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Addentax (ATXG)

Filed: 15 May 18, 12:49pm

 

Exhibit 99.1

 

FINANCIAL STATEMENTS

 

YINGXI INDUSTRIAL CHAIN GROUP CO., LTD AND SUBSIDIARIES

 

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE SIX-MONTH PERIOD ENDED

 

JUNE 30, 2017

 

 F-1 
 

 

YINGXI INDUSTRIAL CHAIN GROUP CO., LTD AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

 Pages
Consolidated Balance sheet as of June 30, 2017 (Unaudited) and December 31, 2016F-3
Consolidated Statement of Loss and Comprehensive Loss for the six-month period ended June 30, 2017 (Unaudited)F-4
Consolidated Statement of Changes in Equity for the six-month period ended June 30, 2017 (Unaudited) and the year ended December 31, 2016F-5
Consolidated Statement of Cash Flows for the six-month period ended June 30, 2017 (Unaudited)F-6
Notes to Consolidated Financial Statements for the six-month period ended June 30, 2017 (Unaudited) and the year ended December 31, 2016F-7 – F-15

 

 F-2 
 

 

YINGXI INDUSTRIAL CHAIN GROUP CO., LTD AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In U.S. Dollars, except share data or otherwise stated)

AS OF JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2016

 

  June 30, 2017  December 31, 2016 
  (Unaudited)    
ASSETS        
CURRENT ASSETS        
Cash and cash equivalents $1,101,571  $227,949 
Accounts receivables, net  5,647,006   5,012,623 
Inventories, net  295,175   274,204 
Other receivables  1,341,760   858,587 
Advances to suppliers  812,162   423,337 
Amounts due from related parties  20,440   191,159 
Total current assets  9,218,114   6,987,859 
         
NON-CURRENT ASSETS        
Plant and equipment, net  648,372   685,050 
Goodwill  929,662   929,662 
Total non-current assets  1,578,034   1,614,712 
TOTAL ASSETS $10,796,148  $8,602,571 
         
LIABILITIES AND EQUITY        
CURRENT LIABILITIES        
Accounts payable $2,876,618  $2,106,611 
Amount due to related parties  2,735,352   2,515,107 
Advances from customers  227,679   364,564 
Accrued expenses and other payables  4,488,498   392,688 
Payable for acquisition of business  -   3,025,751 
Income tax payable  1,985   13,133 
Total current liabilities  10,330,132   8,417,854 
TOTAL LIABILITIES $10,330,132  $8,417,854 
         
COMMITMENTS AND CONTINGENCIES        
         
EQUITY        
Common stock ($0.0004 par value, 250,000,000shares issued and outstanding) $100,000  $100,000 
Retained earnings  353,847   56,271 
Statutory reserve  21,539   21,539 
Accumulated other comprehensive income  (9,370)  6,907 
Total equity  466,016   184,717 
TOTAL LIABILITIES AND EQUITY $10,796,148  $8,602,571 

 

See accompany notes to the consolidated financial statements.

 

 F-3 
 

 

YINGXI INDUSTRIAL CHAIN GROUP CO., LTD AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

(In U.S. Dollars, except share data or otherwise stated)

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2017 (UNAUDITED)

 

  June 30, 2017 
  (Unaudited) 
REVENUES $8,605,502 
     
COST OF REVENUES  (7,622,281)
     
GROSS PROFIT  983,221 
     
OPERATING EXPENSES    
Selling and marketing  (18,877)
General and administrative  (662,996)
Total operating expenses  (681,873)
     
INCOME FROM OPERATIONS  301,348 
     
OTHER INCOME, NET  249 
     
INCOME BEFORE INCOME TAX EXPENSE  301,597 
     
INCOME TAX EXPENSE  (4,021)
     
NET INCOME  297,576 
Foreign currency translation loss  (16,277)
TOTAL COMPREHENSIVE INCOME $281,299 
     
EARNINGS PER SHARE    
Basic and diluted  0.00 
Weighted average number of shares outstanding – Basic and diluted  250,000,000 

 

See accompany notes to the consolidated financial statements.

