Yosen Group Inc (SUNO) SEC Quarterly Report (10-Q) for Q1 2017

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 March 31, 2017

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)

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.

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 May 15, 2017, the registrant had 11,267,918 shares of common stock outstanding.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

YOSEN GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

YOSEN GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

THREE MONTHS ENDED MARCH 31, 2017 and 2016 (UNAUDITED)

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

YOSEN GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2017 and 2016 (UNAUDITED)

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

YOSEN GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017 AND 2016 (UNAUDITED)

Note 1 - ORGANIZATION

Yosen Group, Inc. (the "Company" or "Yosen") was incorporated on August 20, 1998 under the laws of the State of Nevada. Capital Future Developments Limited ("Capital") was incorporated on July 22, 2004 under the laws of the British Virgin Islands. Zhejiang YongXin Digital Technology Company Limited ("Zhejiang"), Yiwu YongXin Communication Limited ("Yiwu"), Hangzhou Wang Da Electronics Company Limited ("Wang Da") were incorporated under the laws of the Peoples Republic of China ("PRC" or "China") on July 11, 2005, July 18, 1997, March 30, 1998, respectively. Zhejiang set up a new operating entity, Hangzhou Letong Digital Technology Co., Ltd. ("Letong") on March 10, 2009. On January 6, 2014 the Company established Yosen Trading Inc. ("Yosen Trading"), its wholly owned US based subsidiary in New York. On April 23, 2015, the Company established a wholly owned subsidiary Hangzhou Yongxin Lamapai E-commerce Co., Ltd ("Hangzhou Lamapai"). On September 24, 2015, Hangzhou Lamapai established a new company Zhejiang Yongxin Lamapai E-commerce Co., Ltd ("Zhejiang Lamapai"). In 2016, Zhejiang Lamapai established Ningbo Yongxin Lamapai E-commerce Co. Ltd ("Ningbo") and Hangzhou Saizhuo brand management Co., Ltd ("Saizhuo"). The Company invested RMB 6,193,541(USD 934,620) to Zhejiang Lamapai. As a result of the investment, the Company owns 64.1% of Zhejiang Lamapai as of March 31, 2017. At the end of March 2017, Saizhuo ceased operation.

On December 21, 2005, Capital became a wholly owned subsidiary of Yosen through a reverse merger ("Merger Transaction"). Yosen acquired all of the issued and outstanding capital stock of Capital pursuant to a Merger Agreement dated December 21, 2005 by and among Yosen, XY Acquisition Corporation, Capital and the shareholders of Capital (the "Merger Agreement"). Pursuant to the Merger Agreement, Capital became a wholly owned subsidiary of Yosen and, in exchange for the Capital shares, Yosen issued 7,000,000 shares of its common stock to the shareholders of Capital, representing 93% of the issued and outstanding capital stock of Yosen at that time and cash of $500,000.

On August 15, 2007, we executed a series of contractual agreements between Capital and Zhejiang. The contractual agreements give Capital and its equity owners an obligation, and having ability to absorb, any losses, and rights to receive returns; however, these contractual agreements did not change the equity ownership of Zhejiang. We did not dispose Capital's actual equity ownership of Zhejiang when we executed the contractual agreements. Capital entered into share-holding entrustment agreements with five individuals - Zhenggang Wang, Yimin Zhang, Huiyi Lv, Xiaochun Wang and Zhongsheng Bao to hold 35%, 20%, 20%, 15% and 10%, respectively, of the equity interest of Zhejiang on behalf of Capital on November 21, 2005. The entrustment agreements confirm that Capital is the actual owner of Zhejiang. Capital enjoys the actual shareholder's rights and has the right to obtain any benefits received by the nominal holders. Zhenggang Wang is the CEO and shareholder of Yosen. Yimin Zhang, Huiyi Lv, Xiaochun Wang and Zhongsheng Bao have no other relationship with Yosen. No consideration was given to these individuals who held the equity of Zhejiang on behalf of Capital.

Letong ceased operations in 2011. Yiwu closed all its stores in stores locations in 2012. Wang Da closed all its stores in the second quarter 2014. Yosen Trading ceased operation in 2015. Saizhuo ceased operation in March 2017.

ORGANIZATIONAL CHART

Our corporate structure as of March 31, 2017 is as follows:

ORGANIZATIONAL CHART

* These entities ceased operation in 2011.

