UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended     March 31, 2013

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____ to _____

 

Commission File Number:  000-28767

 

YOSEN GROUP, INC.

 

(Exact name of registrant as specified in its charter)

 

Nevada	88-0403070
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

368 HuShu Nan Road

HangZhou City, Zhejiang Province, China 310014

 

(Address of Principal Executive Offices) (Zip Code)

 

086-0571-88381700

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes x   No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨  No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer  ¨ (Do not check if a smaller reporting company)

Smaller reporting company    x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule No 12b-2 of the Exchange Act). Yes ¨  No x

 

As of May 15, 2013, the registrant had 18,782,356 shares of common stock outstanding.

 

 

TABLE OF CONTENTS

 

		PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements		1
Consolidated Balance Sheets as of March 31, 2013 (Unaudited) and December 31, 2012		1
Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2013 and 2012 (Unaudited)		2
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 (Unaudited)		3
Notes to Consolidated Financial Statements		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3. Quantitative and Qualitative Disclosure About Market Risk		21
Item 4. Controls and Procedures		21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		22
Item 1A. Risk Factors		22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		22
Item 3. Defaults Upon Senior Securities		22
Item 4. Mine Safety Disclosures		22
Item 5. Other Information		22
Item 6. Exhibits		22
Signatures		23

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

YOSEN GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		March 31,				December 31,
		2013				2012
		(Unaudited)
ASSETS
Current assets:
Cash and equivalents		$	328,584			$	456,495
Accounts receivable, net			448,821				863,800
Inventories			2,030,349				1,970,850
Advances to suppliers			1,373,609				747,171
Advances to related party			-				501,814
Prepaid expenses and other current assets			59,605				198,119
Total current assets			4,240,968				4,738,249
Property and equipment, net			52,143				33,160
Total assets		$	4,293,111			$	4,771,409
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short-term loans		$	2,553,219			$	2,545,541
Accounts payable			806,648				777,389
Accrued expenses			688,731				698,924
Income tax payable			805,913				798,430
Total liabilities			4,854,511				4,820,234
Commitments and contingencies
Stockholders' deficit:
Common stock, $0.001 par value, 50,000,000 shares authorized and 18,782,356 issued and outstanding as of March 31, 2013 and December 31, 2012			18,782				18,782
Additional paid-in capital			24,145,112				24,041,779
Subscription receivable			(50,000	)			(50,000	)
Statutory reserve			11,542,623				11,542,623
Other comprehensive income			7,919,123				7,895,504
Accumulated deficit			(44,137,040	)			(43,497,563	)
Total stockholders' deficit			(561,400	)			(48,875	)
Total liabilities and stockholders' deficit		$	4,293,111			$	4,771,409

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

YOSEN GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

THREE MONTHS ENDED MARCH 31, 2013 and 2012 (UNAUDITED)

 

		2013				2012
Net sales		$	3,633,954			$	5,242,009
Cost of sales			3,488,951				4,868,118
Gross profit			145,003				373,891
Selling, general and administrative expenses			721,201				2,490,135
Loss from continuing operations			(576,198	)			(2,116,244	)
Other (income) expense:
Interest income			(4,909	)			(2,017	)
Other income			(20,607	)			-
Other expense			-				2,643
Total other (income) expense			(25,516	)			626
Loss from continuing operations before income taxes			(550,682	)			(2,116,870	)
Provision for income taxes			-				-
Net loss from continuing operations			(550,682	)			(2,116,870	)
Net loss from discontinued operations, net of income taxes			(88,795	)			(2,662,364	)
Net loss			(639,477	)			(4,779,234	)
Foreign currency translation adjustments			23,619				94,231
Comprehensive loss		$	(615,858	)		$	(4,685,003	)
Basic and diluted loss per share:
Continuing operations		$	(0.03	)		$	(0.18	)
Discontinued operations			-				(0.23	)
Net loss per share		$	(0.03	)		$	(0.41	)
Weighted average shares outstanding:
Basic and Diluted			18,782,356				11,782,265

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

YOSEN GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2013 and 2012 (UNAUDITED)

 

 

		2013				2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(639,477	)		$	(4,779,234	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			2,748				9,713
Stock based compensation			103,333				141,118
(Increase) decrease in assets:
Accounts receivable			416,899				6,237,461
Inventories			(53,468	)			364,911
Prepaid expenses and other current assets			138,932				(21,551	)
Advance to suppliers			(623,161	)			1,045,536
Advance to related party			501,814				-
Increase (decrease) in current liabilities:
Accounts payable			26,871				(1,281,739	)
Accrued expenses			(10,361	)			(3,079,954	)
Income tax payable			(25,293	)			(331,063	)
Net cash used in operating activities			(161,163	)			(1,694,801	)
Effect of exchange rate changes on cash and equivalents			33,252				39,416
Net decrease in cash			(127,911	)			(1,655,385	)
Cash and equivalents, beginning of period			456,495				5,778,280
Cash and equivalents, end of period		$	328,584			$	4,122,895
Supplemental disclosure of cash flow information:
Interest paid		$	43,198			$	-
Income taxes paid		$	7,483			$	358,790

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

YOSEN GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2013 AND 2012 (UNAUDITED)

 

Note 1 - ORGANIZATION

 

Yosen Group, Inc. (the “Company” or “Yosen”) was incorporated on August 20, 1998 under the laws of the State of Nevada. Capital Future Developments Limited - BVI (“Capital”) was incorporated on July 22, 2004 under the laws of the British Virgin Islands (“BVI”). Zhejiang YongXin Digital Technology Company Limited (“Zhejiang”), Yiwu YongXin Communication Limited (“Yiwu”), Hangzhou Wang Da Electronics Company Limited (“Wang Da”), Hangzhou Sanhe Electronic Technology Limited (“Sanhe”), Shanghai Joy & Harmony Electronics Company Limited (“Joy & Harmony”), and Jinhua Baofa Logistic Ltd (“Jinhua”) were incorporated under the laws of Peoples Republic of China (“PRC”) on July 11, 2005, July 18, 1997, March, 30, 1998, April 12, 2004, August 20, 2003 and December 27, 2001, respectively. All dollar amounts are in thousands, unless otherwise indicated.

