Exhibit 99.1
LIAONING YIXING SILK COMPANY LIMITED
FINANCIAL STATEMENTS
Six Months Period Ended June 30, 2017
INDEX TO FINANCIAL STATEMENTS
| Page | |
| Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016 (audited) | 2 |
| Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016 | 3 |
| Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 | 4 |
| Notes to Financial Statements | 5-17 |
| Liaoning Yixing Silk Company Limited | ||||||||
| Balance Sheets | ||||||||
| June 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| (Unaudited) | (Audited) | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 108,589 | $ | 224,999 | ||||
| Accounts receivable, net | 198,841 | 359,348 | ||||||
| Inventory, net | 5,447,310 | 4,401,067 | ||||||
| Prepayments and other current assets | 949,092 | 802,298 | ||||||
| Total Current Assets | 6,703,832 | 5,787,712 | ||||||
| PROPERTY AND EQUIPMENT, NET | 496,103 | 511,269 | ||||||
| OTHER ASSETS | ||||||||
| Deposits | 2,212 | 2,160 | ||||||
| Land use rights, net | 107,059 | 105,936 | ||||||
| TOTAL ASSETS | $ | 7,309,206 | $ | 6,407,077 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable and accrued expenses | $ | 80,286 | $ | 19,230 | ||||
| Advance from customers | 254,513 | 150,297 | ||||||
| Taxes payable | 1,374,640 | 1,224,253 | ||||||
| Other payables - related parties | 635,011 | 958,228 | ||||||
| Short term loans | 2,137,864 | 2,088,347 | ||||||
| Total Current Liabilities | 4,482,314 | 4,440,355 | ||||||
| LONG TERM LIABILITIES | 383,341 | — | ||||||
| Total Liabilities | 4,865,655 | 4,440,355 | ||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Paid-in capital | 3,109,011 | 3,109,011 | ||||||
| PRC statutory reserve | 82,484 | 82,484 | ||||||
| Other accumulated comprehensive income | (60,330 | ) | (112,470 | ) | ||||
| Accumulated deficit | (687,614 | ) | (1,112,303 | ) | ||||
| Total Stockholders' Equity | 2,443,551 | 1,966,722 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 7,309,206 | $ | 6,407,077 | ||||
See accompanying notes to financial statements
| 2 |
| Liaoning Yixing Silk Company Limited | ||||||||||||||||
| Statements of Operations and Comprehensive Income | ||||||||||||||||
| For The Three Months Ended June 30, | For The Six Months Ended June 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| REVENUES | $ | 3,783,543 | $ | 4,193,318 | $ | 5,656,859 | $ | 4,745,969 | ||||||||
| COST OF SALES | 3,310,061 | 4,048,466 | 4,871,571 | 4,566,389 | ||||||||||||
| GROSS PROFIT | 473,482 | 144,852 | 785,288 | 179,580 | ||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| General & administrative | 62,271 | 82,456 | 151,027 | 148,310 | ||||||||||||
| Research & development | 80,623 | 89,937 | 80,623 | 134,517 | ||||||||||||
| Selling expense | 1,336 | 88,312 | 12,754 | 96,206 | ||||||||||||
| TOTAL OPERATING EXPENSES | 144,230 | 260,705 | 244,404 | 379,033 | ||||||||||||
| INCOME (LOSS) FROM OPERATIONS | 329,252 | (115,853 | ) | 540,884 | (199,453 | ) | ||||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Interest income | 32 | 130 | 68 | 189 | ||||||||||||
| Subsidy income | — | 27,662 | ||||||||||||||
| Interest expense | (58,075 | ) | (55,239 | ) | (116,263 | ) | (120,662 | ) | ||||||||
| TOTAL OTHER EXPENSE | (58,043 | ) | (55,109 | ) | (116,195 | ) | (92,811 | ) | ||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | 271,209 | (170,962 | ) | 424,689 | (292,264 | ) | ||||||||||
| �� | ||||||||||||||||
| PROVISION FOR INCOME TAXES | — | — | — | — | ||||||||||||
| NET INCOME (LOSS) | $ | 271,209 | $ | (170,962 | ) | $ | 424,689 | $ | (292,264 | ) | ||||||
| OTHER COMPREHENSIVE LOSS | ||||||||||||||||
| Foreign currency translation adjustment | 36,635 | (49,806 | ) | 52,140 | (40,626 | ) | ||||||||||
| COMPREHENSIVE INCOME/(LOSS) | $ | 307,844 | $ | (220,768 | ) | $ | 476,829 | $ | (332,890 | ) | ||||||
See accompanying notes to financial statements
| 3 |
| Liaoning Yixing Silk Company Limited | ||||||||
| Statements of Cash Flows | ||||||||
| For The Six Months Ended | ||||||||
| June 30, | ||||||||
| 2017 | 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net Income (Loss) | $ | 424,689 | $ | (292,264 | ) | |||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
| Depreciation and amortization expense | 28,310 | 29,870 | ||||||
| Change in operating assets and liabilities: | ||||||||