** The entity ceased operation in 2014.

*** The entity ceased operation in 2015.

**** The entity ceased operation in 2017.

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements ("CFS") were prepared in conformity with accounting principles generally accepted in the United States of America ("US GAAP").  The Company's subsidiaries – Wang Da, Yiwu, Zhejiang, Hangzhou Lamapai and Zhejiang Lamapai's functional currency is the Chinese Renminbi ("RMB"), however, the accompanying consolidated financial statements were translated and presented in United States Dollars ("$", or "USD"). Yosen is the parent company incorporated on August 20, 1998 under the laws of the State of Nevada. The parent company does not have operations. Its main activities were incurring public company expenses. Yosen pays all its expenses in USD, its functional currency. Capital was incorporated on July 22, 2004 under the laws of the BVI. Capital is a holding company and does not have operations. As a result, we determined its functional currency is USD.

Going Concern

The accompanying CFS were prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company realized net loss of $244,165 for the three months ended March 31, 2017. The Company had accumulated deficit of $51,128,801 as of March 31, 2017. There can be no assurance that the Company will become profitable or that it will survive as a public company. These issues raise substantial doubt regarding the Company's ability to continue as a going concern.

Starting from 2011, we closed most of our stores in stores locations and laid off most of our employees. 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. We are now concentrating on improving our product mix, upgrading the stores that are currently open and strengthening cooperation with China Telecom, China Unicom and other large state-owned operators to develop new businesses.

Principles of Consolidation

The CFS include the accounts of Yosen and its wholly owned subsidiaries Capital, Wang Da, Yiwu, Zhejiang, Lamapai, Ningbo and Saizhuo collectively referred to as the Company. All material intercompany accounts, transactions and profits were eliminated in consolidation.

Noncontrolling Interest

As of March 31, 2017, the Company invested RMB 6,193,541($898,852) in Zhejiang Lamapai and owns 64.1% interest in Zhejiang Lamapai. The 35.9% 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 $1,005,085 (unaudited) and $1,005,085 as of March 31, 2017 and December 31, 2016, respectively.

Inventories, net

Inventories are valued at the lower of cost (determined on a weighted average basis) or market.  Management compares the cost of inventories with the market value and allowance is made for writing down their inventories to market value, if lower. As of March 31, 2017 and December 31, 2016, inventory consisted entirely of finished goods.

Property and Equipment, net

Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of:

As of March 31, 2017 and December 31, 2016, property and equipment consisted of the following:

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 March 31, 2017 (unaudited) and December 31, 2016, there were no significant impairments of its long-lived assets.

Fair Value of Financial Instruments

FASB ASC Topic 825, "Financial Instruments" , requires the Company disclose estimated fair values ("FVs") of financial instruments. The carrying amounts reported in the statements of financial position for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of FV.

Short-term Loans

As of March 31, 2017 and December 31, 2016, short-term loans consisted of the following:

Revenue Recognition

In accordance with FASB ASC Topic 605, "Revenue Recognition,"  the Company recognizes revenues when there is persuasive evidence of an arrangement, product delivery and acceptance have occurred, the sales price is fixed and determinable, and collectability of the resulting receivable is reasonably assured.

The Company records revenues when title and the risk of loss pass to the customer.  Generally, these conditions occur on the date the customer takes delivery of the product.  Revenue generated from sales of Yosen products through two main revenue streams:

Sales revenue is therefore recognized on the following basis:

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.

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 engage in assessing 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 returns except for product defects. 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 $3,723 and $793 for the three months ended March 31, 2017 and 2016, 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 $635 and $16,298 in general and administrative expenses for the three months ended March 31, 2017 and 2016, 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 $3,194 advertising expense for the three months ended March 31, 2017 and none for 2016.

Income Taxes

The Company utilizes FASB ASC Topic 740, "Income Taxes." ASC Topic 740 requires a company to use the asset and liability method of accounting for income taxes, whereby deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Under FASB Sub-topic ASC 740-10-25, evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements.

Basic and Diluted Earnings (Loss) per Share

Loss per share is calculated in accordance with FASB ASC Topic 260, "Earnings per Share." Basic earnings (loss) per share is based upon the weighted average number of common shares outstanding. Diluted earnings (losses) per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. If convertible shares and stock options are anti-dilutive, the impact of conversion is not included in the diluted net income (loss) per share. The 10,414,325 weighted average shares in 2016 include anti-dilutive securities.

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 first quarter of 2017 through Zhejiang and Lamapai entities.: mobile phones and E-commerce business (see Note 13). 

