SOYO Group, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
September 30 December 31
2007 2006
------------ ------------
(Unaudited) (Audited)
ASSETS
Current Assets
Cash and cash equivalents $ 2 ,635,546 $ 1,501,040
Accounts receivable, net of allowance for doubtful accounts of
$ 665,537 and $388,958 at September 30, 2007 and December 31, 2006,
respectively 31,987,044 16,467,135
Other receivables 355,688
Inventories, net of allowance for inventory losses of $168,600 and
$88,114 at September 30, 2007 and December. 31, 2006, respectively 16,618,203 7,792,621
Prepaid expenses 105,696 36,633
Deferred income tax assets 1,547,746 177,177
Deposits 557,548 243,095
Total current assets 53,807,471 26,217,701
------------ ------------
Property and equipment 744,071 711,015
Less: accumulated depreciation and amortization (227,459) (159,300)
------------ ------------
516,612 551,715
------------ ------------
Total Assets $ 54,324,083 $ 26,769,416
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 19,904,651 $ 16,073,617
Accrued liabilities 1,091,651 539,767
Business loan 26,094,807 3,588,403
Short term loan -- 100,000
------------ ------------
Total current liabilities 47,091,109 20,301,787
Long term payable -- 3,735,198
------------ ------------
Total liabilities 47,091,109 24,036,985
------------ ------------
|
EQUITY
Class B Preferred stock, $0.001 par value,
authorized - 10,000,000 shares, Issued
and outstanding - 2,797,738 shares in 2007 and 2006 2,114,640 1,918,974
Preferred stock backup withholding (208,645) (149,945)
Common stock, $0.001 par value.
Authorized - 75,000,000 shares, issued and outstanding --
49,039,156 shares (49,025,511 shares - 2006) 49,039 49,026
Additional paid-in capital 19,042,780 17,866,531
Accumulated deficit (13,764,840) (16,952,155)
------------ ------------
Total shareholders' equity 7,232,974 2,732,431
------------ ------------
Total Liabilities and Shareholders' Equity $ 54,324,083 $ 26,769,416
============ ============
|
See accompanying notes to unaudited condensed
consolidated financial statements.
SOYO Group, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended September 30
---------------------------
2007 2006
------------ -----------
Net revenues $ 33,435,184 $ 10,005,084
Cost of revenues 29,804,822 7,771,723
------------ ------------
Gross margin 3, 630,362 2,233,361
------------ ------------
Costs and expenses:
Sales and marketing (315,296) 231,272
General and administrative 1,750,423 1,427,441
151,541
Bad debts 20,635
22,461
Depreciation and amortization 27,107
------------ ------------
Total cost and expenses 1,609,129 1,706,455
------------ ------------
Income from operations 2,021,233 526,906
------------ ------------
Other income (expenses):
------------
Interest income 18,037
Interest expense (440,277) (200,939)
244,454
Other income (expenses) (6,399)
------------ ------------
Other income (expenses) - net (177,786) (207,338)
------------ ------------
Income before provision (benefit) for income taxes 1,843,447 319,568
Provision (benefit) for income taxes --
Current income tax 78,379 --
(744,789)
Deferred income tax --
------------ ------------
Net income 2,509,857 319,568
55,491
Less: Dividends on Convertible Preferred Stock 68,744
------------ ------------
Net income attributable to common shareholders $ 2,441,113 $ 264,077
============ ============
Net income per common share - basic and diluted $0.05/$0.05 $0.01/$0.01
Weighted average number of shares of 49,039,156/ 49,025,511/
common stock outstanding - basic and diluted 54,163,754 58,591,295
|
See accompanying notes to unaudited condensed
consolidated financial statements.
