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, 2007
[ ] 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.
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(Exact Name of Registrant as specified in its Charter)
Nevada 95-4502724
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(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
1420 South Vintage Avenue, Ontario, California 91761-3646
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(Address of Principal Executive Offices) (Zip Code)
(909) 292-2500
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(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 15, 2007 there were 49,025,511 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, 2007
(Unaudited) and December 31, 2006...............................5
Condensed Consolidated Statements of Operations (Unaudited) -
Three Months Ended March 31, 2007 and 2006......................7
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended March 31, 2007 and 2006......................8
Notes to Condensed Consolidated Financial Statements (Unaudited)
- Three Months Ended March 31, 2007 and 2006...................10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..........................................18
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....28
Item 4. Controls and Procedures........................................28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................30
Item 1A. Risk Factors.................................................32
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities..............................................33
Item 3. Defaults upon Senior Securites.................................33
Item 4. Submission of Matters to a Vote of Security Holders............33
Item 5. Other Information..............................................33
Item 6. Exhibits and Reports on Form 8-K...............................33
SIGNATURES....................................................................33
SOYO Group, Inc. and Subsidiary
Consolidated Balance Sheets
----------------------------------------------------------------------------
(Unaudited) (Audited)
----------------------------------------------------------------------------
ASSETS
----------------------------------------------------------------------------
CURRENT March 31, 2007 December 31, 2006
---------------------------------------------------------------------------- ------------ ------------
Cash and cash equivalents $ 1,919,248 $ 1,501,040
---------------------------------------------------------------------------- ------------ ------------
Accounts receivable, net of allowance for 16,235,424 12,878,732
doubtful accounts of $388,958 at
March 31, 2007 and December 31, 2006
respectively
---------------------------------------------------------------------------- ------------ ------------
Inventories 8,334,469 7,792,621
---------------------------------------------------------------------------- ------------ ------------
Prepaid Expenses 29,324 36,633
---------------------------------------------------------------------------- ------------ ------------
---------------------------------------------------------------------------- ------------ ------------
Total Current Assets 26,518,465 22,209,026
---------------------------------------------------------------------------- ------------ ------------
Property and Equipment 720,806 711,015
---------------------------------------------------------------------------- ------------ ------------
Less: accumulated depreciation and amortization (182,590) (159,300)
---------------------------------------------------------------------------- ------------ ------------
538,216 551,715
---------------------------------------------------------------------------- ------------ ------------
Deferred income tax asset 464,035 177,177
---------------------------------------------------------------------------- ------------ ------------
Deposits 313,228 243,095
---------------------------------------------------------------------------- ------------ ------------
---------------------------------------------------------------------------- ------------ ------------
Total Assets $ 27,833,944 $ 23,181,013
---------------------------------------------------------------------------- ------------ ------------
December 31,
------------
---------------------------------------------------------------------------- ------------ ------------
Liabilities and Shareholders Equity
---------------------------------------------------------------------------- ------------ ------------
LIABILITIES
---------------------------------------------------------------------------- ------------ ------------
CURRENT
---------------------------------------------------------------------------- ------------ ------------
Accounts payable 12,877,013 16,073,617
---------------------------------------------------------------------------- ------------ ------------
---------------------------------------------------------------------------- ------------ ------------
Accrued liabilities 543,533 539,767
---------------------------------------------------------------------------- ------------ ------------
Business loan 11,000,512 --
---------------------------------------------------------------------------- ------------ ------------
Short term loan 0 100,000
---------------------------------------------------------------------------- ------------ ------------
---------------------------------------------------------------------------- ------------ ------------
Current liabilities 24,421,058 16,713,384
---------------------------------------------------------------------------- ------------ ------------
---------------------------------------------------------------------------- ------------ ------------
Long term payable -- 3,735,198
---------------------------------------------------------------------------- ------------ ------------
Total Liabilities 24,421,058 20,448,582
---------------------------------------------------------------------------- ------------ ------------
---------------------------------------------------------------------------- ------------ ------------
SHAREHOLDER'S EQUITY
---------------------------------------------------------------------------- ------------ ------------
Class B Preferred stock, $0.001 par value, authorized - 10,000,000 shares, 1,980,737 1,918,974
Issued and outstanding - 3,181,357 in 2007, 2,797,738 shares in 2006
---------------------------------------------------------------------------- ------------ ------------
Preferred stock backup withholding (168,474) (149,945)
---------------------------------------------------------------------------- ------------ ------------
