UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended      September 30, 2016

 

or

 

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

 

For the transition period from ____ to _____

 

Commission File Number:  000-28767

 

YOSEN GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Nevada	88-0403070
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

368 HuShu Nan Road

HangZhou City, Zhejiang Province, China 310014

(Address of Principal Executive Offices) (Zip Code)

 

086-0571-88381700

(Registrant’s telephone number, including area code) 

 

 

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

 

Indicate by check whether the issuer (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 ☒ 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 ☐ 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 ☐ (Do not check if a smaller reporting company)

Smaller reporting company ☒

 

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

Yes ☐ No ☒

 

As of November 14, 2016, the registrant had 9,907,818 shares of common stock outstanding.

 

 

TABLE OF CONTENTS

 

		PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements		1
Consolidated Balance Sheets as of June 30, 2016 (Unaudited) and December 31, 2015		1
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Six Months Ended June 30, 2016 and 2015 (Unaudited)		2
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended June 30, 2016 and 2015 (Unaudited)		3
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (Unaudited)		4
Notes to Consolidated Financial Statements		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3. Quantitative and Qualitative Disclosure About Market Risk		28
Item 4. Controls and Procedures		28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		28
Item 1A. Risk Factors		29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		29
Item 3. Defaults Upon Senior Securities		29
Item 4. Mine Safety Disclosures		29
Item 5. Other Information		29
Item 6. Exhibits		29
Signatures		30

 

PART I. FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

YOSEN GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		September 30,				December 31,
		2016				2015
		(Unaudited)
ASSETS
Current assets:
Cash and equivalents		$	184,886			$	738,611
Accounts receivable, net			19,856				224,787
Inventories			1,453,606				758,746
Advances to suppliers			454,880				725,104
Advance to related party			—				89,754
Prepaid expenses and other current assets			165,595				512,308
Total current assets			2,278,823				3,049,310
Property and equipment, net			659,292				38,704
Intangible asset			19,729				—
Other non-current assets			69,054				—
Total assets		$	3,026,898			$	3,088,014
Current liabilities:
Short-term loans		$	3,073,740			$	2,773,199
Accounts payable			1,189,615				410,985
Accrued expenses and other payables			104,095				658,920
Advance from customers			107,314				48,133
Advance from related party			265,625				—
Income tax payable			687,534				864,844
Total liabilities			5,427,923				4,756,081
Commitments and contingencies
Stockholders’ deficit:
Common stock, $0.001 par value, 50,000,000 shares authorized, 9,907,818 and 9,717,286 issued and outstanding as of September 30, 2016 and December 31, 2015			9,908				9,717
Additional paid-in capital			27,968,875				27,826,168
Subscription receivable			(50,000	)			(50,000	)
Statutory reserve			11,542,623				11,542,623
Other comprehensive income			8,124,280				8,048,781
Accumulated deficit			(50,177,945	)			(49,336,947	)
Total Yosen Group's stockholders’ deficit			(2,582,259	)			(1,959,658	)
Noncontrolling interest			181,234				291,591
Accumulated deficit			(2,401,025	)			(1,668,067	)
Total liabilities and stockholders’ deficit		$	3,026,898			$	3,088,014

 

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

 

 

YOSEN GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

NINE MONTHS ENDED SEPTEMBER 30, 2016 and 2015 (UNAUDITED)

 

		2016				2015
Net sales		$	4,267,574			$	5,343,433
Cost of sales			4,107,872				5,141,911
Gross profit			159,702				201,522
Selling, general and administrative expenses			1,103,052				454,735
Loss from continuing operations			(943,350	)			(253,213	)
Other (income) expense
Interest income			(290	)			(491	)
Other income			(8,865	)			(2,481	)
Other expense			40,122				38,409
Total other expense			30,967				35,437
Loss from continuing operations before income taxes			(974,317	)			(288,650	)
Provision for income taxes			—				—
Net loss from continuing operations			(974,317	)			(288,650	)
Net loss from discontinued operations, net of income taxes			(115,108	)			(283,342	)
Net loss including noncontrolling interest			(1,089,425	)			(571,992	)
Net loss attributable to noncontrolling interest			(274,580	)			—
Net loss attributable to Yosen Group			(814,845	)			(571,992	)
Other comprehensive items:
Foreign currency translation loss attributable to Yosen Group			67,468				88,335
Foreign currency translation loss attributable to noncontrolling interest			8,031				—
Comprehensive loss attributable to Yosen Group		$	(747,377	)		$	(483,658	)
Comprehensive loss attributable to noncontrolling interest		$	(266,549	)		$	—
Basic and diluted loss per share:
Continuing operations		$	(0.07	)		$	(0.01	)
Discontinued operations			(0.01	)			—
Net loss per share		$	(0.08	)		$	(0.01	)
Weighted average shares outstanding:
Basic			9,852,888				8,430,842
Diluted			10,375,447				8,619,268

 

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

 

 

YOSEN GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

THREE MONTHS ENDED SEPTEMBER 30, 2016 and 2015 (UNAUDITED)

 

		2016				2015
Net sales		$	1,191,048			$	1,213,646
Cost of sales			1,107,415				1,167,900
Gross profit			83,633				45,746
Selling, general and administrative expenses			488,555				91,455
Loss from continuing operations			(404,922	)			(45,709	)
Other (income) expense
Interest income			105				(188	)
Other income			(7,636	)			(35	)
Other expense			20,401				9,509
Total other expense			12,870				9,286
Loss from continuing operations before income taxes			(417,792	)			(54,995	)
Provision for income taxes			—				—
Net loss from continuing operations			(417,792	)			(54,995	)
Net loss from discontinued operations, net of income taxes			(34,694	)			(35,472	)
Net loss including noncontrolling interest			(452,486	)			(90,467	)
Net loss attributable to noncontrolling interest			(143,881	)			—
Net loss attributable to Yosen Group			(308,605	)			(90,467	)
Other comprehensive items:
Foreign currency translation gain attributable to Yosen Group			38,934				107,712
Foreign currency translation loss attributable to noncontrolling interest			1,243				—
Comprehensive loss attributable to Yosen Group		$	(269,671	)		$	17,245
Comprehensive loss attributable to noncontrolling interest		$	(142,638	)		$	—
Basic and diluted loss per share:
Continuing operations		$	(0.03	)		$	0.01
Discontinued operations			—				—
Net loss per share		$	(0.03	)		$	0.01
Weighted average shares outstanding:
Basic			9,906,426				8,430,842
Diluted			10,153,666				8,619,268

 

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

 

 

YOSEN GROUP, INC. AND SUBSIDIARIE

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2016 and 2015 (UNAUDITED)

 

		2016				2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss including noncontrolling interest		$	(1,089,425	)		$	(571,992	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation			25,536				(3,936	)
Stock based compensation			—				131,000
(Increase) decrease in assets:
Accounts receivable			203,469				33,677
Inventories			(724,896	)			331,316
Prepaid expenses and other current assets			366,975				(279,711	)
Advance to suppliers			224,859				656,914
Other noncurrent assets			(69,991	)			—
Increase (decrease) in current liabilities:
Accounts payable			795,849				(50,640	)
Accrued expenses and other payables			(604,702	)			(216,842	)
Advance from customers			61,222				(29,421	)
Income tax payable			(156,229	)			(5,509	)
Net cash provided by (used in) operating activities			(967,333	)			2,728
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment			(188,913	)			—
Construction in progress			(471,653	)			—
Net cash used in financing activities			(660,566	)			—
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short term loans			379,933				913,557
Proceeds from equity financing			270,909				—
Advance from related party			357,765				(435,071	)
Repayment of short-term loan			—				(1,379,376	)
Repayment of notes payable			—				(146,090	)
Net cash provided by (used in) financing activities			1,008,607				(1,046,980	)
Effect of exchange rate changes on cash and equivalents			65,567				(15,193	)
Net decrease in cash			(553,725	)			(1,059,445	)
Cash and equivalents, beginning of period			738,611				1,557,586
Cash and equivalents, end of period		$	184,886			$	498,141
Supplemental disclosure of cash flow information:
Interest paid		$	140,044			$	152,547
Income taxes paid			—				—

