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YOSN > SEC Filings for YOSN > Form 10-Q on 19-May-2014All Recent SEC Filings

Show all filings for YOSEN GROUP, INC.

Form 10-Q for YOSEN GROUP, INC.


19-May-2014

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.

Sanhe and Letong ceased operations in 2011. Joy & Harmony ceased operation in 2011 and dissolved in 2013. Yiwu closed all its stores in stores locations in 2012. Jinhua ceased operation in October 2012

On December 21, 2012, we received confirmation from the Secretary of State of the State of Nevada that the Certificate of Change Pursuant to NRS 78.209 (the "Certificate of Change") to our Amended and Restated Articles of Incorporation to effect a reverse split of our common stock, $0.001, par value per share (the "Common Stock"), at a ratio of 1-for-5 with all fractional shares rounded up to the next whole share (the "Reverse Stock Split") was duly filed on December 21, 2012. Immediately prior to the Reverse Stock Split, we had 93,911,327 shares of Common Stock outstanding. After the Reverse Stock Split, we had 18,782,356 shares outstanding. Pursuant to the Reverse Stock Split, the number of authorized shares of our Common Stock was reduced from 100,000,000 to 20,000,000 shares of Common Stock. Each shareholder's percentage ownership interest in the Company and proportional voting power remained unchanged after the Reverse Stock Split except for minor changes and adjustments resulting from rounding up the fractional shares.

Immediately, following the consummation of the Reverse Stock Split, on December 21, 2012, we filed a Certificate of Amendment to our Amended and Restated Articles of Incorporation pursuant to NRS 78.385 and 78.390 (the "Certificate of Amendment") to increase our number of authorized shares of Common Stock from 20,000,000 to 50,000,000 shares (the "Capital Increase Amendment") and to approve the amendment of our Articles of Incorporation to change our name to "Yosen Group, Inc." (the "Name Change Amendment)". The Reverse Stock Split, Capital Increase Amendment and the Name Change Amendment were approved by the board of directors ("BOD" or "Board") of the Company on October 10, 2012. In addition, the actions taken by the BOD with respect to the Capital Increase Amendment and the Name Change Amendment were subsequently adopted by the written consent dated as of October 10, 2012 of our stockholders entitled to vote a majority of the shares of Common Stock then outstanding. The Reverse Stock Split was also ratified by these stockholders.

Following the filing of the Name Change Amendment, we changed our stock symbol to "YOSN" effective as of the opening of trading on January 30, 2013 on the OTCBB.

On January 6, 2014 the Company established a US based wholly-owned subsidiary, Yosen Trading, for the purpose of engaging primarily in international trade and wholesale business, initially with tile, kitchen cabinet, granite and marble products.

Results of Operations for the Three Months Ended March 31, 2014 and 2013

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, Letong, Yiwu and Jinhua were reported as discontinued operations in the financial statements.

The Company reports financial and operating information in continuing operations through two segments, mobile phones segment by Wang Da and Zhejiang and international trade by Yosen Trading:

a) Mobile phones
b) International trade

a) Mobile phones

Wang Da focuses on distributing domestic brands mobile phones. Zhejiang focuses on distribution of Samsung and Apple brand products.

                            Three Months Ended March 31,         Percentage
Mobile phones                  2014                2013            Change
Revenue                   $     3,911,567       $ 3,633,954              7.6 %
Gross Profit              $       221,050       $   145,003              5.8 %
Profit Margin                         5.7 %             4.0 %            1.7 %

Operating Income (Loss) $ 38,653 $ (337,151 ) 111.5 %

For the three months ended March 31, 2014, mobile phones segment generated revenue of $3,911,567, an increase of $277,613 or 7.6% compared to $3,633,954 for the three months ended March 31, 2013. The increase in revenue was primarily due to Zhejiang and Wang Da focusing on distribution of Samsung and Apple brand products, which are the most popular brands in mobile phone market, to stimulate sales.