 

 F-4 
 

 

YINGXI INDUSTRIAL CHAIN GROUP CO., LTD AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In U.S. Dollars, except share data or otherwise stated)

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2017 (UNAUDITED)

 

  Common Stock  Retained earnings  Accumulated other    
  Shares  Amount  Unrestricted  Statutory reserve  comprehensive income  Total Equity 
BALANCE AT AUGUST 4, 2016 (i)  250,000,000  $100,000  $-  $21,539  $  $121,539 
Foreign currency translation                  6,907   6,907 
Net income for the year        56,271         56,271 
BALANCE AT DECEMBER 31, 2016  250,000,000  $100,000  $56,271  $21,539  $6,907  $184,717 
                         
Foreign currency translation                  (16,277)   (16,277) 
Net income for the year        297,576         297,576 
BALANCE AT JUNE 30, 2017 (Unaudited)  250,000,000  $100,000  $353,847  $21,539  $(9,370)  $466,016 

 

(i)Yingxi Industrial Chain Group Co., Ltd was incorporated on August 4, 2016.

 

See accompany notes to the consolidated financial statements.

 

 F-5 
 

 

 

YINGXI INDUSTRIAL CHAIN GROUP CO., LTD AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In U.S. Dollars, except share data or otherwise stated)

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2017

 

  June 30, 2017 
  (Unaudited) 
CASH FLOWS FROM OPERATING ACTIVITIES:    
Net income $297,576 
Adjustments to reconcile net income to net cash used in operating activities:    
Depreciation  54,936 
Changes in operating assets and liabilities:    
(Increase) decrease in:    
Accounts receivable  (634,384)
Inventories  (20,971)
Advances to suppliers  (388,825)
Amounts due from related parties  170,719 
Other receivables  (483,173)
Increase (decrease) in:    
Accounts payables  770,008 
Amounts due to related parties  220,245 
Accrued expenses and other payables  (158,306)
Advances from customers  (136,886)
Taxes payable  (11,148)
Net cash used in operating activities  (320,209)
     
CASH FLOWS FROM INVESTING ACTIVITIES:    
Purchase of plant and equipment  (18,257)
Payment for acquisition of subsidiaries  (3,025,751)
Net cash used in investing activities  (3,044,008)
     
CASH FLOWS FROM FINANCING ACTIVITIES:    
Proceeds from third party borrowings  4,377,288 
Repayment of third party borrowings  (142,546)
Net cash provided by financing activities  4,234,742 
     
NET INCREASE IN CASH AND CASH EQUIVALENTS  870,525 
Effect of exchange rate changes on cash and cash equivalents  3,097 
Cash and cash equivalents, beginning of year  227,949 
CASH AND CASH EQQIVALENTS, END OF YEAR $1,101,571 

 

See accompany notes to the consolidated financial statements.

 

 F-6 
 

 

YINGXI INDUSTRIAL CHAIN GROUP CO., LTD AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2017 (UNAUDITED) AND

FOR THE YEAR ENDED DECEMBER 31, 2016

 

1.ORGANIZATION AND BUSINESS ACQUISITIONS

 

Yingxi Industrial Chain Group Co., Ltd (“Yingxi”) was incorporated in the Republic of Seychelles on August 4, 2016. Yingxi, together with its subsidiaries (the “Company”) is engaged in the business of garments manufacturing and providing logistic services. The Company operates primarily in the People’s Republic of China (“PRC” or “China”).

 

On December 15, 2016, Yingxi entered into an equity transfer agreement with the shareholder of Yingxi Industrial Chain Investment Co., Ltd (“Yingxi HK”) under which Yingxi agreed to pay total consideration of RMB21,008,886 (approximately $3,048,936) in cash in exchange for a 100% ownership interest in Yingxi HK. Yingxi HK was incorporated in Hong Kong in 2016. Yingxi HK is a holding company with no assets other than a 100% equity interest of the following subsidiaries:

 

Qianhai Yingxi Textile & Garments Co., Ltd (“QYTG”), a wholly-owned subsidiary of Yingxi HK, was incorporated in PRC in 2016.

 

Shenzhen Qianhai Yingxi Industrial Chain Services Co., Ltd (“YX”), a wholly-owned subsidiary of QYTG, was incorporated in PRC in 2016.

 

Xin Kuai Jie Transport Co., Ltd (“XKJ”), a wholly-owned subsidiary of YX, was incorporated in PRC in 2001. XKJ is engaged in the provision of logistic services.

 

Shenzhen Hua Peng Fa Logistics Co., Ltd (“HPF”), a wholly-owned subsidiary of YX, was incorporated in the PRC in 2006. HPF is engaged in the provision of logistic services.