 

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

 

 

YOSEN GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016 AND 2015 (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”), Hangzhou Sanhe Electronic Technology, Limited (“Sanhe”), and Shanghai Joy & Harmony Electronic Development Company Limited (“Joy & Harmony”) were incorporated under the laws of the Peoples Republic of China (“PRC” or “China”) on July 11, 2005, July 18, 1997, March 30, 1998, April 12, 2004, and August 25, 2003, respectively. Zhejiang set up a new operating entity, Hangzhou Letong Digital Technology Co., Ltd. (“Letong”) on March 10, 2009. On July 6, 2009, Zhejiang and Yiwu acquired Jinhua. Jinhua was incorporated under the laws of the PRC on December 27, 2001. 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 (“Lamapai entities”). 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 Lamapaid E-commerce Co. Ltd ("Ningbo") and Hangzhou Saizhuo brand management Co., Ltd ("Saizhuo"). Hangzhou Lamaipai, Zhejiang Lamapai, Saizhuo and Ningbo are collectively referred as Lamapai entities ("Lamapai entities"). The Company invested RMB 6,693,540 to Zhejiang Lamapai. As a result of the investment, the Company owns 65.9% of Zhejiang Lamapai as of September 30, 2016. 

 

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 2,333,333 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 3, 2006, Capital completed the acquisition of a 100% interest in Sanhe for a cash and stock transaction valued at $8,750,000. The consideration consisted of 61,050 newly issued shares of the Company’s common stock and $5,000,000 in cash.

 

On November 28, 2006, Capital completed the acquisition of a 100% interest in Joy & Harmony for a cash and stock transaction valued at $18,500,000. The consideration consisted of 181,541 shares of the Company’s common stock and $7,500,000 in cash.

 

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.

 

On July 6, 2009, Yosen and its subsidiary Zhejiang and Yiwu purchased 100% of Jinhua for RMB 120 million ($17,500,000) in cash.  Zhejiang acquired 90% and Yiwu acquired 10% of the equity interests in Jinhua.

 

Letong ceased operations in 2011. Yiwu closed all its stores in stores locations in 2012. Jinhua ceased operations in October 2012 and legally dissolved in 2013. Joy & Harmony was legally dissolved in 2013. Sanhe was legally dissolved in 2015. Wang Da closed all its stores in the second quarter 2014. Yosen Trading ceased operation in 2015.

 

 

 

 

ORGANIZATIONAL CHART

 

Our corporate structure as of September 30, 2016 is as follows:

 

 

 

* These entities ceased operation during 2011.

** These entities ceased operation during 2012.

*** This entity ceased operation during 2015.

 

 

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 and Lamapai entities’ 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 have been 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 $(308,625) and $(814,845) for the three and nine months ended September 30, 2016. The Company had accumulated deficit of $50,177,945 as of September 30, 2016. There can be no assurance 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.

 

Starting from 2011, we closed most of our stores in stores locations and laid off most of our employees in our store in store mobile phone business. We retained highly qualified personnel and a small number of stores with stable revenues. As a result, we significantly cut our operating expenses and our losses are decreasing over time in the mobile phone sector. We are now focusing on opening cross-border e-commerce business to change the Company's business model.

 

Principles of Consolidation

 

The CFS include the accounts of Yosen and its wholly owned subsidiaries Capital, Yosen Trading, Wang Da, Yiwu, Zhejiang, Hangzhou Lamapai, Zhejiang Lamapai, Saizhuo and Ningbo collectively referred to as the Company, of which Yosen Trading, Wang Da, Yiwu are discontinued operating entities, see Note 9. All material intercompany accounts, transactions and profits were eliminated in consolidation.

 

Noncontrolling Interest

As of September 30, 2016, the Company invested RMB 6,193,541($934,620) in Zhejiang Lamapai and owns 65.9% interest in Zhejiang Lamapai. The 34.1% 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 financial statements 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 financial statements. 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 $984,379 (unaudited) and $975,321 as of September 30, 2016 (unaudited) and December 31, 2015, 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 September 30, 2016 and December 31, 2015, 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 September 30, 2016, and December 31, 2015, property and equipment consisted of the following:

 

		September 30, 2016				December 31, 2015
		(Unaudited)
Automotive		$	41,510			$	48,253
Office equipment			142,029				152,480
Plant and equipment			190,528				—
Construction in progress			465,338				—
Subtotal			839,404				200,733
Less: accumulated depreciation			(180,112	)			(162,029	)
Total		$	659,292			$	38,704

 

Depreciation expenses for the nine months ended September 30, 2016 and 2015 were $25,536 and $3,936 respectively.

 

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 September 30, 2016 (unaudited) and December 31, 2015, there were no significant impairments of its long-lived assets.

 

Construction in progress was the costs advanced to contractors and vendors to design, remodel and construct two new customer experience stores for Zhejiang Lamapai, in Hangzhou and Yiwu. As of September 30, 2016, construction in progress was $465,338 (unaudited). We estimate the total budget to complete the store build up will be $884,091. The Company is expected to spend additional $418,753 until completion.

 

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 September 30, 2016 and (unaudited) December 31, 2015, short-term loans consisted of the following:

 

 

		2016				2015
From Bank of Hangzhou, dated July 13, 2016, due on July 12, 2017, with interest rate of 6.96% payable monthly		$	374,846			$	—
From Bank of Chouzhou, dated July 9, 2016, due on July 10, 2017, with interest 6.00% payable monthly, personally guaranteed by the CEO			749,693				—
Bank loan from Bank of Chouzhou, dated July 16, 2016, due on July 10, 2017 with interest rate of 6.0625% payable monthly, personally guaranteed by the CEO			1,499,385				—
Short term loan dated June 1, 2016, due on November 30, 2016, with bank interest payable monthly, personally guaranteed by the CEO*			449,816				—
Bank loan from Bank of Hangzhou, dated July 11, 2013, due on July 8, 2016, with interest rate of 7.38% payable monthly*			—			$	462,200
Bank loan from Bank of Chouzhou, dated July 10, 2015, due on July 8, 2016, with interest rate of 6.0625% payable monthly, personally guaranteed by the CEO*			—			$	770,333
Bank loan from Bank of Chouzhou, dated July 20, 2015, due on July 15, 2016, with interest rate of 6.0625% payable monthly, personally guaranteed by the CEO*			—			$	1,540,666
Short term loan dated, dated June 1, 2016, due on November 30, 2016, with interest rate of 12% payable monthly			—			$	1,540,666
		$	3,073,740			$	2,773,199

 

 

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 is generated from sales of Yosen products through two main revenue streams: 

1.

Retail. 91.0%, 94.7%, 81.1% and 86.7% of the Company's revenue came from sales to customers at outlets installed inside department stores as well directly owned stores (i.e. store in store model) during the three and nine months ended September 30, 2016 and 2015, respectively. Revenue is recognized at point of sale.