Gross profit increased $76,047 or 5.8% from $145,003 for the three months ended March 31, 2013 to $221,050 for the three months ended March 31, 2014. Profit margin increased from 4.0% in the three months ended March 31, 2013 to 5.7% in the three months ended March 31, 2014, an increase of 1.7%. The increase in gross profit was a result of the increase in sales.

Operating income was $38,653 for the three months ended March 31, 2014, an increase of $375,804 or 111.5% compared to operating loss of $(337,151) for the three months ended March 31, 2013. Operating loss decreased primarily due to the decrease in staff and store opening expenses.

b) International Trade

Starting first quarter 2014, Yosen Trading is engaged in international trade and wholesale business, primarily selling tile, kitchen cabinet, granite and marble products in the New York Market.

Three Months Ended March 31, 2014

Revenue            $                           607,976
Gross Profit                                   113,530
Profit Margin                                     18.7 %
Operating Income                               113,389

Total Company

Net Sales

Net sales for the three months ended March 31, 2014 increased $885,589 or 24.4%, to $4,519,543 compared to $3,633,954 for the three months ended March 31, 2013. The increase was attributable to the increase of mobile phone sales from our PRC operating subsidiaries, as well as the new international trade business generating new revenue.

Percentage of Sales

In the first quarter 2014, the Company earned 50.1% of its sales from its retail and 49.9% from its wholesale operations compared to 96.0% from retail and 4.0% from wholesale in the first quarter 2013

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

Percentage of sales from retail and wholesale operations for each segment is as follows in the first quarter 2014:

              Zhejiang       Wang Da       Yosen Trading       Total
Retail           100.0 %        92.0 %              19.1 %      50.1 %
Wholesale            - %         8.0 %              80.9 %      49.9 %

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

              Zhejiang       Wang Da       Total
Retail           100.0 %        92.0 %       96.0 %
Wholesale            - %         8.0 %        4.0 %

Cost of Sales

Cost of sales ("COS") for the three months ended March 31, 2014 was $4,184,963 compared to $3,488,951 for the three months ended March 31, 2013, an increase of $696,012 or 19.9%. The increased COS for the three months was a result of the decrease in sales from the comparable period.

Gross Profit

Gross profit for the three months ended March 31, 2014 was $334,580 compared to gross profit of 145,003 for the three months ended March 31, 2013, an increase of 130.7%. The increased gross profit for the three months was due to increased sales.

Profit Margin

Profit margin for the three months ended March 31, 2014 was 7.4% compared to 4.0% for the three months ended March 31, 2013. The profit margin increase was mainly attributed to the higher profit margin in the new international trade segment.

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A") expenses for the three months ended March 31, 2014 were $306,327 or 6.8% of net sales, compared to $721,201 or 19.8% of net sales for the three months ended March 31, 2013, a decrease of 13.0% of sales. The decrease in SG&A expenses for the first quarter 2014 was primarily due to the decreases in staff cost and new store decoration expenses in Zhejiang.

Operating Income (Loss) from Continuing Operations

Operating income for the three months ended March 31, 2014 was $28,253 or 0.6% of net sales compared to operating loss of $(576,198) or (15.9)% of net sales for the three months ended March 31, 2013, an increase of 104.9%. Increased sales and lower operating expenses were the key factors for the decrease in operating loss from continuing operations during the three months ended March 31, 2014 compared to 2013.

Provision for Income Taxes

The provision for income taxes for the three months ended March 31, 2013 were $0 due to losses incurred by both Wang Da and Zhejiang. The provision for income taxes for the three months ended March 31, 2014 was $13,766 attributed to Yosen Trading.

Net Income (Loss) from Continuing Operations

Net income was $101,989 or 2.3% of net sales for the three months ended March 31, 2014 compared to $550,682 or (15.2)% of net sales for the three months ended March 31, 2013, an increase of 118.5%. Increased sales and lower operating expenses were the key factors for the decrease in net loss from continuing operations during the three months ended March 31, 2014 compared to 2013.