 

Dongguan Heng Sheng Wei Garments Co., Ltd (“HSW”), a wholly-owned subsidiary of YX, was incorporated in the PRC in 2009. HSW is a garment manufacturer.

 

Shantou Chenghai Dai Tou Garments Co., Ltd (“DT”), a wholly-owned subsidiary of YX, was incorporated in the PRC in 2009. DT is a garment manufacturer.

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

(a)Basis of Presentation

 

The consolidated financial statements of the Company and its subsidiaries are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and include the accounts of the Company and its subsidiaries. All material inter-company accounts and transactions have been eliminated in consolidation.

 

(b)Economic and Political Risks

 

The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.

 

The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation.

 

(c)Foreign Currency Translation

 

The Company’s reporting currency is the U.S. dollar. The functional currency of the parent company is the U.S. dollar and the functional currency of the Company’s operating subsidiaries is the Chinese Renminbi (“RMB”). For the subsidiaries whose functional currencies are the RMB, all assets and liabilities are translated at exchange rates at the balance sheet date and revenue and expenses are translated at the average yearly exchange rates and equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign exchange adjustment to other comprehensive income, a component of equity. The exchange rates utilized as follows:

 

 F-7 
 

 

  June 30, 2017  December 31, 2016 
Year-end RMB exchange rate  6.78   6.94 
Average annual RMB exchange rate  6.87   6.92 

 

No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at the rates used in translation.

 

(d)Use of Estimates

 

The preparation of the consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ materially from those estimates.

 

(e)Fair Value Measurement

 

Accounting Standards Codification (“ASC”) 820 “ Fair Value Measurements and Disclosures “, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The statement clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. It also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and that market participant assumptions include assumptions about risk and effect of a restriction on the sale or use of an asset.

 

This ASC establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.

 

The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

At December 31, 2016, the Company has no financial assets or liabilities subject to recurring fair value measurements.

 

The Company’s financial instruments include cash, accounts receivable, advances to suppliers, other receivables, accounts payable, other payables, taxes payables and related party receivables or payables. Management estimates that the carrying amounts of financial instruments approximate their fair values due to their short-term nature. The fair value of amounts with related parties is not practicable to estimate due to the related party nature of the underlying transactions.

 

(f)Cash and Cash Equivalents

 

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company had no cash equivalents at June 30, 2017 and December 31, 2016.

 

(g)Accounts Receivable

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The Company extends credit to its customers in the normal course of business and generally does not require collateral. The Company’s credit terms are dependent upon the segment, and the customer. The Company assesses the probability of collection from each customer at the outset of the arrangement based on a number of factors, including the customer’s payment history and its current creditworthiness. If in management’s judgment collection is not probable, the Company does not record revenue until the uncertainty is removed.

 

 F-8 
 

 

Management performs ongoing credit evaluations, and the Company maintains an allowance for potential credit losses based upon its loss history and its aging analysis. The allowance for doubtful accounts is the Company’s best estimate of the amount of credit losses in existing accounts receivable. Management reviews the allowance for doubtful accounts each reporting period based on a detailed analysis of trade receivables. In the analysis, management primarily considers the age of the customer’s receivable, and also considers the creditworthiness of the customer, the economic conditions of the customer’s industry, general economic conditions and trends, and the business relationship and history with its customers, among other factors. If any of these factors change, the Company may also change its original estimates, which could impact the level of the Company’s future allowance for doubtful accounts. If judgments regarding the collectability of receivables were incorrect, adjustments to the allowance may be required, which would reduce profitability.

 

Accounts receivable are recognized and carried at the original invoice amount less an allowance for any uncollectible amounts. An estimate for doubtful accounts receivable is made when collection of the full amount is no longer probable. Bad debts are written off as incurred. No allowance for doubtful accounts was made as of June 30, 2017 and December 31, 2016.

 

The following customers had an accounts receivable balance greater than 10% of total accounts receivable at June 30, 2017 and December 31, 2016.

 

  June 30, 2017  December 31, 2016 
Customer A  23%  26%
Customer B  21%  18%
Customer C  0%  14%

 

(h)Inventories

 

Manufacturing segment inventories consist of raw materials, work in progress and finished goods and are stated at the lower of cost, determined on a weighted average basis, or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale. When inventories are sold, their carrying amount is charged to expense in the period in which the revenue is recognized. Write-downs for declines in net realizable value or for losses of inventories are recognized as an expense in the period the impairment or loss occurs. The Company recorded an allowance for obsolete finished goods of $155,722 as of June 30, 2017 and December 31, 2016.