 

2.

Wholesale. 9.0% ,5.3%, 18.9% and 13.3% of the Company's revenue came from wholesale during the three and nine months ended September 30,2016 and 2015, respectively. Recognition of income in wholesales is based on the contract terms. Upon purchase of the item by the customer, the Company relieves its inventory and recognizes revenue related to that item.

 

Sales revenue is therefore recognized on the following basis:

 

1.

Store in store or direct store:

 

a.

For goods sold in our directly owned stores, revenue is recognized at point of sale.

 

b.

For goods at customer outlets which the Company’s sales people operate, and inventory of goods is under joint control by the customers and the Company, revenue is recognized at the point of sale to the end buyer. Yosen has title and owns the inventory under joint control. Such joint controlled inventory has been properly included in reported inventory balance of Yosen’s financial statements.

 

During public holidays or department store celebration periods, we provide certain sales incentives to retail customers to increase sales, such as gift giving and price reductions. These are the only temporary incentives during the specified periods. Sales made to our retail customers as a result of incentives are immaterial as a percentage of total sales revenue.

 

2.

Wholesale:

 

a.

Revenue is recognized at the date of goods are received by wholesale customers. We operate our wholesale business by selling large volume orders to second-tier distributors. Revenues from wholesale are recognized at point of sale. Net sales already take into account revenue dilution as they exclude inventory credit, discount for early payment, product obsolescence and return of products and other allowances. Net sales also take into account the return of products in accordance with relevant laws and regulations in China. The Company is in the process of winding down its wholesale business. It will only focus on retail business in the future.

Return policies

 

Our return policy complies with China’s laws and regulations on consumer’s rights and product quality. In accordance with Chinese law, consumers can return or exchange used products within seven days only if the goods do not meet safety and health requirements, endanger a person’s property, or do not meet the advertised performance. If the conditions and requirements as set out in the relevant laws and regulations are met, the retail stores are entitled to accept a return of the goods from the consumer. In such cases, the Company shall accept the returns unconditionally. Goods returned will be redirected to the production factory or supplier who shall bear all losses on the returns in accordance the laws and regulations. Consumer returns or exchanges of products that have not been used, where the packaging has not been damaged, are honored if such return or exchange is within seven days. If a consumer returns a product, the Company must refund the invoice price to the consumer. The Company will then be responsible for returning the goods to the production factory or supplier. At that time the Company can recover the price based on the purchase and sale contract with the producer or supplier. However, when goods are returned, the Company loses the profit margin that it records when revenue is recognized, regardless of whether the production factory or supplier takes the product back or not.

 

 

The return rights granted to wholesale customers are similar to the rights granted to retail customers. Once wholesale customers purchase the products, they follow the same return policy as retail customers. We do not honor any return from wholesale customers other than if the products don’t meet laws and regulations or quality requirements. If the wholesale customers have a high inventory level or product obsolescence caused by lower market demands or other operational issues, the wholesale customers bear their own losses. When a wholesale customer returns products, the Company will return the products to the suppliers or manufacturers. A sales return and allowance is recorded at the sales price. Meanwhile, a purchase return and allowance entry is recorded at the invoice price because the suppliers or manufacturers bear the losses. The net effect is that the Company derecognizes the gross profit when a return takes place, but does not record any loss on the cost of the returned item back to the supplier or manufacturer.

In light of the aforesaid PRC laws and regulations and the Company's arrangements with suppliers, we do not provide an accrual for any estimated losses on subsequent sale of the return of products.  As a result, we do not assess levels of inventory in the distribution channel, product obsolescence and/or introductions of new products, as none of those factors have any impact on us with respect to estimating losses on subsequent sale of returned goods.  Goods return policy strictly complies with the laws and regulations in China on consumer rights and product quality requirements. If the conditions and requirements as set out in the relevant laws and regulations are met, customers are able to return the goods unconditionally. In such cases, the Company shall accept the returns unconditionally. Goods returned will be redirected back to the manufacturers or suppliers who shall meet all losses on returns in accordance the laws and regulations. The Company will only be responsible for assisting the process of execution of goods return. The Company shall not bear any loss from goods returned. As a result, we do not provide any accrual on subsequent return of goods sold.

 

Unlike the US retail market, sellers do not accept returns caused by any change in the sales market or change in customers’ preferences in China. Therefore, the Company generally does not honor any return except for a product defect. As such, situations relating to return of goods from overstock in distribution channels, product obsolescence and over-budgeted goods from launching of new products will not exist.

 

The reported sales do not include estimate of returns due to defects for the period presented because we do not offer customers the right to return in China. We do not allow the customers to return the products for cash refunds, credit, or exchange for other products through general rights of return. If the products are defective, manufacturers are directly responsible for the defects. Yosen Group, as a distributor, only assists customers in returning the defective products to manufacturers. The manufacturers send replacement products to customers directly.

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 $3,223, $7,448, $1,580 and $6,732 for the three and nine months ended September 30, 2016 and 2015, 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.

  

Management Fees Paid to the Department Stores Under “Store in Store” Model

 

Under the “store in store” business operation model, the Company may pay management fees to the department stores, which are in the form of service charges. The management fees are reflected in general and administrative expenses. Such management fees were $1,394, $17,958, $16,823 and $76,680 in general and administrative expenses for the three and nine months ended September 30, 2016 and 2015, respectively.

  

 

 

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 no advertising expense for the three months ended September 30, 2015. Advertising expense for the three and nine months ended September 30, 2016 was $2,210 and $11,731.

 

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 if 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. Excluded from the calculation of diluted earnings (loss) per share for the three and nine months ended September 30, 2016 and 2015 were 3,333 options, as they were not dilutive.

 

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 in two segments in the nine months ended September 30, 2016 through Zhejiang and Lamapai entities.: mobile phones and E-commerce business (see Note 13). 

 

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current US GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016, and early adoption is not permitted. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the impact the adoption of ASU 2014-09 and has not determined the effect of the standard on our ongoing financial reporting.

 

In August 2014, the FASB issued ASU No. 2014-15 (ASU 2014-15), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which 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 ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company is currently evaluating the impact the adoption of ASU 2014-15 on the Company’s CFS and disclosures.

 

In November 2015, the FASB issued Accounting Standards Update No. 2015-17, "Balance Sheet Classification of Deferred Taxes". The new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. This update is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company does not anticipate the adoption of this ASU will have a significant impact on its CFS.

 

In February 2016, the FASB issued an ASU amending the accounting for leases. The new guidance requires the recognition of lease assets and liabilities for operating leases with terms of more than 12 months, in addition to those currently recorded, on our consolidated balance sheets. Presentation of leases within the consolidated statements of operations and consolidated statements of cash flows will be generally consistent with the current lease accounting guidance. The ASU is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact of the ASU; however, we expect the ASU will have a material impact on our CFS, primarily to the consolidated balance sheets and related disclosures.

 

In March 2016, the FASB issued an ASU amending the accounting for stock-based compensation and requiring excess tax benefits and deficiencies to be recognized as a component of income tax expense rather than equity. This guidance also requires excess tax benefits to be presented as an operating activity on the statement of cash flows and allows an entity to make an accounting policy election to either estimate expected forfeitures or to account for them as they occur. The ASU is effective for reporting periods beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the impact of the ASU; however, we expect the ASU will have a material impact on our CFS.

 

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 consolidated financial statements.

 

 

Note 3 – ADVANCES TO SUPPLIERS

 

Advances to suppliers are advance payments to suppliers for the purchase of inventory.

