SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal quarter ended March 31, 2008
[ ] 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 333-42036
SOYO GROUP, INC.
(Exact Name of Registrant as specified in its Charter)
Nevada 95-4502724
---------------------------------------- ------------------------------------
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
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1420 South Vintage Avenue, Ontario, California 91761-3646
(Address of Principal Executive Offices) (Zip Code)
(909) 292-2500
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act 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 is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). [ ] Yes [X] No
Indicate the number of shares outstanding of each of the Registrant's
classes of Common Stock as of the latest practicable date.
As of May 14, 2008 there were 52,179,656 shares Outstanding.
Documents Incorporated by Reference: None
SOYO GROUP, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2008
(Unaudited) and December 31, 2007...................................5
Condensed Consolidated Statements of Operations (Unaudited) -
Three Months Ended March 31, 2008 and 2007..........................7
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended March 31, 2008 and 2007..........................8
Notes to Condensed Consolidated Financial Statements (Unaudited)
- Three Months Ended March 31, 2008 and 2007........................9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................21
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........31
Item 4. Controls and Procedures............................................31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................32
Item 1A. Risk Factors.....................................................33
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities..................................................33
Item 3. Defaults upon Senior Securities....................................33
Item 4. Submission of Matters to a Vote of Security Holders................33
Item 5. Other Information..................................................34
Item 6. Exhibits and Reports on Form 8-K...................................34
SIGNATURES....................................................................34
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SOYO Group, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
Consolidated Balance Sheets
March 31, December 31
2008 2007
---------------- ---------------
(Unaudited) (Restated)
ASSETS
Current Assets
Cash and cash equivalents 3,560,952 1,848,249
Accounts receivable, net of allowance
for doubtful accounts of $ 1,105,663 and $783,573
at March 31, 2008 and December 31, 2007 respectively 29,636,628 27,123,985
Inventories, net of allowance for inventory
obsolescence of $222,044 and $88,114 as of March 31,
2008 and December 31, 2007 and respectively 15,612,047 12,221,265
Prepaid expenses 723,893 187,749
Deferred income tax assets 582,963 544,688
Deposits 8,766,995 8,808,408
---------------- ---------------
Total Current Assets 58,883,478 50,734,344
---------------- ---------------
Investment in 247 MGI 800,000 400,000
Property and equipment 319,252, 316,287
Less accumulated depreciation
and amortization (154,248) (141,613)
---------------- ---------------
165,004 174,674
Deferred income tax - noncurrent 677,037 658,312
Total noncurrent assets 1,642,041 1,232,986
Total Assets $60,525,519 $51,967,330
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $19,051,452 $14,336,196
Accrued liabilities 825,987 789,526
Commercial Loans due to UCB 26,359,020 27,824,490
Gateway Trade Finance 4,279,110
----------------
Income Tax Payable 1,170,876 889,518
---------------- ---------------
Total current liabilities 51,686,445 43,839,730
---------------- ---------------
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Long term payable 0
---------------- ---------------
Total liabilities 51,686,445 43,839,730
---------------- ---------------
EQUITY
Class B Preferred stock, $0.001 par value,
authorized - 10,000,000 shares, Issued
and outstanding - 3,181,357shares in 2008
and 2,797,738 shares in 2006 2,263,678 2,187,165
Preferred stock backup withholding (253,356) (230,402)
Common stock, $0.001 par value.
Authorized - 75,000,000 shares, Issued and
outstanding - 52,179,656 shares in 2008 and 52,004,656
shares in 2007 52,180 52,005
Additional paid-in capital 20,685,530 20,233,500
Accumulated deficit (13,908,958) (14,114,668)
---------------- ---------------
Total shareholders' Equity 8,839,074 8,127,600
---------------- ---------------
Total liabilities and shareholders' equity $60,525,519 $51,967,330
================ ===============
0 0
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See accompanying notes to the unaudited condensed consolidated
financial statements
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SOYO Group, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended March 31,
2008 2007
---- ----
Net revenues $ 24,795,315 $ 14,691,110
Cost of revenues 21,689,211 12,082,914
Gross margin 3,106,104 2,608,196
Costs and expenses:
Sales and marketing 427,635 590,856
General and 1,404,177 1,578,174
administrative
Provision for doubtful accounts 452,090 1,438
Depreciation and amortization:
Property and equipment 12,635 23,291
Total costs and expenses 2,296,537 2,193,759
Income from operations 809,567 414,437
Other income (expense):
Interest income 12,107 31,385
Interes texpense (385,147) (59,715)
Other income (expense) 400,000 (87,690)
Other income (expense), net 26,960 (116,020)
Income before provision for income 836,527 298,417
taxes
Provision for income taxes 433,180 63,085
Deferred income tax benefit (57,000) (286,858)
Net income (loss) 460,347 522,190
Less: dividends on convertible 254,638 61,763
preferred stock
Net income (loss) attributable to 205,709 460,427
common shareholders
Net income (loss) per common share - .00 .01
Basic and diluted .00 .01
Weighted average number of shares of 50,111,501 49,025,511
common stock outstanding - Basic and 55,067,176 54,706,506
diluted
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See accompanying notes to unaudited condensed consolidated
financial statements.
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SOYO Group, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three months ended March 31,
2008 2007
---- ----
OPERATING ACTIVITIES
Net Income (loss) 460,347 522,190
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and Amortization 12,635 23,290
Unrealized gain on available for sale securities (400,000)
Non cash payments for director's compensation
Stock based compensation 212,831 176,794
Provision for doubtful accounts 322,090 1,438
Provision for inventory obsolescence 53,444
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts Receivable (2,834,733) 230,273
Inventories (3,444,226) (541,848)
Prepaid expenses (536,144) 7,309
Deposits 41,413 (70,133)
Deferred income tax asset - current (38,275) (286,858)
Deferred income tax asset - non current (18,725)
Increase (Decrease) in:
Accounts payable 4,715,256 (6,931,802)
Accrued liabilities 36,461 3,766
Income tax payable 281,358
----------- -----------
Net cash used in operating activities (1,136,268) (6,865,581)
----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment (2,965) (9,791)
Proceeds from sale of equipment
----------- -----------
Net cash used in investing activities (2,965) (9,791)
----------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 61,250
Proceeds from accounts receivable discounting 1,294,217
Repayments of accounts receivable discounting (4,882,620)
Proceeds from business loan 4,279,110 11,000,512
Repayment of business loan (1,465,470)
Payment of backup withholding tax on accreted
dividends on preferred stock (22,954) (18,529)
Short term loan (100,000)
----------- -----------
Net cash used in financing activities 2,851,936 7,293,580
----------- -----------
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CASH AND CASH EQUIVALENTS
Net Increase (Decrease) 1,712,703 418,208
At beginning of Period 1,848,249 1,501,040
----------- -----------
At End of Period 3,560,952 1,919,248
=========== ===========
Non cash investing and financing activities
Accretion of discount on Class B preferred stock 76,513 61,763
Stock Option Compensation 176,794
Unrealized gain on available for sale securities 400,000
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See accompanying notes to unaudited condensed consolidated
financial statements.