Recent Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board ("FASB") issued an Accounting Standards Update ("ASU") 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business . The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for interim and annual periods beginning after December 15, 2017 and should be applied prospectively on or after the effective date. The Company is in the process of evaluating the impact of this ASU.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires restricted cash to be presented with cash and cash equivalents on the statement of cash flows and disclosure of how the statement of cash flows reconciles to the balance sheet if restricted cash is shown separately from cash and cash equivalents on the balance sheet. ASU 2016-18 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. The Company is in the process of evaluating the impact of this ASU on its CFS.

In November 2015, the FASB issued an ASU on the balance sheet classification of deferred taxes, which would require that deferred tax assets and liabilities be classified as non-current in the balance sheet. Current GAAP requires the presentation of deferred tax assets and liabilities as either current or non-current in the balance sheet. This ASU is effective for annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual reporting periods. Earlier adoption is permitted. The guidance may be applied either prospectively or retrospectively. The Company does not believe adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory , which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-16 is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. The Company is in the process of evaluating the impact of this ASU on its CFS.

In August 2016, the FASB issued ASU 2016-15,  Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments . ASU 2016-15 provides guidance for targeted changes with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. ASU 2016-15 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. The Company is in the process of evaluating the impact of this ASU on its CFS.

In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting . ASU 2016-09, which amends several aspects of accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, and classification in the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016, with early adoption permitted. The Company does not believe adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ASU 2016-02 requires lessees to recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is in the process of evaluating the impact of this ASU on its CFS.

In August 2014, the FASB issued Accounting Standards Update No. 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.  ASU 2014-15 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.  ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter.  Early adoption is permitted.  The Company does not believe adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers .  ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. 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 interim and annual periods beginning after December 15, 2017.   Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein.  Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption.  The Company is in the process of evaluating the impact of ASU 2014-09 on the Company's CFS.

Management does not believe that any recently issued, but not yet effective, accounting standards could have a material effect on the accompanying financial statements. As new accounting pronouncements are issued, we will adopt those that are applicable under the circumstances.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the Securities Exchange Commission (the "SEC") did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

Note 3 – ADVANCES TO SUPPLIERS

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

Note 4 - COMMON STOCK

On March 18, 2016, the Company sold 190,532 Units to two investors with each Unit consisting of: (i) one share of common stock, $0.001 par value per share and (ii) a three-year warrant to purchase one share of Common Stock of the Company at $0.75, for $142,898. Pursuant to the agreement, 190,532 shares of Common Stock and 190,532 Warrant were issued in 2016. The Proceeds from the issuance of shares and warrants were assigned to the respective securities based on relative fair values.

On May 19, 2016, the board approved an amendment to Yosen's Certificate of Incorporation effecting a one-for-three reverse split of Yosen's common stock. The reverse split was effective as of September 30, 2016. The accompanying 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.

On December 23, 2016, the Company's BOD adopted the Yosen Group 2016 Restricted Stock Plan (the "2016 Plan").  The 2016 Plan provides for the granting of restricted stock awards to employees, directors and consultants of the Company and the employees, directors and consultants of the Company's affiliates. Under the 2016 Plan, 1,360,000 shares of the Company's common stock were initially available for issuance for awards.   As of December 31, 2016, 1,150,000 of the shares available for issuance under the 2016 Plan were issued. In January 2017, 210,000 shares available for issuance were issued. The common stock was valued at grant date with a FV of $476,000. During the three months ended March 31, 2017, $39,667 was recognized as stock based compensation expense.

N ote 5 - STOCK WARRANTS, OPTIONS, AND COMPENSATION

Stock options - Options issued have a 10-year life and were vested upon issuance. The option holder has no voting or dividend rights. The grant price was the market price at the date of grant. The Company records the expense of the stock options over the related vesting period. The options were valued using the Black-Scholes option-pricing model at the date of grant stock option pricing.

Outstanding options and warrants by exercise price consisted of the following as of March 31, 2017:

(1) On September 1, 2015, the Company issued stock warrants to purchase 1,218,076 shares of common stock at $0.75. The stock warrants expire on August 31, 2018. Stock warrants were valued using the Black-Scholes option pricing model. Assumptions used to value the warrants are similar to those used in valuing the stock options as described below.

The Company determined the FV of the 1,218,076 warrants was $1,183,970. As of March 31, 2017, warrants to purchase 1,218,076 shares of common stock remained outstanding. These warrants were plain vanilla warrants and were classified as equity.

(2) On November 16, 2015, the Company issued stock warrants to purchase 66,975 shares of common stock at $0.75 . The stock warrants expire on November 15, 2018. Stock warrants were valued using the Black-Scholes option pricing model. Assumptions used to value the warrants are similar to those used in valuing the stock options as described below.