 

Note 4 – COMMON STOCK

 

On September 1, 2015, the Company sold 1,218,076 Units to four 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 per share, for an aggregate total purchase price of $913,557. Pursuant to the agreement, 1,218,076 shares of Common Stock and 1,218,076 Warrant were issued in 2015. The Proceeds from the issuance of shares and warrants were assigned to the respective securities based on relative fair values.

 

On November 16, 2015, the Company sold 66,975 Units to one investor 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 an exercise price of US$0.75 per share, for an aggregate total purchase price of $50,232. Pursuant to the agreement, 66,975 shares of Common Stock and 66,975 Warrant were issued in 2015. The Proceeds from the issuance of shares and warrants were assigned to the respective securities based on relative fair values.

 

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 per share, 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 financial statements and notes to the financial statements 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.

 

Note 5 - STOCK WARRANTS, OPTIONS, AND COMPENSATION

Stock options - Options issued have a ten-year life and were fully 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 September 30, 2016:

 

Outstanding																Exercisable
Exercise Price				Number of Shares				Weighted Average Remaining Life (Years)				Weighted Average Exercise Price				Number of Shares				Weighted Average Exercise Price
Options:
$	62.4				3,333				0.25			$	62.4				3,333			$	62.4
Warrants:
$	0.75				1,218,076		(1)		2.00			$	0.75				1,218,076			$	0.75
$	0.75				66,975		(2)		2.15			$	0.75				66,975			$	0.75
$	0.75				190,532		(3)		2.35			$	0.75				190,532			$	0.75

 

During 2016 and 2015, the Company did not issue any stock options. The 3,333 stock options outstanding as of September 30, 2015 were issued in 2007 to our former director Mr. Kenneth Berents, have a 10 year term and vested immediately upon issuance.

 

(1) On September 1, 2015, the Company issued stock warrants to purchase 1,218,076 shares of common stock at $0.75 in conjunction with the common stock offering (See Note 5). 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 September 30, 2016, 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 in conjunction with the common stock offering (See Note 5). 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 September 30, 2016, 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 September 30, 2016, warrants to purchase 190,532 shares of common stock remained outstanding. These warrants were plain vanilla warrants and were classified as equity.

 

Note 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 nine months ended September 30, 2016 and 2015.

 

The US operating entity Yosen Group is subject to the US federal income tax at 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 three and nine months ended September 30, 2016, the US operating subsidiaries incurred a net operating loss of $45,576 and $95,536. As a result, $15,496 and $32,482 of deferred tax assets and valuation allowance were recorded in the three and nine months ended September 30, 2016.

 

The PRC operating subsidiaries, Zhejiang and Lamapai entities are subject to the PRC income tax at 25%. In the three and nine months ended September 30, 2016, PRC operating subsidiaries incurred a net operating loss of $372,216 and $878,782. Management believes it is more likely than not that the subsidiaries will not be able to benefit from the deferred tax assets in association with the operating losses. As a result, $93,054 and $219,695 of deferred tax assets and valuation allowance were recorded in the three and nine months ended September 30, 2016.

 

 

The components of deferred tax assets and liabilities as of September 30, 2016 (unaudited) and December 31, 2015 were as follows:

 

		2016				2015
Deferred tax assets:		(Unaudited)
U.S. net operating losses		$	32,482			$	132,459
PRC net operating losses			219,615				263,327
Bad debt			—				4,791
Total deferred tax assets			252,097				400,577
Less valuation allowance			(252,097	)			(400,577	)
		$	—			$	—

 

Reconciliation of the differences between the statutory US Federal income tax rate and the effective rate for the three months ended September 30, 2016 and 2015 is as follows:

 

		2016				2015
Tax (Credit) at US Statutory Rate			(34.0	)%			(34.0	)%
Tax rate difference			8.1	%			9.0	%
Valuation allowance			25.9	%			25.0	%
Effective rate			—	%			—	%

 

Reconciliation of the differences between the statutory US Federal income tax rate and the effective rate for the nine months ended September 30, 2016 and 2015 is as follows:

 

		2016				2015
Tax (Credit) at US Statutory Rate			(34.0	)%			(34.0	)%
Tax rate difference			8.2	%			6.8	%
Valuation allowance			25.8	%			27.2	%
Effective rate			—	%			—	%

 

Note 7 - COMMITMENTS

 

The Company leases office facilities and stores under operating leases that terminate through 2019. Rent expenses for the three months ended September 30, 2016 and 2015 were $149,467 and $85,714. Rent expenses for the nine months ended September 30, 2016 and 2015 were $259,050 and $194,458, respectively. 

 

The future minimum obligations under these agreements are as follows by years as of September 30, 2016:

 

	2017				209,169
	2018				220,125
	2019				231,082
	Total			$	660,376

 

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 percent of income after tax, not to exceed 50 percent 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 September 30, 2016, the Company had allocated $11,542,623 to these non-distributable reserve funds.

 

 

Note 9 – DISCONTINUED OPERATIONS

 

Letong ceased operations in 2011, Yiwu in 2013, Wang Da and Yosen Trading in 2015. As a result, Letong, Yiwu , Wang Da and Yosen Trading met the conditions to be reported as discontinued operations in the financial statements, 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 September 30, 2016 (unaudited) and December 31, 2015 included in the Consolidated Balance Sheets:

		2016				2015
Cash		$	17,544			$	30,714
Accounts receivable			842				329,220
Prepaid expenses and other receivables			—				17,958
Property, plant and equipment			22,505				29,812
Total assets			40,891				510,550
Short-term loans			2,249,078				786,931
Accounts payable			126,005				220,237
Advance from suppliers			10,107				57,581
Accrued expenses and other payable			16,462				6,351
Advance from CEO			7,797				—
Total liabilities			2,409,449				2,632,259
Net assets		$	(2,368,558	)		$	(2,121,709	)

 

The following table summarizes the operating results of the discontinued operations included in the Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2016 and 2015 (unaudited):

		Three Months Ended September 30,
		2016				2015
Sales, net		$	—			$	303,987
Cost of sales			—				216,956
Gross profit (loss)			—				87,031
General and administrative expenses			(715	)			(92,409	)
Loss from discontinued operations			(715	)			(5,378	)
Other income (expenses)			(33,980	)			(30,095	)
Loss before income taxes			(34,695	)			(35,473	)
Provision for income taxes			—
Net loss from discontinued operations, net of income tax		$	(34,695	)		$	(35,473	)

 

		Nine Months Ended September 30,
		2016				2015
Sales, net		$	—			$	534,697
Cost of sales			—				473,414
Gross profit (loss)			—				61,283
General and administrative expenses			(19,995	)			(229,015	)
Loss from discontinued operations			(19,995	)			(167,732	)
Other income (expenses)			(95,113	)			(115,610	)
Loss before income taxes			(115,108	)			(283,342	)
Provision for income taxes			—				—
Net loss from discontinued operations, net of income tax		$	(115,108	)		$	(283,342	)

 

  

Note 10- OTHER COMPREHENSIVE INCOME

 

Other comprehensive income as included in stockholders’ deficit for the three and nine months ended September 30, 2016 and 2015, 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 months ended September 30, 2016, two customers accounted for more than 10% of the Company’s sales, representing 26.3% and 23.9%, respectively of the Company’s sales. During the nine months ended September 30, 2016, two customers accounted for more than 10% of the Company’s sales, at 42.7% and 24.0%. As of September 30, 2016, two vendors comprised more than 10% of the Company’s accounts payable, at 14.7% and 10.6% of the Company’s accounts payable. As of September 30, 2016, no customer accounted for more than 10% of the Company's accounts receivable.