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SOYO Group, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Three Months Ended March 31, 2008 and 2007
1. Organization and Basis of Presentation
Organization - Effective October 24, 2002, Vermont Witch Hazel Company, Inc., a
Nevada corporation ("VWHC"), acquired SOYO, Inc., a Nevada corporation ("SOYO
Nevada"), from SOYO Computer, Inc., a Taiwan corporation ("SOYO Taiwan), in
exchange for the issuance of 1,000,000 shares of convertible preferred stock and
28,182,750 shares of common stock, and changed its name to SOYO Group, Inc.
("SOYO"). The 1,000,000 shares of preferred stock were issued to SOYO Taiwan and
the 28,182,750 shares of common stock were issued to certain members of SOYO
Nevada management.
Subsequent to this transaction, SOYO Taiwan maintained an equity interest in
SOYO, continued to be the primary supplier of inventory to SOYO, and was a major
creditor. In addition, there was no change in the management of SOYO and no new
capital invested, and there was a continuing family relationship between certain
members of the management of SOYO and SOYO Taiwan. As a result, this transaction
was accounted for as a recapitalization of SOYO Nevada, pursuant to which the
accounting basis of SOYO Nevada continued unchanged subsequent to the
transaction date. Accordingly, the pre-transaction financial statements of SOYO
Nevada are now the historical financial statements of the Company.
On December 9, 2002, SOYO's Board of Directors elected to change SOYO's fiscal
year end from July 31 to December 31 to conform to SOYO Nevada's fiscal year
end.
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On October 24, 2002, the primary members of SOYO Nevada management were Ming
Tung Chok, the Company's President, Chief Executive Officer and Director, and
Nancy Chu, the Company's Chief Financial Officer. Ming Tung Chok and Nancy Chu
are husband and wife. Andy Chu, the President and major shareholder of SOYO
Taiwan, is the brother of Nancy Chu.
Unless the context indicates otherwise, SOYO and its wholly-owned subsidiary,
SOYO Nevada, are referred to herein as the "Company".
Basis of Presentation - The accompanying unaudited condensed consolidated
financial statements include the accounts of SOYO and SOYO Nevada. All
significant intercompany accounts and transactions have been eliminated in
consolidation. The unaudited condensed consolidated financial statements have
been prepared in accordance with United States generally accepted accounting
principles, and with the instructions to Form 10-Q and Rule 10-1 of Regulation
S-X..
Interim Financial Statements - The accompanying interim unaudited condensed
consolidated financial statements are unaudited, but in the opinion of
management of the Company, contain all adjustments, which include normal
recurring adjustments, necessary to present fairly the financial position at
March 31, 2008, the results of operations for the three months ended March 31,
2008 and 2007, and cash flows for the three months ended March 31, 2008 and
2007. The condensed consolidated balance sheet as of December 31, 2007 is
derived from the Company's audited consolidated financial statements.
Certain information and footnote disclosures normally included in financial
statements that have been prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission, although
management of the Company believes that the disclosures contained in these
condensed consolidated financial statements are adequate to make the information
presented therein not misleading. For further information, refer to the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2007, as filed with the Securities and Exchange Commission.
The results of operations for the three months ended March 31, 2008 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year ending December 31, 2008. The largest part of the Company's
business, the importing and resale of consumer electronic products, is a
seasonal business. The busiest time of the year is the holiday season, which
occurs at the end of the year. Accordingly, sales for the year should improve as
the year passes, culminating in strongest sales in the third and fourth
quarters.
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Business - Through 2007, The Company sold products under four different product
lines: 1) Computer products ; 2) Consumer Electronics; 3) Furniture 4)
Communcations (VoIP).
The Company began selling furniture under the Levello brand name during the
second quarter of 2007. A series of wood and glass tables and stands, the
Levello products are meant to enhance the physical appearance of the Company's
consumer electronics products. The Levello furniture is a series of pieces that
can be sold independently, or bundled with large screen televisions. During the
initial product roll out during the second quarter, the Company began selling
the Levello series to Costco.com, as well as furniture distributors in the
United States and Mexico.
On December 31, 2007, the Company sold all of the assets related to the VoIP
business to 247MGI of Fort Lauderdale, Florida for 40,000,000 shares of 247MGI's
common stock. The stock is traded on the OTC pink sheets. The Company has no
plans to dispose of the 247MGI stock, and intends to hold it long term as an
investment.
The Company's products are sold to distributors and retailers primarily in North
and South America.
SOYO Group Inc. has signed a license agreement with Honeywell Intellectual
Properties Inc. and Honeywell International Inc., effective January 1, 2007,
under which SOYO will create and market certain consumer electronics products
under the Honeywell Brand.
The agreement is for a minimum period of 6.5 years and calls for the payment of
MINIMUM royalties by SOYO to Honeywell totaling $3,840,000 (Three Million, Eight
Hundred and Forty Thousand Dollars U.S.). Sales levels in excess of minimum
agreed targets will result in associated increases in the royalty payments due.
Minimum royalty payments due under the agreement were $353,000 through December
31, 2007, and $469,000 through December 31, 2008. As of March 31, 2008, the
Company has paid $608,000 to Honeywell as minimum royalty payments.
Through this agreement, SOYO is planning to develop and market consumer
electronics products under the Honeywell brand. Over the life of the contract,
SOYO has the right to create and bring to market LCD monitors and televisions,
front and rear projectors, home audio and video DVD (receivers, AMPS, tuners,
VHS recorders, DVD players and recorders, clock radio, bookshelf systems,
speakers and audio intercom), portable audio/video DVD (boom boxes, portable
CD/DVD players, MP3, MPEG, camcorders/ digital recorders) and accessories for TV
monitors and audio visual products such as cables, surge protectors, Bluetooth,
antennas, headphones (wireless and wired) remote controls, multimedia speakers,
IPOD and PC accessories including portable hard drives and flash drives, wall
mounts, set top boxes and PC embedded boxes. Since there are many market factors
at play in the consumer electronics world, including consumer preferences,
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pricing and other market conditions, SOYO plans to spend the majority of its
time and money on the most profitable products. There can be no assurance that
SOYO will bring all of these products to market in a timely fashion, or at all.
Accounting Estimates - The preparation of financial statements in conformity
with United States generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, 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. Significant estimates primarily relate to the realizable
value of accounts receivable, vendor programs and inventories. Actual results
could differ from those estimates.
2. Earnings Per Share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share",
requires presentation of basic earnings per share ("Basic EPS") and diluted
earnings per share ("Diluted EPS"). Basic income (loss) per share is computed by
dividing net income (loss) available to common shareholders by the weighted
average number of common shares outstanding during the period. Diluted income
per share gives effect to all dilutive potential common shares outstanding
during the period. Potentially dilutive securities consist of the outstanding
shares of preferred stock, and stock options granted to employees in 2005 and
2007. The calculation of fully diluted shares is as follows:
Weighted average Shares outstanding at 3/31/2008 50,111,501
Add: Conversion of Preferred Stock
(2,690,708 divide by $.90 per share) 2,989,676
Vested in the money options
1,966,000
----------
Total fully diluted shares at 3/31/2008 55,067,177
==========
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As of March 31, 2008, potentially dilutive securities consisted of 2,614,195
shares of Class B Convertible Preferred Stock with a stated liquidation value of
$1.00 per share that are convertible into common stock at fair market value, but
not less than $0.25 per share. As of March 31, 2008, 2,989,676 shares of common
stock were issuable upon conversion of the Class B Convertible Preferred Stock
based on the $0.90 per share conversion price.
