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YOSN > SEC Filings for YOSN > Form 10-K on 11-Apr-2014All Recent SEC Filings

Show all filings for YOSEN GROUP, INC.

Form 10-K for YOSEN GROUP, INC.


11-Apr-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations of the Company is based upon, and should be read in conjunction with, the audited consolidated financial statements and related notes thereto appearing elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements. Our actual results may differ significantly from those projected in the forward-looking statements. Our Management's Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking. Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; and other risks be detailed from time to time in our filings with the SEC.

Because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements.

Results of Operations

Year Ended December 31, 2013 compared to Year Ended December 31, 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 operations. 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:

Wang Da



Wang Da focuses on distributing domestic brands mobile phones.



                         Year Ended December 31,          Percentage
Wang Da                   2013              2012            Change
Revenue               $  1,373,752      $ 17,190,387            (92.0 )%
Gross Profit (Loss)     (1,122,742 )         762,333           (247.3 )%
Profit Margin                (81.7 )%            4.4 %          (86.2 )%
Operating (Loss)          (208,741 )      (6,082,590 )          (96.6 )%

For 2013, Wang Da generated revenue of $1,373,752, a decrease of $15,816,635 or 92.0% compared to $17,190,387 for 2012. Gross profit decreased $1,885,075 or 247.3% from $762,333 for 2012 to $(1,122,742) for 2013. The decrease in revenue was primarily due to closing of Wang Da's retail stores. The decrease in revenue was also a result of splitting part of the mobile business to Zhejiang. Operating losses was $208,741 in 2013, decreased $5,873,849 or 96.6% compared to $6,082,590 in 2012. Operating losses as a percentage of sales decreased from 35.4% in 2012 to 15.2% in 2013, primarily as a result of closing retail stores to cut losses in 2013.

Profit margin decreased from 4.4% in 2012 to (81.7)% in 2013. The decrease in profit margin was primarily due to adjustment for remaining inventory which resulted in an increase in cost of goods sold and a decrease in gross profit of $853,478. The decrease in profit margin was also a result of lower profit margin on cell phone products.

Zhejiang



Zhejiang focuses on distribution of Samsung and Apple brand mobile phone
products.



                      Year Ended December 31,         Percentage
Zhejiang               2013             2012            Change
Revenue            $ 11,414,126     $  4,306,736            165.0 %
Gross Profit            338,645          142,576            137.5 %
Profit Margin               3.0 %            3.3 %           (0.3 )%
Operating (Loss)     (1,679,534 )     (1,133,496 )          (48.2 )%

For 2013, Zhejiang generated revenue of $11,414,126, an increase of $7,107,390 or 165.0% compared to $17,190,387 for 2012. Gross profit increased $196,069 or 137.5% from $142,576 for 2012 to $338,645 for 2013. The increase in revenue was a result of Wang Da splitting part of the mobile business to Zhejiang. Operating losses was $1,679,534 in 2013, increased $546,038 or 48.2% compared to $1,133,496 in 2012. Operating losses as a percentage of sales decreased from 26.3% in 2012 to 14.7% in 2013. The increase in operating losses was primarily due to increase in staff cost and new stores opening cost.

Profit margin was 3.0% in 2013, remained relatively stable compared to 3.3% in 2012.

Total Company Net Sales

Net sales for 2013 totaled $12,787,878, a year-over-year decrease of $8,709,246 or 40.5% compared to $21,497,124 for 2012. The decrease was primarily due to the Company's reorganization and refocusing its product mix. The decrease is also attributable to the increased competition in the cell phone products market in China.

Percentage of Sales

In 2013, the Company earned 92.2% of its sales from its retail and 7.8% from its wholesale operations compared to 92.9% from retail and 7.1% from wholesale in 2012.

Percentage of sales from retail and wholesale operations for each segment is as follows in 2013:

              Wang Da       Zhejiang     Total
Retail           85.6 %         98.8 %     92.2 %
Wholesale        14.4 %          1.2 %      7.8 %

Percentage of sales from retail and wholesale operations for each segment is as follows in 2012:

              Wang Da       Zhejiang     Total
Retail           87.9 %         98.0 %     92.9 %
Wholesale        12.1 %          2.0 %      7.1 %

Cost of Sales

Cost of sales ("COS") for 2013 totaled $12,630,598, or 98.8% of sales compared to $20,592,214, or 95.8% of for 2012. The decrease in the COS was a result of the decrease in sales. The COS as a percentage increased during 2013 primarily due to an adjustment of $853,478 made at the end of 2013 to remaining inventory.

