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YOSN > SEC Filings for YOSN > Form 10-Q on 14-Aug-2013All Recent SEC Filings

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Form 10-Q for YOSEN GROUP, INC.


14-Aug-2013

Quarterly Report


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 owns 100% of Capital and Capital owns 100% of Joy & Harmony and Sanhe. Until August 14, 2007, when it made the change to its ownership structure described in the next paragraph to comply with certain requirements of the PRC law, Capital owned 100% of the capital stock of Zhejiang. Zhejiang owns 90% and Yiwu owns 10% of Wang Da. Zhejiang owns 90% and Wang Da owns 10% of Yiwu. On March 10, 2009 Zhejiang set up a new operating entity, Hangzhou Letong Digital Technology Co., Ltd. ("Letong") to establish an electronic retail franchise operation for Yosen. On July 6, 2009, Zhejiang and Yiwu completed the acquisition of Jinhua Baofa Logistic Ltd ("Jinhua"). Jinhua was incorporated under the laws of PRC on December 27, 2001.

On December 21, 2005, Capital became a wholly owned subsidiary of Yosen through a merger with a wholly owned subsidiary of the Company (the "Merger Transaction"). Yosen acquired all of the issued and outstanding capital stock of Capital pursuant to a the Merger Agreement dated at 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, 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 gave 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 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.

As a result of the Merger Agreement, the reorganization was treated as an acquisition by the accounting acquiree, accounted for as a recapitalization and reverse merger by the legal acquirer for accounting purposes. Pursuant to the recapitalization, all capital stock shares and amounts and per share data were retroactively restated. Accordingly, the financial statements include the following:

(1) The balance sheet consists of the net assets of the accounting acquirer at historical cost and the net assets of the legal acquirer at historical cost.

(2) The statements of operations include the operations of the accounting acquirer for the period presented and the operations of the legal acquirer from the date of the merger.

Pursuant to a share exchange agreement, dated August 3, 2006, we issued 183,150 shares of restricted common stock to the former shareholders of Sanhe, valued at $3,750,000, which was the fair value ("FV") of the shares at the date of the share exchange agreement. This amount is included in the cost of net assets and goodwill purchased.

Pursuant to a share exchange agreement, dated November 28, 2006, we issued 544,622 newly issued shares of common stock to the former shareholders of Joy & Harmony, valued at $11,000,000, which was the FV of the shares at the date of exchange agreement. This amount is included in the cost of net assets and goodwill purchased.

On July 6, 2009, Yosen's subsidiaries, Zhejiang and Yiwu completed acquisition of Jinhua, a company organized under the laws of the PRC. Zhejiang acquired 90% and Yiwu acquired 10% of the equity interests in Jinhua from the shareholders of Jinhua for RMB 120,000 ($17,500,000) in cash.

Results of Operations for the Three and Six Months Ended June 30, 2013 and 2012

Reportable Operating Segments

In 2011, Sanhe closed all its 210 stores in stores, Joy & Harmony closed all its 196 stores in stores, and Letong closed its direct retail and franchise operation. In 2012, Yiwu closed all its 178 stores in stores, and Jinhua closed its logistics operations. As such, Sanhe, Joy & Harmony, Letong, Yiwu and Jinhua were reported as discontinued operations in the financial statements.

The Company reports financial and operating information in continuing operations only in the mobile phones segment through Wang Da and Zhejiang:

a) Wang Da

b) Zhejiang

a) Wang Da

Wang Da focuses on distributing domestic brands mobile phones.