The Company applies the treasury stock method to each individual compensation
grant. If a grant is out-of-the-money based on the stated exercise price, the
effects of including any component of the assumed proceeds associated with that
grant in the treasury stock method calculation would be antidilutive. A holder
would not be expected to exercise out-of-the money awards. For the period ended
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March 31, 2008, al stock options granted in 2005 and 2007 were "in the money"
and therefore are all included in the computation of diluted EPS.
Comprehensive Income (Loss) - The Company reports comprehensive income or loss,
its components and accumulated balances in its consolidated financial
statements. Comprehensive income or loss includes all changes in equity except
those resulting from investments by owners and distributions to owners. The
Company did not have any items of comprehensive income (loss) during the three
months ended March 31, 2008 and 2007.
Significant Risks and Uncertainties - The Company operates in a highly
competitive industry subject to aggressive pricing practices, pressures on gross
margins, frequent introductions of new products, rapid technological advances,
continual improvement in product price/performance characteristics, and changing
consumer demand.
As a result of the dynamic nature of the business, it is possible that the
Company's estimates with respect to the realizability of inventories and
accounts receivable may be materially different from actual amounts. These
differences could result in higher than expected allowance for bad debts or
inventory reserve costs, which could have a materially adverse effect on the
Company's financial position and results of operations.
Stock Options and Warrants - As of December 31, 2007, the Company had both
warrants and options outstanding. The outstanding warrants were those issued to
Evergreen Technology as part of the private placement completed in March 2005.
The warrants expired unexercised on March 20, 2008.
On July 22, 2005, the Company issued 2,889,000 option grants to employees at a
strike price of $0.75. One third of those options vested and were available for
purchase on July 22, 2006, one third vested on July 22, 2007, and one third will
vest on July 22, 2008. The grants will expire if unused on July 22, 2010. As of
March 31, 2008, none of the options had been exercised, and 1,200,000 options
issued to Ming Chok and Nancy Chu had been returned to the Company. Seventeen
employees who were issued stock options in 2005 had left the Company, and those
17 employees forfeited 714,000 options. Of the remaining 987,000 outstanding
options, 662,000 were vested as of March 31, 2008. The remaining 325,000 will
vest on July 22, 2008. If not exercised, all 987,000 options will expire on July
22, 2010.
The Company did not grant any stock options to employees, officers or directors
in 2006. On February 2, 2007, the Company issued 4,805,000 option grants to
employees at a strike price of $0.35. One third of those options were
immediately vested and available for purchase on February 2, 2007, one third
vested on February 2, 2008, and the remaining one third will vest on February 2,
2009. The grants will expire if unused on February 2, 2012.
During 2007, 674,500 of the options granted in 2007 were exercised. As of March
31, 2008, eight ndividuals who were granted options in 2007 had left the
Company. Those individuals exercised a total of 183,000 options, and forfeited
an additional 520,000 options.
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As of March 31, 2008, employees held 3,710,500 options of the options granted in
2007, of which 2,500,000 have vested. The Company also issued 100,000 options to
three new employees later in 2007, of which 67,000 have vested.
For the three months ended March 31, 2008 and 2007, the Company recorded
$144,594 and $176,749 respectively, in compensation costs relating to stock
options granted to employees. The amounts recorded represent equity-based
compensation expense related to options that were issued in 2005 and 2007. The
compensation costs are based on the fair value at the grant date.
The fair value of the options issued in July 2005 was estimated using the
Black-Scholes option-pricing model with the following assumptions: risk free
interest rate of 4.04 %, expected life of five (5) years and expected volatility
147%. The fair value of the options issued in February 2007 was estimated using
the Black-Scholes option-pricing model with the following assumptions: risk free
interest rate of 4.82 %, expected life of five (5) years and expected volatility
129%.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the sales price is fixed or determinable, and
collectibility is probable.
The Company recognizes product sales generally at the time the product is
shipped, although under certain circumstances the Company recognizes product
sales at the time the product reaches its destination. Concurrent with the
recognition of revenue, the Company provides for the estimated cost of product
warranties and reduces revenue for estimated product returns. Sales incentives
are generally classified as a reduction of revenue and are recognized at the
later of when revenue is recognized or when the incentive is offered. When other
significant obligations remain after products are delivered, revenue is
recognized only after such obligations are fulfilled. Shipping and handling
costs are included in cost of goods sold.
3. Investment in 247MGI
On December 31, 2007, the Company completed the sale of all assets of the VoIP
division to 247MGI, Inc., a Miami, Florida based publicly traded corporation
just beginning operations. The sales price of the assets was $1,000,000, which
was paid by 40,000,000 shares of 247MGI's restricted common stock. As of March
31, 2008, the shares had not been registered under the Securities Act of 1933,
and any future sale of the shares was restricted completely for one year, and
subject to volume restrictions after that. The Company has no management
participation in 247MGI's business. At December 31, 2007, 247MGI had only
75,272,814 common shares outstanding, so the Company owned a majority of the
outstanding shares. In February, 2008, 247MGI issued 335,000,000 common shares,
diluting our holding to approximately 10% of the outstanding common shares. The
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Company intends to hold the 247MGI shares as a long term investment.
Since the Company's shares are unregistered and illiquid, the net realizable
value of the Company's investment is difficult to calculate. The Company has
initially recorded the investment for $400,000 and during the first quarter
2008, had marked-to-market the asset to $800,000 based on the closing stock
price of 247MGI as of March 31, 2008.
4. Commercial Loans Due to UCB
At March 31, 2008, Commercial loans due to UCB consisted of:
------------------------------------- ---------------
Asset based financing $ 17,662,733
------------------------------------- ---------------
Purchase Order financing 8,696,287
------------------------------------- ---------------
Total $ 26,359,020
------------------------------------- ---------------
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In March 2007, the Company announced that it had secured a $12 MM Asset Based
Credit Facility from a California bank to provide funding for future growth. The
agreement stated that UCB would provide SOYO with a revolving financing facility
of up to $12 million to finance working capital, letters of credit or other
capital needs. The maximum amount of the facility to be extended at any point in
time based on the Company's accounts receivable and inventory, which would serve
as collateral for the loan.
In April 2007, by mutual agreement of the parties, the maximum loan balance was
increased from $12 million to $14 million. The maximum loan balance was
increased in December 2007 to $17 million, and then to $18 million. All other
terms of the agreement, including the interest rate, maturity date and method of
evaluating the Company's inventory and receivables to determine eligible
collateral were left unchanged during the increases.. For reporting purposes,
the loan has been segregated from other payables and reported as a separate line
item. At March 31, 2008, the balance of the loan due to UCB was $17,662,733.
In June 2007, UCB offered to provide the Company with an alternative source of
financing- Purchase Order financing. This line differed from all other forms of
financing in that the bank was offering to advance funds against our customers
specific purchase orders, provided the customer met the bank's stringent credit
requirements. The end result is that the Company can use this credit line only
by obtaining purchase orders from large customers before ordering the
merchandise. The funds would then be advanced to the manufacturer after product
was shipped, and once the product was delivered to the customer, and the status
of the order was changed from a purchase order to a receivable, the loan would
15
have to be paid back, or the balance transferred to the asset based credit line.
The Company began buying merchandise under the Purchase Order financing line in
June 2007. As of March 31, 2008, the amount SOYO owed to UCB was $8,696,287.