Common stock, $0.001 par value authorized - 75,000,000 shares, Issued and 49,026 49,026
outstanding - 49,025,511
---------------------------------------------------------------------------- ------------ ------------
Additional paid-in capital 18,043,325 17,866,531
---------------------------------------------------------------------------- ------------ ------------
---------------------------------------------------------------------------- ------------ ------------
Accumulated deficit (16,491,728) (16,952,155)
---------------------------------------------------------------------------- ------------ ------------
Total shareholders' equity 3,412,886 2,732,431
---------------------------------------------------------------------------- ------------ ------------
Total liabilities and shareholders' equity $ 27,833,944 $ 23,181,013
---------------------------------------------------------------------------- ------------ ------------
See accompanying notes to the unaudited condensed financial statements
SOYO Group, Inc. and Subsidiary
Consolidated Statements of Operations
(Unaudited)
Three months ended March 31,
------------------------------------------------------ --------------------------------
2007 2006
------------------------------------------------------ --------------- ---------------
Net revenues $ 14,691,110 $ 11,548,187
------------------------------------------------------ ------------ ------------
Cost of revenues 12,082,914 9,897,099
------------------------------------------------------ ------------ ------------
Gross margin 2,608,196 1,651,088
------------------------------------------------------ ------------ ------------
Costs and expenses
------------------------------------------------------ ------------ ------------
Sales and marketing 590,856 74,886
------------------------------------------------------ ------------ ------------
General and administrative 1,578,174 1,484,994
------------------------------------------------------ ------------ ------------
Provision for doubtful accounts 1,438 50,000
------------------------------------------------------ ------------ ------------
Depreciation and amortization:
------------------------------------------------------ ------------ ------------
Property and equipment 23,291 25,815
------------------------------------------------------ ------------ ------------
Total costs and expenses 2,193,759 1,635,695
------------------------------------------------------ ------------ ------------
Income (loss) from operations 414,437 15,393
------------------------------------------------------ ------------ ------------
Other income (expense):
------------------------------------------------------ ------------ ------------
Interest income 31,385 3,247
------------------------------------------------------ ------------ ------------
Interest expense (59,715) (72,387)
------------------------------------------------------ ------------ ------------
Other income (expense) (87,690) 4,531
------------------------------------------------------ ------------ ------------
Other income (expense), (116,020) (64,609)
net
------------------------------------------------------ ------------ ------------
Income (Loss) before provision (benefit) for income 298,417 (49,216)
taxes
------------------------------------------------------ ------------ ------------
Provision (benefit) for income taxes 63,085 --
------------------------------------------------------ ------------ ------------
Deferred income tax expense (286,858) --
------------------------------------------------------ ------------ ------------
Net income (loss) 522,190 (49,216)
------------------------------------------------------ ------------ ------------
------------------------------------------------------ ------------ ------------
Less: dividends on convertible preferred stock 61,763 49,856
------------------------------------------------------ ------------ ------------
Net income (loss) attributable to common shareholders 460,427 (99,072)
------------------------------------------------------ ------------ ------------
Net income (loss) per common share - .01 N/A
Basic and diluted .01
------------------------------------------------------ ------------ ------------
Weighted average number of shares of common stock 49,025,511 48,540,681
outstanding - Basic and diluted 54,706,506 53,296,071
------------------------------------------------------ ------------ ------------
See accompanying notes to unaudited condensed consolidated financial statements.
SOYO Group, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three months ended March 31,
--------------------------------------------------------- -------------------------------
2007 2006
--------------------------------------------------------- -------------------------------
OPERATING ACTIVITIES
--------------------------------------------------------- -------------- ---------------
Net Income (loss) 522,190 (49,216)
--------------------------------------------------------- ----------- -----------
Adjustments to reconcile net income to net cash
used in operating activities:
--------------------------------------------------------- ----------- -----------
Depreciation and Amortization 23,290 25,815
--------------------------------------------------------- ----------- -----------
Non cash payments for director's compensation -- 24,570
--------------------------------------------------------- ----------- -----------
Stock based compensation 176,794 359,871
--------------------------------------------------------- ----------- -----------
Provision for doubtful accounts 1,438 50,000
--------------------------------------------------------- ----------- -----------
Changes in operating assets and liabilities:
--------------------------------------------------------- ----------- -----------
(Increase) decrease in:
--------------------------------------------------------- ----------- -----------
Accounts Receivable (3,358,130) 407,037
--------------------------------------------------------- ----------- -----------
Inventories (541,848) (3,263,986)
--------------------------------------------------------- ----------- -----------
Prepaid expenses 7,309 18,879
--------------------------------------------------------- ----------- -----------
Deposits (70,133) (5,525)
--------------------------------------------------------- ----------- -----------
Deferred income tax asset (286,858) --
--------------------------------------------------------- ----------- -----------
Increase (Decrease) in:
--------------------------------------------------------- ----------- -----------
Accounts payable (3,196,604) 2,953,329