                     Three Months Ended June 30,         Percentage
Wang Da                2013                2012            Change
Revenue            $     277,820       $  5,124,935            (94.6 )%
Gross Profit       $       1,823       $    202,495            (99.1 )%
Profit Margin                0.7 %              4.0 %           (3.3 )%
Operating (Loss)   $      (8,906 )     $   (923,588 )          (99.0 )%




                     Six Months Ended June 30,         Percentage
Wang Da                2013              2012            Change
Revenue            $    748,740      $ 10,366,943            (92.8 )%
Gross Profit       $      7,359      $    576,386            (98.7 )%
Profit Margin               1.0 %             5.6 %           (4.6 )%
Operating (Loss)   $    (43,677 )    $ (2,150,299 )          (98.0 )%

For the three months ended June 30, 2013, Wang Da generated revenue of $277,820, a decrease of $4,847,115 or 94.6% compared to $5,124,935 for the three months ended June 30, 2012. For the six months ended June 30, 2013, Wang Da generated revenue of $748,740, a decrease of $9,618,203 or 92.8% compared to $10,366,943 for the six months ended June 30, 2012. The decrease in revenue was primarily due to the closing of 154 stores in stores in 2012 and two in the first three months of 2013. Wang Da only has six stores in operation during the three months ended June 30, 2013. Splitting part of the mobile phone business to Zhejiang also contributed to the decrease in revenue.

Gross profit decreased $200,672 or 99.1% from $202,495 for the three months ended June 30, 2012 to $1,823 for the three months ended June 30, 2013. Profit margin decreased from 4.0% in the three months ended June 30, 2012 to 0.7% in the three months ended June 30, 2013, a decrease of 3.3%. Gross profit decreased $569,027 or 98.7% from $576,386 for the six months ended June 30, 2012 to $7,359 for the six months ended June 30, 2013. Profit margin decreased from 5.6% in the six months ended June 30, 2012 to 1.0% in the six months ended June 30, 2013, a decrease of 4.6%. The decrease in gross profit was a result of the decrease in sales.

Operating loss was $8,906 for the three months ended June 30, 2013, a decrease of $914,682 or 99.0% compared to $923,588 for the three months ended June 30, 2012. Operating loss was $43,677 for the six months ended June 30, 2013, a decrease of $2,106,622 or 98.0% compared to $2,150,299 for the six months ended June 30, 2012. Operating loss decreased primarily due to the closing of stores in stores to cut losses.

b) Zhejiang

Starting from the third quarter 2012, Zhejiang operated as part of the mobile phone business focusing on distribution of Samsung and Apple brand products.

                  Three Months Ended
                    June 30, 2013
Revenue          $          2,834,839
Gross Profit                  171,641
Profit Margin                     6.1 %
Operating Loss               (186,605 )




                  Six Months Ended
                   June 30, 2013
Revenue          $        5,997,873
Gross Profit                311,108
Profit Margin                   5.2 %
Operating Loss             (488,985 )

Total Company

Net Sales

Net sales for the three months ended June 30, 2013 decreased by 39.3%, to $3,112,659 compared to $5,124,934 for the three months ended June 30, 2012. Net sales for the six months ended June 30, 2013 decreased by 34.9%, to $6,746,613 compared to $10,366,943 for the six months ended June 30, 2012. The decrease was attributable to the increased competition in the mobile phone market in China as well as Wang Da's closing of 154 stores in 2012 and two stores in the first six months of 2013. In the second quarter 2013, Wang Da opened one new store, Zhejiang opened one store and closed 10.

Percentage of Sales



Percentage of sales from retail and wholesale operations for each segment is as
follows in the three months ended June 30, 2013:



             Zhejiang       Wang Da      Total
Retail            96.2 %        96.2 %     96.2 %
Wholesale          3.8 %         3.8 %      3.8 %

Percentage of sales from retail and wholesale operations for each segment is as follows in the six months ended June 30, 2013:

             Zhejiang       Wang Da      Total
Retail            98.1 %        94.1 %     96.1 %
Wholesale          1.9 %         5.9 %      3.9 %

Percentage of sales from retail and wholesale operations for each segment is as follows in the three months ended June 30, 2012:

            Zhejiang       Wang Da      Total
Retail              - %        81.7 %     81.7 %
Wholesale           - %        18.3 %     18.3 %