5. Gateway Trade Finance
During March 2008, the Company received a large order from a customer that could
not be financed by its current credit facilities. The Company negotiated for
Gateway Finance to advance and guarantee payment of the production run. The
entire balance will be paid during the second quarter of 2008. The Company does
not plan to utiliize external financing of this nature for future purchases due
to the high cost, but may do so on a limited basis if the tranaction warrants
it.
6. Shareholders' Equity
a. Common Stock
As of December 31, 2002, the Company had authorized 75,000,000 shares of common
stock with a par value of $0.001 per share.
Effective October 24, 2002, the Company issued 28,182,750 shares of common stock
to Ming Tung Chok and Nancy Chu, who are members of SOYO Nevada management (see
Note 1). The shares of common stock were valued at par value, since the
transaction was deemed to be a recapitalization of SOYO Nevada. During October
2002, the management of SOYO Nevada also separately purchased 6,026,798 shares
of the 11,817,250 shares of common stock of VWHC outstanding prior to VWHC's
acquisition of SOYO Nevada, for $300,000 in personal funds. The 6,026,798 shares
represented 51% of the outstanding shares of common stock. When the transaction
was complete, and control of the Company was transferred, SOYO Nevada management
owned 34,209,548 shares of the 40,000,000 outstanding shares of the Company's
common stock. Subsequent to the transaction, management distributed 8,000,000
shares of common stock to various brokers, bankers and other individuals that
assisted with the transaction. In 2007, Mr. Chok gave a gift of 1,000,000 shares
to an individual. In March, 2008, Mr. Chok announced that he and his wife bought
776,000 shares of the Company's common stock in a private placement at $1.25 per
share. No one individual or corporation other than those named in Item 12 of
this report ever owned more than 5% of the common shares outstanding.
b. Preferred Stock
Through the bylaws, the Company has authorized 10,000,000 shares of preferred
stock with a par value $0.001 per share.
The Board of Directors is vested with the authority to divide the authorized
shares of preferred stock into series and to determine the relative rights and
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preferences at the time of issuance of the series.
During the first quarter of 2004, SOYO Taiwan entered into an agreement with an
unrelated third party to sell the $12,000,000 long-term payable due it by the
Company. As part of the agreement, SOYO Taiwan required that the purchaser would
be limited to collecting a maximum of $1,630,000 of the $12,000,000 from the
Company without the prior consent of SOYO Taiwan. SOYO Taiwan forgave debt in an
amount equal to the difference between $12,000,000 and the value of the
preferred stock. This forgiveness will be treated as a capital transaction.
Payment was received by SOYO Taiwan in February and March 2004. An agreement was
reached whereby 2,500,000 shares of Class B cumulative Preferred stock would be
issued by the Company to the unrelated third party in exchange for the long-term
payable.
The Class B cumulative Preferred stock has a stated liquidation value of $1.00
per share and a 6% dividend, payable quarterly in arrears, in the form of cash,
additional shares of preferred stock, or common stock, at the option of the
Company. The Class B cumulative Preferred stock has no voting rights. The shares
of Class B cumulative Preferred stock are convertible, in increments of 100,000
shares, into shares of common stock at any time through December 31, 2008, based
on the fair market value of the common stock, subject, however, to a minimum
conversion price of $0.25 per share. No more than 500,000 shares of Class B
cumulative Preferred stock may be converted into common stock in any one year.
On December 31, 2008, any unconverted shares of Class B cumulative Preferred
stock automatically convert into shares of common stock based on the fair market
value of the common stock, subject, however, to a minimum conversion price of
$0.25 per share. Beginning one year after issuance, upon ten days written
notice, the Company or its designee will have the right to repurchase for cash
any portion or all of the outstanding shares of Class B cumulative Preferred
stock at 80% of the liquidation value ($0.80 per share). During such notice
period, the holder of the preferred stock will have the continuing right to
convert any such preferred shares pursuant to which written notice has been
received into common stock without regard to the conversion limitation. The
Class B cumulative Preferred stock has unlimited piggy-back registration rights,
and is non-transferrable.
For the quarter ended March 31, 2008, the Company recorded accreted dividends of
$76,513. For the quarter ended March 31, 2007, the Company recorded accreted
dividends of $61,763.
7. Income Taxes
Components of the provision (benefit) for income taxes for the periods ended:
17
Three
Year Year Months
Ended Ended Ended
12/31/2006 12/31/2007 3/31/2008
----------- ----------- -----------
Current:
Federal $ 1,000 $ 515,000 $ 364,000
State 52,000 324,000 69,000
----------- ----------- -----------
Total 53,000 839,000 433,000
----------- ----------- -----------
Deferred:
Federal -- (1,038,000) (48,000)
State -- (165,000) (9,000)
----------- ----------- -----------
Total -- (1,203,000) (57,000)
----------- ----------- -----------
Total $ 53,000 $ (364,000) $ 376,000
=========== =========== ===========
|
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets as of March 31, 2008, December 31, 2007 and
2006 are as follows:
Components of deferred income taxes as of:
12/31/2006 12/31/2007 3/31/2008
----------- ----------- -----------
Net operating loss carryforwards $ 1,310,000 $ -- $ --
Depreciation 288,000 214,000 206,000
Reserves and allowances 214,000 442,000 644,000
Shares-based compensation -- 444,000 471,000
----------- ----------- -----------
State income taxes 69,000 103,000 99,000
----------- ----------- -----------
Total deferred tax assets 1,881,000 1,203,000 1,420,000
Valuation allowance (1,881,000) -- --
----------- ----------- -----------
Deferred tax assets -- 1,203,000 1,420,000
----------- ----------- -----------
Unrealized gain on trading
securities -- -- 160,000
----------- ----------- -----------
Deferred tax liability -- -- 160,000
----------- ----------- -----------
Net deferred tax assets $ -- $ 1,203,000 $ 1,260,000
=========== =========== ===========
|
The reconciliation between the income tax rate computed by applying the U.S.
federal statutory rate and the effective rate for the three months ended March
31, 2008 and the years ended December 31, 2007 and 2006 is as follows:
18
Reconciliation of federal income tax rate:
Three
Year Year Months
Ended Ended Ended
12/31/2006 12/31/2007 3/31/2008
--------- --------- ---------
federal statutory rate 34.0% 34.0% 34.0%
Stock-based compensation 33.0% 9.5% 5.9%
State income taxes 6.5% 3.6% 7.2%
Non-deductible expenses 2.9% 0.6% 0.7%
Change in valuation allowance -67.2% -60.0% 0.0%
Other 0.8% 0.0% -2.9%
--------- --------- ---------
Effective tax rate 10.0% -12.3% 44.9%
========= ========= =========
|
8. Significant Concentrations
a. Customers
The Company sells to both distributors and retailers. Revenues through such
distribution channels are summarized as follows:
Three Months Ended March 31,
-------------------------------------------
2008 % 2007 %
----------- ------ ----------- ------
Revenues:
----------------------- ----------- ------ ----------- ------
Distributors $12,817,221 51.69 $11,883,335 80.89
----------------------- ----------- ------ ----------- ------
Retailers 10,631,444 42.87 941,413 6.41
----------------------- ----------- ------ ----------- ------
Others 1,346,650 5.44 1,866,362 12.70
----------------------- ----------- ------ ----------- ------
Total $24,795,315 100.00 $14,691,110 100.00
----------------------- ----------- ------ ----------- ------
|
During the three months ended March 31, 2008 and 2007, the Company offered price
protection to certain customers under specific programs aggregating $ 198,000
and $200,354 respectively, which reduced net revenues and accounts receivable
accordingly.