 

During the six-month period ended June 30, 2017, approximately 53% of total inventory purchases were from the Company’s five largest suppliers. Management believes that should the Company lose any one of its major suppliers, other suppliers are available that could provide similar products to the Company on comparable terms.

 

(i)Plant and Equipment

 

Plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over the assets’ estimated useful lives, using the straight-line method. Estimated useful lives of the plant and equipment are as follows:

 

Production plant5-10 years
Motor vehicles10-15 years
Office equipment5-10 years

 

The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income. The cost of maintenance and repairs is charged to the statement of income as incurred, whereas significant renewals and betterments are capitalized.

 

(j)Goodwill

 

Goodwill represents the excess of the purchase price over the net fair value of the identifiable tangible and intangible assets acquired and the fair value of liabilities assumed in acquisitions. ASC350-30-50 “Goodwill and Other Intangible Assets”, requires the testing of goodwill and indefinite-lived intangible assets for impairment at least annually. The Company tests goodwill for impairment in the fourth quarter of each year.

 

Under applicable accounting guidance, the goodwill impairment analysis is a two-step test. The first step of the goodwill impairment test involves comparing the fair value of each reporting unit with its carrying amount including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, the second step must be performed to measure potential impairment.

 

 F-9 
 

 

The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated possible impairment. If the implied fair value of goodwill exceeds the goodwill assigned to the reporting unit, there is no impairment. If the goodwill assigned to a reporting unit exceeds the implied fair value of goodwill, an impairment charge is recorded for the excess.

 

In the fourth quarter of 2016, the Company tested goodwill for impairment and it was determined that goodwill was not impaired and none of the Company’s reporting units with significant goodwill was at risk of failing step one of this goodwill impairment test.

 

(k)Accounting for the Impairment of Long-Lived Assets

 

Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technology or other industry changes. Determination of recoverability of assets to be held and used is by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

 

There was no impairment of long-lived assets as of June 30, 2017 and December 31, 2016.

 

(l)Revenue Recognition

 

The Company recognizes manufacturing revenue from product sales, net of value added taxes, upon delivery at which time title passes to the customer provided that there are no uncertainties regarding customer acceptance, persuasive evidence of an arrangement exists, the sales price is fixed and determinable and collectability is deemed probable. Service revenue is recognized at the time at the point in time when delivery is completed and the shipping terms of the contract have been satisfied.

 

Cost of revenues for manufacturing segment includes the direct raw material cost, direct labor cost, manufacturing overheads including depreciation of production equipment and rent. Cost of for service segment includes gasoline and diesel fuel, toll charges and subcontracting fees.

 

(m)Earnings Per Share

 

The Company reports earnings per share in accordance with ASC 260 “Earnings Per Share”, which requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Further, if the number of common shares outstanding increases as a result of a stock dividend or stock split or decreases as a result of a reverse stock split, the computations of a basic and diluted earnings per share shall be adjusted retroactively for all periods presented to reflect that change in capital structure.

 

The Company’s basic earnings per share is computed by dividing the net income available to holders by the weighted average number of the Company’s ordinary shares outstanding. Diluted earnings per share reflects the amount of net income available to each ordinary share outstanding during the period plus the number of additional shares that would have been outstanding if potentially dilutive securities had been issued. The Company had no potentially dilutive ordinary shares as of June 30, 2017 and December 31, 2016.

 

(n)Income Taxes

 

The Company accounts for income taxes using the asset and liability method prescribed by ASC 740 “Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.

 

 F-10 
 

 

The Company does not have any material unrecognized tax benefits.

 

The Company is governed by the Income Tax Laws of the PRC. The PRC federal statutory tax rate is 25%. The Company files income tax returns with the relevant government authorities in the PRC. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.

 

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 does not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the six-month period ended June 30, 2017. The Company’s effective tax rate differs from the PRC federal statutory rate primarily due to non-deductible expenses, temporary differences and preferential tax treatment.

 

(o)Recently issued and adopted accounting pronouncements

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” (“ASU 2014-09”). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 supersedes most existing revenue recognition guidance in US GAAP. In August 2015, the FASB issued ASU 2015-14,Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date (“ASU 2015-14”), which defers the effective date of ASU 2014-09 to January 1, 2018 for the Company. Early adoption is permitted. The Company expects to adopt ASU 2014-09 utilizing the modified retrospective method in the first quarter of 2018.