| (Increase) decrease in accounts receivables | 166,863 | 287,634 | ||||||
| (Increase) decrease in prepayments and other receivables | (126,136 | ) | 167,628 | |||||
| (Increase) decrease in inventories | (929,831 | ) | (411,493 | ) | ||||
| Increase (decrease) in taxes payable | 119,804 | 116,933 | ||||||
| Increase (decrease) in advance from customers | 99,364 | 72,944 | ||||||
| Increase (decrease) in accounts payable and accrued expenses | 59,825 | (148,771 | ) | |||||
| Net Cash Provided by (Used in) Operating Activities | (157,112 | ) | (177,519 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Deposits | — | (22,949 | ) | |||||
| Purchases of property and equipment | — | (13,005 | ) | |||||
| Net Cash Used in Investing Activities | — | (35,954 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Repayment to related party | (567,913 | ) | (70,379 | ) | ||||
| Cash received from advances | 378,433 | — | ||||||
| Proceeds from related parties | 226,405 | 379,066 | ||||||
| Net Cash Provided by Financing Activities | 36,925 | 308,687 | ||||||
| Effect of exchange rate changes on cash | 3,777 | (4,398 | ) | |||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (116,410 | ) | 90,816 | |||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 224,999 | 120,936 | ||||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 108,589 | $ | 211,752 | ||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
| Cash paid for interest | $ | 58,188 | $ | 120,662 | ||||
| Cash paid for income taxes | $ | — | $ | 145 | ||||
See accompanying notes to financial statement
| 4 |
LIAONING YIXING SILK COMPANY LIMITED
Notes to Financial Statements
(Unaudited)
June 30, 2017 and December 31, 2016
NOTE 1 - NATURE OF OPERATIONS
Liaoning Yixing Silk Company Limited (the “Company”), was established on November 25, 2010 in Xifeng City, Liaoning Province, in the Peoples Republic of China as a limited liability company. Effective on that same day, the Company acquired all the assets and operations of Xifeng County Yixing Silk Factory (“Xifeng”). The Company’s registered capital is RMB20 million, approximately $3.1 million U.S.
The Company is engaged in the manufacturing and retail sale of raw wild silk and silk related products, such as bedding, comforters, clothing, and silk thread products. The Company also manufactures raw silk batting that is sold to other manufacturers for inclusion in their varied products. Liaoning Yixing Silk Company’s manufacturing facilities and showroom are located in Xifeng city, in the Liaoning Province of northern Peoples Republic of China. The Company also has retail locations in Shenyang city, Liaoning Province, and in the Nantong textiles district, in Nantong city, Jiangsu Province, China, a popular hub for textiles commerce in the Shanghai area of China.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
A) BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). The financial statements and notes are representations of management.
The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods.
B) USE OF MANAGEMENT’S ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
C) CONCENTRATIONS OF RISKS
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, trade receivables and advances to suppliers. As of June 30, 2017 and December 31, 2016, with respect to trade receivables and advances to suppliers, the Company extends credit based on evaluations of the customers' and suppliers' financial position and business history with the Company. The Company generally is required to make advances to suppliers.
| 5 |
LIAONING YIXING SILK COMPANY LIMITED
Notes to Financial Statements
(Unaudited)
June 30, 2017 and December 31, 2016
The Company’s operations are carried out in China. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments of China and by the general state of the Chinese economy. The Company’s operations in the foreign country are subject to specific considerations and significant risks not typically associated with companies in economically developed nations. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected 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. Also, due to the current economic conditions in China and challenges being faced by the Chinese economy, the Company may face a risk of reduction in future revenue growth and non- collection of receivables from the customers in China.
