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YOSN > SEC Filings for YOSN > Form 10-Q on 19-Nov-2013All Recent SEC Filings

Show all filings for YOSEN GROUP, INC.

Form 10-Q for YOSEN GROUP, INC.


19-Nov-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 Nine Months Ended September 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 dissolved in July 2013, 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 September 30,        Percentage
Wang Da                 2013                    2012             Change
Revenue            $       356,076       $        4,454,413         (92.0) %
Gross Profit       $         6,773       $          115,856         (94.2) %
Profit Margin                  1.9 %                    2.6 %        (0.7) %
Operating (Loss)   $       (6,167)       $        (418,550)         (98.5) %



                     Nine Months Ended September 30,        Percentage
Wang Da                 2013                  2012            Change
Revenue            $     1,105,182       $   14,819,945         (92.5) %
Gross Profit       $        14,110       $      694,262         (98.0) %
Profit Margin                  1.3 %                4.7 %        (3.4) %
Operating (Loss)   $      (49,980)       $  (2,567,635)         (98.1) %

For the three months ended September 30, 2013, Wang Da generated revenue of $356,076, a decrease of $4,098,337 or 92.0% compared to $4,454,413 for the three months ended September 30, 2012. For the nine months ended September 30, 2013, Wang Da generated revenue of $1,105,182, a decrease of $13,714,763 or 92.5% compared to $14,819,945 for the nine months ended September 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 seven stores in operation during the three months ended September 30, 2013. Splitting part of the mobile phone business to Zhejiang also contributed to the decrease in revenue.

Gross profit decreased $109,083 or 94.2% from $115,856 for the three months ended September 30, 2012 to $6,773 for the three months ended September 30, 2013. Profit margin decreased from 2.6% in the three months ended September 30, 2012 to 1.9% in the three months ended September 30, 2013, a decrease of 0.7%. Gross profit decreased $680,152 or 98.0% from $694,262 for the nine months ended September 30, 2012 to $14,110 for the nine months ended September 30, 2013. Profit margin decreased from 4.7% in the nine months ended September 30, 2012 to 1.3% in the nine months ended September 30, 2013, a decrease of 3.4%. The decrease in gross profit was a result of the decrease in sales.

Operating loss was $6,167 for the three months ended September 30, 2013, a decrease of $412,383 or 98.5% compared to $418,550 for the three months ended September 30, 2012. Operating loss was $49,980 for the nine months ended September 30, 2013, a decrease of $2,517,655 or 98.1% compared to $2,567,635 for the nine months ended September 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 September 30,          Percentage
Zhejiang                 2013                    2012              Change
Revenue            $       2,188,988       $       1,117,926           95.8 %
Gross Profit       $         119,108       $          73,200           62.7 %
Profit Margin                    5.4 %                   6.5 %        (1.1) %
Operating (Loss)   $       (163,870)       $       (766,319)         (78.6) %



                       Nine Months Ended September 30,         Percentage
Zhejiang                 2013                   2012             Change
Revenue            $      8,195,022       $      1,117,926          633.1 %
Gross Profit       $        430,596       $         73,200          488.2 %
Profit Margin                   5.3 %                  6.5 %        (1.2) %
Operating (Loss)   $      (653,635)       $      (766,319)         (14.7) %

For the three months ended September 30, 2013, Zhejiang generated revenue of $2,188,988, an increase of $1,071,062 or 95.8% compared to $1,117,926 for the three months ended September 30, 2012. For the nine months ended September 30, 2013, Zhejiang generated revenue of $8,195,022, an increase of $7,077,096 or 633.1% compared to $1,117,926 for the nine months ended September 30, 2012. The increase in revenue was due to Zhejiang started its mobile phone sale business in the third quarter of 2012. Zhejiang only operated three months during the first nine months of 2012 compared to nine months in the same period of 2013.

Gross profit increased $45,908 or 62.7% from $73,200 for the three months ended September 30, 2012 to $119,108 for the three months ended September 30, 2013. Profit margin decreased from 6.5% in the three months ended September 30, 2012 to 5.4% in the three months ended September 30, 2013, a decrease of 1.1%. Gross profit increased 357,396 or 488.2% from $73,200 for the nine months ended September 30, 2012 to $430,596 for the nine months ended September 30, 2013. Profit margin decreased from 6.5% in the nine months ended September 30, 2012 to 5.3% in the nine months ended September 30, 2013, a decrease of 1.2%. The increase in gross profit was a result of the increase in sales.

Operating loss was $163,870 for the three months ended September 30, 2013, a decrease of $602,449 or 78.6% compared to $766,319 for the three months ended September 30, 2012. Operating loss was $653,635 for the nine months ended September 30, 2013, a decrease of $112,684 or 14.7% compared to $766,319 for the nine months ended September 30, 2012. Operating loss decreased primarily due to the increase in gross profit.

Total Company

Net Sales

Net sales for the three months ended September 30, 2013 decreased by $3,025,240 or 54.3%, to $2,545,064 compared to $5,570,304 for the three months ended September 30, 2012. Net sales for the nine months ended September 30, 2013 decreased by $6,637,667 or 41.6%, to $9,300,204 compared to $15,937,871 for the nine months ended September 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. Zhejiang opened 5 stores and closed 11 in the first nine months of 2013.