Percentage of sales from retail and wholesale operations for each segment is as follows in the six months ended June 30, 2012:

            Zhejiang       Wang Da      Total
Retail              - %        79.1 %     79.1 %
Wholesale           - %        20.9 %     20.9 %

Cost of Sales

Cost of sales ("COS") for the three months ended June 30, 2013 was $2,939,195 compared to $4,922,440 for the three months ended June 30, 2012, a decrease of 40.3%. COS for the six months ended June 30, 2013 was $6,428,146 compared to $9,790,558 for the six months ended June 30, 2012, a decrease of 34.3%. The decreased COS for the three and six months was a result of the decrease in sales from the comparable periods. In addition, higher cost of mobile phones contributed to the increased cost of sales.

Gross Profit

Gross profit for the three months ended June 30, 2013 was $173,464 compared to gross profit of $202,494 for the three months ended June 30, 2012, a decrease of 14.3%. Gross profit for the six months ended June 30, 2013 was $318,467 compared to gross profit of $576,385 for the six months ended June 30, 2012, a decrease of 44.7%. The decreased gross profit for the three and six months ended June 30, 2013 was due to lower sales.

Profit Margin

Profit margin for the three months ended June 30, 2013 was 5.6% compared to 4.0% for the three months ended June 30, 2012. The profit margin increase was mainly attributed to Yongxin selling higher margin electronic products in the second quarter 2013. Profit margin for the six months ended June 30, 2013 was 4.7% compared to 5.6% for the six months ended June 30, 2012. The profit margin decrease was mainly attributed to the decreased unit price of cell phone products while the cost did not decrease correspondingly.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended June 30, 2013 were $557,375 or 17.9% of net sales, compared to $1,288,890 or 25.1% of net sales for the three months ended June 30, 2012, a decrease of 56.8% of sales. Selling, general and administrative expenses for the six months ended June 30, 2013 were $1,278,576 or 19.0% of net sales, compared to $3,779,025 or 36.5% of net sales for the six months ended June 30, 2012, a decrease of 66.2% of sales. The decrease in selling, general and administrative expenses was primarily due to the closing of 154 stores in 2012 and 13 stores in the first six months of 2013, which led to a significant decrease in staff related cost and store management fees.

Operating Loss from Continuing Operations

Operating loss for the three months ended June 30, 2013 was $383,911 or (12.3)% of net sales compared to $1,086,396 or (21.2)% of net sales for the three months ended June 30, 2012, a decrease of 64.7%. Operating loss for the six months ended June 30, 2013 was $960,109 or (14.2)% of net sales compared to $3,202,640 or (30.9)% of net sales for the six months ended June 30, 2012, a decrease of 70.0%. Lower operating expense was the key factor for the decrease in operating loss from continuing operations during the three and six months ended June 30, 2013 compared to 2012.

Provision for Income Taxes

The provision for income taxes for the three and six months ended June 30, 2013 and 2012 were $0 due to losses incurred by both Wang Da and Zhejiang.

Net Loss from Continuing Operations

Net loss was $349,854 or (11.2)% of net sales for the three months ended June 30, 2013 compared to $1,706,735 or (33.3)% of net sales for the three months ended June 30, 2012, a decrease of 79.5%. Net loss was $900,536 or (13.3)% of net sales for the six months ended June 30, 2013 compared to $3,823,605 or
(36.9)% of net sales for the six months ended June 30, 2012, a decrease of 76.4%. Lower operating expenses was the key factor for the decrease in net loss from continuing operations during the three and six months ended June 30, 2013 compared to 2012.

Net Loss from Discontinued Operations

Net loss from discontinued operations for the three months ended June 30, 2013 was $64,365 compared to $1,652,974 for 2012, a decrease of $1,588,609. Net loss from discontinued operations for the six months ended June 30, 2013 was $153,160 compared to $4,315,338 for 2012, a decrease of $4,162,178. The decrease was due to Yiwu and Jinhua ceasing operations in the first six months of 2013 when both companies were still operating and had net losses in the comparable period in 2012.