SOYO Group, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
(Unaudited)
Nine months ended September 30
----------------------------
2007 2006
------------ ------------
Net revenues $ 72,328,689 $ 32,340,785
Cost of revenues 62,287,039 26,149,583
------------ ------------
Gross margin 10,041,650 6,191,202
------------ ------------
Costs and expenses:
Sales and marketing 1,400,442 628,286
General and administrative 5,496,795 4,182,118
Bad debts 278,042 123,819
Depreciation and amortization 68,161 79,496
------------ ------------
Total cost and expenses 7,243,440 5,013,719
------------ ------------
Income from operations 3,144,672 1,177,483
------------ ------------
Other income (expenses):
Interest income 66,831 6,607
Interest expense (822,158) (351,408)
Other income (expenses) 139,888 (1,115)
------------ ------------
Other income (expenses) - net (615,439) (345,916)
------------ ------------
Income before provision (benefit) for income taxes 2,182,771 831,567
Provision (benefit) for income taxes
Current income tax 271,239 --
Deferred income tax (1,471,449) --
------------ ------------
Net income 3,382,981 831,567
Less: Dividends on Convertible Preferred Stock 195,667 157,945
------------ ------------
Net income attributable to common shareholders $ 3,187,314 $ 673,622
============ ============
Net income per common share - basic and diluted $0.06/$0.06 $0.01/$0.01
Weighted average number of shares of 49,039,156/ 49,025,511/
Common stock outstanding - basic and diluted 54,163,754 58,591,295
|
See accompanying notes to unaudited condensed
consolidated financial statements.
SOYO Group, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
(Unaudited
Nine months ended September 30
----------------------------
2007 2006
------------ ------------
OPERATING ACTIVITIES
Net Income $ 3,382,981 $ 831,567
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and Amortization 68,159 79,496
Non cash payments for director's compensation -- 37,110
Non cash payments for public relations and promotion 6,825 82,770
Stock based compensation 1,169,437 398,484
Bad debts 278,042 123,819
Payment of long-term debt (3,735,198) --
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (15,797,951) 151,682
Other Receivables (355,688) --
Inventories (8,825,582) 2,839,171
Prepaid expenses (69,063) 20,984
Deposits (314,453) (377,806)
Deferred income tax asset (1,370,569) --
Increase (Decrease) in:
Accounts payable 3,831,034 (2,432,944)
Accrued liabilities 551,884 (1,004,926)
------------ ------------
Net cash provided by (used in) operating activities (21,180,142) 749,407
------------ ------------
INVESTING ACTIVITIES
Purchase of property and equipment (33,056) (109,448)
------------ ------------
Net cash used in investing activities (33,056) (109,448)
------------ ------------
FINANCING ACTIVITIES
Payment of Note Payable -- (65,000)
Proceeds from business loan-net 22,506,404 --
Payment of backup withholding tax on
accreted dividends on preferred stock (58,700) (47,384)
Payment of short-term loan (100,000) --
------------ ------------
Net cash provided by (used in) financing activities 22,347,704 (112,384)
------------ ------------
CASH AND CASH EQUIVALENTS
Net Increase (Decrease) 1,134,506 527,575
At beginning of Period 1,501,040 828,294
------------ ------------
At End of Period $ 2,635,546 $ 1,355,869
============ ============
|
Supplemental disclosure of cash flow information
Cash paid for interest 822,158
Cash paid for income taxes 21,503
Non cash investing and financing activities:
Conversion of Business Loan of $913,750 and Accrued 965,302
Interest of $51,552 to common stock
Conversion of Accounts Payable of $554,871 to common stock 554,871
Accretion of discount on Class B preferred stock 195,666 157,945
Director's Compensation --
Stock Option Compensation 1,169,437
|
See accompanying notes to unaudited condensed
consolidated financial statements.
SOYO Group, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Nine Months Ended September 30, 2007 and 2006
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.
In conjunction with this transaction, SOYO Nevada transferred $12,000,000 of
accounts payable to SOYO Taiwan to long-term payable, without interest, due
December 31, 2005. During the three months ended March 31, 2004, the Company
agreed with a third party to convert the long-term payable into convertible
preferred stock.
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.
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
September 30, 2007, the results of operations for the three and nine months
ended September 30, 2007 and 2006, and cash flows for the nine months ended
September 30, 2007 and 2006. The condensed consolidated balance sheet as of
December 31, 2006 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/A for the fiscal year ended December 31,
2006, as filed with the Securities and Exchange Commission.
The results of operations for the three and nine months ended September 30, 2007
are not necessarily indicative of the results of operations to be expected for
the full fiscal year ending December 31, 2007. 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 fourth quarter.
Business - The Company sells products under four different product lines: 1)
Computer products ; 2) Consumer Electronics; 3) Communications Equipment and
Services (VoIP); and 4) Furniture.
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.
During the second and third quarters of 2007, the Company discussed with
multiple third parties the possibility of selling the VoIP division, part of the
communications equipment product line. . The Company's intent is to sell all of
the assets of the division. As of the date of this report, a preliminary term
sheet has been signed by both parties, and due diligence is taking place. The
Company is still negotiating the potential sale, and there is no guarantee the
sale will be completed in the near future.