Top Ten Suppliers of Each of Our Subsidiaries in 2013



                     Wang Da                                Zhejiang
1    China PTAC Communication Services Co.,    China PTAC Communication Services
     Ltd (Hangzhou)                            Co., Ltd (Zhejiang)
2    China United Internet Communication       Tianyin Telecommunication Company
     Co., Ltd (Hangzhou)                       Limited (Zhejiang)
3    Phone World Digital Chain Group Co.,      Sichuang ChanghongIT products
     Ltd.,                                     Company Limited
4    Unicom VSENS Co., Ltd                     Zhejiang Wangyuda Trade Company
                                               Limited
5    Shenzhen Tianyin Telecommunication        ESC Technology (Shanghai ) Ltd
     Company Limited
6    Shenzhen Aisidi Company Limited           Hangzhou Dingfeng Digital
                                               Telecommunication Company Limited
7    China United Internet Communication       Beijing Jinke Xin'an Technology
     Co., Ltd (Ningbo Yinzhou)                 Company Ltd
8    N/A                                       Hangzhou Zhisheng Digital
                                               Technology Company Ltd
9    N/A                                       Shenzhen Aisidi Company Limited
10   N/A                                       Marketing 133

Profit Margin

Profit margin in 2013 decreased to 1.2% compared to 4.2% in 2012. The profit margin decrease was mainly due to an adjustment of $853,478 made at the end of 2013 to remaining inventory, which resulted in an increase in COS and a decrease in gross profit.

Because the Company does not include the costs for its distribution network in COS, its gross profit and profit margin as a percentage of net sales ("profit margin") may not be comparable to those of other retailers that may include distribution costs in cost of sales and in gross profit and profit margin.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for 2013 totaled $3,630,578, or 28.4% of net sales, compared to $10,158,291, or 47.3% for 2012. General and administrative expense decreased as a percentage of sales, primarily due to Wang Da closing its retail stores to cut expenses.

Loss from Continuing Operations

Operating loss for 2013 was $3,473,298 or (27.2)% of net sales compared to $9,253,381 or (43.0)% for 2012. Lower general and administrative expenses contributed to the decrease in loss from operations.

Provision for Income Taxes

Provision for income taxes for 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 for 2013 was $3,441,949 or (26.9)% of net sales compared to $9,213,515 or (42.9)% for 2012. Lower general and administrative expenses contributed to the decrease in loss from operations.

Net Loss from Discontinued Operations

Net loss from discontinued operations for 2013 was $184,739 compared to $6,653,484 for 2012, a decrease of $6,468,745. The decrease in net loss from discontinued operations was due to Yiwu and Jinhua having net losses in 2012 but not operating in 2013.

Net Loss

Net loss for 2013 was $3,626,688 compared to $15,866,999 for 2012, a decrease of $12,240,311. The decrease in net loss was primarily due to Yiwu and Jinhua having net losses in 2012 and not operating in 2013. Wang Da closed stores to cut operating losses also contributed to the decrease in total net loss of the Company.

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.

                                              2013         2012
RMB/$ exchange rate at year end               0.1637       0.1591
Average RMB/$ exchange rate for the years     0.1615       0.1589

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 gain of $7,768 in 2013 and $131,905 in 2012, which is a separate line item on the Statements of Operations and Comprehensive Loss.

Retail locations

The following table reflects a roll forward during 2012 and 2013 of our retail locations (i.e., number of stores opened, number of stores closed and number of stores open at year-end). "Store in store" refers to the sales counters where the Company's products are displayed for sale within large-scale supermarkets, department stores and other sites. At present, all of our "stores in stores" are in Zhejiang province.

    (Number of Locations)         Wang Da       Yiwu      Zhejiang      Total
Locations at January 1, 2012           153        178             -          -
Opened during 2012                       8          -            37         45
Closed during 2012                    (154 )     (178 )          (3 )     (335 )
Locations at December 31, 2012           7          -            34         41

Opened during 2013                       2          -             8         10
Closed during 2013                      (9 )        -           (14 )      (23 )
Locations at December 31, 2013           -          -            28         28

The following table reflects the square footage of each store space during 2012 and 2013.