 

The Company is in the process of reviewing revenue contracts across each revenue stream and continues to evaluate the impact the standard would have on each revenue stream. As a result of the Company’s evaluation performed to date, the Company does not believe the adoption of this new standard will have a material impact on the Company’s revenue recognition policy.

 

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities(“ASU 2016-01”)”. The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company evaluated the impact of adopting the new standard and conclude there was no material impact to its consolidated financial statement.

 

In February 2016, the FASB issued ASU 2016-02,“Lease (Topic 842)”, which amends recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. This standard will take effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently assessing the impact of this new standard on its consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash flows -—Classification of Certain Cash Receipts and Cash Payment”, effective for the fiscal years beginning after December 15, 2017, and interim periods within that fiscal year. This Update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The Company evaluated the impact of adopting the new standard on its consolidated financial statements and conclude there was no material impact to the Company’s financial statement.

 

In January, 2017, the FASB issued 2017-01 “Business Combinations”, effective for the annual reporting period beginning after December 15, 2017, and interim period within that period. This Updated clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions of assets or business. The Company evaluated the impact of adopting the new standard on its consolidated financial statements and conclude there was no material impact to the Company’s financial statement.

 

In February 2017, the FASB issued ASU 2017-05 “Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20)”, effective for the annual reporting period beginning after the December 15, 2017, including the interim reporting period within that period. This update provides guidance on the recognition of gains and losses on transfers of nonfinancial assets and in substance nonfinancial assets to counterparties that are not customers. The Company evaluated the impact of adopting the new standard on its consolidated financial statements and conclude there was no material impact to the Company’s financial statement.

 

The Company reviews new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant impact on the Company’s consolidated financial statements.

 

3.BUSINESS ACQUISITION

 

On December 10, 2016, the Company entered into an equity transfer agreement relating to the acquisition of 100% of the equity of Yingxi Industrial Chain Investment Co., Ltd (“Yingxi HK”) and subsidiaries. The acquisition was financed with proceeds from the Company’s borrowings from the third party. The acquisition was closed on December 15, 2016. The results of operations of Yingxi HK are included in the Company’s consolidated financial statements beginning on December 15, 2016.

 

The following represents the purchase price allocation at the dates of the acquisition:

 

 F-11 
 

 

Cash and cash equivalents $230,390 
Other current assets  6,373,688 
Plant and equipment  710,829 
Goodwill  929,662 
Current liabilities  (5,174,094)
Statutory reserves  (21,539)
Total purchase price $3,048,936 

 

4.ACCOUNTS RECEIVABLES

 

The Company provides an allowance for doubtful accounts receivable. The receivables and allowance balances at June 30, 2017 and December 31, 2016 are as follows:

 

  June 30, 2017  December 31, 2016 
  (Unaudited)    
Accounts receivable $5,647,006  $5,012,623 
Less: allowance for doubtful accounts  -   - 
Accounts receivable, net $5,647,006  $5,012,623 

 

No allowance for doubtful accounts was made as of June 30, 2017 and December 31, 2016.

 

5.OTHER RECEIVABLES

 

Other receivables primarily represent unsecured and non-interest bearing short-term advances that the Company makes from time-to-time to third-party entities. These advances are due unsecured and on demand.

 

6.RELATED PARTY TRANSACTIONS

 

Name of Related Parties Relationship with the Company
Zhida Hong President, CEO, CFO and a director of the Company
Zhongpeng Chen A legal representative of HPF
Bihua Yang A legal representative of XKJ
Dewu Huang A legal representative of DT
Qiuying Chen A spouse of legal representative of DT
Yingping Ding A legal representative of HSW
Jinlong Huang A spouse of legal representative of HSW

 

The Company leases Shenzhen XKJ office with rent-free from Bihua Yang.

 

The Company had the following related party balances at the end of the year:

 

Amounts due from related parties June 30, 2017  December 31, 2016 
  (Unaudited)    
Zhongpeng Chen $-  $191,159 
Zhida Hong  20,440   - 

 

Amounts due to related parties June 30, 2017  December 31, 2016 
   (Unaudited)     
Zhongpeng Chen $798,769  $651,334 
Bihua Yang  18,274   1,961 
Dewu Huang  127,357   15,839 
Yinping Ding  501,177   752,384 
inlong Huang  1,289,775   1,093,589 
  $2,735,352  $2,515,107 

 

The balances represent cash advances paid to or due from legal representatives for reimbursable company expenses.