 

During the three months ended September 30, 2015, three customers accounted for more than 10% of the Company’s sales, at 28.3%, 25.2% and 14.5%, respectively of the Company’s sales. During the nine months ended September 30, 2015, two customers accounted for more than 10% of the Company’s sales, which represented 40.1% and 18.0%, respectively of the Company’s sales. As of September 30, 2015, two customers comprised more than 10% of the Company’s accounts receivable, which represented 80.8% and 18.6%, respectively. As of September 30, 2015, two vendors comprised more than 10% of the Company’s accounts payable, which represented 76.9% and 11.8%, respectively.

 

Note 13 - SEGMENT INFORMATION

 

Zhejiang focuses on selling Samsung and Apple and other brand name mobile phones in PRC. In September 2015, the Company established Hangzhou Lamapai and Zhejiang Lamapai for cross border E-commerce business. Hangzhou Lamapai, Zhejiang Lamapai, Saizhuo and Ningbo collectively are referred as Lamapai entities. Lamapai entities are the operating entities for the Company's E-commerce business. As a result, we have two reportable segments - mobile phones and E-commerce in the three and nine months ended September 30, 2016.

 

The following table presents summarized information by segment:  

 

		Three Months Ended September 30, 2016
			Mobile				E-Commerce
			Phones				Business				Other				Total
Sales, net		$	797,222			$	393,826			$	—			$	1,191,048
Cost of sales			(780,180	)			(327,235	)			—				(1,107,415	)
Gross profit			17,042				66,591				—				83,633
Selling, general and administrative expenses			(48,745	)			(394,404	)			(45,406	)			(488,556	)
Loss from continuing operations			(31,703	)			(327,813	)			(45,406	)			(404,922	)
Other Income (expense)			1,321				(14,021	)			(170	)			(12,870	)
Provision for income taxes			—				—				—				—
Net loss from continuing operations			(30,382	)			(341,834	)			(45,576	)			(417,792	)
Net loss from discontinued operations			—				—				—				(34,694	)
Net loss  including noncontrolling interest		$	(30,382	)		$	(341,834	)		$	(45,576	)		$	(452,486	)

 

 

		Nine Months ended September 30, 2016
			Mobile				E-Commerce
			Phones				Business				Other				Total
Sales, net		$	3,679,685			$	587,889			$	—			$	4,267,574
Cost of sales			(3,623,491	)			(484,381	)			—				(4,107,872	)
Gross profit			56,194				103,508				—				159,702
Selling, general and administrative expenses			(186,024	)			(822,095	)			(94,933	)			(1,103,052	)
Loss from continuing operations			(129,830	)			(718,587	)			(94,933	)			(943,350	)
Other Income (expense)			(15,937	)			(14,427	)			(603	)			(30,967	)
Provision for income taxes			—				—				—				—
Net (loss) from continuing operations			(145,767	)			(733,014	)			(95,536	)			(974,317	)
Net loss from discontinued operations							—								(115,108	)
Net loss including noncontrolling interest		$	(145,767	)		$	(733,014	)		$	(95,536	)		$	(1,089,425	)

  

		September 30, 2016				December 31, 2015
Mobile Phones		$	1,009,775			$	1,542,222
E-commerce			2,304,479				—
Other			(287,356	)			1,545,792
Total Assets			3,026,898				3,088,014

 

 

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

Forward Looking Statements

 

We have included and from time to time may make in our public filings, press releases or other public statements, certain statements, including, without limitation, those under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” and similar expressions. You are cautioned not to place undue reliance on these forward-looking statements. In addition, our management may make forward-looking statements to analysts, investors, representatives of the media and others. These forward-looking statements are not historical facts and represent only our beliefs regarding future events, many of which, by their nature, are inherently uncertain and beyond our control.

 

The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.  The following discussion contains forward-looking statements.  Our actual results may differ significantly from those projected in the forward-looking statements.  Factors that may cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in  “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q.

 

Overview

 

Yosen Group, Inc. (formerly known as “China 3C Group”) (including our subsidiaries unless the context indicates otherwise, the “Company”, “Yosen,”“Yosen Group,”“we,” or “us”) was incorporated on August 20, 1998 under the laws of the State of Nevada.

 

In 2007 we began operating r a “store in store” business model. The “store in store” business model resulted in expanded marketing channels, thus, stimulated the growth of sales in 2007 and 2008. We were only engaged in the resale and distribution of third party products and generated 100% of our revenue from resale of items such as mobile phones, facsimile machines, DVD players, stereos, speakers, MP3 and MP4 players, iPods, electronic dictionaries, CD players and audio systems. We used to operate “stores in stores” under the brand names Hangzhou Wang Da, Yiwu YongXin, Shanghai Joy & Harmony, Hangzhou Sanhe and Zhejiang Yongxin. However, starting in 2009, we had declining sales under the model due to increased competition from direct stores and large department stores and the impact of the economic slowdown. As a result, we closed Shanghai Joy & Harmony and Hangzhou Sanhe in 2011. Yiwu YongXin ceased operation in 2012 and Wang Da ceased operation in 2013.

 

On July 6, 2009, we acquired Jinhua Baofa Logistic Ltd. (“Jinhua”).  At that point, we started providing transportation logistics services to businesses in Eastern China. We closed Jinhua in 2012 due to continuing losses incurred .

 

Under the stores in stores model, we distribute our products mainly via the so-called concessionaire agreements with larger department stores, supermarkets, large electronics retail stores, and other retailers. Under this model, companies such as Yosen own their own outlets within larger stores and in so doing assume responsibility for most financial and operational aspects of those outlets including capital cost, inventory, wages, product selections, pricing, and general management. Our retail partners are compensated via margin they earn on the products we sell. This model is similar to that employed by many department stores in the US. However, it is different from the model found at large electronics retailers like Best Buy and general retailers like Wal-Mart. We found that many investors are curious as to why the model in China differs from that in the US. We believe the main reasons are:

 

·          We decrease the financial risk for our retail partners by assuming responsibility for the inventory and capital expense associated with distributing our products.

 

·          We decrease operational risk for our retail partners by hiring and managing employees and handling logistics issues such as wholesale purchase and delivery and returns and after-sales service.

 

·          We decrease merchandising risk for our retail partners by bringing product expertise and specific market knowledge that is difficult for large retailers to develop on their own across a broad range of product categories.

 

·          China’s size, regional differences, logistical difficulties, managerial challenges, underdeveloped credit markets, and rapid growth rate increases risk for all retailers and drive the need to mitigate risk which is why our retail partners rely on us.

 

 

On December 21, 2012, we received confirmation from the Secretary of State of the State of Nevada that the Certificate of Change Pursuant to NRS 78.209 (the “Certificate of Change”) to our Amended and Restated Articles of Incorporation to effect a reverse split of our common stock, $0.001, par value per share (the “Common Stock”), at a ratio of 1-for-5 with all fractional shares rounded up to the next whole share (the “Reverse Stock Split”) was duly filed on December 21, 2012. Immediately prior to the Reverse Stock Split, we had 93,911,327 shares of Common Stock outstanding. After the Reverse Stock Split, we had 18,782,356 shares outstanding. Pursuant to the Reverse Stock Split, the number of authorized shares of our Common Stock was reduced from 100,000,000 to 20,000,000 shares of Common Stock. Each shareholder's percentage ownership interest in the Company and proportional voting power remained unchanged after the Reverse Stock Split except for minor changes and adjustments resulting from rounding up the fractional shares.