--------------------------------------------------------- ----------- -----------
Accrued liabilities 3,766 (939,599)
--------------------------------------------------------- ----------- -----------
--------------------------------------------------------- ----------- -----------
Net cash used in operating activities (6,718,786) (643,744)
--------------------------------------------------------- ----------- -----------
--------------------------------------------------------- ----------- -----------
INVESTING ACTIVITIES
--------------------------------------------------------- ----------- -----------
Purchase of property and equipment (9,791) (50,182)
--------------------------------------------------------- ----------- -----------
Proceeds from sale of equipment -- --
--------------------------------------------------------- ----------- -----------
--------------------------------------------------------- ----------- -----------
Net cash used in investing activities (9,791) (50,182)
--------------------------------------------------------- ----------- -----------
--------------------------------------------------------- ----------- -----------
FINANCING ACTIVITIES
--------------------------------------------------------- ----------- -----------
Advances from Officers, Directors, Shareholders (65,000)
--------------------------------------------------------- ----------- -----------
Proceeds from issuance of common stock --
--------------------------------------------------------- ----------- -----------
Payment of backup withholding tax on accreted
dividends on preferred stock (18,529) (14,957)
--------------------------------------------------------- ----------- -----------
Increase (Decrease) in:
--------------------------------------------------------- ----------- -----------
Business loan 11,000,512 --
--------------------------------------------------------- ----------- -----------
Short term loan (100,000) --
--------------------------------------------------------- ----------- -----------
Long term debt (3,735,198) --
--------------------------------------------------------- ----------- -----------
Net cash used in financing activities 7,146,785 (79,957)
--------------------------------------------------------- ----------- -----------
--------------------------------------------------------- ----------- -----------
CASH AND CASH EQUIVALENTS
--------------------------------------------------------- ----------- -----------
Net Increase (Decrease) 418,208 (773,883)
--------------------------------------------------------- ----------- -----------
At beginning of Period 1,501,040 828,294
--------------------------------------------------------- ----------- -----------
At End of Period 1,919,248 54,411
--------------------------------------------------------- ----------- -----------
--------------------------------------------------------- ----------- -----------
Supplemental disclosure of cash flow information
--------------------------------------------------------- ----------- -----------
--------------------------------------------------------- ----------- -----------
Cash paid for interest 159,715 72,387
--------------------------------------------------------- ----------- -----------
Cash paid for income taxes 30,805
--------------------------------------------------------- ----------- -----------
--------------------------------------------------------- ----------- -----------
Non cash investing and financing activities
--------------------------------------------------------- ----------- -----------
--------------------------------------------------------- ----------- -----------
Accretion of discount on Class B preferred stock 61,763 49,856
--------------------------------------------------------- ----------- -----------
Director's Compensation 0 24,570
--------------------------------------------------------- ----------- -----------
Stock Option Compensation 176,794 134,952
--------------------------------------------------------- ----------- -----------
See accompanying notes to unaudited condensed consolidated financial statements.
SOYO Group, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Three Months Ended March 31, 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 monthFs ended March 3F1, 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 electeFd 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
March 31, 2007, the results of operations for the three months ended March 31,
2007 and 2006, and cash flows for the three months ended March 31, 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 for the fiscal year ended December 31,
2006, as filed with the Securities and Exchange Commission.
The results of operations for the three months ended March 31, 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 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 and South America.
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 stock options owned by employees.
As of March 31, 2007, potentially dilutive securities consisted of 3,181,357
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, 2007, 5,680,995 shares of common
stock were issuable upon conversion of the Class B Convertible Preferred Stock
based on the $0.56 per share conversion price.
As of March 31, 2006, 4,755,390 shares of common stock were issuable upon
conversion of the Class B Convertible Preferred Stock based on the $0.62 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
March 31, 2007, out-of-the-money awards are not included in the computation of
diluted EPS. Since the 2005 options granted are all out of the money, and the
2007 options awarded are unvested, the only potentially dilutive securities are
the 3,181,357 shares of Class B Convertible Preferred Stock.
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 three
months ended March 31, 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 - The Company has adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"), which establishes a fair value method of accounting for stock-based
compensation plans, as amended by Statement of Financial Accounting Standard No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure"
("SFAS No. 148").
SFAS No. 123(R) requires that companies recognize all share-based payments to
employees, including grants of employee stock options, in the financial
statements. The cost will be based on the fair value of the equity or liability
instruments issued and recognized over the respective vesting period of the
stock option. Pro forma disclosure of this cost will no longer be an alternative
under SFAS No. 123(R). SFAS 123(R) is effective for public companies at the
beginning of the first fiscal year that begins after June 15, 2005.