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. Negotiations were concluded between the parties, and
the final agreement was signed by authorized Honeywell Executives in January
2007. The agreement was counter-signed by SOYO Group Inc.'s CEO on February 8
2007.
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 are $353,000 through December
31, 2007, and $469,000 through December 31, 2008. As of September 30, 2007, the
Company has paid $243,000 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,
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.
The first nine months of the contract were spent developing product
specifications and marketing launch plans for the first products to be released.
The Company plans a 2007 release of a 1.8 inch portable storage drive with data
encryption. Additionally, there will be a 2007 release of a series of LCD
monitors, beginning with a 22 inch wide model, and featuring height, swivel,
tilt and 90 degree rotations, with a built in web cam. The Company is currently
working on a larger screen television launch, which is currently projected for a
2008 release. Features of the larger screen TV are considered confidential, and
will not be released to the public until the television is ready for launch.
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.
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 per share is
computed by dividing net income 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 in the money stock options owned by employees.
As of September 30, 2007, potentially dilutive securities consisted of 3,315,260
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 September 30, 2007, 3,382,918 shares of
common stock were issuable upon conversion of the Class B Convertible Preferred
Stock based on the $0.98 per share conversion price.
As of September 30, 2006, 9,565,784 shares of common stock were issuable upon
conversion of the Class B Convertible Preferred Stock based on the $0.32 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
September 30, 2007, both the 2005 awards and the 2007 awards were fully in the
money, and therefore were considered as part of the calculation of the fully
diluted shares. Therefore, the 2005 awards, the 2007 awards and the 3,246,517
shares of Class B Convertible Preferred Stock are all considered potentially
dilutive securities. Based on the above, the filly diluted shares can be
calculated as follows:
Shares outstanding at 9/30/2007 49,039,156
Add: Conversion of Preferred Stock 3,382,918
Add: Vested in the money options 1,741,680
------------
Total fully diluted shares at 9/30/2007 54,163,754
============
|
Comprehensive Income (Loss) - The Company displays 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 nine
months ended September 30, 2007 and 2006.
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-Based Compensation - Effective January 1, 2006, the Company has adopted
Statement of Financial Accounting Standards No. 123 (R), "Share Based Payment"
("SFAS No. 123(R)"). Under SFAS 123(R), stock-based awards granted prior to
January 1, 2006 will be charged to expense over the remaining portion of their
vesting period. These awards will be charged to expense under the straight-line
method using the same fair value measurements which were used in calculating pro
forma stock-based compensation expense under SFAS 123. For stock-based awards
granted on or after January 1, 2006, the Company determined stock-based
compensation based on the fair value method specified in SFAS 123(R), and
amortized stock-based compensation expense on the straight-line basis over the
requisite service period.
SFAS 123(R) requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
initial estimates. For further information, refer to note 5, Stock Based
Compensation.
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 in accordance with contractual agreements
with the customer; generally at the time the product is shipped and in some
cases 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.
2. Short Term Loan
In October 2005, the Company borrowed $165,000 from an unrelated third party for
working capital purposes. As of December 31, 2006, $65,000 of the loan had been
repaid, and $100,000 was still outstanding. The balance was paid off during the
first quarter of 2007.
3. Business Loan
------------------------------------------------------- -----------------
At September 30, 2007:
------------------------------------------------------- -----------------
Asset Based Financing Due to UCB $15,257,100
------------------------------------------------------- -----------------
Purchase Order Financing Due to UCB 10,837,707
------------------------------------------------------- -----------------
Total Due to UCB $26,094,807
------------------------------------------------------- -----------------
|
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 from $12 million to $14 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. For reporting purposes, the loan has been segregated from other
payables and reported as a separate line item. As of September 30, 2007, the
amount SOYO owed to UCB was $15,257,100. The amount temporarily exceeded the
maximum loan balance, with the permission of the lender, pending receipt of
several payments.
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. As of September 30, 2007, the amount SOYO owed to UCB was
$10,837,707.
4. Equity-Based Transactions
Effective December 30, 2003, 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. In substance, SOYO Taiwan
forgave debt in an amount equal to the difference between the $12,000,000 and
the value of the preferred stock issued in settlement of this debt. This
forgiveness of debt was treated as a capital transaction. Payment from the third
party was received by SOYO Taiwan in February and March 2004. An agreement was
reached during the three months ended March 31, 2004 whereby 2,500,000 shares of
Class B preferred stock would be issued by the Company to the unrelated third
party in exchange for the long-term payable.