Net Loss from Discontinued Operations

Net loss from discontinued operations for the three months ended March 31, 2014 was $77,831 compared to $88,795 for 2013, a decrease of $10,964.

Net Income (Loss)

Net income was $24,158 for the three months ended March 31, 2014 compared to net loss of $(639,477) for the three months ended March 31, 2013, a decrease of 103.8%. The decrease in net loss was due to Zhejiang and Yosen Trading having net profit in the first quarter 2014.

Foreign Currency Translation Adjustments

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

                                                Three Months Ended
                                                     March 31,
                                                 2014          2013
RMB/$ exchange rate at period end                 0.1623       0.1596
Average RMB/$ exchange rate for the periods       0.1635       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 gain of $13,268 in the first quarter 2014 and $23,619 in 2013, which is a separate line item on the Statements of Operations and Comprehensive Loss.

Liquidity and Capital Resources

Cash has historically been generated from operations. Operations and liquidity needs are funded primarily through cash flows from operations. Cash and equivalents were $1,489,571 at March 31, 2014, compared to $1,426,018 at December 31, 2013.

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

                                                               Three Months Ended March 31,
                                                                  2014                2013
Net cash provided by (used in) operating activities          $       242,843       $  (161,163 )
Net cash used in financing activities                               (163,516 )               -
Effect of exchange rate change on cash and equivalents               (15,774 )          33,252
Net increase (decrease) in cash and equivalents                       63,553          (127,911 )
Cash and equivalents at beginning of period                        1,426,018           456,495
Cash and equivalents at end of period                        $     1,489,571       $   328,584

Operating Activities

Net cash used in operating activities was $242,843 for the three months ended March 31, 2014 compared to $(161,163) for the three months ended March 31, 2013, a 250.7% increase. Net cash used in operating activities was mainly attributable to several factors, including (i) a decrease in net loss of $663,635; (ii) increase in accounts payable of $349,317, (iii) increase in accrued expenses of $345,563, offset by the increase in inventories of $535,301, add back of stock compensation of $98,952.

                        Three Months Ended March 31,          Percentage
                           2014                2013            Change

Sales, Net            $     4,519,543       $ 3,633,954              24.4 %

Accounts receivable   $       324,796       $   448,821             (27.6 )%

Accounts receivable decreased 27.6% in the first quarter of 2014 while sales increased 24.4%. Accounts receivable as a percentage of sales decreased due to the Company generated more revenue from retail customers rather than wholesale in 2014. Management monitors and periodically assesses the collectability of accounts receivable to ensure the allowance for bad debts account is reasonably estimated. Collection of accounts receivable is based on the terms of legal binding documents. Our accounts receivable department has periodically reviewed the allowance for doubtful accounts. The bad debts allowance is based on the aging of receivables, credit history and credit quality of the customers, the term of the contracts as well as the balance outstanding. If an account receivable item is considered probable to be uncollectible, it will be charged to bad debts immediately.

Cash and equivalents as of March 31, 2014 and December 31, 2013 were solely bank accounts in US and China. Specifically, cash and equivalents for each subsidiary as of March 31, 2014 and December 31, 2013 included:

Name of Entities       Region       Currency    March 31, 2014       December 31, 2013
Yosen                US entity        USD                   933                     135
Yosen Trading        US entity        USD                44,743                       -
Zhejiang           Chinese entity     RMB               358,397                 167,678
Yiwu               Chinese entity     RMB             8,516,999               8,526,143
Wang Da            Chinese entity     RMB                20,939                  17,694
Jinhua             Chinese entity     RMB                   258                     458
Sanhe              Chinese entity     RMB                   543                     743

Cash equivalents held in the PRC subsidiaries are not freely transferrable outside the country. The amounts not freely transferable as of March 31, 2014 and December 31, 2013 were RMB 8,897,136 ($1,443,895) (unaudited) and RMB 8,712,716 ($1,425,883).

Capital Expenditures

We did not have any capital expenditure for the first three months of 2014 and 2013.

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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