Transition methods available to public companies include either the modified
prospective or modified retrospective adoption. The modified prospective
transition method requires that compensation cost be recognized beginning on the
effective date, or date of adoption if earlier, for all share-based payments
granted after the date of adoption and for all unvested awards existing on the
date of adoption. The modified retrospective transition method, which includes
the requirements of the modified prospective transition method, additionally
requires the restatement of prior period financial information based on amounts
previously recognized under SFAS No. 123 for purposes of pro-forma disclosures.
The Company adopted SFAS No. 123(R) effective January 1, 2006. The Company
adopted the modified prospective method. As a result, the Company recognized a
charge against earnings of $176,794 for the three months ended March 31, 2007.
For further information, refer to note 4, Stock Based Compensation on page 14.
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 will vest and be available
for purchase on February 2, 2008, one third on February 2, 2009, and one third
on February 2, 2010. The grants will expire if unused on February 2, 2012.
As of March 31, 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. No employees who were granted stock options in 2007 had left the
Company as of the date of this report.
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.
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
During the quarter, 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. For reporting purposes,
the loan has been segregated from other payables and reported as a separate line
item. As of March 31, 2007, the amount SOYO owed to UCB was $11,000,512.
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
Prior to January 1, 2006, the Company accounted for employee stock-based
compensation using the intrinsic value method supplemented by pro forma
disclosures in accordance with APB 25 and SFAS 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"). Under the intrinsic value based method, compensation
cost is the excess, if any, of the quoted market price of the stock at grant
date or other measurement date over the amount an employee must pay to acquire
the stock.
Effective January 1, 2006 the Company adopted SFAS 123R using the modified
prospective approach and accordingly prior periods have not been restated to
reflect the impact of SFAS 123R. Under SFAS 123R, stock-based awards granted
prior to its adoption will be expensed over the remaining portion of their
vesting period. These awards will be expensed under the straight line
amortization 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 will
amortize stock-based compensation expense on a straight-line basis over the
requisite service period, which is generally a three-year vesting period.
SFAS 123R requires forfeitures to be estimated at the time of grant and revised,
if necessary, in subsequent periods if actual forfeitures differ from initial
estimates. Stock-based compensation expense has been recorded net of estimated
forfeitures for the period ended March 31, 2007 such that expense was recorded
only for those stock-based awards that are expected to vest. Previously under
APB 25 to the extent awards were forfeited prior to vesting, the corresponding
previously recognized expense was reversed in the period of forfeiture.
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 $63,805 during the
quarter. Additionally, the Company recognized a gain related to deferred income
tax assets of $286,858, 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 March 31,
--------------------------- ------------------- ----------------
2007 2006
--------------------------- ------------------- ----------------
Revenues:
--------------------------- ------------------- ---------------
Distributors $11,883,335 $4,479,959
--------------------------- ------------------- ----------------
Retailers 941,413 7,068,228
--------------------------- ------------------- ----------------
Others 1,866,362 --
--------------------------- ------------------- ----------------
Total $14,691,110 $11,548,187
--------------------------- ------------------- ----------------
During the three months ended March 31, 2007 and 2006, the Company offered price
protection to certain customers under specific programs aggregating $200,354 and
$0, respectively, which reduced net revenues and accounts receivable
accordingly.
During the three months ended March 31, 2007, the Company had no customer that
accounted for more than 10% of net revenues.
b. Geographic Segments
Financial information by geographic segments is summarized as follows:
Three Months Ended March 31,
--------------------------------------- ----------------------- ----------------
2007 2006
--------------------------------------- ----------------------- ----------------
Revenues:
--------------------------------------- ----------------------- ----------------
United States $12,921,171 $9,114,585
--------------------------------------- ----------------------- ----------------
Canada (34,865) N/A
--------------------------------------- ----------------------- ----------------
Central and South America 564,296 2,205,222
--------------------------------------- ----------------------- ----------------
Others 1,240,508 228,380
--------------------------------------- ----------------------- ----------------
Total $14,691,110 $11,548,187
--------------------------------------- ----------------------- ----------------
NOTE: Prior to mid 2006, the Company reported all United States and Canadian
revenue as a single line item under the caption North America. As such, the
breakout between US and Canadian revenue is not available. The 2006 revenue
reported as US revenue includes sales to Canada.
c. During the quarter ended June 30, 2006, the Company began calculating net
revenue by product line for financial reporting purposes. 2007 sales by product
line are as follows:
Three Months Ended March 31,
-------------------------------------- --------------------- -----------------
2007 2006
-------------------------------------- --------------------- ----------------
Revenues:
-------------------------------------- --------------------- -----------------
Computer Parts and Peripherals $11,683,419 N/A
-------------------------------------- --------------------- -----------------
Consumer Electronics 2,981,198 N/A
-------------------------------------- --------------------- -----------------
VoIP 26,493 N/A
-------------------------------------- --------------------- -----------------
Total $14,691,110
-------------------------------------- --------------------- -----------------
d. Suppliers
As of December 31, 2006, no more than 44% 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 17% 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.