19
During the three months ended March 31, 2008, the Company had one customer,
Office Max, that accounted for $5,763,265 of its quarterly revenue, equal to
23.3% of its net revenue for the quarter.
During the three months ended March 31, 2007, the Company had no customers that
accounted for more than 10% of net revenues during the quarter.
b. Geographic Segments
Financial information by geographic segments is summarized as follows:
Three Months Ended March 31,
----------------------------------------------
2008 % 2007 %
------------ ------ ------------ ------
Gross revenues:
------------------------------- ------------ ------ ------------ ------
United States $ 20,179,297 81.38 $ 12,921,171 87.95
------------------------------- ------------ ------ ------------ ------
Canada 923,396 3.72 (34,865) (.23)
------------------------------- ------------ ------ ------------ ------
Central and South America 1,531,532 6.19 564,296 3.84
------------------------------- ------------ ------ ------------ ------
Others 2 161,090 8.71 1,240,508 8.44
------------------------------- ------------ ------ ------------ ------
Total $ 24,795,315 100.00 $ 14,691,110 100.00
------------------------------- ------------ ------ ------------ ------
|
Three Months Ended March 31,
-------------------------------------------
2008 % 2007 %
----------- ------ ----------- ------
Revenues:
---------------------------------- ----------- ------ ----------- ------
Computer Parts and Peripherals $18,736,382 75.56 $11,683,419 79.53
---------------------------------- ----------- ------ ----------- ------
Consumer Electronics 5,752,241 23.20 2,981,198 20.21
---------------------------------- ----------- ------ ----------- ------
VoIP 26,493 .26
---------------------------------- ----------- ------ ----------- ------
Furniture 306,692 1.24
---------------------------------- ----------- ------ ----------- ------
Total $24,795,315 100.00 $14,691,110 100.00
---------------------------------- ----------- ------ ----------- ------
|
d. Suppliers
As of March 31, 2008, no more than 36% of the products distributed by the SOYO
Group are being supplied by any one supplier. Other than that single supplier,
no other Vendor supplied more than 28% percent of the Company's inventory
available for sale. SOYO Group, Inc. is establishing new partnerships with other
OEM manufacturers in the North America and Asia Pacific Regions in order to
provide innovative products for consumers.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008
contains "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, including statements that include the words
"believes", "expects", "anticipates", or similar expressions. These
forward-looking statements include, but are not limited to, statements
concerning the Company's expectations regarding its working capital
requirements, financing requirements, business prospects, and other statements
of expectations, beliefs, future plans and strategies, anticipated events or
trends, and similar expressions concerning matters that are not historical
facts. The forward-looking statements in this Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2008 involve known and unknown risks,
uncertainties and other factors that could cause the actual results, performance
or achievements of the Company to differ materially from those expressed in or
implied by the forward-looking statements contained herein.
Financial Outlook:
For the three months ended March 30, 2008, the Company earned $460,347, or $0.01
per share before dividends on preferred stock.
For the three months ended March 30, 2007, The Company earned $522,190, or .01
per share before dividends on preferred stock.
As a general rule, the Company has been totally reliant upon the cash flows from
its operations to fund future growth. In the last few years, the Company has
begun and continues to implement the following steps to increase its financial
position, liquidity, and long term financial health:
In 2005, the Company completed a small private placement, began factoring
invoices to improve cash flows, and converted several million dollars of debt to
equity, all of which improved the Company's financial condition.
In 2006, the Company changed factors to a more beneficial arrangement, and
entered into a Trade Finance Flow facility with GE Capital to fund "Star"
transactions. The agreement provided for GE Capital to guarantee payment, on the
21
Company's behalf, for merchandise ordered from GE Capital approved manufacturers
in Asia. GE Capital guarantees the payment subject to a purchase order from one
of our customers. The Company accepts delivery of the goods in the US, and then
has the option to either pay for the goods or sell the receivable (from the
customer) to our factor, which pays GE Capital.
In March 2007, the Company announced that it had secured a $12 MM Asset Based
Credit Facility from UCB, a California bank, to provide funding for future
growth.
During the first quarter of 2007, the Company began to use the $12 million asset
based credit facility arranged with United Commercial Bank (see Form 8-K dated
March 2, 2007). The agreement calls for UCB to provide funds for SOYO to
purchase inventory in an amount determined by an evaluation of SOYO's current
inventory and accounts receivable. According to the terms of the agreement, all
accounts receivable sold to other factors were purchased by UCB.
In April 2007, by mutual agreement of the parties, the maximum loan balance was
increased several times. All other terms of the agreement, including the
interest rate, maturity date and method of evaluating the Company's inventory
and receivables to determine eligible collateral were left unchanged. For
reporting purposes, the loan has been segregated from other payables and
reported as a separate line item on the balance sheet.
In June 2007, UCB offered to provide the Company with an alternative source of
financing- Purchase Order financing. This line differed from all other forms of
financing in that the bank was offering to advance funds against our customers
specific purchase orders, provided the customer met the bank's stringent credit
requirements. The end result is that the Company can use this credit line only
by obtaining purchase orders from large customers before ordering the
merchandise. The funds would then be advanced to the manufacturer after product
was shipped, and once the product was delivered to the customer, and the status
of the order was changed from a purchase order to a receivable, the loan would
have to be paid back, or the balance transferred to the asset based credit line.
The Company began buying merchandise under the Purchase Order financing line in
June 2007.
In September 2007, the Company announced to shareholders that it was negotiating
with several independent third parties to raise capital. The capital would be
used to improve the balance sheet and increase the Company's borrowing
capabilities. The Company further stated that with the large increases in sales
during the year, all of the Company's credit had been utilized, and that the
Company was having difficulties purchasing enough products to maintain the 2007
level of sales growth. As of the date of this report, the Company had not yet
agreed with any outside party on any capital transaction.
22
Critical Accounting Policies:
The Company prepared its condensed consolidated financial statements in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires the use of
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amount of revenues and expenses
during the reporting period. Management periodically evaluates the estimates and
judgments made. Management bases its estimates and judgments on historical
experience and on various factors that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates as a result of
different assumptions or conditions.
The Company operates in a highly competitive industry subject to aggressive
pricing practices, pressures on gross margins, frequent introductions of new
products, rapid technological advances, continual improvement in product
price/performance characteristics, and changing consumer demand.
As a result of the dynamic nature of the business, it is possible that the
Company's estimates with respect to the realizability of inventories and
accounts receivable may be materially different from actual amounts. These
differences could result in higher than expected allowance for bad debts or
inventory reserve costs, which could have a materially adverse effect on the
Company's financial position and results of operations.
The following critical accounting policies affect the more significant judgments
and estimates used in the preparation of the Company's condensed consolidated
financial statements.
Vendor Programs:
Firm agreements with vendors for price protection, product rebates, marketing
and training, product returns and promotion programs are generally recorded as
adjustments to product costs, revenue or sales and marketing expenses according
to the nature of the program. Depending on market conditions, the Company may
implement actions to increase customer incentive offerings, which may result in
a reduction of revenue at the time the incentive is offered. The Company records
the corresponding cost or expense at the time it has a firm agreement with a
vendor.