 

Immediately, following the consummation of the Reverse Stock Split, on December 21, 2012, we filed a Certificate of Amendment to our Amended and Restated Articles of Incorporation pursuant to NRS 78.385 and 78.390 (the “Certificate of Amendment”) to increase our number of authorized shares of Common Stock from 20,000,000 to 50,000,000 shares (the “Capital Increase Amendment”) and to approve the amendment of our Articles of Incorporation to change our name to “Yosen Group, Inc.” (the “Name Change Amendment)”. The Reverse Stock Split, Capital Increase Amendment and the Name Change Amendment were approved by the board of directors (“BOD” or “Board”) of the Company on October 10, 2012. In addition, the actions taken by the BOD with respect to the Capital Increase Amendment and the Name Change Amendment were subsequently adopted by the written consent dated as of October 10, 2012 of our stockholders entitled to vote a majority of the shares of Common Stock then outstanding. The Reverse Stock Split was also ratified by these stockholders.

 

Following the filing of the Name Change Amendment, we changed our stock symbol to "YOSN" effective as of the opening of trading on January 30, 2013 on the OTCBB.

 

 

On January 6, 2014 the Company established a US based wholly-owned subsidiary, Yosen Trading Inc., a New York corporation (“Yosen Trading”), for the purpose of engaging primarily in international trade and wholesale business, initially with tile, kitchen cabinet, granite and marble products. Yosen Trading ceased operation in 2015.

 

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 the first quarter of 2016, Zhejiang Lamapai established two new companies Ningbo Yongxin Lamapai E-commerce Co. Ltd ("Ningbo") and Hangzhou Saizhuo brand management Co., Ltd ("Saizhuo"). Hangzhou Lamapai, Zhejiang Lamapai, Saizhuo and Ningbo, collectively are referred as Lamapai entities ("Lamapai entities"). The Company invested RMB6,193,541(USD 970,436) to Zhejiang Lamapai. As a result of the investment, the Company owns 65.9% of Zhejiang Lamapai as of September 30, 2016. 

 

As of September 30, 2016, we operated 7 “stores in stores”, under the brand name Zhejiang YongXin, selling primarily Apple and Samsung products. The Company also opened 1 direct store under Hangzhou Lamapai and 1 direct store under Saizhuo for imported products.

 

On September 30, 2016, we received confirmation from the Secretary of State of the State of Nevada that the Certificate of Change Pursuant to NRS 78.209 (the “Certificate of Change”) to our Amended and Restated Articles of Incorporation to effect a reverse split of our common stock, $0.001, par value per share (the “Common Stock”), at a ratio of 1-for-3 with all fractional shares rounded up to the next whole share (the “Reverse Stock Split”) was duly filed on September 30, 2016. Immediately prior to the Reverse Stock Split, we had 29,719,277 shares of Common Stock outstanding. After the Reverse Stock Split, we had 9,907,818 shares outstanding.

 

Results of Operations for the Three Months Ended September 30, 2016 and 2015

 

Reportable Operating Segments

 

Our subsidiary Zhejiang invested RMB 6,193,541 (USD 970,436) to Zhejiang Lamapai. As of September 30, the Company owns 65.9% of equity interest in Zhejiang Lamapai. As a result, we had two reportable segments: mobile phones through Zhejiang and E-commerce through Zhejiang Lamapai.

  

	a)	Mobile phones
	b)	E-commerce

 

a)

Mobile phones

 

Zhejiang focuses on distribution of Samsung and Apple brand products.

 

		Three Months Ended September 30,								Percentage
Mobile phones		2016				2015				Change
Revenue		$	797,222			$	1,213,646				(34.3	)%
Gross Profit		$	17,042			$	45,746				(62.7	)%
Profit Margin			2.1	%			3.8	%			(1.7	)%
Operating Loss		$	(31,703	)		$	(45,709	)			30.6	%

 

 

		Nine Months Ended September 30,								Percentage
Mobile phones		2016				2015				Change
Revenue		$	3,679,685			$	5,343,433				(31.1	)%
Gross Profit		$	56,194			$	201,521				(72.1	)%
Profit Margin			1.5	%			3.8	%			(2.3	)%
Operating Loss		$	(129,830	)		$	(121,964	)			(6.4	)%

 

For the three months ended September 30, 2016, Mobile phones generated revenue of $797,222, a decrease of $416,424 or 34.3% compared to $1,213,646 for the three months ended September 30, 2015. For the nine months ended September 30, 2016, Mobile phones generated revenue of $3,679,685, a decrease of $1,663,748 or 31.1% compared to $5,343,433 for the nine months ended September 30, 2015. The decrease in revenue was primarily due to closing of 10 store in stores and lack of new products introduced by Apple and Samsung in the nine months ended September 30, 2016.

 

Gross profit decreased $28,705 or 62.7% from $45,746 for the three months ended September 30, 2015 to $17,042 for the three months ended September 30, 2016. Profit margin decreased from 3.8% in the three months ended September 30, 2015 to 2.1% in the three months ended September 30, 2016, a decrease of 1.7%.  Gross profit decreased $145,328 or 72.1% from $201,521 for the nine months ended September 30, 2015 to $56,194 for the nine months ended September 30, 2016. Profit margin decreased from 3.8% in the nine months ended September 30, 2015 to 1.5% in the nine months ended September 30, 2016, a decrease of 2.3%.  The decrease in gross profit was a result of the decrease in sales price and unit cost remained flat.

 

Operating loss was $31,703 for the three months ended September 30, 2016, a decrease of $14,006 or 30.6% compared to operating loss of $45,709 for the three months ended September 30, 2015. Operating loss was $129,830 for the nine months ended September 30, 2016, compared to $121,964 for the nine months ended September 30, 2015. Change in operating losses was primarily due to change in management fee, labor cost and rent expenses.

 

b)

E-commerce

Zhejiang Lamapai is engaged in cross-border online to offline (“O2O”) distribution. Lamapai entities distribute a variety of imported products including but not limited to Digital products, baby products, health nutrition and frozen food and etc. Lamapai entities sell the products through its online store, applications on mobile devices and also in physical stores. In May 2016, Zhejiang Lamapai opened 1 store in Yiwu. In June 2016, Saizhuo opened 1 store in Hangzhou. Ningbo did not have operation in the nine months ended September 30, 2016.

 

		Three Months Ended September 30,
E-Commerce		2016
Revenue		$	393,826			$	—
Gross Profit		$	66,591			$	—
Profit Margin			16.9	%			—
Operating Loss		$	(327,813	)		$	—

 

		Nine Months Ended September 30,
E-Commerce		2016
Revenue		$	587,889			$	—
Gross Profit		$	103,508			$	—
Profit Margin			17.6	%			—
Operating Loss		$	(718,587	)		$	—

 

Total Company

 

Net Sales

 

Net sales for the three months ended September 30, 2016 was $1,191,048, a decrease of $22,598 or 1.86% compared to $1,213,646 for the three months ended September 30, 2015. Net sales for the nine months ended September 30, 2016 was $4,267,574, a decrease of $1,075,859 or 20.1% compared to $5,343,433 for the nine months ended September 30, 2015. The decrease was attributable to Zhejiang closing 10 stores and lack of new products introduced by Apple and Samsung in the nine months ended September 30, 2016. Lamapai entities opened two stores in the second quarter of 2016. The stores started operations and generated revenue of $590,550, which offset the decreased sales in Zhejiang.