 

On December 21, 2005, Capital became a wholly owned subsidiary of Yosen through a reverse merger (“Merger Transaction”). Yosen acquired all of the issued and outstanding capital stock of Capital pursuant to a Merger Agreement dated 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, in exchange 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 3, 2006, Capital completed the acquisition of a 100% interest in Sanhe for a cash and stock transaction valued at $8.75 million. The consideration consisted of 183,150 newly issued shares of the Company’s common stock and $5 million in cash.

 

On November 28, 2006, Capital completed the acquisition of a 100% interest in Joy & Harmony for a cash and stock transaction valued at $18.5 million. The consideration consisted of 544,622 shares of the Company’s common stock and $7.5 million in cash.

 

On August 15, 2007, we executed a series of contractual agreements between Capital and Zhejiang. The contractual agreements give 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 actual 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.

 

On July 6, 2009, Yosen and its subsidiary Zhejiang and Yiwu purchased 100% of Jinhua for RMB 120 million ($17.5 million) in cash.  Zhejiang acquired 90% and Yiwu acquired 10% of the equity interests in Jinhua.

 

Following the acquisition of Jinhua, the Company began providing logistic service to businesses in addition to its traditional business of resale and distribution of third party products such as mobile phones, facsimile machines, DVD players, stereos, speakers, MP3 and MP4 players, iPods, electronic dictionaries, CD players, radios and audio systems.

 

 

ORGANIZATIONAL CHART

 

Our corporate structure as of March 31, 2013 is as follows:

 

 

* These entities ceased operation as of December 31, 2011.

** These entities ceased operation as of December 31, 2012.

 

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”).  The Company’s subsidiaries – Wang Da, Yiwu, Joy & Harmony, Sanhe, Jinhua and Zhejiang’s functional currency is the Chinese Renminbi (“RMB”), however, the accompanying consolidated financial statements were translated and presented in United States Dollars (“$”, or “USD”). Yosen is the parent company that was incorporated on August 20, 1998 under the laws of the State of Nevada. The parent company does not have operations; therefore, it does not have sales. The main activities of Yosen were incurring public company expenses. Yosen pays all of its expenses in USD. Therefore, we believe Yosen’s functional currency is USD. Capital was incorporated on July 22, 2004 under the laws of the BVI. Capital is a holding company and it does not have operations. As a result, we determined that Yosen and Capital’s functional currency is USD.

 

 

Reverse Stock Split

 

On December 31, 2012, the Company effected a reverse split of the Company’s Common Stock, $0.001, par value per share, at a ratio of 1-for-5 with all fractional shares rounded up to the next whole share. Immediately prior to the Reverse Stock Split, the Company had 93,911,327 shares of Common Stock outstanding. After the Reverse Stock Split, the Company had 18,782,356 shares outstanding. Pursuant to the Reverse Stock Split, the number of authorized shares of the Company’s Common Stock was reduced from 100,000,000 to 20,000,000 shares of Common Stock.

 

Immediately, following the consummation of the Reverse Stock Split, the Company filed a Certificate of Amendment to its Amended and Restated Articles of Incorporation to increase the number of authorized shares of the Company’s Common Stock from 20,000,000 to 50,000,000 shares and to approve the amendment of the Company’s Articles of Incorporation to change the name of the Company to “Yosen Group, Inc.”. The par value of our common stock remains unchanged at $0.001 per share and the number of authorized shares of common stock remains the same after the reverse stock split.

 

As the par value per share of our common stock remained unchanged at $0.001 per share, a total of $75,000 was reclassified from common stock to additional paid-in capital. All references to shares of common stock and per share data for all periods presented in the accompanying financial statements and notes thereto have been adjusted to reflect the reverse stock split on a retroactive basis.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company realized net loss of $15,867,000 and $52,844,207 for 2012 and 2011, respectively. For the three months ended March 31, 2013, the Company realized further net loss of $639,477 and had accumulated deficit of $44,137,040 as of March 31, 2013. In addition, the Company’s cash position substantially deteriorated from 2010. There can be no assurance that the Company will become profitable or that it will survive as a public company. These issues raise substantial doubt regarding the Company’s ability to continue as a going concern.

 

In 2011 and 2012, we closed most of our stores in stores locations and laid off most of our employees. We retained highly qualified personnel and a small number of stores with stable revenues. As a result, we significantly cut our operating expenses and our losses are decreasing over time. We are now concentrating on improving our product mix, upgrading the stores that are currently open and strengthening cooperation with China Telecom, China Unicom and other large state-owned operators to develop new businesses.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Yosen and its wholly owned subsidiaries Capital, Wang Da, Yiwu, Joy & Harmony, Sanhe and Jinhua and variable interest entity Zhejiang, collectively referred to as the Company. All material intercompany accounts, transactions and profits were eliminated in consolidation.