The Company determined the FV of the 66,975 warrants was $81,375. As of March 31, 2017, warrants to purchase 66,975 shares of common stock remained outstanding. These warrants were plain vanilla warrants and were classified as equity.

(3) On March 18, 2016, the Company issued stock warrants to purchase 190,532 shares of common stock at $0.75  in conjunction with the common stock offering (See Note 5). The stock warrants expire on March 17, 2019. Stock warrants were valued using the Black-Scholes option pricing model. Assumptions used to value the warrants are similar to those used in valuing the stock options as described below.

The Company determined the FV of the 190,532 warrants was $206,917. As of March 31, 2017, warrants to purchase 190,532 shares of common stock remained outstanding. These warrants were plain vanilla warrants and were classified as equity.

No te 6 - INCOME TAXES

The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor were any interest expense or penalties recognized during the three months ended March 31, 2017 and 2016.

Under ASC 740-10-25, evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements.

The US operating entity Yosen Group is subject to the US federal income tax at a rate of 34%. Yosen Group does not conduct any operations and only incurs public company expenses, such as legal fees, accounting fees, investor relations expenses and filing fees. In the three months ended March 31, 2017, the US operating subsidiaries incurred a net operating loss of $61,700. As a result, $20,978 of deferred tax assets and valuation allowance was recorded. In the three months ended March 31, 2016, the US operating subsidiaries incurred a net operating loss of $1,133. As a result, $385 of deferred tax assets and valuation allowance was recorded.

The PRC operating subsidiaries, Zhejiang, Lamapai and Ningbo are subject to the PRC income tax at a rate of 25%. In the three months ended March 31, 2017, Zhejiang, Lamapai and Ningbo incurred a net operating loss of $182,465. 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, $45,616 of deferred tax assets and valuation allowance were recorded in the three months ended March 31, 2017.  In the three months ended March 31, 2016, Zhejiang incurred a net operating loss of $55,248, as a result, $13,812 of deferred tax assets and valuation allowance were recorded in the three months ended March 31, 2016.

The components of deferred tax assets and liabilities as of March 31, 2017 (unaudited) and December 31, 2016 were as follows:

Reconciliation of the differences between the statutory US Federal income tax rate and the effective rate for the three months ended March 31, 2017 and 2016 is as follows:

Note 7 - COMMITMENTS

The Company leases office facilities under operating leases that terminate at the end of 2017. Rent expense for the three months ended March 31, 2017 and 2016 was $96,600 and $55,150, respectively. 

The future minimum obligations under these agreements are as follows by years as of March 31, 2017:

Note 8 - STATUTORY RESERVE

In accordance with the laws and regulations of the PRC, a wholly-owned Foreign Invested Enterprise's income, after the payment of the PRC income taxes, shall be allocated to the statutory surplus reserves and statutory public welfare fund. Prior to January 1, 2006, the proportion of allocation for reserve was 10% of the profit after tax to the surplus reserve fund and additional 5-10 percent to the public affair fund. The public welfare fund reserve was limited to 50% of the registered capital. Effective January 1, 2006, there is now only one fund requirement. The reserve is 10% of income after tax, not to exceed 50% of registered capital.

Statutory reserve funds are restricted to offset against losses, expansion of production and operation or increase in register capital of the respective company. Statutory public welfare fund is restricted to the capital expenditures for the collective welfare of employees. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for distribution except in liquidation. As of March 31, 2017, the Company had allocated $11,542,623 and $11,542,623 to these non-distributable reserve funds.

Note 9 – DISCONTINUED OPERATIONS

Letong ceased operations in 2011, Yiwu ceased operation in 2013. Wang Da ceased operation in 2014. Yosen Trading ceased operation in 2015. Saizhuo ceased operation in 2017. As a result, Letong, Yiwu , Wang Da , Yosen Trading and Saizhuo met the conditions to be reported as discontinued operations in the CFS, and accordingly, the results of operations have been reclassified for all periods to conform to the current period's presentation.

The following table summarizes the assets and liabilities of the discontinued operations as of March 31, 2017 and December 31, 2016 included in the Consolidated Balance Sheets:

The following table summarizes the operating results of the discontinued operations included in the Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2017 and 2016:

Note 10- OTHER COMPREHENSIVE INCOME

Other comprehensive income as included in stockholders' deficit for the three months ended March 31, 2017 and 2016, represents foreign currency translation adjustment.