Percentage of Sales

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

            Zhejiang     Wang Da     Total
Retail          97.9 %      96.7 %    97.3 %
Wholesale        2.1 %       3.3 %     2.7 %

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

            Zhejiang     Wang Da     Total
Retail          98.0 %      95.0 %    96.5 %
Wholesale        2.0 %       5.0 %     3.5 %

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

            Zhejiang     Wang Da   Total
Retail           100 %      98.2 %   99.1 %
Wholesale          - %       1.8 %    0.9 %

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

            Zhejiang     Wang Da     Total
Retail           100 %      85.4 %    85.7 %
Wholesale          - %      14.6 %    14.3 %

Cost of Sales

Cost of sales ("COS") for the three months ended September 30, 2013 was $2,419,183 compared to $5,381,382 for the three months ended September 30, 2012, a decrease of $2,962,199 or 55.0%. COS for the nine months ended September 30, 2013 was $8,855,499 compared to $15,170,409 for the nine months ended September 30, 2012, a decrease of $6,314,910 or 41.6%. The decreased COS for the three and nine months was a result of the decrease in sales from the comparable periods.

Gross Profit

Gross profit for the three months ended September 30, 2013 was $125,881 compared to gross profit of $188,922 for the three months ended September 30, 2012, a decrease of $63,041 or 33.4%. Gross profit for the nine months ended September 30, 2013 was $444,705 compared to gross profit of $767,462 for the nine months ended September 30, 2012, a decrease of $322,757 or 42.1%. The decreased gross profit for the three and nine months ended September 30, 2013 was due to lower sales.

Profit Margin

Profit margin for the three months ended September 30, 2013 was 4.9% compared to 3.4% for the three months ended September 30, 2012. The profit margin increase was mainly attributed to Zhejiang selling higher margin electronic products in 2013. Profit margin for the nine months ended September 30, 2013 and 2012 was 4.8%.

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) expenses for the three months ended September 30, 2013 were $461,613 or 18.1% of net sales, compared to $2,844,428 or 51.1% of net sales for the three months ended September 30, 2012, a decrease of 83.8% of sales. SG&A expenses for the nine months ended September 30, 2013 were $1,741,463 or 18.7% of net sales, compared to $6,624,438 or 41.6% of net sales for the nine months ended September 30, 2012, a decrease of 73.7% of sales. The decrease in SG&A expenses was primarily due to the closing of 154 stores in 2012 and 13 stores in the first nine 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 September 30, 2013 was $335,732 or
(13.2)% of net sales compared to $2,655,506 or (47.7)% of net sales for the three months ended September 30, 2012, a decrease of 87.4%. Operating loss for the nine months ended September 30, 2013 was $1,296,758 or (13.9)% of net sales compared to $5,856,976 or (36.7)% of net sales for the nine months ended September 30, 2012, a decrease of 77.9%. Lower operating expense was the key factor for the decrease in operating loss from continuing operations during the three and nine months ended September 30, 2013 compared to 2012.

Provision for Income Taxes

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

Net Loss from Continuing Operations

Net loss from continuing operations was $333,313 or (13.1)% of net sales for the three months ended September 30, 2013 compared to $2,900,505 or (52.1)% of net sales for the three months ended September 30, 2012, a decrease of 88.5%. Net loss from continuing operations was $1,234,535 or (13.3)% of net sales for the nine months ended September 30, 2013 compared to $6,722,817 or (42.2)% of net sales for the nine months ended September 30, 2012, a decrease of 81.6%. Lower operating expenses was the key factor for the decrease in net loss from continuing operations during the three and nine months ended September 30, 2013 compared to 2012.

Net Loss from Discontinued Operations

Net loss from discontinued operations for the three months ended September 30, 2013 was $47,284 compared to $1,300,566 for September 30, 2012, a decrease of $1,253,282. Net loss from discontinued operations for the nine months ended September 30, 2013 was $200,720 compared to $5,614,307 for September 30, 2012, a decrease of $5,413,587. The decrease was due to Yiwu and Jinhua ceasing operations in the first nine months of 2013 when both companies were still operating and had net losses in the comparable period in 2012.

Net Loss

Net loss was $380,597 for the three months ended September 30, 2013 compared to $4,201,071 for the three months ended September 30, 2012, a decrease of 90.9%. Net loss was $1,435,255 for the nine months ended September 30, 2013 compared to $12,337,124 for the nine months ended September 30, 2012, a decrease of 88.4%. 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.

                                               Nine Months Ended
                                                 September 30,
                                                2013        2012
RMB/$ exchange rate at period end               0.1630      0.1583
Average RMB/$ exchange rate for the periods     0.1609      0.1585

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 $(1,533) in the three months ended September 30, 2013 compared to $12,750 in the comparable period in 2012. Yosen recorded a foreign currency gain of $21,677 in the nine months ended September 30, 2013 and $85,816 in 2012, which is a separate line item on the Statements of Operations and Comprehensive Loss.

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