 

Currency Translation

 

The accounts of Zhejiang, Wang Da, Yiwu, Sanhe, Joy & Harmony and Jinhua were maintained, and its financial statements were expressed in RMB. Such financial statements were translated into USD in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 830-10, “Foreign Currency Translation,” with RMB as the functional currency. According to FASB ASC Topic 830-10, assets and liabilities were translated at the ending exchange rate, stockholders’ equity is translated at the historical rates and income statement items are translated at the average exchange rate for the year. The resulting translation adjustments are reported as other comprehensive income in accordance with FASB ASC Topic 220, “Reporting Comprehensive Income,” as a component of shareholders’ equity. Transaction gains and losses are reflected in the consolidated statements of operations and comprehensive loss.

 

Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

 

Risks and Uncertainties

 

The Company is subject to risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, foreign currency exchange rates and the volatility of public markets.

 

Contingencies

 

Certain conditions may exist as of the date the financial statements are issued, which could result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s management evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability is accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed.

 

Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.

 

Accounts Receivable

 

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Terms of the sales vary. Reserves are recorded primarily on a specific identification basis. Allowance for doubtful accounts was $208,955 (unaudited) and $208,326 as of March 31, 2013 and December 31, 2012, respectively.

 

Inventories

 

Inventories are valued at the lower of cost (determined on a weighted average basis) or market value.  Management compares the cost of inventories with the market value and allowance is made for writing down their inventories to market value, if lower. As of March 31, 2013 and December 31, 2012, inventory consisted entirely of finished goods valued at $2,030,349 (unaudited) and $1,970,850, respectively.

 

Property and Equipment, net

 

Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of:

 

Automotive	5 years
Office Equipment	5 years

 

As of March 31, 2013 and December 31, 2012, property and equipment consisted of the following:

 

		2013				2012
		(Unaudited)
Automotive		$	61,677			$	39,783
Office equipment			212,830				168,468
Subtotal			274,507				208,251
Less: accumulated depreciation			(222,364	)			(175,091	)
Total		$	52,143			$	33,160

 

 

Long-Lived Assets

 

The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with FASB ASC 360 “Property, Plant and Equipment”, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Company believes that, as of March 31, 2013 (unaudited) and December 31, 2012, there were no significant impairments of its long-lived assets.

 

Fair Value of Financial Instruments

 

FASB ASC Topic 825 “Financial Instruments” requires that the Company disclose estimated fair values of financial instruments. The carrying amounts reported in the statements of financial position for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value.

 

Short-term Loans

 

As of March 31, 2013 and December 31, 2012, short-term loans consisted of the following:

 

		2013				2012
		(Unaudited)
Bank loan from Bank of Chouzhou, dated July 16, 2012, due on July 15, 2013, with an annual interest rate of 6.6% payable monthly, personally guaranteed by the CEO.		$	797,881			$	795,482
Bank loan from Bank of Chouzhou, dated July 17, 2012, due on July 16, 2013, with an annual interest rate of 6.6% payable monthly, personally guaranteed by the CEO.			1,595,762				1,590,963
Bank loan from Bank of Hangzhou, dated September 10, 2012, due on March 8, 2014, with an annual interest rate of 11.2% payable monthly.			159,576				159,096
		$	2,553,219			$	2,545,541

 

Revenue Recognition

 

In accordance with Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) 104 (codified in FASB ASC Topic 605), the Company recognizes revenues when there is persuasive evidence of an arrangement, product delivery and acceptance have occurred, the sales price is fixed and determinable, and collectability of the resulting receivable is reasonably assured.

 

The Company records revenues when title and the risk of loss pass to the customer.  Generally, these conditions occur on the date the customer takes delivery of the product.  Revenue is generated from sales of Yosen products through two main revenue streams:

 

1.

Retail. 96.0% and 76.4%  of the Company's revenue comes from sales to customers at outlets installed inside department stores etc. (i.e. store in store model) during three months ended March 31, 2013 and 2012, respectively and is mainly achieved through two broad categories:

 

a.

Purchase contracts . Sales by purchase contracts have terms of 30 days from the transfer of goods to the customer. Under this method, the Company delivers goods to places designated by the customers and receives confirmation of delivery. At that time, ownership and all risks associated to the goods are transferred to the customers and payment is made within 30 days. The Company relieves its inventory and recognizes revenue upon receipt of confirmation from the customer.

 

b.

Point of sale transfer of ownership . Under this method, the Company’s products are placed in third party stores and sold by the Company’s sales people. Upon purchase of the item by the customer, the Company relieves its inventory and recognizes revenue related to that item.

 

 

2.

Wholesale. 4.0% and 23.6% of the Company's revenue comes from wholesale during three months ended March 31, 2013 and 2012, respectively. Recognition of income in wholesales is based on the contract terms. In the three months ended March 31, 2013 and 2012, the main contract with respect to wholesale has an agreed upon provision pursuant to which payments be paid 15 days after receipt of goods and that ownership and all risks associated with the goods are transferred to the customers on the date of goods received and payments will be made 15 days therefrom.

 

Sales revenue is therefore recognized on the following basis:

 

1.

Store in store model:

 

a.

For goods sold under sales and purchase contracts, revenue is recognized when goods are received by customers.

 

b.