    (In Square Foot)         Wang Da        Yiwu        Zhejiang        Total
Area at January 1, 2012        21,383        27,442             -        48,825
Opened during 2012              5,160             -        19,410        24,570
Closed during 2012            (23,603 )     (27,442 )      (1,350 )     (52,395 )
Area at December 31, 2012       2,940             -        18,060        21,000

Opened during 2013                254             -         4,838         5,092
Closed during 2013             (3,194 )           -        (7,436 )     (10,630 )
Area at December 31, 2013           -             -        15,462        15,462

The following table reflects net sales per square foot for 2012 and 2013.

       Wang Da       Zhejiang      Average
2012   $  5,847     $      248     $  3,048
2013        626          4,216        2,421

The following table reflects the amount of comparable or same store sales for each period (i.e., the change in sales from stores that were open for each year presented). A "comparable store" is defined as the same "store in store," for which sales of that "store in store" is compared in the same month or same quarter of different years, such as the comparison of the sales occurring during March 2011 and March 2012 in the same "store in store."

       Wang Da       Zhejiang      Average
2012   $  5,219     $    6,251     $  5,735
2013      2,194          4,077        3,136

Assessment of whether the stores are "comparable" is based on:

(1) stores are in the same address;

(2) relatively same business area (e.g. if the business area of a store has changed no more than 30%, it is regarded as having same business area; if the change in business area is more than 30%, the change in business area will be regarded as too significant as to be comparable;

(3) relatively same business layout (e.g. if the layout of sales counter in a store remains unchanged over time, then that store would be regarded as a comparable store; if there is significant change in layout of a sales counter in a store, that store will not be regarded as a comparable store);

(4) stores with same product mix would be regarded as comparable; if there is significant change in product mix in a store, that store will not be regarded as a comparable store;

(5) with respect to net sales per square foot each year and how we treat changes in square footage, this depends on the materiality of the impact on sales per square foot as a result of an increase or decrease in square footage. By way of example, a store with an area of 130 square feet had sales of $14,000 per month in 2006, which results in approximately $108 in sales per square foot. In 2007, if the same store increased the area of operation to 140 square feet and had sales of $16,000 per month that would result in approximately $114 in sales per square foot. We would deem the $6 increase in sales per square foot to be immaterial. Accordingly, in this case, we will use the area of 130 square feet to compare same store sales, and the additional 10 square feet will be ignored in the calculation of same store sales.

We consider changes in store square footage of more than 30% to be material. Stores that undergo such changes will not be accounted for as "comparable stores" because the change is too significant.

(6) with respect to net sales per square foot each year and how we treat relocated stores, if a "store in store" is relocated to a different retail location, which we would refer to as a different operating environment, during the period, then that "store in store" will not be used in the same store comparison. However, if the "store in store" is relocated to another location within the same retail location (or same operating environment) then the "store in store" sales will be used in the calculation of the same store comparison; and

(7) with respect to net sales per square foot each year and how we treat closed stores, we treat a closed "store in store" the same way we treat a "store in store" relocated to different retail location. A closed "store in store" is not used in the same store comparison.

Opened and closed "stores in stores" are primarily recognized based on the duration of the agreements with the shopping centers, as well as the sale and profits of a "store in store." Prior to opening a new "store in store" we are usually approached by a large-scale department store or supermarket that offers us the opportunity to open a "store in store." Our decision is based on our study of the population traffic flow, the department store and supermarkets themselves, and the level of expected profitability of a potential "store in store." Following our inspection, we sign contracts with the department store and supermarkets, which specifically address the terms and conditions of opening, closing and relocating the "stores in stores."

Liquidity and Capital Resources

Cash has historically been generated from operations. Operations and liquidity needs are funded primarily through cash flows from operations and short-term borrowings.

Cash and equivalents were $1,426,018 at December 31, 2013 and current assets totaled $3,927,806. The Company's current liabilities were $5,264,878 at December 31, 2013. Working capital deficiency at December 31, 2013 was $(1,337,072). During 2013, net cash used in operating activities was $962,511.

Cash and equivalents were $456,495 at December 31, 2012 and current assets totaled $4,738,249. The Company's current liabilities were $4,820,284 at December 31, 2012. Working capital deficit at December 31, 2012 was $(82,035). During 2012, net cash used in operating activities was $8,015,081.

The Company had short-term loans of $2,618,487 and $2,545,541, respectively as of December 31, 2013 and 2012. The Company had long-term loan of $490,966 and $0, respectively as of December 31, 2013 and 2012.