 

The balances with related parties are unsecured, non-interest bearing and repayable on demand. These balances were fully settled in 2017.

 

 F-12 
 

 

7.INVENTORIES

 

Inventories consist of the following as of June 30, 2017 and December 31, 2016:

 

  December 31, 2016  December 31, 2016 
  (Unaudited)    
Raw materials $188,990  $170,528 
Finished goods  265,221   258,954 
Total  454,211   429,482 
Less: allowance for obsolete inventories  (159,036)  (155,278)
Inventories, net $295,175  $274,204 

 

8.ADVANCES TO SUPPLIERS

 

The Company has made advances to third-party suppliers in advance of receiving inventory parts. These advances are generally made to expedite the delivery of required inventory when needed and to help to ensure priority and preferential pricing on such inventory. The amounts advanced to suppliers are fully refundable on demand and totaled $812,162 and $423,337 as of June 30, 2017 and December 31, 2016, respectively.

 

9.PLANT AND EQUIPMENT

 

Plant and equipment consists of the following as of December 31, 2016:

 

  June 30, 2017  December 31, 2016 
  (Unaudited)    
Production plant $143,938  $140,537 
Motor vehicles  837,618   815,417 
Office equipment  11,560   11,287 
   993,116   967,241 
Less: accumulated depreciation  (344,744)  (282,191)
Plant and equipment, net $648,372  $685,050 

 

Depreciation expense for the six-month period ended June 30, 2017 was $54,936.

 

10. INCOME TAXES

 

(a)Enterprise Income Tax (“EIT”)

 

The Company operates in China and files tax returns in the Chinese jurisdictions.

 

Yingxi Industrial Chain Group Co., Ltd was incorporated in the republic of Seychelles and, under the current laws of the British Virgin Islands, is not subject to income taxes.

 

Yingxi HK was incorporated in Hong Kong and is subject to Hong Kong income tax at a tax rate of 16.5%. No provision for income taxes in Hong Kong has been made as Yingxi HK had no taxable income for the six-month period ended June 30, 2017.

 

QYTG and YX were incorporated in the PRC and is subject to the PRC federal statutory tax rate is 25%. No provision for income taxes in the PRC has been made as QYTG and YX had no taxable income for the six-month period ended June 30, 2017.

 

The Company is governed by the Income Tax Laws of the PRC. Yingxi’s operating companies, HSW, HPF and DT were subject to an EIT rate of 25% in 2017 and 2016. XKJ enjoyed the preferential tax benefits and its EIT rate was 15% in 2017 and 2016.

 

No deferred taxes were recognized as of June 30, 2017 and December 31, 2016.

 

The following table reconciles the PRC statutory rates to the Company’s effective tax rate for the six-month period ended June 30, 2017:

 

  June 30, 2017 
  (Unaudited) 
PRC statutory tax rate  25%
Preferential tax treatment  (3%)
Tax losses not recognized  (11%)
Others  (10%)
Effective income tax rate  1%

 

 F-13 
 

 

The reconciliation of income taxes computed at the PRC federal statutory tax rate applicable to the PRC, to income tax expenses are as follows:

 

  June 30, 2017 
  (Unaudited) 
PRC statutory tax rate  25%
Computed expected tax expenses $75,399 
Temporary differences and tax losses not recognized  (62,518)
Preferential tax treatment  (8,860)
Income tax expenses $4,021 

 

(b)Value Added Tax (“VAT”)

 

In accordance with the relevant taxation laws in the PRC, the normal VAT rate for domestic sales is 17%, which is levied on the invoiced value of sales and is payable by the purchaser. The Company is required to remit the VAT it collects to the tax authority. A credit is available whereby VAT paid on purchases can be used to offset the VAT due on sales.

 

For services, the applicable VAT rate is 11% under the relevant tax category for logistic company, except the branch of HPF enjoyed the preferential VAT rate of 3% in 2017 and 2016. The Company is required to pay the full amount of VAT calculated at the applicable VAT rate of the invoiced value of sales as required. A credit is available whereby VAT paid on gasoline and toll charges can be used to offset the VAT due on service income.

 

11.CONSOLIDATED SEGMENT DATA

 

Segment information is consistent with how management reviews the businesses, makes investing and resource allocation decisions and assesses operating performance. The segment data presented reflects this segment structure.