For goods at customer outlets which the Company’s sales people operate, and inventory of goods is under joint control by the customers and the Company, revenue is recognized at the point of sale to the end buyer. Yosen has title and owns the inventory under joint control. Such joint controlled inventory has been properly included in reported inventory balance of Yosen’s financial statements.

 

During public holidays or department store celebration periods, we provide certain sales incentives to retail customers to increase sales, such as gift giving and price reductions. These are the only temporary incentives during the specified periods. Sales made to our retail customers as a result of incentives are immaterial as a percentage of total sales revenue.

 

2.

Wholesale:

 

a.

Revenue is recognized at the date of goods are received by wholesale customers. We operate our wholesale business by selling large volume orders to second-tier distributors and large department stores. Revenues from wholesale are recognized as net sales after confirmation with distributors. Net sales already take into account revenue dilution as they exclude inventory credit, discount for early payment, product obsolescence and return of products and other allowances. Net sales also take into account the return of products in accordance with relevant laws and regulations in China.

 

Return Policies

 

Our return policy complies with China’s laws and regulations on consumer’s rights and product quality. In accordance with Chinese law, consumers can return or exchange used products within seven days only if the goods do not meet safety and health requirements, endanger a person’s property, or do not meet the advertised performance. If the conditions and requirements as set out in the relevant laws and regulations are met, the retail stores are entitled to accept a return of the goods from the consumer. In such cases, the Company shall accept the returns unconditionally. Goods returned will be redirected to the production factory or supplier who shall bear all losses on the returns in accordance the laws and regulations. Consumer returns or exchanges of products that have not been used, where the packaging has not been damaged, are honored if such return or exchange is within seven days. If a consumer returns a product, the Company must refund the invoice price to the consumer. The Company will then be responsible for returning the goods to the production factory or supplier. At that time the Company can recover the price based on the purchase and sale contract with the producer or supplier. However, when goods are returned, the Company loses the profit margin that it records when revenue is recognized, regardless of whether the production factory or supplier takes the product back or not.

 

The return rights granted to wholesale customers are similar to the rights granted to retail customers. Once wholesale customers purchase the products, they follow the same return policy as retail customers. We do not honor any return from wholesale customers other than if the products do not meet laws and regulations or quality requirements. If the wholesale customers have a high inventory level or product obsolescence caused by lower market demands or other operational issues, the wholesale customers bear their own losses. When a wholesale customer returns products, the Company will return the products to the suppliers or manufacturers. A sales return and allowance is recorded at the sales price. Meanwhile, a purchase return and allowance entry is recorded at the invoice price because the suppliers or manufacturers bear the losses. The net effect is that the Company derecognizes the gross profit when a return takes place, but does not record any loss on the cost of the returned item back to the supplier or manufacturer.

 

In light of the aforesaid PRC laws and regulations and the Company's arrangements with suppliers, we do not provide an accrual for any estimated losses on subsequent sale of the return of products.  As a result we do not engage in assessing levels of inventory in the distribution channel, product obsolescence and/or introductions of new products, as none of those factors have any impact on us with respect to estimating losses on subsequent sale of returned goods.  Goods return policy strictly complies with the laws and regulations in China on consumer rights and product quality requirements. If the conditions and requirements as set out in the relevant laws and regulations are met, customers are able to return the goods unconditionally. In such cases, the Company shall accept the returns unconditionally. Goods returned will be redirected back to the manufacturers or suppliers who shall meet all losses on returns in accordance the laws and regulations. The Company will only be responsible for assisting the process of execution of goods returned. The Company shall not bear any loss from goods returned. As a result, we do not provide any accrual on subsequent return of goods sold.

 

 

Unlike the US retail market, sellers do not accept returns caused by any change in the sales market or change in customers’ preferences in China. Therefore, the Company generally does not honor any return except for a product defect. As such, situations relating to return of goods from overstock in distribution channels, product obsolescence and over-budgeted goods from launching of new products will not exist.

 

The reported sales do not include estimate of returns due to defects for the period presented because we do not offer customers the right to return in China. We do not allow the customers to return the products for cash refunds, credit, or exchange for other products through general rights of return. If the products are defective, manufacturers are directly responsible for the defects. Yosen, as a distributor, only assists customers in returning the defective products to manufacturers. The manufacturers send replacement products to customers directly.

 

Cost of Sales

 

Cost of sales (“COS”) consists of actual product cost, which is the purchase price of the product less any discounts.  COS excludes freight charges, purchase and delivery costs, internal transfer, freight charges and the other costs of the Company’s distribution network, which are identified in general and administrative expenses.

 

General and Administrative Expenses

 

General and administrative expenses are comprised principally of payroll and benefits costs for retail and corporate employees, occupancy costs of corporate facilities, lease expenses, management fees, traveling expenses and other operating and administrative expenses, including freight charges, purchase and delivery costs, internal transfer freight charges and other distribution costs.

 

Shipping and Handling Fees

 

The Company follows FASB ASC Topic 605-45, “Handling Costs, Shipping Costs”.  The Company does not charge its customers for shipping and handling. The Company classifies shipping and handling fees as part of general and administrative expenses which were $4,334 and $8,590 for the three months ended March 31, 2013 and 2012, respectively.

 

Vendor Discounts

 

The Company has negotiated preferred pricing arrangements with certain vendors on certain products. These arrangements are not contingent on any levels of volume and are considered vendor discounts as opposed to rebates. The Company records these discounts along with the purchase of the discounted items, resulting in lower inventory cost and a corresponding lower COS as the products are sold.