D) FOREIGN CURENCY TRANSLATION AND OTHER COMPREHENSIVE INCOME
The reporting currency of the Company is the U.S. dollar. The Company uses the local currency, Renminbi (RMB), as its functional currency. Assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. The statement of operations accounts is translated at the average translation rates and the equity accounts are translated at historical rates. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
Translation adjustments included in accumulated other comprehensive income amounted to $(60,330) and $(112,470) as of June 30, 2017 and December 31, 2016, respectively. Cash flows are also translated at average translation rates for the periods, therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.
The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a material impact on the Company because it has not engaged in any significant transactions that are subject to the restrictions.
E) CASH & CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are maintained with major financial institutions in China. Deposits held with these banks are not covered by a government insurance system, therefore all deposits are at risk. The Company has not experienced any losses in such accounts and believes that it is not exposed to any significant credit risk on cash and cash equivalents. There were no cash equivalents at June 30, 2017 and December 31, 2016.
| 6 |
LIAONING YIXING SILK COMPANY LIMITED
Notes to Financial Statements
(Unaudited)
June 30, 2017 and December 31, 2016
F) ACCOUNTS RECEIVABLE
The Company regularly assesses the collectability of its accounts receivable, and considers receivables with aging exceeding 120 days to be potentially uncollectible. Management will analyze the need for an allowance for doubtful accounts at that time. An allowance for bad debt was established for the period ended June 30, 2017 and December 31, 2016 in the amount of $27,338 (RMB 185,420).
The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectability of trade receivables. A considerable amount of judgement is required in assessing the amount of the allowance. The Company considers the historical level of credit losses and applies percentages to aged receivable categories. The Company makes judgements about the credit worthiness of each customer based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future. If the financial positions of the customers were to deteriorate, resulting in their inability to make payments, a larger allowance may be required. For those amounts identified as doubtful after assessment, the Company makes specific provision for these doubtful amounts. Bad debts are written off when identified. The Company extends unsecured credit to customers ranging from 30 to 90 days in the normal course of business. The Company does not accrue interest on trade receivables.
G) INVENTORIES
Inventories are stated at the lower of cost or market, computed on a weighted average cost basis. If required, the Company provides inventory allowances based on excess and obsolete inventories. During the period ended June 30, 2017 and December 31, 2016, the Company wrote off inventory amounts of $0 and $0.
H) PROPERTY AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, ranging from 3 to 7 years for furniture, fixtures, machinery and equipment, 15 to 20 years for buildings and improvements. Leasehold improvements are amortized over the lesser of the term of the lease or the economic life of the asset. Routine repairs and maintenance are expensed when incurred.
I) INCOME TAXES
The Company applies ASC 740 which requires the asset and liability method of accounting for income taxes. The asset and liability method requires that the current or deferred tax consequences of all events recognized in the financial statements are measured by applying the provisions of enacted tax laws to determine the amount of taxes payable or refundable currently or in future years. Deferred tax assets are reviewed for recoverability and the Company records a valuation allowance to reduce its deferred tax assets when it is more likely than not that all or some portion of the deferred tax assets will not be recovered.
| 7 |
LIAONING YIXING SILK COMPANY LIMITED
Notes to Financial Statements
(Unaudited)
June 30, 2017 and December 31, 2016
ASC 740 requires recognition and measurement of uncertain tax positions using a “more-likely-than-not” approach, requiring the recognition and measurement of uncertain tax positions. The adoption of ASC 740 had no material impact on the Company’s financial statements. Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will to be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
J) REVENUE RECOGNITION
Revenue is recognized when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, the Company has no other significant obligations and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as advance from customers. Revenue represents the invoiced value of goods, net of value-added tax (VAT). All of the Company’s products sold in the PRC are subject to a Chinese value-added tax at a rate of 3% to 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing the finished product.
K) BUSINESS COMBINATIONS
The Company accounts for its business combinations using the acquisition method of accounting in accordance with Accounting Standards Codification ("ASC") 805 "Business Combinations."ASC 805 requires the use of the purchase method of accounting for any business combinations initiated after June 30, 2002, and further clarifies the criteria to recognize intangible assets separately from goodwill.
With the acquisition of Xifeng County Yixing Silk Factory (Xifeng), the Company acquired seven (7) intellectual patents registered with the State Intellectual Property Office of the People's Republic of China. These include 3 design patents, 3 invention patents, and 1 utility model patent. There was no book value for these intellectual patents.
L) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company adopted ASC 820, “Fair Value Measurements” which defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined as follows:
| ☐ | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ☐ | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
| ☐ | Level 3 inputs to the valuation methodology are unobservable and significant to the fair measurement. |
The carrying amounts reported in the balance sheets for cash and cash equivalents, and current liabilities each qualify as financial instruments and are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The carrying value of short term loans approximates fair value because negotiated terms and conditions are consistent with current market rates as of June 30, 2017 and December 31, 2016.
| 8 |
LIAONING YIXING SILK COMPANY LIMITED
Notes to Financial Statements
(Unaudited)
June 30, 2017 and December 31, 2016
M) RECENT ACCOUNTING PRONOUNCEMENTS
In February 2016, the FASB issued ASU 2016-02 "Leases" to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the consolidated balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 creates a new ASC 842 "Leases" to replace the previous ASC 840 "Leases." ASU 2016-02 affects both lessees and lessors, although for the latter the provisions are similar to the previous model, but updated to align with certain changes to the lessee model and also the new revenue recognition provisions contained in ASU 2014-09. The new guidance is effective for the Company for the year ending March 31, 2020 and interim reporting periods during the year ending March 31, 2020. Early adoption is permitted. The Company is evaluating the effects, if any, of the adoption of this revised guidance on the Company's financial position, results of operations or cash flows.
N) IMPAIRMENT OF LONG-LIVED ASSETS
The Company has adopted FASB ASC 360 “Accounting for the Impairment or Disposal of Long-Lived Assets," which requires that long-lived assets to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As of June 30, 2017 and December 31, 2016, no impairment of long lived assets was deemed necessary by management.
O) LAND USE RIGHTS
The Company has capitalized the cost of using the land on which their offices and facilities reside. In the Peoples Republic of China, the entities are not allowed to purchase and own the land, but must receive permission from the government and pay the requested fees for the land use right. These fees have been capitalized under “Land Use Rights”. The terms of the agreement are for 50 years, and the costs are being amortized over this period with an annual amortization of approximately $3000.
| 9 |
LIAONING YIXING SILK COMPANY LIMITED
Notes to Financial Statements
(Unaudited)
June 30, 2017 and December 31, 2016
NOTE 3 – GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of its liabilities in the normal course of business. The Company has an accumulated deficit of $687,614 and $1,112,303 as of June 30, 2017 and December 31, 2016, respectively. There was net cash used in operating activities of $157,112 for the six months ended June 30, 2017. As the Company has limited cash flow from operations, its ability to maintain normal operations is dependentupon obtaining adequate cash to finance its manufacturing processes. The Company’s ability to meet its cash requirements for the next twelve months largely depends on the related-party loans from our major shareholder and CEO, and the continued renewal of our short-term bank loans. These factors raise substantial doubt about the Company's ability to continue as a going concern.
The Company is in the process of obtaining informal assurance from our current lender that our short-term loans will continue to be renewed and further opening dialog with the lender to convert the short-term loans to long term loans. Additionally, the Company is in the process of completing a merger with a U.S. public company, through which secondary financing may be secured, alleviating the Company’s reliance on related-party advances, and assisting with continued growth in the silk market. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
NOTE 4 - INVENTORIES
Inventories consist of the following at June 30, 2017 and December 31, 2016:
June 30, 2017 | December 31, 2016 | |||||||
| Raw materials | $ | 2,704,180 | $ | 1,985,967 | ||||
| Finished goods | 2,743,130 | 2,415,100 | ||||||
| Cost to market adjustment | — | — | ||||||
| Total Inventories (net) | $ | 5,447,310 | $ | 4,401,067 | ||||
NOTE 5 – PREPAYMENTS AND OTHER CURRENT ASSETS
As of June 30, 2017 and December 31, 2016, the prepayments and other current assets were $949,092 and $802,298, respectively. They consist of primarily prepayments to vendors for the raw materials.