The Company reports financial and operating information in the following two segments:

 

 (a)Manufacturing of garments (the “Manufacturing segment”); and
 (b)Providing logistic services (the “Service segment”).

 

The Company also provides general corporate services to its segments and these costs are reported as “Corporate and others”.

 

Selected information in the segment structure is presented in the following tables for the six-month period ended June 30, 2017 and for the year ended December 31, 2016:

 

Revenues by segment for the six-month period ended June 30, 2017 are as follows:

 

Revenues June 30, 2017 
  (Unaudited) 
Manufacturing segment $3,320,108 
Service segment  5,285,394 
  $8,605,502 

 

Income from operations by segment for the year ended June 30, 2017 are as follows:

 

Operating income June 30, 2017 
  (Unaudited) 
Manufacturing segment $(50,217)
Service segment  351,559 
Corporate and other  6 
Income from operations $301,348 
Manufacturing segment  (427)
Service segment  691 
Corporate and other  (15)
Income before income taxes $301,597 
Income taxes  (4,021)
Net income $297,576 

 

Depreciation and amortization by segment for the six-month period ended June 30, 2017 are as follows:

 

Depreciation June 30, 2017 
  (Unaudited) 
Manufacturing segment $15,359 
Service segment  39,577 
  $54,936 

 

 F-14 
 

 

Total assets by segment at June 30, 2017 and December 31, 2016 are as follows:

 

Total assets June 30, 2017  December 31, 2016 
  (Unaudited)    
Manufacturing segment $6,394,020  $5,801,186 
Service segment  4,302,018   2,700,866 
Corporate and other  100,110   100,519 
  $10,796,148  $8,602,571 

 

Goodwill by segment at June 30, 2017 and December 31, 2016 is as follows:

 

Goodwill June 30, 2017 (Unaudited) and December 31, 2016 
Manufacturing segment $475,003 
Service segment  454,659 
  $929,662 

 

12.ACCRUED EXPENSES AND OTHER PAYABLES

 

Accrued expenses and other payables consist of the following as of June 30, 2017 and December 31, 2016:

 

  June 30, 2017  December 31, 2016 
  (Unaudited)    
Loan from third parties (i) $4,293,697  $129,596 
Employee advances  1,092   67 
Accrued wages and welfare  104,585   117,078 
Value-added taxes payable  84,692   135,930 
Other payables  4,431   10,017 
  $4,488,497  $392,688 

 

 (i)Loan from third parties represent unsecured and non-interest bearing short-term advances that the Company makes from time-to-time from third-party entities. These advances are due unsecured and on demand.

 

13.RESERVES

 

(a)Statutory reserve

 

In accordance with the relevant laws and regulations of the PRC, the subsidiary of the Company established in the PRC is required to transfer 10% of its profit after taxation prepared in accordance with the accounting regulations of the PRC to the statutory reserve until the reserve balance reaches 50% of the subsidiary’s paid-up capital. Such reserve may be used to offset accumulated losses or increase the registered capital of the subsidiary, subject to the approval from the PRC authorities, and are not available for dividend distribution to the shareholders. At June 30, 2017 and December 31, 2016, the paid-up statutory reserve was RMB148,418 or $21,539.

 

(b)Currency translation reserve

 

The currency translation reserve represents translation differences arising from translation of foreign currency financial statements into the Company’s functional currency.

 

14.COMMITMENTS AND CONTINGENCIES

 

Leases

 

During the six-month period ended June 30, 2017, the Company leased offices in various cities in the PRC, under operating leases expiring on various dates through 2019. Rent expense for the six-month period ended June 30, 2017 was approximately $40,369.

 

Future minimum lease payments for leases with initial or remaining noncancelable lease terms in excess of one year are as follows:

 

2017 $14,733 
2018  29,467 
2019  9,822 
  $54,022 
15.SUBSEQUENT EVENTS

 

In December 2017, the Company signed an agreement with a customer and related parties under which the related party agreed to buy the accounts receivable of a customer amounting to RMB8,663,368 (approximately $1,247,000). The Company accounts for this arrangement under ASC 860, “Transfers and Servicing”. This arrangement is without recourse, the receivable is isolated from the Company, the transferee has the right to pledge or exchange the receivables, and the Company does not maintain effective control over the receivable. Therefore, this arrangement satisfies the conditions to be accounted for as a sale.

 

 F-15