Note 11 - CURRENT VULNERABILITY DUE TO CERTAIN RISK FACTORS

The Company's operations are in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, by the general state of the PRC's economy. The Company's business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

Note 12 - MAJOR CUSTOMERS, VENDORS AND CREDIT RISK

During the three months ended March 31, 2017, two customers accounted for more than 10% of the Company's sales, representing 30.6% and 15.2%. As of March 31, 2017, no customer comprised more than 10% of the Company's accounts receivable. One vendor comprised more than 10% of the Company's accounts payable, representing 29.2% of the Company's accounts payable.

During the three months ended March 31, 2016, two customers accounted for more than 10% of the Company's sales, representing 58.0% and 23.3%. As of March 31, 2016, one customer comprised more than 10% of the Company's accounts receivable, representing 84.7% of the Company's accounts receivable. One vendor comprised more than 10% of the Company's accounts payable, representing 18.1% of the Company's accounts payable. During the three months ended March 31, 2015, two customers accounted for more than 10% of the Company's sales, representing 53.2% and 13.0%. As of March 31, 2015, two customers comprised more than 10% of the Company's accounts receivable, representing 64.1% and 21.8%, respectively. Two vendors comprised more than 10% of the Company's accounts payable, representing 77.7% and 12.4% of the Company's accounts payable. 

Note 13 - SEGMENT INFORMATION

Zhejiang focuses on selling Samsung and Apple and other brand name mobile phones in PRC. Hangzhou Lamapai, Zhejiang Lamapai and Ningbo collectively 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 first quarter of 2017.

The following table presents summarized information by segment: 

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 under "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 operate "stores in stores" under the brand names Hangzhou Wang Da, Yiwu YongXin 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, Yiwu YongXin ceased operation in 2012 and Wang Da ceased operation in 2013. Zhejiang is the only entity operating under the "store in store" business model.

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 like 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 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, 2015 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 898,852) to Zhejiang Lamapai. As a result of the investment, the Company owns 64.1% of Zhejiang Lamapai as of March 31, 2016. 

On August 26, 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. Immediately prior to the Reverse Stock Split, we had 29,292,527 shares of Common Stock outstanding. After the Reverse Stock Split, we had 9,764,176 shares outstanding. 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.

Results of Operations for the Three Months Ended March 31, 2017 and 2016

Reportable Operating Segments

Zhejiang focuses on distribution of Samsung and Apple brand products.

For the three months ended March 31, 2017, mobile phones segment generated revenue of $621,598, a decrease of $1,250,842 or 66.8% compared to $1,872,440 for the three months ended March 31, 2016. The decrease in revenue was primarily due to Zhejiang closed 4 stores compared to 2016.

Gross profit decreased $13,381or 56.6% from $23,640 for the three months ended March 31, 2016 to $10,260 for the three months ended March 31, 2017. Profit margin increased from 1.3% in the three months ended March 31, 2016 to 1.7% in the three months ended March 31, 2017, an increase of 0.4%.  The decrease in gross profit was a result of the decrease in sales. The increase in profit margin was due to Zhejiang only sold to retail customers starting in 2017.

Operating loss was $78,844 for the three months ended March 31, 2017, an increase of $22,179 or 39.1% compared to $56,665 for the three months ended March 31, 2016. The increase in operating losses was primarily related to clearance costs of cell phone samples as a result of store closings.

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.

Total Company

Net Sales

Net sales for the three months ended March 31, 2017 was $1,265,815 a decrease of $606,625 or 32.4% compared to $1,872,440 for the three months ended March 31, 2016. The decrease was attributable to Zhejiang closing 3 stores and Saizhuo closing 1 store in the first quarter 2017.

Percentage of Sales

In the first quarter 2017, the Company earned 100% of its sales from its retail compared to 91.1% from retail and 8.9% from wholesale in the first quarter 2016.

Percentage of sales from retail and wholesale operations for each segment is as follows in the first quarter 2017:

Cost of Sales

Cost of sales ("COS") for the three months ended March 31, 2017 was $1,195,084 compared to $1,848,800 for the three months ended March 31, 2016, a decrease of $653,716 or 35.4%. The decreased COS for the three months was a result of the decrease in sales from the comparable period.

Gross Profit

Gross profit for the three months ended March 31, 2017 was $70,731 compared to $23,640 for the three months ended March 31, 2016, an increase of 199.2%. The increased gross profit for the three months was due to increased unit cost of mobile phones.