NOTE 6 – PROPERTY AND EQUIPMENT AND LAND USE RIGHTS, NET
Depreciation expense was $26,939 and $28,429 during the six months ended June 30, 2017 and 2016, respectively. The majority of the depreciation expense was included as a component of cost of goods sold for the six months ended June 30, 2017 and 2016.
| 10 |
LIAONING YIXING SILK COMPANY LIMITED
Notes to Financial Statements
(Unaudited)
June 30, 2017 and December 31, 2016
Property and equipment consist of the following:
June 30, 2017 | December 31, 2016 | |||||||
| Manufacturing equipment | $ | 1,236,244 | $ | 1,207,610 | ||||
| Buildings and improvements | 844,055 | 824,505 | ||||||
| TOTAL | 2,080,299 | 2,032,115 | ||||||
| Accumulated depreciation | (1,584,196 | ) | (1,520,846 | ) | ||||
| Property and equipment, net | $ | 496,103 | $ | 511,269 | ||||
Amortization expenses of land use rights for the six months ended June 30, 2017 and 2016 are $1,371 and $1,441, respectively. Land use rights consist of the following:
June 30, 2017 | December 31, 2016 | |||||||
| Land use rights | $ | 138,887 | $ | 135,670 | ||||
| Accumulated amortization | (31,828 | ) | (29,734 | ) | ||||
| Total land use rights | $ | 107,059 | $ | 105,936 | ||||
Estimated amortization expenses of land user rights for the next five twelve months periods ended December 31, are as follows:
| Year Ended | Expense | |||||
| December 31, 2017 | $ | 2,736 | ||||
| December 31, 2018 | $ | 2,736 | ||||
| December 31, 2019 | $ | 2,736 | ||||
| December 31, 2020 | $ | 2,736 | ||||
| December 31, 2021 | $ | 2,736 | ||||
| 11 |
LIAONING YIXING SILK COMPANY LIMITED
Notes to Financial Statements
(Unaudited)
June 30, 2017 and December 31, 2016
NOTE 7 – SHORT TERM LOANS
| June 30, 2017 | December 31, 2016 | |||||||
| A 2-year term Bank Note from a Chinese Bank in the amount of 4.5 million RMB, note bears interest at 11.16%, interest is due quarterly, with principal due on March 30, 2017. The note is secured by fixed assets. | $ | 663,476 | $ | 648,107 | ||||
| A 2-year term Bank Note from a Chinese Bank in the amount of 5 million RMB, note bears interest at 11.16%, interest is due quarterly, with principal due on March30, 2017. The note is secured by fixed assets. | 737,194 | 720,120 | ||||||
| A 2-year term Bank Note from a Chinese Bank in the amount of 5 million RMB, note bears interest at 11.16%, interest is due quarterly, with principal due on March30, 2017. The note is secured by fixed assets. | 737,194 | 720,120 | ||||||
| Total | $ | 2,137,864 | $ | 2,088,347 | ||||
For the six months ended June 30, 2017 and 2016, interest expenses amounted to $116,263 and $120,662, respectively.
At June 30, 2017 and December 31, 2016, accrued interest on the outstanding short-term loans was $58,828 and $0, respectively.
Apart from the collateral of Company’s fixed assets, there were no other loan covenants required by the loans disclosed above.
NOTE 8 – TAXES PAYABLE
Taxes payable consisted of the following:
June 30, 2017 | December 31, 2016 | |||||||
| VAT provision | $ | 1,204,085 | $ | 1,055,129 | ||||
| Income tax payable | 170,203 | 166,261 | ||||||
| Other levies | 352 | 2,863 | ||||||
| Total | $ | 1,374,640 | $ | 1,224,253 | ||||
| 12 |
LIAONING YIXING SILK COMPANY LIMITED
Notes to Financial Statements
(Unaudited)
June 30, 2017 and December 31, 2016
NOTE 9 – INCOME TAXES
ASC 740 requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. As a result of the implementation of this standard, the Company performed a review of its material tax positions in accordance with recognition and measurement standards established by FASB ASC 740-10.
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Deferred tax assets and the valuation account are as follows:
June 30, 2017 | December 31, 2016 | |||||||
| Deferred tax assets: | ||||||||
| NOL carryover | $ | 151,200 | $ | 257,400 | ||||
| Valuation allowance | (151,200 | ) | (257,400 | ) | ||||
| Net deferred tax asset | $ | — | $ | — | ||||
The income tax provision differs from the amount of income tax determined by applying the PRC federal income tax rates of 25% to pretax income from continuing operations for the six months ended June 30, 2017 and 2016.
