ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto appearing elsewhere in
this Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
This Annual Report on Form 10-K for the fiscal year ended December 31, 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 may include, among others, statements concerning the
Company's expectations regarding its business, growth prospects, revenue trends,
operating costs, working capital requirements, facility expansion plans,
competition, results of operations 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 Annual Report on Form 10-K for the fiscal
year ended December 31, 2006 involve known and unknown risks, uncertainties and
other factors that could cause actual results, performance or achievements of
the Company to differ materially from those expressed in or implied by the
forward-looking statements contained herein.
Each forward-looking statement should be read in context with, and with an
understanding of, the various disclosures concerning the Company and its
business made elsewhere in this annual Report on Form 10-K for the fiscal year
ended December 31, 2006, as well as other public reports filed with the United
States Securities and Exchange Commission. You should not place undue reliance
on any forward-looking statement as a prediction of actual results or
developments. The Company does not intend to update or revise any
forward-looking statement contained in this Annual Report on Form 10-K for the
fiscal year ended December 31, 2006 to reflect new events or circumstances
except to the extent required by applicable law.
Background and Overview:
Incorporated in Nevada on October 22, 1998, SOYO Group, Inc. is a distributor of
consumer electronics, communications and computer parts. A substantial portion
of the products are manufactured in Taiwan and China. Through SOYO Group, Inc.
the Company offers a line of LCD televisions and computer monitors, wireless
headset devices, motherboards and related peripherals for intensive multimedia
applications, telecommunications services and equipment. The product line also
includes Bare Bone systems, flash memory as well as small hard disk drives for
corporate and mobile users, internal multimedia reader/writer and wireless
networking solutions products for any home and office (SOHO) users.
SOYO Group's products are sold through an extensive network of authorized
distributors to resellers, system integrators, value-added resellers (VARs).
These products are also sold through major retailers, distributors and e-tailers
to the consumers throughout North America and Latin America.
The Company sells to distributors, retailers and directly to consumers. Revenues
through such distribution channels for each of the three years ended December
31, 2006, 2005 and 2004 are summarized as follows:
Year Ended December 31
2006 % 2005 % 2004 %
Revenues
Distributors $35,510,804 62.6 $22,312,488 58.3 $14,704,452 45.3
Retailers 15,187,152 26.8 15,742,332 41.2 17,721,962 54.7
Others 6,060,732 10.6 208,212 0.5 N/A N/A
Total $56,758,688 100.0 $38,263,032 100.0 $32,426,414 100.0
During the year ended December 31, 2006, no customer accounted for more than 8%
of sales.
During the year ended December 31, 2005, the Company had one customer (E23) that
accounted for revenues of $13,552,324, equivalent to 35% of net revenues.
Revenues by geographic segment are summarized as follows:
Year Ended December 31
2006 % 2005 % 2004 %
Revenues
United States $42,628,547 75.2 $20,686,944 54.1 $25,936,978 80.0
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Other N. America 2,472,209 4.4 983,606 2.6 N/A N/A
Central and South America 10,253,665 18.0 2,993,532 7.8 6,317,907 19.5
Hong Kong 139,490 0.2 13,598,950 35.5 171,529 0.5
Other locations 1,264,777 2.2 N/A N/A N/A N/A
Total $56,758,688 100.0 $38,263,032 100.0 $32,426,414 100.0
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During the year 2004 segment data on the "Other N. America Business" segment was
not kept as it was very small in relation to the size of the United States
business at that time, no compilations of the data were made as there were no
internal decision process that would have been governed by such information and
the compilation of this information would have been impractical and offered no
value to the organization.
During the first part of 2005, the Company had made a commitment to its new
product lines, but did not have much inventory to sell. While waiting for the
initial inventory shipments, the Company entered into a short term agreement to
make sales of computer components to a vendor in Hong Kong (E23). The sales had
relatively low margin, and not a business that the Company planned to be in long
term. Nevertheless, the sales of such products in 2005 represented a significant
portion of the Company's business.
Revenues by product line are summarized as follows:
Year Ended December 31
2006 % 2005 % 2004 %
Revenues
Consumer electronics $27,543,873 48.5 $18,739,719 49.0 N/A N/A
Computer parts and
peripherals 29,204,792 51.5 18,906,367 49.4 N/A N/A
Voice and communication 10,023 -- 616,946 1.6 N/A N/A
Total $56,758,688 100.0 $38,263,032 100.0 $32,426,414 100.0
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The breakdowns to segregate sales by product line is not available for years
prior to 2005. During the years prior to 2005, the Company sold primarily
computer parts and peripherals. The dollar volume of sales of both consumer
electronics and voice and communication products were very small and immaterial
in the scope of the Company's business. As sales of consumer electronics and
voice and communication products prior to 2005 have grown, the Company has begun
recognizing the sales in each category, and will continue to segregate the sales
for reporting purposes in the future.