 

Management Fees Paid to the Department Stores Under “Store in Store” Model

 

Under the “store in store” business operation model, the Company may pay management fees to the department stores, which are in the form of service charges. The management fees are reflected in general and administrative expenses. Such management fees were $22,181 and $256,026 in general and administrative expenses for the three months ended March 31, 2013 and 2012, respectively.

 

Share Based Payment

 

The Company follows FASB ASC 718-10, “Stock Compensation”, which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. FASB ASC 718-10 requires measurement of the cost of employee services received in exchange for an award of equity instruments based on the grant-date FV of the award (with limited exceptions). Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized.

 

 

Advertising

 

Advertising expenses consist primarily of costs of promotion for corporate image and product marketing and costs of direct advertising. The Company expenses all advertising costs as incurred. Advertising expense was $7,105 and $0 for the three months ended March 31, 2013 and 2012, respectively.

 

Income Taxes

 

The Company utilizes FASB ASC Topic 740, “Income Taxes”. Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

Basic and Diluted Loss per Share

 

Loss per share is calculated in accordance with FASB ASC Topic 260, “Earnings per Share”. Basic earnings (loss) per share is based upon the weighted average number of common shares outstanding. Diluted earnings (losses) per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. If convertible shares and stock options are anti-dilutive, the impact of conversion is not included in the diluted net income (loss) per share. Excluded from the calculation of diluted (loss) per share for the three months ended March 31, 2013 and 2012 were 10,000 options, as they were not dilutive.

 

Statement of Cash Flows

 

In accordance with FASB ASC Topic 230, “Statement of Cash Flows”, cash flows from the Company’s operations are calculated based upon the functional currency, in our case the RMB. As a result, amounts related to changes in assets and liabilities reported on the statement of cash flows will not necessarily agree with the changes in the corresponding balances on the balance sheet.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable, advances to suppliers and other receivables arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. The Company has a diversified customer base, most of which is in China. The Company controls credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.

 

Segment Reporting

 

FASB ASC Topic 280, “Segment Reporting”, requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. The Company operated in four segments before the acquisition of Jinhua in July 2009. Since then, the Company operated in five segments until Sanhe and Joy & Harmony ceased operations at the end of 2011 and Yiwu and Jinhua ceased operations in 2012. As a result, the Company operated only in mobile phone segment since 2012 (see Note 13).

 

Recent Accounting Pronouncements

 

In June 2011, FASB issued ASU 2011-05, Comprehensive Income (ASC Topic 220):  Presentation of Comprehensive Income.  Under the amendments in this update, an entity has the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, an entity is required to present components of net income and total net income in the statement of net income. The statement of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income. In addition, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented.  The amendments in this update should be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this statement did not have a significant impact on the Company’s financial statements.

 

 

In December 2011, FASB issued ASU 2011-11, Disclosures about offsetting Assets and Liabilities, requiring additional disclosure about offsetting and related arrangements. ASU 2011-11 is effective retrospectively for periods beginning on or after January 1, 2013. The adoption of ASU 2011-11 did not have a material impact on the Company’s consolidated financial statements.

 

In July 2012, FASB issued ASU 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 (impairment) of indefinite-lived intangible assets other than goodwill. ASU 2012-02 allows an entity the option of first performing a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. The adoption of ASU 2012-02 did not have a material impact on the Company’s consolidated financial statements.

 

Note 3 – ADVANCES TO SUPPLIERS

 

Advances to suppliers represent advance payments to suppliers for the purchase of inventory.

 

Note 4 - STOCK WARRANTS, OPTIONS, AND COMPENSATION

 

Stock options - Options issued have a ten-year life and were fully vested upon issuance. The option holder has no voting or dividend rights. The grant price was the market price at the date of grant. The Company records the expense of the stock options over the related vesting period. The options were valued using the Black-Scholes option-pricing model at the date of grant stock option pricing.

 

Outstanding options by exercise price consisted of the following as of March 31, 2013:

 

Options Outstanding																Options Exercisable
Exercise Price				Number of Shares				Weighted Average Remaining Life (Years)				Weighted Average Exercise Price				Number of Shares				Weighted Average Exercise Price
$	20.8				10,000				3.75			$	20.8				10,000			$	20.8

 

During the three months ended March 31, 2013, the Company did not issue any stock options. The 10,000 stock options outstanding as of March 31, 2013 were issued in 2007 to our former director Mr. Kenneth Berents, have a 10 year term and vested immediately upon issuance.

 

The Company estimates the FV of stock options at grant date using the Black-Scholes valuation model, consistent with the provisions of FASB ASC 718-10 “Stock Compensation”. Key inputs and assumptions used to estimate the FV of stock options include the grant price of the award, the expected option term, volatility of the company’s stock, the risk-free rate and the Company’s dividend yield.

 

The following table presents the weighted-average assumptions used in the valuation at the grant date and the resulting weighted average FV per option granted:

 

Term			10 years
Expected volatility			130%
Risk – free interest rate			2%
Dividend yield			0%
Weighted-average grant date FV		$	4.50

 

 

Note 5 - COMPENSATED ABSENCES

 

Regulation 45 of the labor laws in the PRC entitles employees to annual vacation leave after 1 year of service. In general all leave must be utilized annually, with proper notification. Any unutilized leave is cancelled.

 

Note 6 - INCOME TAXES

 

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor were any interest expense or penalties recognized during the three months ended March 31, 2013 and 2012.

