2016
|
Sales,
net
|
|
$
|
863,621
|
|
|
$
|
2,932,363
|
|
Cost
of sales
|
|
|
826,693
|
|
|
|
2,891,181
|
|
Gross
profit
|
|
|
36,928
|
|
|
|
41,182
|
|
General
and administrative expenses
|
|
|
(208,508
|
)
|
|
|
(287,063
|
)
|
Loss
from discontinued operations
|
|
|
(171,580
|
)
|
|
|
(245,881
|
)
|
Other
expenses
|
|
|
(260,266
|
)
|
|
|
(78,402
|
)
|
Loss
before income taxes
|
|
|
(431,846
|
)
|
|
|
(324,283
|
)
|
Provision
for income taxes
|
|
|
—
|
|
|
|
—
|
|
Net
loss from discontinued operations, net of income tax
|
|
$
|
(431,846
|
)
|
|
$
|
(324,283
|
)
|
|
|
|
|
|
|
|
|
|
Note
10 –
OTHER COMPREHENSIVE INCOME
Other
comprehensive income as included in stockholders’ deficit for the three months ended June 30, 2017 and 2016, represents
foreign currency translation adjustment.
Note
11 –
CURRENT VULNERABILITY DUE TO CERTAIN RISK FACTORS
The
Company’s operations are in the PRC. Accordingly, the Company’s business, financial condition and results of operations
may be influenced by the political, economic and legal environments in the PRC, by the general state of the PRC’s economy.
The Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
Note
12 –
MAJOR CUSTOMERS, VENDORS AND CREDIT RISK
During
the three and six months ended June 30, 2017 and 2016, no customer accounted for more than 10% of the Company’s sales. As
of June 30, 2017, no customer comprised more than 10% of the Company’s accounts receivable. No vendor comprised more than
10% of the Company’s accounts payable.
Note
13 –
SEGMENT INFORMATION
As
of June 30, 2017, Zhejiang Lamapai was the only operating entity for the Company's E-commerce business. The operating results
of Zhejiang Lamapai are presented in the consolidated statements of operations and comprehensive loss.