Accounts Receivable:
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the sales price is fixed or determinable, and
collectibility is probable.
23
The Company records estimated reductions to revenue for incentive offerings and
promotions. Depending on market conditions, the Company may implement actions to
increase customer incentive offerings, which may result in an incremental
reduction of revenue at the time the incentive is offered. The Company records
the corresponding effect on receivable and revenue when the Company offers the
incentive to customers. All accruals estimating sales incentives, warranties,
rebates and returns are based on historical experience and the Company
management's collective experience in anticipating customers actions. These
amounts are reviewed and updated each month when financial statements are
generated.
Complicating these estimates is the Company's different return policies. The
Company does not accept returns from customers for refunds, but does repair
merchandise as needed. The cost of the shipping and repairs may be borne by the
customer or the Company, depending on the amount of time that has passed since
the sale and the product warranty.
The Company has different return policies with different customers. While the
Company does not participate in "guaranteed sales" programs, the Company has
begun to sell products to several national retail chains. Some of these chains
have standard contracts which require the Company to accept returns for credit
within standard return periods, usually sixty days. While these return policies
are more generous than the Company usually offers, management has made the
decision to accept the policies and sell the products to these national chains
for both the business volume and exposure such sales generate. These sales have
been taking place since late 2005, and returns have consistently been below
management's expectations. Therefore, no adjustments to the financial statements
have been necessary.
Each month, management reviews the accounts receivable aging report and adjusts
the allowance for bad debts based on that review. The adjustment is made based
on historical experience and management's evaluation of the collectibility of
outstanding accounts receivable over 90 days. At all times, the allowance for
bad debts is large enough to cover all receivables that management is not
certain it will collect, plus another one percent of the net accounts
receivable.
Inventories:
Inventories are stated at the lower of cost or market. Cost is determined by
using the average cost method. The Company maintains a perpetual inventory
system which provides for continuous updating of average costs. The Company
evaluates the market value of its inventory components on a regular basis and
reduces the computed average cost if it exceeds the component's market value.
24
Income Taxes:
The Company accounts for income taxes using the asset and liability method
whereby deferred income taxes are recognized for the tax consequences of
temporary differences by applying statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of certain assets and liabilities. Changes in deferred tax assets and
liabilities include the impact of any tax rate changes enacted during the year.
Through 2006, a valuation allowance was provided for the amount of deferred tax
assets that, based on available evidence, were not expected to be realized.
Beginning in 2007, the Company discontinued the use of the valuation allowance.
Based on its current financial condition, current business and profitability
forecasts, the Company believes that the benefits accrued as deferred tax assets
were more likely than not to be realized in future periods.
Results of Operations:
Three Months Ended March 31, 2008 and 2007::
Net Revenues. Net revenues increased by $10,104,205 or 68.8%, to $24,795,315 in
the three months ended March 31, 2008, as compared to $14,691,110 in 2007. The
increase in revenues was mainly due to the strong relationship with Office Max
that began in 2007. In the first quarter of 2008, sales to Office Max were
$5,763,265, which accounted for over 23% of the Company's revenues for the
quarter.
Gross Margin. Gross margin was $3,106,104 or 12.5% in 2008, as compared to
$2,608,196 or 17.7% in 2007. Gross margins decreased on a percentage basis as
the Company increased sales to larger national retail chains. Additionally,
higher fuels costs on purchases made FOB shipping point led to higher product
costs and subsequently lower gross margins. The Company expects gross margins to
stabilize around 15% and remain there throughout the year., as sales of higher
margin products increase.
Sales and Marketing Expenses. Selling and marketing expenses decreased by
$163,221 to $427,635 in 2008, as compared to $590,856 in 2007. The decrease is
due to the use of outside sales reps. The Company began using outside sales reps
to open new markets in 2006, and as the sales have grown, the commissions grew
through 2007. The Company has not employed a lot of new outside sales reps over
the last few quarters, although that number will grow again when the Honeywell
products are available for sale in 2008. The Company continues to believe this
is a cost effective way to obtain shelf space at various retailers, so the
outside commissions are likely to continue to grow larger as the business
continues to grow and mature.
General and Administrative Expenses. General and administrative expenses
decreased by $173,997 to $1,404,177 in 2008, as compared to $1,578,174 in 2007.
During the first part of 2007, the Company was defending itself against several
lawsuits and investigations filed by various entities accusing the Company of
not processing rebate claims correctly. The Company cooperated with the
25
investigations, but the cost of defending the investigations and fixing the
rebate problems was substantial. The higher expenses incurred in 2007 are
partially offset by the non cash expense of the employee stock option plan in
2008. The Company issued 4,905,000 options to employees in 2007. Approximately
700,000 of the options have been exercised, and 520,000 have been forfeited by
employees who left the Company. The Company recognizes a charge each quarter for
the amortization of the fair value of the options granted.
Bad Debts. The Company recorded a provision for bad debts of $452,090 in the
three months ended March 31, 2008, and $1,435 for the three months ended March
31, 2007. The provision has jumped as the Company has had trouble collecting
from some smaller regional accounts during the quarter. As a result, the Company
has tightened its credit policies to protect against bad debts.
Depreciation and Amortization. Depreciation and amortization of property and
equipment was $12,635 for the three months ended March 31, 2008, as compared to
$23,291 for the three months ended March 31, 2007. The decrease was caused by
the sale of the VoIP assets in December 2007. The Company owns less property and
equipment subject to depreciation.
Income from Operations. The income from operations was $809,567 for the three
months ended March 31, 2008, as compared to $414,437 for the three
months ended March 31, 2007 This is a result of the increased revenues and gross
margins described above.
Miscellaneous Income. The miscellaneous income for the three months ended March
31, 2008 amounted to $400,000 representing unrealized gain on investment in
247MGI which was marked-to-market at $0.02 per share. Miscellaneous income was a
loss of $87,690 for the three months ended March 31, 2007.
Interest Income. Interest income was $12,107 for the three months ended March
31, 2008, as compared to $31,385 for the three months ended March
31, 2007. The decrease, while insignificant, is due to the Company having less
cash on hand due to very tight credit constraints. All available cash is being
used to purchase inventory.
Interest Expense. Interest expense was $385,147 for the three months ended March
31, 2008. Interest expense was $59,715 for the three months ended March 31,
2007. The increase was due to a single factor. The Company's revenues have grown
significantly throughout the last year, as has the need for capital. The Company
is borrowing more money under its credit lines.
Provision for Income Taxes. The Company recognized a provision for income taxes
of $433,180 in 2008. Of that amount, $364,000 was for federal income taxes, and
the balance for state income taxes. The provision is now necessary as net
operating loss carry forwards will no longer offset all of the Company's tax
liabilities.
Deferred Income Tax Benefit/ (Expense): The deferred income tax benefit
26
(expense) was $48,000 for the three months ended March 31, 2008. This is a
result of timing differences between GAAP income and taxable income. The
deferred income tax benefit was $286,858 in the three months ended March 31,
2007. For more information, see footnote 7 to this report.
Net Income. Net income was $460,347 for the three months ended March 31, 2008,
as compared to $522,190 for the three months ended March 31, 2007.