 

Under FASB ASC 740-10-25, evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements.

 

The US entity, Yosen is subject to the US federal income tax at a rate of 34%. The US entity does not conduct any operations and only incurs public company expenses, such as legal fees, accounting fees, investor relations expenses and filing fees. In the process of applying step one, we determined it is more likely than not that all of the Company’s deferred tax assets will not be realized. As of March 31, 2013, the US entity has incurred net accumulated operating losses of $8,323,729 for income tax purposes. As a result, $2,829,627 of valuation allowance was recorded to reduce the deferred tax asset to zero. The net change in valuation allowance was $81,286 and $90,241 for the three months ended March 31, 2013 and 2012, respectively for the US entity.

 

The PRC subsidiaries, Sanhe, Wang Da, Joy & Harmony, Yiwu and Zhejiang are subject to the PRC income tax at 25%. Jinhua is subject to PRC income tax using simplified tax system. As of March 31, 2013, the PRC operating subsidiaries incurred an adjusted net accumulated operating loss of $14,465,280. In applying step one, management believes these subsidiaries will continue to incur losses in the near future due to high market competition, slowing market demand, rising labor and fuel costs. We believe it is more likely than not that the subsidiaries will not be able to benefit from the deferred tax assets in association with the operating losses. As a result, $3,639,280 of valuation allowance was recorded to reduce the deferred tax asset to zero. The net change in valuation allowance was $77,901 and $462,707 for the three months ended March 31, 2013 and 2012, respectively for the PRC operating subsidiaries.

 

The components of deferred income tax assets and liabilities as of March 31, 2013 (unaudited) and December 31, 2012 are as follows:

 

		2013				2012
Deferred tax assets:
U.S. net operating losses		$	2,829,627			$	2,748,341
PRC net operating losses			3,639,280				3,561,479
Total deferred tax assets			6,469,008				6,309,820
Less valuation allowance			(6,469,008	)			(6,309,820	)
		$	-			$	-

 

Reconciliation of the differences between the statutory US Federal income tax rate and the effective rate for the three months ended March 31, 2013 and 2012 is as follows:

 

		2013				2012
(Credit) Tax at US Statutory Rate			(34.0	)%			(34.0	)%
Tax rate difference			5.1	%			7.9	%
Valuation allowance			28.9	%			26.1	%
Effective rate			-	%			-	%

 

Note 7 - COMMITMENTS

 

The Company leases office facilities under operating leases that terminate through 2017. Rent expense for the three months ended March 31, 2013 and 2012 was $3,585 and $48,102, respectively. The future minimum obligations under these agreements are as follows by years as of March 31, 2013:

 

 

2014		$	173,305
2015			218,127
2016			63,830
2017			10,638
		$	465,900

 

Note 8 - STATUTORY RESERVE

 

In accordance with the laws and regulations of the PRC, a wholly-owned Foreign Invested Enterprise’s income, after the payment of the PRC income taxes, shall be allocated to the statutory surplus reserves and statutory public welfare fund. Prior to January 1, 2006, the proportion of allocation for reserve was 10% of the profit after tax to the surplus reserve fund and additional 5-10% to the public affair fund. The public welfare fund reserve was limited to 50% of the registered capital. Effective January 1, 2006, there is now only one fund requirement. The reserve is 10% of income after tax, not to exceed 50% of registered capital.

 

Statutory reserve funds are restricted to offset against losses, expansion of production and operation or increase in register capital of the respective company. Statutory public welfare fund is restricted to the capital expenditures for the collective welfare of employees. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for distribution except in liquidation. As of March 31, 2013, the Company had allocated $11,542,623 to these non-distributable reserve funds.

 

Note 9 – DISCONTINUED OPERATIONS

 

In 2011, Sanhe closed all its 210 stores in stores. Joy & Harmony closed all its 196 stores in stores. Letong closed its direct retail and franchise operation. All three entities ceased operation as of December 31, 2011. In 2012, Yiwu closed all its 178 stores in stores. Jinhua ceased its logistics operation. As such, Sanhe, Joy & Harmony, Letong, Yiwu and Jinhua met the conditions to be reported as discontinued operations in the financial statements, and accordingly, the results of operations have been reclassified for all periods to conform to the current period's presentation.

 

The following table summarizes the assets and liabilities of the discontinued operations as of March 31, 2013 (unaudited) and December 31, 2012 included in the Consolidated Balance Sheets:

 

		2013				2012
Cash			134,013				10,377
Prepaid expenses and other assets			-				26,394
Property, plant and equipment			29,723				21,835
Total assets			163,736				58,606
Short-term loans			2,393,642				2,386,445
Accrued expenses			18,700				-
Income tax payable			842,177				839,725
Other payable			106,339				106,019
Total liabilities			3,360,858				3,332,189
Net assets		$	(3,197,122	)		$	(3,273,583	)

 

The following table summarizes the operating results of the discontinued operations for the three months ended March 31, 2013 and 2012 included in the Consolidated Statements of Operations and Comprehensive Loss:

 

		2013				2012
Sales, net		$	-			$	2,470,577
Cost of sales			-				2,949,387
Gross profit (loss)			-				(478,810	)
General and administrative expenses			24,822				1,515,430
Loss from discontinued operations			(24,822	)			(1,994,240	)
Other income (expense)			(63,973	)			(630,469	)
Loss before income taxes			(88,795	)			(2,624,709	)
Provision for income taxes			-				37,655
Net loss from discontinued operations, net of income tax		$	(88,795	)		$	(2,662,364	)

 

 

Note 10- OTHER COMPREHENSIVE INCOME

 

Other comprehensive income as included in stockholders’ equity for the three months ended March 31, 2013 and 2012, represents foreign currency translation adjustment.