In continuing efforts to work with and leverage its supply base, SOYO entered
into an agreement with GE Capital in 2006 whereby GE guarantees payment to GE
approved vendors thereby facilitating larger orders, decreasing risk and
allowing SOYO to seamlessly finance these transactions.
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,
2006 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, 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 year 2006, the Company earned $678,537,or $0.01 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.
For the year 2005, the Company earned $540,310 or $0.01 cents per share, before
preferred dividends, and revamped its core product offerings. As a result, the
consumer electronics division, featuring LCD televisions and monitors, was
responsible for over 30% of the Company's sales, a number that was expected to
grow in the coming years.
For the year 2004, the Company incurred a net loss before preferred dividends of
($3,920,245).
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 financiFal 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.
There can be no assurances that these measures will result in an improvement in
the Company's profitability or liquidity. To the extent that the Company's
profitability and liquidity do not improve, the Company may be forced to reduce
operations to a level consistent with its available working capital resources.
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
collectibility 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 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.
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 March 31, 2007 and 2006::
Net Revenues. Net revenues increased by $3,142,923 or 27.2%, to $14,691,110 in
the three months ended March 31, 2007, as compared to $11,548,187 in 2006. The
increase in revenues was mainly due to new markets being opened by the sales
department for LCD television sales. New customers during the quarter included
American TV (15 stores in the Midwest U.S.), 6th Avenue Electronics, and
featured spots during the quarter on ShopNBC.
Gross Margin. Gross margin was $2,608,196 or 17.7% in 2007, as compared to
$1,651,088 or 14.3% in 2006. Gross margins increased both on a numerical and a
percentage basis as the Company increased sales of higher margin products such
as LCD monitors and wireless Bluetooth devices.
Sales and Marketing Expenses. Selling and marketing expenses increased by
$515,970 to $590,856 in 2007, as compared to $74,886 in 2006. The increase is
due to higher commissions to outside sales reps. The Company began using outside
sales reps 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.
General and Administrative Expenses. General and administrative expenses
increased by $93,180 to $1,578,174 in 2007, as compared to $1,484,994 in 2006.
The increase is due 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 has been needed to keep up with the increased
business volume. Approximately $50,000 of the increase is due to increased costs
of implementing FASB 123(R). The non cash charge against earnings was
approximately $135,000 in the quarter ended March 31, 2006 and $177,000 in the
quarter ended March 31, 2007
Provision for Doubtful Accounts. The Company recorded a provision for doubtful
accounts of $1,438 in the three months ended March 31, 2007. The Company
recorded a provision for doubtful accounts of $50,000 for the three months ended
March 31, 2006. As of March 31, 2007, the Company believes its provision for
doubtful accounts is adequate.
Depreciation and Amortization. Depreciation and amortization of property and
equipment was $23,291 for the three months ended March 31, 2007, as compared to
$25,815 in 2006.
Income from Operations. The income from operations was $414,437 for the three
months ended March 31, 2007, as compared to $15,393 for the three months ended
March 31, 2006. This is a result of the increased expenses described above
offsetting the higher gross margin.
Miscellaneous Income. Miscellaneous income was a loss of $87,690 for the three
months ended March 31, 2007. Miscellaneous income was $4,531 in the three months
ended March 31, 2006.
Interest Income. Interest income was $31,385 for the three months ended March
31, 2007, as compared to $3,247 for the three months ended March 31, 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 $59,715 for the three months ended March
31, 2007. Interest expense was $72,387 for the three months ended March 31,
2006. The decrease was due to a single factor. The Company was operating under
an expensive factoring agreement in 2006, but has since obtained much better
terms on its financing. As a result, the cost of the financing is lower.
Provision for Income Taxes. The Company recognized a provision for income taxes
of $63,085 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 gain (expense) was
a gain of $286,858 for the three months ended March 31, 2007. This is a result
of timing differences between GAAP income and taxable income. There was no
deferred income tax gain or loss in the three months ended March 31, 2006.