The Class B 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 preferred stock has no voting rights. The shares of Class B preferred
stock are convertible, in increments of 100,000 shares, into shares of common
stock based on the $1.00 stated value, 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 preferred stock may be converted into common stock in any one year. On
December 31, 2008, any unconverted shares of Class B 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 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 preferred stock has
unlimited piggy-back registration rights, and is non-transferable.
The Company recorded the issuance of the Class B preferred stock at its fair
market value on March 31, 2004 of $1,304,000, which was determined by an
independent investment banking firm. The $10,696,000 difference between the
$12,000,000 long-term payable and the $1,304,000 fair market value of the Class
B preferred stock was credited to additional paid-in capital. The difference
between the fair market value and the liquidation value of the Class B preferred
stock is being recognized as an additional dividend to the Class B preferred
stockholder, and as a reduction to earnings available to common stockholders,
and will be accreted from April 1, 2004 through December 31, 2008.
5. Stock-Based Compensation
On March 7, 2005, the Company registered its 2005 Stock Compensation Plan on
Form S-8 with the Securities and Exchange Commission, registering on behalf of
our employees, officers, directors and advisors up to 5,000,000 shares of our
common stock purchasable by them pursuant to common stock options granted under
our 2005 Stock Compensation Plan. The plan was approved by shareholder vote
during a special meeting of shareholders on February 17, 2006. However, since
Mr. Chok and Ms. Chu, husband and wife, are directors who own more than 50% of
the Company, shareholder approval is essentially a formality; hence the grant
date of the stock options is July 22, 2005.
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 will vest and be available for
purchase on July 22, 2006, one third on July 22, 2007, and one third on July 22,
2008. The grants will expire if unused on July 22, 2010.
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 will vest on February 2,
2008, and one third on February 2, 2009. The grants will expire if unused on
February 2, 2012. An additional 100,000 options were issued during the 3rd
quarter to new employees. All options were issued to employees on the 91st day
of their employment at the end of their probationary employment period. All
options were issued at market value on the day of the grant.
As of September 30, 2007, none of the options granted in 2005 or 2007 had been
exercised. As of September 30, 2007, 10 employees who had been granted stock
options in 2005 had left the Company, and grants totaling 462,000 options were
returned to the Company. Additionally, Ming Chok and Nancy Chu, the CEO and CFO,
who had each been granted 600,000 options in 2005, forfeited those options and
returned them to the Company. Four employees who were granted stock options in
2007 had left the Company as of the date of this report, and 145,000 options
were returned to the Company.
For the nine months ended September 2007 and 2006, the Company recorded
$1,270,317 and $398,484, respectively, in compensation costs relating to stock
options granted to employees. The amounts recorded represent equity-based
compensation expense related to the options that were issued in 2005 and 2007.
The compensation costs are based on the fair value at the grant date. There was
no such expense recorded during our fiscal year 2005.
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 weighted average fair value of the options granted in July 2005 was
approximately $1.3 million.
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 4.820%, expected life of five (5) years and expected volatility
129%. The weighted average fair value of the options granted in February 2007
was approximately $1.4 million.
6. Income Taxes
Through 2006, the Company used net operating loss carryforwards to offset all
income taxes payable. As of December 31, 2006, the Company had federal operating
loss carryforwards of approximately $4,195,130 expiring in various years through
2024, which can be used to offset future taxable income, if any. As of December
31, 2006, there were no state operating loss carryforwards available to the
Company.
As a result, the Company recognized income tax expense of $78,379 during the
quarter, and $271,239 during the nine month period ended September 30, 2007.
Additionally, the Company recognized deferred income tax benefit of $744,789
during the quarter and $1,471,449 during the nine month period ended September
30, 2007, resulting from timing differences between taxable income and US GAAP.
7. Significant Concentrations
a. Customers
The Company sells to both distributors and retailers. Revenues through such
distribution channels are summarized as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2007 2006 2007 2006
---------------- ----------------- ------------------- -------------------
Revenues:
Distributors $15,997,750 $7,570,129 $42,134,450 $23,113,748
Retailers 14,652,522 2,068.429 23,420,813 8,264,126
Others 2,784,912 366,526 6,773,426 962,911
---------------- ----------------- ------------------- -------------------
Total $33,435,184 $10,005,084 $72,328,689 $32,340,785
---------------- ----------------- ------------------- -------------------
|
During the three months ended September 30, 2007 and 2006, the Company offered
price protection to certain customers under specific programs aggregating
$299,853 and $95,752, respectively, which reduced net revenues and accounts
receivable accordingly.