Net Loss

Net loss was $414,219 for the three months ended June 30, 2013 compared to $3,359,709 for the three months ended June 30, 2012, a decrease of 87.7%. Net loss was $1,053,696 for the six months ended June 30, 2013 compared to $8,138,943 for the six months ended June 30, 2012, a decrease of 87.1%. The decrease in net loss was due to closing Sanhe, Joy & Harmony, Yiwu and Jinhua to avoid additional operating losses.

Foreign Currency Translation Adjustments

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

                                                Six Months Ended
                                                    June 30,
                                                2013         2012
RMB/$ exchange rate at period end               0.1618       0.1596
Average RMB/$ exchange rate for the periods     0.1605       0.1593

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 $(408) in the three months ended June 30, 2013 and a foreign currency gain of $4,336 in the comparable period in 2012. Yosen recorded a foreign currency gain of $23,211 in the six months ended June 30, 2013 and $98,567 in 2012, which is a separate line item on the Statements of Operations and Comprehensive Loss.

Liquidity and Capital Resources

During the six months ended June 30, 2013, cash has been mostly generated from financing activities. Operations and liquidity needs are funded primarily through cash flows from bank loans. Cash and equivalents were $81,240 at June 30, 2013, compared to $456,495 at December 31, 2012.

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

                                                               Six Months Ended June 30,
                                                                 2013              2012
Net cash used in operating activities                        $    (413,488 )   $ (4,053,900 )
Effect of exchange rate change on cash and equivalents              38,233           85,817
Net decrease in cash and equivalents                              (375,255 )     (3,968,083 )
Cash and equivalents at beginning of period                        456,495        5,778,280
Cash and equivalents at end of period                        $      81,240     $  1,810,197

Operating Activities

Net cash used in operating activities was $413,488 for the six months ended June 30, 2013 compared to $4,053,900 for the six months ended June 30, 2012, an 89.8% decrease. Net cash used in operating activities was mainly attributable to several factors, including (i) decrease in net loss of $7,085,247, (ii) decrease in accounts receivable of $476,786, (iii) decrease in advance to related party of $501,814, (iv) increase in accrued expenses of $227,027, (v) increase in advance from related party of $733,291, offset by the increase in advance to suppliers of $1,590,403 and decrease in accounts payable of $264,988, add back of stock compensation of $206,667.

                        Six Months Ended June 30,         Percentage
                          2013              2012            Change

Sales, Net            $   6,746,613     $ 10,366,943            (34.9 )%

Accounts receivable   $     397,607     $  3,151,350            (87.4 )%

Accounts receivable decreased 87.4% in the first six months of 2013 while sales decreased 34.9%. Accounts receivable as a percentage of sales decreased due to the Company generating more revenue from retail customers rather than wholesale in 2013. 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 legally 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 accordingly.

Cash and equivalents as of June 30, 2013 and December 31, 2012 were solely bank accounts in US and China. Specifically, cash and equivalents for each subsidiary as of June 30, 2013 and December 31, 2012 included:

                                                                    December 31,
Name of Entities       Region       Currency    June 30, 2013           2012
Yosen                US entity        USD                4,311            383,834
Zhejiang           Chinese entity     RMB              378,197            359,757
Yiwu               Chinese entity     RMB               47,499             52,663
Wang Da            Chinese entity     RMB               41,582             31,730
Jinhua             Chinese entity     RMB                2,190              2,388
Sanhe              Chinese entity     RMB                4,406              8,499
Joy & Harmony      Chinese entity     RMB                1,026              1,674

Cash equivalents held in the PRC subsidiaries are not freely transferrable outside the country. The amounts not freely transferable as of June 30, 2013 and December 31, 2012 were RMB474,900 ($76,929) and RMB456,711 ($72,661).

Capital Expenditures

We did not have any capital expenditures for the first six months of 2013 and 2012.

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.

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