The components of income tax expense are as follows:
| 2017 | 2016 | |||||||
| Tax at statutory rate | $ | — | $ | — | ||||
| US GAAP adjustments | — | — | ||||||
| Valuation allowance | — | — | ||||||
| Income tax expense | $ | — | $ | — |
The Company has adopted FASB ASC 740-10 to account for income taxes. The Company currently has no issues creating timing differences that would mandate deferred tax expense. Net operating losses have been presented in these U.S. GAAP financial statements, but because of the acquisition in 2010, the
| 13 |
LIAONING YIXING SILK COMPANY LIMITED
Notes to Financial Statements
(Unaudited)
June 30, 2017 and December 31, 2016
Company will not be able to use the loss carry-forward, therefore, an evaluation allowance has been made to the extent of any tax benefit that net operating losses could have generated.
The Company did not have any tax positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months.
The Company includes interest and penalties arising from the underpayment of income taxes in the consolidated statements of operations in the provision for income taxes. As of June 30, 2017, and December 31, 2016, the Company had no accrued interest or penalties related to uncertain tax positions.
The tax years that remain subject to examination by major taxing jurisdictions are for the years ended December 31, 2016, 2015 and 2014.
NOTE 10 – STOCKHOLDERS’ EQUITY
The Company was organized in the Peoples Republic of China on November 25, 2010, with a registered capital of RMB20,000,000, approximately $3,053,168 U.S., including the equity transferred from the previous company, Xifeng. As of June 30, 2017 and December 31, 2016, total paid-in capital was $3,109,011 and $3,109,011, respectively.
NOTE 11 – STATUTORY RESERVES
The laws and regulations of the People’s Republic of China require that before an enterprise distributes profits to its shareholders, it must first satisfy all tax liabilities, provision for losses in previous years, and make allocations, in proportions determined at the discretion of the board of directors, to the statutory reserves. The statutory reserves include the surplus reserve funds and the enterprise fund and these statutory reserves represent restricted retained earnings.
The Company is required to transfer 10% of its net income, as determined in accordance with the PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the Company’s registered capital.
The transfer to this reserve must be made before distribution of any dividend to shareholders. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital. For the periods ended June 30, 2017 and December 31, 2016, the Company contributed contributions of $0 and $0 to these reserves, respectively.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
In February 2012, the Company committed to an operating lease for showroom space to commence February 1, 2012. The lease expires in January2017, but was re-negotiated for an additional year to expire January 10, 2018. Rent is paid annually at the commencement of the lease agreement. The annual lease obligation was $30,566 and $27,655 for the lease periods ended 2017 and 2016, respectively.
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LIAONING YIXING SILK COMPANY LIMITED
Notes to Financial Statements
(Unaudited)
June 30, 2017 and December 31, 2016
In September 2012, the Company committed to an operating lease for warehouse space to commence September 10, 2012 and expires September 10, 2016. Lease payments are due annually upon commencement of the lease term. Annual rental fee for this lease is about $1,000.
Rent expense for the six months ended June 30, 2017 and 2016 was $15,778 and $14,322, respectively.
Future minimum lease payments are as follows:
| Year | Amount |
| 2017 | $1,000 |
NOTE 13 - RELATED PARTY TRANSACTIONS
The president of the Company, who is also the sole shareholder of the Company, and his family members, have advanced various funds to the Company since its inception, and/or paid for various business properties or expenses from his personal finances. As of June 30, 2017, and December 31, 2016, the outstanding advances from related parties were $635,011 and $958,228, respectively. Advances made from related parties during the six months ended June 30, 2017 and the twelve months ended December 31, 2016 were $226,405 and $402,807, respectively. Payments back to related parties during the six months ended June 30, 2017 and the twelve months ended December 31, 2016 were $567,913 and $69,283, respectively. It was interest free for the amount due to the related parties, and no interest was accrued as of June 30, 2017.
NOTE 14 - CONCENTRATION OF SUPPLIERS AND CUSTOMERS
During the six months ended June 30, 2017, the Company had one major supplier through which the Company purchased 96% of its inventory. During the six months ended June 30, 2016, the Company had two major suppliers through which the Company purchased 75% and 16% of its inventory. Although the Company believes comparable products could be purchased from other vendors, the loss of this vendor could have a temporary severe impact on the Company’s operations.
Also during the six months ended June 30, 2017, the Company had two major customers through which the Company sold 17% and 12% of its total products. During the six months ended June 30, 2016 the Company had one major customer through which the Company sold 21% of its total products.