 

Note 11 - CURRENT VULNERABILITY DUE TO CERTAIN RISK FACTORS

 

The Company’s operations are in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, by the general state of the PRC’s economy. The Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

 

Note 12 - MAJOR CUSTOMERS, VENDORS AND CREDIT RISK

 

During the three months ended March 31, 2012, no single customer accounted for more than 10% of the Company’s sales or accounts receivable and no single vendor accounted for more than 10% of the Company’s purchases. During the three months ended March 31, 2013, four customers accounted for more than 10% of the Company’s sales, which represented 31.4%, 13.4%, 10.6% and 10.4%, respectively of the Company’s sales. As of March 31, 2013, three customers comprised more than 10% of the Company’s accounts receivable, which represented 39.1%, 19.9% and 19.8%, respectively. One vendor comprised more than 10% of the Company’s accounts payable, which represented 16.9% of the Company’s accounts payable.

 

Note 13 -   SEGMENT INFORMATION

 

We separately operate and prepare accounting and other financial reports to management for two business organizations (Wang Da and Zhejiang). Starting from the third quarter 2012, mobile phones businesses are split between Wang Da and Zhejiang. Wang Da focuses on distributing domestic brands mobile phones. Zhejiang focuses on distributing Samsung and Apple brand products. As a result, Zhejiang’s operations, together with Wang Da, are reported in “Mobile Phones” segment since 2012, as disclosed in the Consolidated Statements of Operations and Comprehensive Loss.

 

We only have one reportable segment - mobile phones, required by FASB ASC Topic 280, “Segment Reporting”, operated by Wang Da and Zhejiang. The operating results for mobile phones segment for the three months ended March 31, 2013 and 2012 are disclosed in the Consolidated Statements of Operations and Comprehensive Loss.

 

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 Months Ended March 31, 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 March 31,								Percentage
Wang Da		2013				2012				Change
Revenue		$	470,920			$	5,242,009				(91.0	)%
Gross Profit		$	5,536			$	373,891				(98.5	)%
Profit Margin			1.2	%			7.1	%			(5.9	)%
Operating (Loss)		$	(34,771	)		$	(1,226,771	)			(97.2	)%

 

For the three months ended March 31, 2013, Wang Da generated revenue of $470,920, a decrease of $4,771,089 or 91.0% compared to $5,242,009 for the three months ended March 31, 2012. The decrease in revenue was primarily due to the closing of 154 stores in stores in 2012 and 2 stores in the first three months of 2013. Wang Da only has 5 stores in operation during the three months ended March 31, 2013. Splitting part of the mobile phone business to Zhejiang also contributed to the decrease in revenue.

 

Gross profit decreased $368,355 or 98.5% from $373,891 for the three months ended March 31, 2012 to $5,536 for the three months ended March 31, 2013. Profit margin decreased from 7.1% in the three months ended March 31, 2012 to 1.2% in the three months ended March 31, 2013, a decrease of 5.9%.  The decrease in gross profit was a result of the decrease in sales.

 

Operating loss was $34,771 for the three months ended March 31, 2013, a decrease of $1,192,000 or 97.2% compared to $1,226,771 for the three months ended March 31, 2012. Operating loss decreased primarily due to the closing of store 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 March 31, 2013
Revenue		$	3,163,034
Gross Profit			139,467
Profit Margin			1.4	%
Operating Loss			(302,380	)

 

Total Company

 

Net Sales

 

Net sales for the three months ended March 31, 2013 decreased by 30.7%, to $3,633,954 compared to $5,242,009 for the three months ended March 31, 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 2 stores in the first three months of 2013.

 

Percentage of Sales

 

In the first quarter 2013, the Company earned 96.0% of its sales from its retail and 4.0% from its wholesale operations compared to 76.4% from retail and 23.6% from wholesale in the first quarter 2012

 

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 2013:

 

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

  

 

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

 

		Zhejiang				Wang Da				Total
Retail			-	%			76.4	%			76.4	%
Wholesale			-	%			23.6	%			23.6	%

 

Cost of Sales

 

Cost of sales (“COS”) for the three months ended March 31, 2013 was $3,488,951 compared to $4,868,118 for the three months ended March 31, 2012, a decrease of 28.3%. The decreased COS for the three months was a result of the decrease in sales from the comparable period. In addition, higher cost of mobile phones also contributed to the increased cost of sales.

 

Gross Profit

 

Gross profit for the three months ended March 31, 2013 was $145,003 compared to gross profit of 373,891 for the three months ended March 31, 2012, a decrease of 61.2%. The decreased gross profit for the three months was due to lower sales.

 

Profit Margin

 

Profit margin for the three months ended March 31, 2013 was 4.0% compared to 7.1% for the three months ended March 31, 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 March 31, 2013 were $721,201 or 19.8% of net sales, compared to $2,490,135 or 47.5% of net sales for the three months ended March 31, 2012, a decrease of 27.7% of sales. The decrease in selling, general and administrative expenses for the first quarter was primarily due to the closing of 154 stores in 2012 and 2 stores in the first three 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 March 31, 2013 was $576,198 or (15.9)% of net sales compared to $2,116,244 or (40.4)% of net sales for the three months ended March 31, 2012, a decrease of 24.5%. Lower operating expenses was the key factor for the decrease in operating loss from continuing operations during the three months ended March 31, 2013 compared to 2012.