Financial Outlook:
In 2006, the Company earned $468,670, 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.
In 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.
In 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 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.
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 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 consolidated financial
statements.
Vendor Programs:
Funds received from 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. In 2006, the Company booked price protection,
co-op marketing fees and sales incentives as expenses under these programs. In
2005, the Company booked over $1.3 million received from such programs to prior
years' purchase discounts and allowances settled in 2005.
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.
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.
In order to determine the value of the Company's accounts receivable, the
Company records a provision for doubtful accounts to cover probable credit
losses. Management reviews and adjusts this allowance periodically based on
historical experience and its evaluation of the collectibility of outstanding
accounts receivable.
Prior Year's Purchases and Discounts:
There were no amounts related to prior years booked in 2006. However, in early
2005 the company negotiated with its suppliers for discounts and allowances
related to purchases made in 2004. The company and its suppliers settled their
differences in 2005. The company accounted in 2005 for the settlement as a gain
contingency, in accordance with FAS 5, Accounting for Contingencies.
The company also accounted in 2005 for its settlement with suppliers of
discounts and allowances as a reduction of cost of goods sold because purchase
discounts and allowances are of a "character typical of the customary business
activities of the entity" in accordance with APB 9, as amended by APB 30,
Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions.
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.
Sales Incentives
The Company offers sales incentives to our customers in the form of co-op
advertising, price protection and sales discounts. All costs associated with
sales incentives are classified as a reduction to net revenues. The following is
a summary of the different types of sales incentives: Co-operative advertising
allowances are offered to customers as a reimbursement towards their costs for
advertising in which our product is featured on its own or in conjunction with
other companies' products. The amount offered is either a fixed amount or is
based upon a fixed percentage of sales revenue during a specified time period.
Price protection is a concession given by the Company to compensate for the
difference between the price of the product paid by the customer and a
subsequent price reduction of the product by the Company.
Sales discounts are offered to customers at various times based on management's
discretion. Discounts could be used to increase sales of a certain model, move
stale inventory out of the warehouse, introduce new products, or for another
reason that management finds attractive.
Allowance for Doubtful Accounts
The Company regularly analyzes customer balances, and, when it becomes evident a
specific customer will be unable to meet its financial obligations to the
Company, such as in the case of the deterioration in the customer's operating
results or financial position, a specific allowance for doubtful account is
recorded to reduce the related receivable to the amount that is believed
reasonably collectible. The Company also records allowances for doubtful
accounts for all other customers based on a variety of factors including the
length of time the receivables are past due, the financial health of the
customer and historical experience. If circumstances related to specific
customers change, estimates of the recoverability of receivables could be
further adjusted.
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"), as amended by SFAS No.148 "Accounting for
Stock-Based Compensation--Transition and Disclosures." 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. Under the intrinsic value method, the
Company has recognized stock-based compensation common stock on the date of
grant.
Effective January 1, 2006 the Company adopted SFAS 123(R) using the modified
prospective approach and accordingly prior periods have not been restated to
reflect the impact of SFAS 123(R). Under SFAS 123(R), 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 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
three years.
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. Stock-based compensation expense has been recorded net of
estimated forfeitures for the year ended December 31, 2006 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.
SFAS 123 requires the Company to provide pro-forma information regarding net
loss as if compensation cost for the stock options granted to the Company's
employees had been determined in accordance with the fair value based method
prescribed in SFAS 123. Options granted to non-employees are recognized in these
financial statements as compensation expense under SFAS 123 (See Note 11) using
the Black-Scholes option-pricing model.
If the fair value based method under FAS 123 had been applied in measuring
stock-based compensation expense for the year ended December 31, 2005, the pro
forma on net income (loss) and net income (loss) per share would have been as
follows:
Year Ended
December 31,
2005
----------------
Net income (loss) attributable to common shareholders, as reported $ (633,443)
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effect --
Deduct: Total stock-based employee compensation expense
determined under fair-value based method for all awards
not included in net income (loss_ (224,919)
----------------
Pro forma net income (loss) attributable to common shareholders $ (858,362)
================
Income (loss) per share:
Basic/diluted - as reported ($0.01)/($0.01)
Basic/diluted - pro forma ($0.02)/($0.02)
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Results of Operations:
Years Ended December 31, 2006 and 2005-
Net Revenues. Net revenues increased by $18,495,656 or 48.3% to $56,758,688 in
2006 as compared to $38,263,032 in 2005. The increase in net revenues was
primarily attributable to the strong sales of LCD TVs and LCD monitors, as well
as the success of our sales force in opening new markets and developing new
business opportunities New customers that purchased products from the Company in
2006 that had never before purchased products from the Company included Staples,
the Home Depot and Wal Mart Canada.