During the nine months ended September 30, 2007 the Company offered price
protection to certain customers under specific programs aggregating $840,005,
which reduced net revenues and accounts receivable accordingly.
During the nine months ended September 30, 2007, the following customers
accounted for more than 10% of net revenues:
Customer Revenues
Office Max $8,207,597
b. Geographic Segments
Financial information by geographic segments is summarized as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2007 2006 2007 2006
---------------- ----------------- --------------------- -----------------
Revenues:
United States $25,048,776 $5,292,158 $53,772,219 $22,751,676
Canada 3,651,806 1,660,253 7,367,771 2,500,052
Central and South 1,993,723 3,046,713 7,193,625 6,790,067
America
Other 2,740,879 5,960 3,995,074 298,990
---------------- ----------------- --------------------- -----------------
Total $33,435,184 $10,005,084 $72,328,689 $32,340,785
---------------- ----------------- --------------------- -----------------
|
c. Product lines
Three Months Ended September 30, Nine Months Ended September 30,
2007 2006 2007 2006
----------------- ---------------- ---------------- -----------------
Revenues:
Computer Products $14,340,348 $ 1,760,853 $38,115,666 $ 4,862,719
Consumer Electronics 19,032,619 7,803,431 34,088,058 27,093,098
VoIP 21,557 440,800 65,823 384,968
Furniture 40,660 N/A 59,142 N/A
----------------- ---------------- ---------------- -----------------
Total $33,435,184 $10,005,084 $72,328,689 $32,340,785
----------------- ---------------- ---------------- -----------------
|
d. Suppliers
During 2007, no more than 26% of the products distributed by the SOYO Group were
supplied by any third party vendor. SOYO Group, Inc. is currently establishing
new partnerships with other OEM manufacturers in the North America and Asia
Pacific Regions in order to provide innovative products for consumers, and to
reduce reliance on any one supplier.
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 September 30,
2007 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 September 30, 2007 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.
Background and Overview:
Historically, the Company has sold computer components and peripherals to
distributors and retailers primarily in North, Central and South America. The
Company operated in one business segment. A substantial majority of the
Company's products were purchased from SOYO Taiwan pursuant to an exclusive
distribution agreement effective through December 31, 2005, and were sold under
the "SOYO" brand.
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. During October 2002, certain members of 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 VWHC common stock. Accordingly, SOYO Taiwan and SOYO
Nevada management currently own 34,209,548 shares of the Company's common stock
outstanding.
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, for financial
reporting purposes, 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.
Unless the context indicates otherwise, SOYO and its wholly-owned subsidiary,
SOYO Nevada, are referred to herein as the "Company".
In 2004, the Company decided to make a significant change in the core offerings
for sale. The emphasis switched from motherboards and hardware to peripherals,
leading to a more diverse product offering. Also in 2004, the Company introduced
its VoIP products. In 2005, SOYO Group, Inc. entered the LCD display market with
the introduction of 17- and 19-inch LCD monitors, and 32 and 37 inch LCD
televisions. Both products were introduced in the second quarter of 2005.
Currently, the Company sells products under three different product lines: 1)
Computer Components and Peripherals; 2) Consumer Electronics; and 3)
Communications Equipment and Services. The products are sold to distributors and
retailers primarily in North, Central and South America.
Financial Outlook:
For the three months ended September 30, 2007, the Company earned $2,441,113, or
$0.05 per share before dividends on preferred stock and $3,187,314 for the nine
months ended September 30, 2007 or $0.06 per share before dividends on preferred
stock, The large increases in sales of LCD televisions and LCD monitors were
primarily responsible for the large increase in net revenues.
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, 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 from $12 million to $14 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. For reporting purposes, the loan has been segregated from other
payables and reported as a separate line item. As of September 30, 2007, the
amount SOYO owed to UCB was $15,257,100. The amount temporarily exceeded the
maximum loan balance, with the permission of the lender, pending receipt of
several payments.
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. As of September 30, 2007, the amount SOYO owed to UCB was
$10,837,707.