Net Income. Net income was $522,190 for the three months ended March 31, 2007,
as compared to a net loss of ($49,216) for the three months ended March 31,
2006.
Financial Condition - March 31, 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.
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 $6,718,786 from operating
activities during the three months ended March 31, 2007, as compared to
utilizing cash of $643,744 in operating activities during the three months ended
March 31, 2006.
At March 31, 2007, the Company had cash and cash equivalents of $1,919,248, as
compared to $1,501,040 at December 31, 2006.
The Company had working capital of $2,097,407 at March 31, 2007, as compared to
working capital of $5,495,642 at December 31, 2006, resulting in current ratios
of 1.086:1 and 1.33:1 at March 31, 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 $16,235,424 at March 31, 2007, as compared to
$12,878,732 at December 31, 2006, an increase of $3,356,692. The Company's
provision for doubtful accounts stood at $388,958 as of March 31, 2007 and
December 31, 2006.
Inventories increased to $8,334,469 at March 31, 2007, as compared to $7,792,621
at December 31, 2006, an increase of $541,848 or 7%. Inventory in transit was
$2,024,520 at March 31, 2007, down from $4,005,265 at December 31, 2006.
Accounts payable increased to $23,877,525 at March 31, 2007, as compared to
$16,073,617 at December 31, 2006, an increase of $7,803,908. The increase is due
to $3,700,000 of debt being reclassified from long term debt to current, and the
other $4 million is offset by a similar increase in accounts receivable, as the
Company's sales and purchases continue to grow.
Accrued liabilities increased to $543,533 at March 31, 2007, as compared to
$539,767 at December 31, 2006, an increase of $3,766 or less than one percent..
Financing Activities. In October 2005, the Company borrowed $165,000 from an
individual for working capital purposes. As of March 31, 2007, the entire loan
had been repaid.
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. As
of March 31, 2007, the Company owed UCB bank $11,000,512 that had been borrowed
under the facility. The $11,005,512 is included in the payables and working
capital calculations described above.
Principal Commitments:
A summary of the Company's contractual cash obligations as of March 31, 2007, is
as follows:
--------------------------------- ---------------------- -------------------- ------------------- ------------------
Less than 1 year 1-3 years 4-5 years Over 5 years
--------------------------------- ---------------------- -------------------- ------------------- ------------------
Contractual Cash Obligations
--------------------------------- ---------------------- -------------------- ------------------- ------------------
Operating Leases 212,692 141,794
--------------------------------- ---------------------- -------------------- ------------------- ------------------
Notes Payable
--------------------------------- ---------------------- -------------------- ------------------- ------------------
Purchase Commitments 2,024,520
--------------------------------- ---------------------- -------------------- ------------------- ------------------
Total 2,237,122 141,794
--------------------------------- ---------------------- -------------------- ------------------- ------------------
At March 31, 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 $2,024,520.
At December 31, 2006, 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 Properties Inc. and 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 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. There are no minimum payments due each calendar year. For
more information, please see the contract, which is included as exhibit 10.4 to
Form 10-K dated December 31, 2006.
Off-Balance Sheet Arrangements:
At March 31, 2007, the Company did not have any transactions, obligations or
relationships that could be considered off-balance sheet arrangements.
Commitments and Contingencies:
At March 31, 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.
In June 2006, the FASB released FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN
48). FIN 48 clarifies the accounting and reporting for uncertainties in income
tax law. This interpretation prescribes a comprehensive model for the financial
statement recognition, measurement, presentation and disclosure of uncertain tax
positions taken or expected to be taken in income tax returns. This statement is
effective for fiscal years beginning after December 15, 2006. The Company is
currently evaluating the impact FIN 48 may have on its financial condition or
results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does 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.
As the Company's debt obligations at March 31, 2007 are primarily short-term in
nature and non-interest bearing, the Company does not have any risk from an
increase in interest rates. However, 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.
The Company does not have any foreign currency risk, as its revenues and
expenses, as well as its debt obligations, are denominated and settled in United
States dollars.
4. CONTROLS AND PROCEDURES
Evaluation of Disclosure and Control Procedures
Based on a current evaluation under the supervision and with the participation
of the Company's management, the Company's principal executive officer and
principal financial officer have concluded that the Company's disclosure
controls and procedures as defined in rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (Exchange Act) were not effective as
of March 31, 2007 and did not ensure that information required to be disclosed
by the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission rules and forms and (ii) accumulated
and communicated to the Company's management, including its principal executive
officer and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure. Based on that evaluation, that as of
such date, the Company's disclosure controls and procedures were not effective.
In addition, the Company's automated financial reporting systems are overly
complex, poorly integrated and inconsistently implemented.