 

 

Percentage of Sales

 

Percentage of sales from retail and wholesale operations for each segment is as follows in the three months ended September 30, 2016:

				Mobile Phones				E-commerce				Total
	Retail				82	%			100	%			91	%
	Wholesale				18	%			—				9	%

  

Percentage of sales from retail and wholesale operations for each segment is as follows in the nine months ended September 30, 2016:

 

				Mobile Phones				E-commerce				Total
	Retail				89.4	%			100	%			94.7	%
	Wholesale				10.6	%			—				5.3	%

 

Percentage of sales from retail and wholesale operations for each segment is as follows in the three months ended September 30, 2015:

 

				Mobile Phones				E-commerce				Total
	Retail				81.1	%			—	%			81.1	%
	Wholesale				18.9	%			—				18.9	%

 

Percentage of sales from retail and wholesale operations for each segment is as follows in the nine months ended September 30, 2015:

 

				Mobile Phones				E-commerce				Total
	Retail				86.7	%			—	%			86.7	%
	Wholesale				13.3	%			—				13.3	%

 

Cost of Sales

 

Cost of sales (“COS”) for the three months ended September 30, 2016 was $1,107,415 compared to $1,167,900 for the three months ended September 30, 2015, a decrease of 5.18%. COS for the nine months ended September 30, 2016 was $4,107,872 compared to $5,141,912 for the nine months ended September 30, 2015, a decrease of 20.1%. The decreased COS for the three and nine months was a result of the decrease in sales from the comparable periods.

 

Gross Profit

 

Gross profit for the three months ended September 30, 2016 was $83,633 compared to gross profit of $45,746 for the three months ended September 30, 2015, an increase of 82.82%. Gross profit for the nine months ended September 30, 2016 was $159,702 compared to gross profit of $201,522 for the nine months ended September 30, 2015, a decrease of 20.8%. The decreased gross profit for the three and nine months ended September 30, 2016 was due to lower gross profit generated from mobile phone sales and the international trade business.

 

Profit Margin

 

Profit margin for the three months ended September 30, 2016 was 7.0% compared to 3.8% for the three months ended September 30, 2015. Profit margin for the nine months ended September 30, 2016 was 3.7% compared to 3.8% for the nine months ended September 30, 2015. The profit margin increase was mainly attributed to higher gross margin in the E-Commerce business.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for the three months ended September 30, 2016 were $488,555 or 41.0% of net sales, compared to $91,455 or 7.5% of net sales for the three months ended September 30, 2015, an increase of 434.2% of sales. Selling, general and administrative expenses for the nine months ended September 30, 2016 were $1,103,052 or 25.8% of net sales, compared to $454,735 or 8.5% of net sales for the nine months ended September 30, 2015, an increase of 142.6% of sales. The increase in selling, general and administrative expenses was primarily due to general administrative expenses related opening new stores for Zhejiang Lamapai and Saizhuo.

 

Operating Loss from Continuing Operations

 

Operating loss for the three months ended September 30, 2016 was $(404,922) or (34.0)% of net sales compared to $(45,709) or (3.8)% of net sales for the three months ended September 30, 2015. Operating loss for the nine months ended September 30, 2016 was $(943,350) or (22.1)% of net sales compared to $(253,213) or (4.7)% of net sales for the nine months ended September 30, 2015. Increase in general administrative expenses in association with opening new stores for Zhejiang Lamapai and Saizhuo was the key factors for the increase in operating loss from continuing operations during the three and nine months ended September 30, 2016 compared to 2015.

 

 

Other (Income) Expense

 

Total other expense was $12,870 for the three months ended September 30, 2016 compared to $9,286 for same period in 2015. Total other expense was $30,967 for the nine months ended September 30, 2016 compared to $35,437 for same period in 2015.

 

Provision for Income Taxes

 

The provision for income taxes for the three and nine months ended September 30, 2016 and 2015 were $0 due to losses incurred by Zhejiang and Lamapai entities.

 

Net Loss from Continuing Operations

 

Net loss from continuing operations was $(417,792) for the three months ended September 30, 2016 compared to $(54,995) for the three months ended September 30, 2015. Net loss from continuing operations was $(974,317) for the nine months ended September 30, 2016 compared to net loss of $(288,650) for the nine months ended September 30, 2015. Additional general administrative expenses relating to opening new stores for Zhejiang Lamapai and Saizhuo were the key factors for the increase in net loss from continuing operations during the three and nine months ended September 30, 2016 compared to 2015.

 

Net Loss from Discontinued Operations

 

Net loss from discontinued operations for the three months ended September 30, 2016 was $(34,694) compared to $(35,472) for 2015, a decrease of $778. Net loss from discontinued operations for the nine months ended September 30, 2016 was $(115,108) compared to $(283,342) for 2015, a decrease of $168,234. Net Loss from discontinued operations decreased primarily due to Zhejiang's closing store in stores to cut losses.

 

Net Loss including noncontrolling interest

Net loss including noncontrolling interest was $(452,486) for the three months ended September 30, 2016 compared to $(90,467) for the three months ended September 30, 2015. Net loss including noncontrolling interest was $(1,089,425) for the nine months ended September 30, 2016 compared to $(571,992) for the nine months ended September 30, 2015. The increase in net loss was due to decrease in gross profit and increase in operating expenses

 

Net loss attributable to noncontrolling interest

 

Net loss attributable to noncontrolling interest was $(143,881) and $(274,580) in the three and nine months ended September 30, 2016 and $0 in 2015. Net loss attributable to noncontrolling interest represents the elimination of the income or loss attributable to non-Yosen ownership interests in Yosen's consolidated entities - Zhejiang Lamapai, Hangzhou Lamapai, Saizhuo and Ningbo.

 

Net loss attributable to Yosen Group

 

Net loss attributable to Yosen Group was $(308,605) in the three months ended September 30, 2016 compared to $(90,467) in the three months ended September 30, 2015. Net loss attributable to Yosen Group was $(814,845) in the nine months ended September 30, 2016 compared to $(571,992) in the nine months ended September 30, 2015. The increase in net loss was attributable to losses incurred by Lamapai entities.  

 

Foreign Currency Translation Adjustments

 

The impact of foreign translation from our accounts in RMB to USD on Yosen’s operating results was not material. During the translation process, the assets and liabilities of all PRC subsidiaries are translated into USD at period-end exchange rates. The revenues and expenses are translated into USD at average exchange rates of the periods. Resulting translation adjustments are recorded as a component of accumulated other comprehensive income within stockholders’ equity.

 

		Nine Months Ended September 30,
		2016				2015
RMB/$ exchange rate at period end			0.1499				0.1574
Average RMB/$ exchange rate for the periods			0.1520				0.1623

 

 

Transaction gains or losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency were included in the consolidated results of operations. As a result of the translation, Yosen recorded a foreign currency gain of $40,177 in the three months ended September 30, 2016 compared to a foreign currency loss of $107,712 in 2015. Yosen recorded a foreign currency gain of $75,499 in the nine months ended September 30, 2016 and $88,335 in 2015, which is a separate line item on the Statements of Operations and Comprehensive Loss.

 

Liquidity and Capital Resources

 

Cash has historically been generated from operations. Operations and liquidity needs are funded primarily through cash flows from operations. Cash and equivalents were $184,886 at September 30, 2016, compared to $738,611 at December 31, 2015.