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.
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. The Company records estimated reductions to
revenues 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 in 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
collectibles is probable.
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 considered 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.
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.
Income Taxes:
The Company records a valuation allowance to reduce its deferred tax assets to
the amount that is more likely than not to be realized. In the event the Company
was to determine that it would be able to realize its deferred tax assets in the
future in excess of its recorded amount, an adjustment to the deferred tax
assets would be credited to operations in the period such determination was
made. Likewise, should the Company determine that it would not be able to
realize all or part of its deferred tax assets in the future, an adjustment to
the deferred tax assets would be charged to operations in the period such
determination was made.
Results of Operations:
Three Months Ended September 30, 2007 and 2006:
Net Revenues. Net revenues increased by $23,430,100 or 234%, to $33,435,184 in
the three months ended September 30, 2007, as compared to $10,005,084 in 2006.
The increase in revenues can be attributed mainly to sales of LCD monitors in
the United States, and LCD televisions sold under the Prive line in Canada. Our
sales of LCD computer monitors grew significantly during the period, as
OfficeMax, a large national retailer, featured the SOYO brand 24" monitor in its
retail ads during the period. For a period of time within the quarter, the SOYO
24" LCD monitor was the top selling computer monitor in the United States, and
was available exclusively at OfficeMax. The strong performance of the LCD
televisions was due primarily to the Prive line sold by Wal Mart Canada.
Gross Margin. Gross margin was $3,630,362 or 10.9% in 2007, as compared to
$2,233,361 or 22.3% in 2006. As noted above, sales of the Company's LCD monitors
and LCD television products were very strong. These are among the lower margin
products that the Company sells. Sales of higher margin products, such as the
Levello furniture line, were in line with the Company's expectations. As a
result, gross margin, when expressed as a percentage of sales, was lower than
anticipated, but the gross margin, when expressed in dollars, was well above our
forecast.
Sales and Marketing Expenses. Selling and marketing expenses were ($315,296)
during the quarter, as compared to $231,272 in 2006. The Company was able to
negotiate a one time $1,100,000 reduction of the purchase price of LCD
televisions for marketing and advertising funds. The Company has purchased over
$12,000,000 of product from this supplier in 2007. Without the one time credit,
sales and marketing expenses would have been approximately $785,000, a large
increase over the $231,000 spent in the same period in 2006. The increase was
due to a higher amount of commissions paid to outside sales representatives for
getting the Company's products placed in premium locations for sale. The Company
is expects that this expense will continue to increase as revenues increase.
General and Administrative Expenses. General and administrative expenses
increased by $322,982 to $1,750,423 in 2007, as compared to $1,427,441 in 2006.
Labor costs and costs related to stock options have increased substantially as
revenues have grown and additional staff was needed. Those costs have been
partially offset by significantly lower attorney's fees. The Company has
retained a law firm to handle day to day matters, which has substantially
reduced the need for outside counsel. Additionally, the Company was involved in
several lawsuits in 2006, causing high legal fees.
Bad debts. The Company recorded a provision for doubtful accounts of $151,541 in
the three months ended September 30, 2007. The Company recorded a provision for
doubtful accounts of $20,635 for the three months ended September 30, 2006. The
increase of $130,906 is due to the large increase in receivables balance. As of
September 30, 2007, the Company believes its provision for doubtful accounts is
adequate.
Depreciation and Amortization. Depreciation and amortization of property and
equipment was $22,461 for the three months ended September 30, 2007, as compared
to $27,107 in 2006. Depreciation expense is lower than a year ago since the
Company is no longer depreciating certain assets in China that are part of the
VoIP business. The assets were written down to fair value in 2006 and are no
longer being depreciated.
Income from Operations. The income from operations was $2,021,233 for the three
months ended September 30, 2007, as compared to $526,906 for the three months
ended September 30, 2006. This is a result of the increased revenues and the
reduced selling and marketing expenses.
Interest Income. Interest income was $18,037 for the three months ended
September 30, 2007. There was no interest income for the three months ended
September 30, 2006.,
Interest Expense. Interest expense was $440,277 for the three months ended
September 30, 2007. Interest expense was $200,939 for the three months ended
September 30, 2006. The increase was due to a single factor. The Company now has
access to a large asset based credit line to finance inventory purchases and
future growth. The large sales increases, market penetration, and improved
performance would not have happened without the asset based line and subsequent
interest expense.