The Company's Chief Executive Officer and Chief Financial Officer arrived at
this conclusion based on a number of factors, including the fact that the
Company's system of internal control requires considerable manual intervention
to do the following: (1) to properly record accounts payable to vendors for
purchases of inventory, (2) to properly record adjustments to inventory per the
general ledger to physical inventory balances, (3) to properly record inventory
adjustments to the lower of cost or market using the average inventory method,
(4)to have effective controls over interim physical inventory procedures, and 5)
to generate timely and accurate financial information to allow for the
preparation of timely and complete financial statements. The Company did not
have an effective financial reporting process because of the aforementioned
material weaknesses. Accordingly, the Company's Chief Executive Officer and
Chief Financial Officer concluded that there were significant deficiencies,
including material weaknesses, in the Company's internal controls over its
financial reporting at the end of the period ended March 31, 2007.
To address these significant deficiencies and material weaknesses, the Company
Has taken the following corrective actions:
The Company is operating without a permanent Accounting Manager or Controller.
While the Company does not have a permanent Accounting Manager or Controller,
the Company believes it has enough staff working in the accounting department to
complete all work required on a timely basis. The Company has retained a
financial consultant and former CPA to oversee the day to day management of the
accounting department. The Company has recently added additional personnel to
complete the day to day accounting tasks. The Company promoted a bookkeeper to
Acting Accounting Manager.
Management hired experts to assist in the evaluation and implementation of new
accounting software. The evaluation was completed, and the software has been
paid for. The Company has been testing and customizing the software for the last
few months, and expects that the software will be installed and operational
during the third quarter of 2007.
In conjunction with the Company's financial statements for the quarter ended
March 31, 2007, the Company's Chief Executive Officer and its Chief Financial
Officer reviewed and evaluated the corrective actions listed above. The officers
believed that such corrective actions minimize the risk of material
misstatement, but the corrective actions continued to have significant
deficiencies.
As of March 31, 2007, the Chief Executive Officer and the Chief Financial
Officer are satisfied that with the personnel in place, and with the additional
efforts of the Financial Consultant/ CPA, that the books and records portray a
completely accurate picture of the Company's financial position and that all
transactions are being captured and reported as required. The Company believes
that once the new software is installed and operational, all significant
deficiencies will have been addressed and corrected.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Soyo Inc. v. XtraPlus, etc, et al. On or about September 27, 2004, Soyo, Inc.
("Soyo") sold computer components to XtraPlus Corporation, dba ZipZoomFly.com
("XtraPlus"), a computer retailer. Soyo invoiced XtraPlus for $183,600, but
XtraPlus failed to pay the invoice and, on March 4, 2005, Soyo filed a civil
complaint against XtraPlus in the Superior Court of the State of California for
the County of San Bernardino ("Court"). XtraPlus thereafter filed a
Cross-Complaint against Soyo on May 11, 2005 in which it alleged claims for: (1)
Breach of Contract; (2) Breach of Warranty; (3) Breach of the Implied Covenant
of Good Faith and Fair Dealing; and (4) Violation of Business & Professions Code
ss. 17200. In its prayer in the Cross-Complaint, XtraPlus sought special and
general damages in excess of $100,000, attorneys' fees and costs, and such other
relief as the Court might determine to be just and proper. After it filed its
Complaint, Soyo also sought an attachment of $183,600, plus interest and costs.
Ultimately, XtraPlus paid Soyo $40,000 of the amount sought, and deposited into
the registry of the Court the sum of $140,000 until the action was concluded.
On January 12, 2007, the Court ordered that summary adjudication be granted in
favor of Soyo on two of the four claims in Soyo's Complaint against XtraPlus
(Soyo voluntarily dismissed the other two claims), and that Soyo recover the
remaining balance due on its claim. The Court also ordered that summary judgment
be granted in favor of Soyo and against XtraPlus on all of the claims against
Soyo that were contained in the XtraPlus Cross-Complaint. The formal order and
the proposed judgment reflecting this disposition were entered on February 14,
2007. XtraPlus paid the Judgment of $168,498.20 plus additional costs of
$5,176.03 for a total of $173,674.23 and a full Satisfaction of Judgment has
been filed.