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LIAONING YIXING SILK COMPANY LIMITED
Notes to Financial Statements
(Unaudited)
June 30, 2017 and December 31, 2016
NOTE 15 – MATERIAL AGREEMENTS
On December 5, 2016, the Company and it’s shareholder executed several agreements with Spirited Trading Xifeng, Ltd., (Xifeng) a PRC Company, wherein the Company and it’s shareholder assigned various rights, authorities and management powers to Xifeng and thus became a Variable Interest Entity (VIE) of Xifeng. As of December 5, 2016, the Company as a VIE would be required to consolidate it’s financial information with Xifeng, however these financial statements are un-consolidated stand alone financial statements of the Company. The VIE Agreements are as follows:
Exclusive Business Cooperation Agreements
Pursuant to the terms of certain Exclusive Business Cooperation Agreements dated December 5, 2016, between the Company and Xifeng (the “Exclusive Business Cooperation Agreements”), the VIE Company agreed to entrust the operations and management of its business to Xifeng. According to the Exclusive Business Cooperation Agreements, Xifeng possesses the full and exclusive right to manage the VIE Company’s operations, assets and personnel, has the right to control all of the VIE Company' cash flows through an entrusted bank account, is entitled to the VIE Company’s net profits as a management fee, is obligated to pay all of the VIE Company’s payables and loan payments, and bears all losses of the VIE Company. The Exclusive Business Cooperation Agreements also states that Xifeng is the exclusive technology provider to the VIE Company. The Exclusive Business Cooperation Agreements will remain in effect until (i) the parties mutually agree to terminate the agreement; (ii) Xifeng gives a written notice of termination of the Agreements, or (iii) the expiration date of December 4, 2026.
Shareholder’s Voting Proxy Agreements
Pursuant to the terms of certain Shareholder’s Voting Proxy Agreements dated December 5, 2016, among Xifeng and the shareholders of the VIE Company (the “Shareholder’s Voting Proxy Agreements”), the shareholders of the VIE Company irrevocably appointed Xifeng as their proxy to exercise on such shareholders’ behalf all of their voting rights as shareholders pursuant to PRC law and the Articles of Association of the VIE Company, including the appointment and election of directors of the VIE Company. The Shareholder’s Voting Proxy Agreements will remain in effect until Xifeng requests a cancellation of the agreement.
Exclusive Option Agreements
Pursuant to the terms of certain Exclusive Option Agreements dated December 5, 2016, among Xifeng, the VIE Company, and the shareholders of the VIE Company (the “Exclusive Option Agreements”), the shareholders of the VIE Company granted Xifeng an irrevocable and exclusive purchase option (the “Option”) to acquire the VIE Company’ equity interests and/or remaining assets, but only to the extent that the acquisition does not violate limitations imposed by PRC law on such transactions. The Option is exercisable at any time at Xifeng’s discretion so long as such exercise and subsequent acquisition of the VIE Company does not violate PRC law. The consideration for the exercise of the Option is to be the lowest price allowed by PRC law. Xifeng may transfer all rights and obligations under the Exclusive Option Agreements to any third parties without the approval of the shareholders of the VIE Company so long as a written notice is provided. The Exclusive Option Agreements may be terminated by mutual agreements or by 30 day written notice by Xifeng.
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LIAONING YIXING SILK COMPANY LIMITED
Notes to Financial Statements
(Unaudited)
June 30, 2017 and December 31, 2016
Equity Pledge Agreements
Pursuant to the terms of certain Equity Pledge Agreements dated December 5, 2016, among Xifeng, the VIE Company, and the shareholders of the VIE Company (the “Pledge Agreements”), the shareholders of the VIE Company pledged all of their equity interests in the VIE Company to Xifeng, to guarantee all of Xifeng's rights and benefits under the Exclusive Business Cooperation Agreements, the Shareholder’ Voting Proxy Agreements and the Exclusive Option Agreements. Prior to termination of the Pledge Agreements, the pledged equity interests cannot be transferred without Xifeng's prior written consent. The Pledge Agreements may be terminated only upon the written agreement of the parties or by 30 day written notice by Xifeng.
NOTE 16 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events from the balance sheet date through the date the financial statements were issued and has determined that there are no such events that would have a material impact on the financial statements.
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