Provision for Income Taxes. The Company recognized a provision for income taxes
of $78,379 for the three months ended September 30, 2007. There was no provision
in 2006. 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 Gain (Expense): The deferred income tax benefit (expense)
was $744,789 for the three months ended September 30, 2007. This is a result of
timing differences between GAAP income and taxable income, and is mainly
attributable to the net operating loss carryforward. There was no deferred
income tax gain or loss in the three months ended September 30, 2006.
Net Income. Net income was $2,441,113 for the three months ended September 30,
2007, as compared to $264,077 for the three months ended September 30, 2006.
Increases in sales and marketing expenses, as well as increased labor costs
offset the higher gross margin earned in the period.
Nine Months ended September 30, 2007 and 2006:
Net Revenues. Net revenues increased by $39,987,904 or 124%, to $72,328,689 in
the nine months ended September 30, 2007, as compared to $32,340,785 in 2006.
The increase in revenues was mainly due to new markets being opened by the sales
department for LCD television sales, large sales of computer monitors through
Office Max, a national chain, and increased sales in Latin America. The largest
increase in LCD television sales was in Canada, where the Prive line developed
by the Company was well received, and sold primarily through Wal Mart.
Gross Margin. Gross margin was $10,041,650 or 13.9% in 2007, as compared to
$6,191,202 or 19.1% in 2006. Gross margins increased on a dollar basis as
revenues more than doubled over the same period in 2006. Gross margin decreased
on a percentage basis as the large increase in revenues was due to very high
sales to national retail chains of lower margin products. These sales were good
for the Company as they were profitable and promoted the SOYO and Prive brand
names, even though margins were below the Company's target. Sales of higher
margin products such as the Levello furniture line met expectations, and
contributed to increasing the blended gross margin on all products.
Sales and Marketing Expenses. Selling and marketing expenses increased by
$772,156 to $1,400,442 in 2007, as compared to $628,286 in 2006. The increase is
due to a number of factors. The first component is higher commissions to outside
sales representatives. The Company began using outside sales representatives to
open new markets in 2006, and as the sales have grown, the commissions have
grown. The Company believes 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 sales continue to grow. Additionally, the Company launched the Prive
television line for Wal Mart Canada during the period, as well as the Levello
furniture line. The start up costs of both lines are included in the sales and
marketing expenses. Finally, a large component of the sales and marketing
expenses is the initial cost of creating and launching the Honeywell consumer
electronics products. These factors are offset by a $1,100,000 reduction in the
purchase price of LCD televisions from one of the Company's suppliers.
General and Administrative Expenses. General and administrative expenses
increased by $1,314,677 to $5,496,333 in 2007, as compared to $4,182,118 in
2006. The increase is due almost entirely to increased labor costs. As sales
have almost tripled in the last two years, the Company has added staff in the
sales, finance and operations areas. The staff was needed to keep up with the
increased business volume. Approximately $700,000 of the increase can be traced
directly to the stock options issued to employees.
Bad debts. The Company recorded a provision for doubtful accounts of $278,042 in
the nine months ended September 30, 2007. The Company recorded a provision for
doubtful accounts of $123,819 for the nine months ended September 30, 2006. The
increase is necessary just based on the increased balance of the receivables. As
of September 30, 2007, the Company believes its provision for doubtful accounts
is adequate.
Depreciation and Amortization. Depreciation and amortization of property and
equipment was $68,161 for the nine months ended September 30, 2007, as compared
to $79,496 in 2006. Depreciation expense is lower than a year ago since the
Company is no longer depreciating certain assets in China that are part of the
VoIP business. The assets were written down to fair value in 2006 and are no
longer being depreciated.
Income from Operations. The income from operations was $2,798,210 for the nine
months ended September 30, 2007, as compared to $1,177,483 for the nine months
ended September 30, 2006. This is a result of the increased sales and gross
margins being partially offset by the higher general and administrative expenses
and other expenses described above.
Interest Income. Interest income was $66,831 for the nine months ended September
30, 2007, as compared to $6,607 for the nine months ended September 30, 2006.
The increase is due to the Company having more cash on hand due to improved
financial performance over the last year.
Interest Expense. Interest expense was $822,158 for the nine months ended
September 30, 2007. Interest expense was $351,408 for the nine months ended
September 30, 2006. The increase was due to a single factor. The Company was
operating under a factoring agreement in 2006, but has since obtained an asset
based credit line. Borrowings are way up, which has led to increased inventory
turnover, sales and receivables. The increases in net revenues would not have
been possible without the credit line, and therefore the interest expense.