Financial Condition - March 31, 2008:
Liquidity and Capital Resources:
As a general rule, the Company has been totally reliant upon the cash flows from
its operations to fund future growth. In the last few years, the Company has
begun and continues to implement the following steps to increase its financial
position, liquidity, and long term financial health:
In 2005, The Company completed a small private placement, began factoring
invoices to improve cash flows, and converted several million dollars of debt to
equity, all of which improved the Company's financial condition.
In 2006, the Company changed factors to a more beneficial arrangement, and
entered into a Trade Finance Flow facility with GE Capital to fund "Star"
transactions. The agreement provided for GE Capital to guarantee payment, on the
Company's behalf, for merchandise ordered from GE Capital approved manufacturers
in Asia. GE Capital guarantees the payment subject to a purchase order from one
of our customers. The Company accepts delivery of the goods in the US, and then
has the option to either pay for the goods or sell the receivable (from the
customer) to our factor, who pays GE Capital.
In March 2007, the Company announced that it had secured a $12 MM Asset Based
Credit Facility from a California bank to provide funding for future growth.
In September 2007, the Company announced to shareholders that it was negotiating
with several independent third parties to raise capital. The capital would be
used to improve the balance sheet and increase the Company's borrowing
capabilities. The Company further stated that with the large increases in sales
during the year, all of the Company's credit had been utilized, and that the
Company was having difficulties purchasing enough products to maintain the 2007
level of sales growth. As of the date of this report, the Company had not yet
agreed with any outside party on any capital transaction.
In March 2008, Ming Chok, Chief Executive Officer, purchased 776,000 shares of
the Company's common stock in a private placement at $1.25 per share, At the
27
same time, he announced plans to invest approximately another $1 million in the
Company's common stock during the second quarter of 2008.
Operating Activities. The Company utilized cash of $1,136,268 from operating
activities during the three months ended March 31, 2008, as compared to
utilizing cash of $6,865,581 in operating activities during the three months
ended March 31, 2007.
At March 31, 2008, the Company had cash and cash equivalents of $3,560,952, as
compared to $1,848,249 at December 31, 2007.
The Company had working capital of $7,197,033 at March 31, 2008, as compared to
working capital of $6,894,614 at December 31, 2007, resulting in current ratios
of 1.14:1 and 1.16:1 at March 31, 2008 and December 31, 2007, respectively.
Accounts receivable increased to $29,636,628 at March 31, 2008, as compared to
$27,123,985 at December 31, 2007, an increase of $2,512,643. The Company's
provision for doubtful accounts increased to $1,105,663 as of March 31, 2008.
Inventories increased to $15,612,047 at March 31, 2008, as compared to
$12,221,265 at December 31, 2007, an increase of $3,390,782 or 27.7%. Inventory
in transit was $5,062,989 at March 31, 2008.
Accounts payable increased to $19,051,452 at March 31, 2008, as compared to
$14,336,196 at December 31, 2007, an increase of $4,715,256. The increase is due
to the large increases in accounts receivables and inventories.
Accrued liabilities increased to $825,987 at March 31, 2008, as compared to
$789,526 at December 31, 2007, an increase of $36,461 or less than five
percent..
Commercial loans due to UCB decreased to $26,359,020 at March 31, 2008 from
$27,824,490 at December 31, 2007. The decrease is due to payments the Company
made on the Purchase Order financing line.
Due to Gateway Trade Finance was $4,279,110 at March 31, 2008. During March
2008, the Company received a large order from a customer that could not be
financed by its current credit facilities. The Company negotiated for Gateway
Trade Finance to guarantee payment of the production run. The balance has been
partially paid off, but over $2,500,000 is still outstanding as of May 13, 2008.
This balance will be paid off during the second quarter. The Company does not
plan to utilize external financing like this for future purchases due to the
high cost, but may do so on a limited basis if the transaction warrants it.
Principal Commitments:
A summary of the Company's contractual cash obligations as of March 31, 2008, is
as follows:
28
Less than 1
Contractual Cash Obligations year 2-3 years 4-5 years Over 5 years
---------------- ---------------- ------------------- ----------------
Operating Leases $141,797 N/A N/A N/A
Advances from Directors N/A N/A N/A N/A
Notes Payable/ Short Term Loan N/A N/A N/A N/A
Purchase Commitments $5,062,989 N/A
Royalty Payments Due $169,000 $1,178,000 $1,605,000 $448,000
Long Term Debt - - - -
---------------- ---------------- ------------------- ----------------
Total $5,373,786 $1,178,000 $1605,000 $448,000
================ ================ =================== ================
|
At March 31, 2008, the Company did not have any long term purchase commitment
contracts to honor. The only purchase commitments were for inventory already
purchased and in transit of $5,062,989.
At March 31, 2008, the Company did not have any material commitments for capital
expenditures or have any transactions, obligations or relationships that could
be considered off-balance sheet arrangements.
On February 8, 2007, SOYO Group announced that the Company had entered into a
licensing agreement with Honeywell International Inc., effective January 1st
2007, under which SOYO will supply and market certain consumer electronics
products under the Honeywell Brand.
The agreement is for a minimum period of 6.5 (six point five) years and calls
for the payment of MINIMUM royalties by SOYO to Honeywell International Inc.
totaling $3,840,000 (Three Million, Eight Hundred and Forty Thousand Dollars
U.S.). Sales levels in excess of minimum agreed targets will result in
associated increases in the royalty payments due. Minimum royalty payments due
under the agreement are $424,000 in 2008. Although the Company signed the
agreement in 2007 and no sales of Honeywell branded products were made in 2007,
$383,000 in royalties were paid to Honeywell International Inc. in 2007, and
$255,000 has been paid in 2008.
Off-Balance Sheet Arrangements:
At March 31, 2008, the Company did not have any transactions, obligations or
relationships that could be considered off-balance sheet arrangements.
Commitments and Contingencies:
At March 31, 2008, the Company did not have any material commitments for capital
expenditures.
Recent Accounting Pronouncements:
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159") which permits entities
to choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. SFAS 159 was
29
effective for the Company on January 1, 2008. The Company does not expect any
material impact from applying SFAS 159.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Issues No. 157, "Fair Value Measurements"
("SFAS 157"), which defines the fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements. This
statement was effective for the Company on January 1, 2008. The Company does not
expect any material impact from applying SFAS 157.
In December 2007, the FASB issued Statement No. 141 (revised 2007), "Business
Combinations." The new standard requires the acquiring entity in a business
combination to recognize all (and only) the assets acquired and liabilities
assumed in the transaction; establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed; and
requires the acquirer to disclose to investors and other users all of the
information they need to evaluate and understand the nature and financial effect
of the business combination. This statement is effective for fiscal years
beginning January 1, 2009 and the Company believes this will have no impact on
its financial statements.
In December, 2007, the FASB issued Statement No. 160, "Noncontrolling Interests
in Consolidated Financial Statements--an amendment of ARB No. 51." This
statement establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. This
statement is effective prospectively, except for certain retrospective
disclosure requirements, for fiscal years beginning after December 15, 2008. The
Company believes this will have no impact on its financial statements.
In March 2008, the Financial Accounting Standards Board (FASB) issued Statement
No. 161, "Disclosures about Derivative Instruments and Hedging Activities." This
statement requires companies with derivative instruments to disclose information
that should enable financial statement users to understand how and why a company
uses derivative instruments, how derivative instruments and related hedged items
are accounted for under FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and how derivative instruments and related
hedged items affect a company's financial position, financial performance and
cash flows. This statement is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008 and the
Company believes this will have no impact on its financial statements.