Normandin v. Soyo Group, Inc. et al. On August 2, 2004, Gerry Normandin,
individually and on behalf of a proposed nationwide class of consumers, filed a
Complaint in the Superior Court of the State of California for the County of San
Bernardino against the Company and DOES 1 through 100. Normandin asserted three
causes of action in his Complaint: (1) Violation of the Consumer Legal Remedies
Act, Civil Code Section 1750 et seq.; (2) Violation of Business and Professions
Code Section 17200 et seq.; and (3) Violation of Business and Professions Code
Section 17500 et seq. Normandin prayed for an order certifying the case as a
class action, an award of actual damages suffered by plaintiff and the class in
an amount not less than $1,000 per person, an order for restitution and
disgorgement of monies wrongfully acquired by defendants through the sales of
motherboards having defective capacitors, an order enjoining the Company from
further sales of motherboards with defective capacitors, an award of punitive
damages, attorneys' fees and costs, pre-judgment interest and such other relief
as the Court may deem just and proper.
The parties have reached a settlement of the action. However, the agreed upon
settlement agreement must receive Preliminary Approval by the Court after a
noticed hearing. Then, if preliminarily approved, Class Notice must be given to
members of the class whom Normandin represents, and any objections to the
settlement considered and addressed by the Court. The papers necessary for the
Preliminary Approval Hearing are being drafted and will be filed within 30 days.
We cannot predict the outcome of these pending matters, nor whether the
settlement agreement will ultimately be approved and the case dismissed.
Soyo v. Hartford: Soyo tendered a claim to Hartford Insurance Company of the
Midwest ("Hartford") under which it sought a defense and indemnity for the
claims asserted in the Normandin action. Hartford rejected that claim, and on
May 1, 2006, Soyo Group Inc. filed an action for: (1) Declaratory Relief; (2)
Breach of Contract; and (3) Bad Faith against Hartford. Soyo, Inc. was
subsequently added as a Plaintiff in a First Amended Complaint ("FAC") that was
filed in the action. In the Prayer in the FAC, Soyo sought general, special and
punitive damages in amounts that were unspecified, as well as interest costs and
attorneys fees.
The dispute was mediated, and an agreement in principle to resolve it was
reached on December 21, 2006. The formal settlement agreement is being prepared
and has not yet been executed by any of the parties.
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 seeks class
action status and alleges 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 seeks
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 has agreed to the terms of a settlement which is currently before
the court for approval.
On May 22, 2005, the Company received notice of an investigation by the Attorney
General of the State of California (the "AG") regarding the Company's alleged
failures to timely pay rebates to purchasers of Soyo products. The Company has
cooperated with the investigation and has agreed to the terms of a stipulation
for entry of final judgment and permanent injunction (the "Injunction") relating
to the Company's administration of rebate claims. On March 7, 2007, the
Injunction was filed by the AG and entered by the Superior Court of California,
County of San Diego in the action entitled People of the State of California v.
Soyo Group, Inc., et al., Case No. GIC 8813770. The Company believes that
compliance with the terms of the Injunction will have no material adverse effect
on the Company.
On February 15, 2006, the Company received notice of an investigation by counsel
for the Federal Trade Commission (the "FTC") regarding the Company's alleged
failures to timely pay rebates to purchasers of Soyo products. The Company has
cooperated with the investigation and has agreed to the terms of an agreement
containing a consent order to be filed by the FTC relating to the Company's
administration of rebate claims, which is currently before the FTC for approval.
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 Tortious Interference with
Economic Relations and seeks compensatory and punitive damages. Both named
defendants were served on January 26, 2007. No trial date has been set. The
Company is vigorously asserting its claims against the defendants. No
counterclaims have been asserted against the Company in the action to date.
On March 22, 2007, Semiconductor Energy Laboratory Co., Ltd. instituted an
action against several defendants, including the Company, in the United States
District Court for the Northern District of California (Case No. C071667 MHP)
alleging patent infringement with respect to certain products the Company is
alleged to have imported and sold in the United States. No trial date has been
set. Pursuant to order of the Court, the Company's deadline to respond to the
Complaint is currently on July 12, 2007. Discovery has not commence and no trial
date has been set. The Company strongly dispute any liability in the matter and
will vigorously defend itself in the action.
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, 2006, 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
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, 2007 By: /s/ Ming Tung Chok
-----------------------
Ming Tung Chok
President and Chief
Executive Officer
DATE: May 15, 2007 By: /s/ Nancy Chu
-----------------------
Nancy Chu
Chief Financial Officer
DATE: May 15, 2007 By /s/ Paul F. Risberg
--------------------------
Name: Paul F. Risberg
Title: Director
DATE: May 15, 2007 By /s/ Chung Chin Keung
--------------------------
Name: Chung Chin Keung
Title: Director
DATE: May 15, 2007 By /s/ Zhi Yang Wu
--------------------------
Name: Zhi Yang Wu
Title: Director
INDEX TO EXHIBITS
Exhibit
Number Description of Document
------ -----------------------
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 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - Ming Tung Chok and Nancy Chu