 

Provision for Income Taxes

 

The provision for income taxes for the three months ended March 31, 2013 and 2012 were $0 due to losses incurred by both Wang Da and Zhejiang.

 

Net Loss from Continuing Operations

 

Net loss was $550,682 or (15.2)% of net sales for the three months ended March 31, 2013 compared to $2,116,870 or (40.4)% of net sales for the three months ended March 31, 2012, a decrease of 74.0%. Lower operating expenses was the key factors for the decrease in net loss from continuing operations during the three months ended March 31, 2013 compared to 2012.

 

Net Loss from Discontinued Operations

 

Net loss from discontinued operations for the three months ended March 31, 2013 was $88,795 compared to $2,662,364 for 2012, a decrease of $2,573,569. The decrease was due to Yiwu and Jinhua ceased operations in the first quarter 2013 when both companies were still operating and had net losses in the comparable period in 2012.

 

 

Net Loss

 

Net loss was $639,477 for the three months ended March 31, 2013 compared to $4,779,234 for the three months ended March 31, 2012, a decrease of 86.6%. 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.

 

		Three Months Ended March 31,
		2013				2012
RMB/$ exchange rate at period end			0.1596				0.1584
Average RMB/$ exchange rate for the periods			0.1593				0.1588

 

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 $23,619 in the first quarter 2013 and $94,231 in 2012, 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 $328,584 at March 31, 2013, compared to $456,495 at December 31, 2012.

 

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

 

		Three Months Ended March 31,
		2013				2012
Net cash used in operating activities		$	(161,163	)		$	(1,694,801	)
Effect of exchange rate change on cash and equivalents			33,252				39,416
Net decrease in cash and equivalents			(127,911	)			(1,655,385	)
Cash and equivalents at beginning of  period			456,495				5,778,280
Cash and equivalents at end of period		$	328,584			$	4,122,895

 

Operating Activities

 

Net cash used in operating activities was $161,163 for the three months ended March 31, 2013 compared to $1,694,801 for the three months ended March 31, 2012, a 90.5% decrease.  Net cash used in operating activities was mainly attributable to several factors, including (i) a decrease in net loss of $4,139,757; (ii) decrease in accounts receivable of $416,899, (iii) decrease in advance to related party of $501,814, (iv) decrease in accounts payable and accrued expenses of $16,510, offset by the increase in advance to suppliers of $623,161 add back of stock compensation of $103,333.

 

		Three Months Ended March 31,
		2013				2012				Percentage Change
Sales, Net		$	3,633,954			$	5,242,009				(30.7	)%
Accounts receivable		$	448,821			$	4,468,729				(90.0	)%

 

 

Accounts receivable decreased 90.0% in the first quarter of 2013 while sales decreased 30.7%. Accounts receivable as a percentage of sales decreased due to the Company generated 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 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, 2013 and December 31, 2012 were solely bank accounts in US and China. Specifically, cash and equivalents for each subsidiary as of March 31, 2013 and December 31, 2012 included:

 

Name of Entities

Region

Currency

March 31, 2013

December 31, 2012

Yosen

US entity

USD

96,490

383,834

Zhejiang

Chinese entity

RMB

1,177,245

359,757

Yiwu

Chinese entity

RMB

223,624

52,663

Wang Da

Chinese entity

RMB

42,053

31,730

Jinhua

Chinese entity

RMB

2,189

2,388

Sanhe

Chinese entity

RMB

8,300

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 March 31, 2013 and December 31, 2012 were RMB 1,454,437 ($232,094) and RMB 456,711 ($72,661).

 

Capital Expenditures

 

We did not have any capital expenditure for the first three 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.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, our management conducted an evaluation of our disclosure controls and procedures as of March 31, 2013, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of such date, the Company’s disclosure controls and procedures were not effective due to the material weakness in our internal controls identified in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosures.

 

Changes in Internal Control Over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during the first quarter of 2013 covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1.    Legal Proceedings.

 

We are not currently a party to any material legal proceedings. From time to time, however, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business.

 

 

Item 1A. Risk Factors.

 

There have been no material changes from the Risk Factors previously disclosed in the Company’s Annual Report on Form 10-K for its year ended December 31, 2012.

 

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3.   Defaults Upon Senior Securities.

 

None.

 

Item 4.   Mine Safety Disclosures.

 

Not applicable.

 

Item 5.   Other Information.

 

None.

 

Item 6.   Exhibits.

 

Exhibit No.		Document Description
31.1		Certification of the Chief Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Chief Financial Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
101		The following financial statements from China 3C Group’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets (unaudited); (ii) the Consolidated Statements of Operations and Comprehensive Loss (unaudited); (iii) the Consolidated Statements of Cash Flows (unaudited); and, (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	YOSEN GROUP, INC.
Date: May 15, 2013	By:	/s/ Zhenggang Wang
		Name:   Zhenggang Wang
		Title: Chief Executive Officer and Chairman
		(Principal Executive Officer)
Date: May 15, 2013	By:	/s/ Weiping Wang
		Name:   Weiping Wang
		Title: Chief Financial Officer (Principal Accounting and Financial Officer)

 

EXHIBIT INDEX

 

Exhibit No.		Document Description
31.1		Certification of the Chief Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Chief Financial Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).