30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Through December 31, 2007, Company did not have any market risk with respect to
such factors as commodity prices, equity prices, and other market changes that
affect market risk sensitive investments. On December 31, 2007, the Company sold
all of the assets related to the VoIP business to 247MGI of Fort Lauderdale,
Florida for 40,000,000 shares of 247MGI's common stock. The stock is traded on
the OTC pink sheets. The Company has no plans to dispose of the 247MGO stock,
and intends to hold it as a long term investment.
The Company's debt obligations at March 31, 2008 were primarily short-term in
nature. As of March 31, 2008, The Company does not have any long term debt.
However, the Company does have $26,359,020 of debt at a variable interest rate.
As a result, the Company does have some financial risk from an increase in
interest rates. To the extent that the Company arranges new interest-bearing
borrowings in the future, an increase in current interest rates would cause a
commensurate increase in the interest expense related to such borrowings.
Through 2006, The Company had absolutely no foreign currency risk, as its
revenues and expenses, as well as its debt obligations, are denominated and
settled in United States dollars. In 2007, the Company began selling product to
a Canadian vendor who paid in Canadian dollars. The Company believes that risk
is immaterial to its overall business, and has no plans to hedge that risk in
2008. If the risk grows, or the Company begins to sell product to other
customers in non US dollar related transactions, the Company may reevaluate that
position.
4. CONTROLS AND PROCEDURES
Evaluation of Disclosure and Control Procedures
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rules 13a-15(f) and
15d-15(f) of the Exchange Act. Our internal control system was designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes, in accordance
with United States generally accepted accounting principles. Because of inherent
limitations, a system of internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate due to change in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
An internal control material weakness is a significant deficiency, or
combination of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the financial statements will not be
prevented or detected.
Our management, including our principal executive officer and principal
accounting officer, conducted an evaluation of the effectiveness of our internal
controls as of December 31, 2007, and this assessment identified material
weaknesses in our internal control over the financial reporting process. In
particular, our accounting system can not be relied upon to properly value
inventory, or to generate timely and accurate financial information to allow for
the preparation of timely and complete financial statements. The system's output
has been reviewed, and our financial statements for the period ended March 31,
2008 properly reflect the Company's financial position.
In making the assessment of internal control over financial reporting management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control-Integrated Framework. Because of
31
the material weakness described in the preceding paragraph, our management
concluded that our internal control over financial reporting was not effective
as of March 31, 2008.
We are actively engaged in the implementation of remediation efforts to address
the material weakness in internal control over financial reporting. These
remediation efforts include devising and implementing effective controls to
review and monitor the system output, and to replace our current accounting
software with new software. Management hired experts to assist in the evaluation
and implementation of new accounting software. The evaluation was completed, the
software has been paid for, and significant customization has been performed to
adapt the software to the Company's business. All employees, managers and other
system users have been trained and tested on the use of the new software. The
Company will begin parallel testing in the next few weeks, and the software will
be "live" during the second quarter of fiscal year 2008.
The Company believes that once the new software is installed and operational,
all significant deficiencies will have been addressed and corrected.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934) during the fiscal quarter ended April 1, 2008 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 26, 2007, the Company filed a lawsuit against Astar Electronics
USA, Inc., KXD Technology, Inc. and Does 1 - 25 in the Superior Court of
California for the County of Los Angeles, Central District (Case No. BC365349).
The Company alleges claims for breach of contract, fraud, and tortuous
interference with economic relations and seeks compensatory and punitive
damages. Both named defendants were served on January 26, 2007. On May 17, 2007,
the Company filed a First Amended Complaint against Defendants alleging
additional claims for trademark infringement, trademark dilution, unfair
competition and false advertising. In or about June 2007, Astar Electronics USA,
Inc. and KXD Technology, Inc. answered and KXD Technology, Inc. filed a
cross-complaint against the Company and two of its officers, Nancy Chu and Ming
Chok alleging claims for breach of contract, fraud, tortuous interference with
economic relations and common counts. In or about July 2007, Astar Electronics
USA, Inc. filed a notice of dissolution with the California Secretary of State.
On August 15, 2007, KXD Technology, Inc. filed for bankruptcy protection in the
United States Bankruptcy Court, Central District of California. On September 13,
2007, the Court entered an order sua sponte to stay the entire action pending
the resolution of the bankruptcy proceeding. No trial date has been set.
On November 11, 2007, the Company filed a lawsuit against MDG Computers Canada,
Inc. in the Ontario Superior Court of Justice in Canada. The Company alleges
claims for trademark infringement, passing off and false designation related to
the sales of televisions by MDG Computers Canada, Inc. bearing the Company's
trademarks. On December 18, 2007, MDG Computers Canada, Inc. filed an answer to
32
the complaint. The Company shall continue to vigorously pursue its claims
against MDG Computers Canada, Inc. No trial date has been set.
On June 30, 2006, a lawsuit was filed in the United States District Court,
Central District of California, Eastern Division, entitled Robert Lewis, Jr. v.
Soyo Group, Inc., et al., Case No. EDCV 06-699 VAP (JWJx). The case sought class
action status and alleged failures to timely pay rebates to purchasers of Soyo
products allegedly in violation of unfair competition laws, the California
Consumer Legal Remedies Act and contracts with purchasers. The plaintiff sought
disgorgement of all amounts obtained by the Company as a result of the alleged
misconduct, plus actual damages, punitive damages and attorneys' fees and costs.
The Company agreed to settle the matter, the court approved the settlement, and
the Company's final settlement payment was paid on April 2, 2008.
There are no other legal proceedings that have been filed against the Company.
None of the Company's directors, officers or affiliates, or owner of record of
more than five percent (5%) of its securities, or any associate of any such
director, officer or security holder, is a party adverse to the Company or has a
material interest adverse to the Company in reference to pending litigation.
ITEM 1A: RISK FACTORS
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended December 31, 2007, which could
materially affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-K are not the only risks facing our
Company. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
33
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of exhibits required to be filed as part of this report is set forth in
the Index to Exhibits, which immediately precedes such exhibits, and is
incorporated herein by reference.
(b) Reports on Form 8-K
None
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.
SOYO GROUP, INC.
(Registrant)
DATE: May 15, 2008 By: /s/ Ming Tung Chok
-----------------------
Ming Tung Chok
President and Chief
Executive Officer
DATE: May 15, 2008 By: /s/ Nancy Chu
-----------------------
Nancy Chu
Chief Financial Officer
DATE: May 15, 2008 By /s/ Jay Schrankler
--------------------------
Name: Jay Schrankler
Title: Director
DATE: May 15, 2008 By /s/ Chung Chin Keung
--------------------------
Name: Chung Chin Keung
Title: Director
DATE: May 15, 2008 By /s/ Henry Song
--------------------------
Name: Henry Song
Title: Director
|
34
INDEX TO EXHIBITS
Exhibit
Number Description of Document
------ -----------------------
10.6 SOYO Group Agreement with UCB Bank, dated March 2, 2007
23.1 Consent of Independent Registered Public Accounting Firm, Vasquez
& Company LLP
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 - Ming Tung Chok
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 - Nancy Chu
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - Ming Tung Chok
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - Nancy Chu
|
35
Soyo (CE) (USOTC:SOYO)
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Soyo (CE) (USOTC:SOYO)
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