 

Our cash flows for the nine month periods are summarized as follows:

 

		Nine Months Ended September 30,
		2016				2015
Net cash provided by (used in) operating activities		$	(967,333	)		$	2,727
Net cash used in investing activities			(660,566	)		$	—
Net cash provided by (used in) financing activities			1,008,607				(1,046,980	)
Effect of exchange rate change on cash and equivalents			65,567				(15,192	)
Net decrease in cash and equivalents			(553,725	)			(1,059,445	)
Cash and equivalents at beginning of period			738,611				1,557,586
Cash and equivalents at end of period		$	184,886			$	498,141

 

Operating Activities

 

Net cash used in operating activities was $967,333 for the nine months ended September 30, 2016 compared to $472,227 provided by operating activities for the nine months ended September 30, 2015, a 104.8% decrease.  Net cash used in operating activities was mainly attributable to several factors, including (i) a decrease in accrued expenses of $604,702; (ii)increase in inventories of $724,896, offset by the decrease in advance to suppliers of $224,859 and accounts receivable of $203,469, and increase in accounts payable of 795,849 add back depreciation of 25,536.

 

		Nine Months Ended September 30,
		2016				2015				Percentage Change
Sales, Net		$	4,267,574			$	5,343,433				20.1	%
Accounts receivable		$	19,856			$	224,787				91.2	%

 

Accounts receivable decreased 91.2% in the nine months ended September 30, of 2016 while sales decreased 20.1%. Management monitors and periodically assesses the collectability of accounts receivable to ensure the allowance for bad debts account is reasonably estimated. Collection of accounts receivable is based on the terms of legal binding documents. Our accounts receivable department has periodically reviewed the allowance for doubtful accounts. The bad debts allowance is based on the aging of receivables, credit history and credit quality of the customers, the term of the contracts as well as the balance outstanding. If an account receivable item is considered probable to be uncollectible, it will be charged to bad debts immediately.

 

Investing Activities

 

		Nine Months Ended September 30,
		2016				2015
Net cash used in investing activities		$	(660,566	)		$	—

 

Net cash used in investing activities in the nine months ended September 30, 2016 and 2015 was $660,566 and $0. The investment activities in the nine months ended September 30, 2016 were mainly attributed to construction of new customer experience stores for Zhejiang Lamapai.

 

 

Financing Activities

 

The Company received $270,909 from equity financing and $379,933 from short term loans in the nine months ended September 30, 2016. The Company had received an advance to related party of $357,765 as of September 30, 2016 compared to payment to related party of $442,804 on September 30, 2015.

 

		Nine Months Ended September 30,
		2016				2015
Net cash provided by (used in) financing activities		$	1,008,607			$	(1,046,980	)

 

Net decrease in Cash and Equivalents

 

		Nine Months Ended September 30,
		2016				2015
Net decrease in cash and equivalents		$	(553,725	)		$	(1,059,445	)

 

Cash and Equivalents

 

		Nine Months Ended September 30,
		2016				2015
Cash and equivalents		$	184,886			$	498,141

 

Cash and equivalents as of September 30, 2016 and December 31, 2015 were solely bank accounts in US and China. Specifically, cash and equivalents for each subsidiary as of September 30, 2016 and December 31, 2015 included:

 

Name of Entity

Region

Currency

September 30, 2016

December 31, 2015

Yosen Group

US entity

USD

68,165

111,498

Capital

BVI entity

USD

—

—

Yosen Trading

US entity

USD

5,413

220,225

Zhejiang

Chinese entity

RMB

138,662

74,768

Yiwu

Chinese entity

RMB

60,492

4,948

Wang Da

Chinese entity

RMB

20,418

25,194

Zhejiang Lamapai

Chinese entity

RMB

459,079

2,536,078

Hangzhou Lamapai

Chinese entity

RMB

—

—

Saizhuo

Chinese entity

RMB

48,826

—

Ningbo

Chinese entity

RMB

14,878

—

 

Cash equivalents held in the PRC subsidiaries are not freely transferrable outside the country. The amounts not freely transferable as of September 30, 2016 and December 31, 2015 were RMB 742,355 ($111,308) (unaudited) and RMB2,640,989 ($406,888).

 

Capital Expenditures

 

We had capital expenditure of $660,566 for the first nine months of 2016 mainly attributable to the construction of new customer experience store for Zhejiang Lamapai.

 

Working Capital Requirements

 

Historically operations and short term financing have been sufficient to meet our cash needs. We believe we will be able to generate revenues from sales and raise capital through private placement offerings of our equity securities to provide the necessary cash flow to meet anticipated working capital requirements. However, our actual working capital needs for the long and short term will depend upon numerous factors, including operating results, competition, and the availability of credit facilities, none of which can be predicted with certainty. Future expansion will be limited by the availability of financing products and raising capital.

 

Off-Balance Sheet Arrangements

 

We have never entered into any off-balance sheet arrangements and have never established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations is based upon our CFS, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these CFS requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

 

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimates are made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur, could materially impact the consolidated financial statements. We believe the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the CFS. 

 

Revenue Recognition

 

Our revenues are generated from sales of electronics products. All of our revenue transactions contain standard business terms and conditions. We determine the appropriate accounting for these transactions after considering (1) whether a contract exists; (2) when to recognize revenue on the deliverables; and (3) whether all elements of the contract have been fulfilled and delivered. In addition, our revenue recognition policy requires an assessment as to whether collection is reasonably assured, which inherently requires us to evaluate the creditworthiness of our customers. Changes in judgments on these assumptions and estimates could materially impact the timing or amount of revenue recognition.

 

Please refer to Note 2 in the footnotes to the financial statements for detailed description of our revenue recognition policy.

 

 

Inflation

 

Neither inflation nor changing prices has had a material impact on the Company’s net sales, revenues or continuing operations during the past three fiscal years.

 

After Sales Service

 

The after-sales services we provide to our customers are primarily repair and maintenance. If a customer buys a product from us and needs repairs, we can usually arrange to have the manufacturer repair the product. In certain cases, clerks in our stores are able to make the repairs directly.

 

Tabular Disclosure of Contractual Obligations

 

Not applicable.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, our management conducted an evaluation of our disclosure controls and procedures as of September 30, 2016, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of such date, the Company’s disclosure controls and procedures were not effective due to the material weakness in our internal controls identified in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosures.

 

Changes in Internal Control Over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during the nine months ended September 30, 2016 covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

 

Item 1.    Legal Proceedings.

 

We are not currently a party to any material legal proceedings. From time to time, however, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business.

 

Item 1A. Risk Factors.

 

There have been no material changes from the Risk Factors previously disclosed in the Company’s Annual Report on Form 10-K for its year ended December 31, 2015.

 

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

 

None.

 

Item 3.    Defaults Upon Senior Securities.

 

None.

 

Item 4.   Mine Safety Disclosures.

 

Not applicable.

 

Item 5.   Other Information.

 

None.

 

Item 6.   Exhibits.

 

Exhibit No.		Document Description
31.1		Certification of the Chief Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Chief Financial Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
101		The following financial statements from China 3C Group’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2016 formatted in XBRL (extensible Business Reporting Language): (i) the Consolidated Balance Sheets (unaudited); (ii) the Consolidated Statements of Operations and Comprehensive Loss (unaudited); (iii) the Consolidated Statements of Cash Flows (unaudited); and, (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text.

  

 

SIGNATURES

 

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

 

	YOSEN GROUP, INC.
Date: November 15, 2016	By:	/s/ Zhenggang Wang
		Name: Zhenggang Wang
		Title: Chief Executive Officer and Chairman
		(Principal Executive Officer)
Date: November 15, 2016	By:	/s/ Weiping Wang
		Name: Weiping Wang
		Title: Chief Financial Officer (Principal Accounting and Financial Officer)