Provision for Income Taxes. The Company recognized a provision for income taxes
of $271,239 in 2007. There was no provision in 2006. 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 Gain (Expense): The deferred income tax benefit (expense)
was $1,471,449 for the nine months ended September 30, 2007. This is a result of
timing differences between GAAP income and taxable income mainly due to the net
operating loss carryforward. There was no deferred income tax gain or loss in
the three months ended September 30, 2006.
Net Income. Net income was $3,187,314 for the nine months ended September 30,
2007, as compared to $673,622 for the three months ended September 30, 2006.
Financial Condition - September 30, 2007:
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 April 2007, by mutual agreement of the parties, the maximum loan balance was
increased from $12 million to $14 million.
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.
On December 27, 2006, the Company filed Form 8-K detailing SOYO's agreements
with vendors Eastech and Corion regarding SOYO's payment of trade debts. The
Company had several issues with the quality of the merchandise received from
both vendors, and refused to pay for the merchandise without concessions in
regard to price, RMA, and other factors. Ultimately, the Company was able to
come to mutually agreeable terms with both vendors. The end result is that the
Company will pay both vendors over time, which results in a portion of each debt
being reclassified to long term debt, and helps the Company's liquidity. The
Company does not expect that any other trade receivables or payables will be
settled in such a manner.
Operating Activities. The Company utilized cash of $21,180,142 from operating
activities during the nine months ended September 30, 2007, as compared to
generating cash of $749,407 from operating activities during the nine months
ended September 30, 2006.
At September 30, 2007, the Company had cash and cash equivalents of $2,635,546
as compared to $1,501,040 at December 31, 2006.
The Company had working capital of $6,716,362 at September 30, 2007, as compared
to working capital of $5,915,914 at December 31, 2006, resulting in current
ratios of 1.14:1 and 1.29:1 at September 30, 2007 and December 31, 2006,
respectively. At year end, the Company had classified almost $4 million of debt
as long term debt. That debt has now been reclassified as current debt, and is
now part of the calculation of working capital.
Accounts receivable increased to $31,987,044 at September 30, 2007, as compared
to $16,467,135 at December 31, 2006, an increase of $15,519,909. The Company's
allowance for doubtful accounts stood at $665,537 as of September 30, 2007 and
$388,958 at December 31, 2006.
Inventories increased to $16,618,203 at September 30, 2007, as compared to
$7,792,621 at December 31, 2006, an increase of $8,825,582. Inventory in transit
was $4,993,095 at September 30, 2007.
Accounts payable increased to $19,904,651 at September 30, 2007, as compared to
$16,073,617 at December 31, 2006. When taken together with other current
liabilities, the balance has increased from $16,613,384 to $47,128,290, which
offsets the large increase to receivables, inventories and deposits.
Accrued liabilities increased to $1,091,651 at September 30, 2007, as compared
to $539,767 at December 31, 2006, an increase of $589,065.
Principal Commitments:
A summary of the Company's contractual cash obligations as of September 30,
2007, is as follows:
Less than 1
year 1-3 years 4-5 years Over 5 years
---------------- --------------- --------------- -------------
Contractual Cash Obligations
Operating Leases $212,692 $35,449 $ - $ -
Royalties Payable 424,000 1,178,000 1,606,000 448,000
Purchase Commitments 4,993,095
---------------- --------------- --------------- -------------
Total $5,629,787 $1,213,449 $1,606,000 $ 448,000
================ =============== =============== =============
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At September 30, 2007, 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 $4,993,095.
At September 30, 2007 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 Intellectual Properties Inc. and Honeywell
International Inc., effective January 1, 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 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.
Off-Balance Sheet Arrangements:
At September 30, 2007, the Company did not have any transactions, obligations or
relationships that could be considered off-balance sheet arrangements.
Commitments and Contingencies:
At September 30, 2007, 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
will be effective for the Company on January 1, 2008. The Company is currently
evaluating the impact SFAS 159 may have on its financial condition or results of
operations.
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 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. Early adoption is encouraged, provided that the Company has not yet
issued financial statements for that fiscal year, including any financial
statements for an interim period within that fiscal year. The Company is
currently evaluating the impact SFAS 157 may have on its financial condition or
results of operations.