The WFOE Law (1986), as amended and The WFOE Law Implementing Rules (1990), as amended, contain the principal regulations governing dividend distributions by WFOEs. Under these regulations, WFOEs, such as Wang Da and Zhejiang may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, Wang Da and Zhejiang are required to set aside a certain amount of any accumulated profits each year (a minimum of 10%, and up to an aggregate amount equal to half of its registered capital), to fund certain reserve funds. These reserves are not distributable as cash dividends except in the event of liquidation and cannot be used for working capital purposes. The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. The Company's two operating subsidiaries in China paid $525 in dividends during 2005, however, we do not intend to pay dividends on our common stock in the foreseeable future. If we ever determine to pay a dividend, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of such dividends from the profits of Wang Da and Zhejiang.

In summary, our cash flows were:

                                                           Year Ended December 31,
                                                            2013             2012
Net cash used in operating activities                    $  (962,511 )   $ (8,015,081 )
Net cash provided by investing activities                          -          143,244
Net cash provided by financing activities                  1,857,686        2,545,541
Effect of exchange rate change on cash and equivalents        74,348            4,511
Net increase (decrease) in cash and equivalents              969,521       (5,321,785 )
Cash and equivalents at beginning of year                    456,495        5,778,280
Cash and equivalents at end of year                      $ 1,426,018     $    456,495

Operating Activities

Net cash used in operating activities was $962,511 in 2013 compared to $8,015,081 in 2012. This decrease was mainly attributable to (i) a decrease in net losses of $12,240,312 from $(15,867,000) in 2012 to $(3,626,688) in 2013,
(ii) decrease in accounts receivable of $665,568, decrease in inventory of $529,964, offset by the decrease in accounts payable and accrued expenses of $574,465 in 2013, adding back the non-cash item, stock compensation expense of $1,241,333.

Investing Activities

2013 2012
Net cash used in investing activities $ - $ 143,244

Net cash used in investing activities in 2013 was $0. Net cash used in investing activities in 2012 was $143,244, which included proceeds from disposal of property and equipment of $146,905 and purchase of equipment of $3,661.

Financing Activities

The Company had short-term loans of $2,618,487 and $2,545,541, respectively as of December 31, 2013 and 2012. The Company had long-term loan of $490,966 as of December 31, 2013.

2013 2012 Net cash provided by financing activities $ 1,857,686 $ 2,545,541

Net Decrease in Cash and Equivalents

2013 2012
Net increase (decrease) in cash and equivalents $ 969,523 $ (5,321,785 )

Cash and Equivalents

2013 2012
Cash and equivalents $ 1,426,018 $ 456,495

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

Name of Entity       Region       Currency      2013           2012
Yosen Group        US entity        USD              135       383,834
Capital            BVI entity       USD                -             -
Zhejiang         Chinese entity     RMB          167,678       359,757
Yiwu             Chinese entity     RMB        8,526,143        52,663
Sanhe            Chinese entity     RMB              743         8,499
Wang Da          Chinese entity     RMB           17,694        31,730
Joy & Harmony    Chinese entity     RMB                -         1,674
Jinhua           Chinese entity     RMB              458         2,388

Cash equivalents held in the PRC subsidiaries are not freely transferrable outside the country. The amounts not freely transferable as of December 31, 2013 and 2012 were RMB8,712,716 ($1,425,883) and RMB456,711 ($72,661), respectively.

Capital Expenditures

Capital expenditures for purchase of fixed assets during 2013 and 2012 were $0 and $3,661, respectively.

Working Capital Requirements

We have funded our business operations through cash generated from operations and short-term loans. 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. We believe our currently available working capital, primarily cash from operations, may not be adequate to execute our business operations. This would likely require us to obtain additional funds from equity or debt markets. We currently have no commitments from any financing sources. There is no assurance we will be able to raise any funds on terms favorable to us, or at all. In the event we issue shares of equity or convertible securities, the shares held by our existing stockholders would be diluted. Future expansion will be limited by the availability of financing products and raising capital.

Going Concern

As discussed in Note 2 to the financial statements, The Company realized net loss of $3,626,688 and $15,866,999 for 2013 and 2012, respectively. The Company had accumulated deficit of $47,124,250 as of December 31, 2013. In addition, the Company's cash position substantially deteriorated from 2010. These issues raise substantial doubt regarding the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

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 consumer 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; (3) whether all elements of the contract have been fulfilled and delivered; and (4) 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.

After Sales Service

The after-sales services that 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.

Recent Accounting Pronouncements

In July 2012, FASB issued ASU No. 2012-02, Intangibles-Goodwill and Other (Topic 350), "Testing Indefinite-Lived Intangible Assets for Impairment."ASU 2012-02 simplifies the guidance for testing the decline in the realizable value . . .

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