Profit Margin

Profit margin for the three months ended March 31, 2017 was 5.6% compared 1.3% for the three months ended March 31, 2016. The profit margin increase was mainly attributed to E-commerce segment, which has a higher gross margin, represents a higher percentage of sales in first quarter 2017.

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A") expenses for the three months ended March 31, 2017 were $235,973 or 18.6% of net sales, compared to $196,484 or 10.5% of net sales for the three months ended March 31, 2016, an increase of 8.1% of sales. The increase in selling, general and administrative expenses was primarily due to higher general administrative expenses in E-commerce business.

Operating Loss from Continuing Operations

Operating loss for the three months ended March 31, 2017 was $165,242 compared to $172,844 for the three months ended March 31, 2016, a decrease of 4.4%. The decrease in operating losses was primarily due to closing of store in stores to cut losses and control on general and administrative expenses. 

Other Expenses

Other income for the three months ended March 31, 2017 was $0 compared to $20,811 for 2016. Other expense for the three months ended March 31, 2017 was $78,976 compared to $19,869 for 2016. Other expense consists primarily costs related to sample clearance in Zhejiang. Total other income was $78,923 including $53 interest income for the three months ended March 31, 2017 compared to $1,171 for same period in 2016.

Provision for Income Taxes

The provision for income taxes for the three months ended March 31, 2017 and 2016 were $0 due to losses incurred by both Zhejiang and Lamapai entities.

Net Loss from Continuing Operations

Net loss from continuing operations was $244,165 or 19.3 % of net sales for the three months ended March 31, 2017 compared to $171,673 or 9.2 % of net sales for the three months ended March 31, 2016, an increase of 10.1%. Decreased sales, lower gross profit and additional expenses incurred by Lamapai were the key factors for the decrease in net income from continuing operations during the three months ended March 31, 2017 compared to 2016.

Net Loss from Discontinued Operations, net of taxes

Net loss from discontinued operations for the three months ended March 31, 2017 was $105,624 compared to $43,048 for 2016, an increase of $62,576. The increase was due to Saizhuo ceased operation in March 2017. As a result, Saizhuo was added to discontinued operation in first quarter 2017.

Net Loss including noncontrolling interest

Net Loss including noncontrolling interest was $349,789 for the three months ended March 31, 2017 compared $214,721 for the three months ended March 31, 2016.

Net loss attributable to noncontrolling interest

Net loss attributable to noncontrolling interest was $64,826 in the first quarter 2017 and $36,594 in 2016. 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 $284,963 in the first quarter of 2017 compared to $178,127 in the first quarter of 2016, an increase of $106,836. The increase in net loss attributable to Yosen Group was primarily due to lower sales and higher operating expenses.  

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.

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 loss of $21,925 in the first quarter 2017 and $12,344 in the same period of 2016, 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 $68,123 at March 31, 2017, compared to $135,847 at December 31, 2016.

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

Operating Activities

Net cash used in operating activities was $24,245 for the three months ended March 31, 2017 compared to $239,468 for the three months ended March 31, 2016, a 89.9% decrease.  Net cash used in operating activities was mainly attributable to several factors, including (i) a decrease in accrued expenses of $103,208; (ii)decrease in accounts payable of $159,336 and (iii) decrease in advance from customers of $44,672, offset by the decrease in inventories of $300,575 and advance to suppliers of $98,447 and accounts receivable of $33,895, add back of stock compensation of 39,667.

Accounts receivable decreased 83.4% in the first quarter of 2017 while sales decreased 32.4%. 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

Net cash used in investing activities in the three months ended March 31, 2017 and 2016 was $6,813 and $521,706. The investment activities in the three months ended March 31, 2016 were mainly attributed to construction of new customer experience store for Zhejiang Lamapai.

Financing Activities

Net decrease in Cash and Equivalents

Cash and Equivalents

Cash and equivalents as of March 31, 2017 and December 31, 2016 were solely bank accounts in US and China. Specifically, cash and equivalents for each subsidiary as of March 31, 2017 and December 31, 2016 included:

Cash equivalents held in the PRC subsidiaries are not freely transferrable outside the country. The amounts not freely transferable as of March 31, 2017 and December 31, 2016 were RMB 257,222 ($37,330) (unaudited) and RMB623,501($89,794).

Capital Expenditures

We had $6,813 capital expenditure for the first three months of 2017.

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 consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements 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 consolidated financial statements. 

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 March 31, 2017, 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, 2016.

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 first quarter of 2017 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, 2016.

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.

I tem 5.   Other Information.

None.

Item 6.   Exhibits.

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.