During the years ended December 31, 2006 and 2005, the Company offered price
protection to certain customers under specific programs aggregating $70,119 and
$140,828 respectively, which reduced net revenues and accounts receivable
accordingly.
Gross Margin. Gross margin was $9,224,439 or 16.3% in 2006, as compared to
$4,692,970 or 12.3 % in 2005. Gross margin increased in 2006 as compared to
2005, both on an absolute and percentage of revenue basis, as the Company
completed the changed in its core sales offerings from primarily hardware,
motherboards and barebones systems to a greater emphasis on computer peripherals
and consumer electronics. The Company was able to earn high margins throughout
most of the year on LCD monitors, and LCD televisions. Margins were also helped
by lower than expected RMA claims and returns of the Company's LCD monitors.
Sales and Marketing Expenses. Selling and marketing expenses increased by
$232,436 or 25.5 %, to $1,143,475 in 2006, as compared to $911,039 in 2005. The
increase was entirely due to payments to outside sales reps during the year. The
Company began to employ outside sales reps to assist in obtaining new clients.
The program was successful, as the outside reps were primarily responsible for
the Company obtaining Staples, Home Depot and other big box retailers as
customers.
General and Administrative Expenses. General and administrative expenses
increased by $1,951,472 or 53.3 %, to $5,610,810 in 2005, as compared to
$3,659,338 in 2005. There were several reasons for the increase.
The biggest factor in the increased G&A costs was the Company's mandatory
implementation of SFAS No. 123(R). In December 2004, the FASB issued Statement
of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment
("SFAS No. 123(R)") which replaces SFAS No. 123, Accounting for Stock-Based
Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. 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) was effective for public
companies at the beginning of the first fiscal year that begins after June 15,
2005.
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 $134,952 for the three months ended March 31, 2006,
$121,573 for the three months ended June 30, 2006, $126,924 for the three months
ended September 30, 2006, and $122,773 for the three months ended December 31,
2006. The complete effect of the adoption was a non cash charge against earnings
of approximately $506,222 over the twelve month period.
The next element contributing to the increase in the S,G&A expenses was the
Company's use of consultants during the year. The Company was actively searching
for new financing throughout the year, culminating in the completion of the UCB
$12 million revolving loan commitment (see Form 8-K filed March 1, 2007). The
Company employed several high cost consultants to identify and negotiate with
potential financial partners. All together, the Company spent over $600,000 to
pay consultants during the year. The cost of the consultants will not be
repeated in 2007, as the Company has terminated their services.
The final element contributing to the increased SG&A costs in 2006 were the
legal fees. The Company defended itself against several lawsuits during 2006 and
negotiated settlements with both the California Attorney General and the Federal
Trade Commission in regard to charges that the Company did not process and pay
customer rebate claims properly (see Item 3- Legal Proceedings). The costs
associated with the Company's defense of the lawsuits stemming from the rebate
issues, and the administrative penalty totalled almost $600,000.
Taken together, the costs of adapting SFAS No. 123(R) , the business consultants
and the increase in legal fees over 2005 totaled approximately $1.7 million,
which accounts for substantially all of the increased costs over 2005.
Provision for Doubtful Accounts. The provision for doubtful accounts was
increased to $907,065 in 2006, as compared to $34,513 in 2005. Since 2004, the
Company has used three different factors to increase cash flow. As a result,
credit policies and requirements have changed frequently in the last few years.
When the Company was prepared to sign the agreement for the $12 million finance
line (see Form 8-K file March 2, 2007), it reexamined the receivables and wrote
off all balances over 90 days, and wrote down to present value all balances over
90 days that were making monthly payments. This resulted in a large write off
taken in the fourth quarter. As a result, any balances with even a small
question about collectivity have been written off. Because of this aggressive
stance, the allowance for bad debts has decreased, even though the accounts
receivables balance has increased by over $5 million.
Depreciation and Amortization. Depreciation and amortization of property and
equipment was $43,818 in 2006 as compared to $35,394 in 2005.
Income (Loss) from Operations. The income from operations was $1,519,271 for the
year ended December 31, 2006, as compared to income from operations of $514,920
for the year ended December 31, 2005.
Interest Expense. Interest expense increased substantially to $901,900 in 2006,
as compared to $129,567 in 2005. The increase is due to the Company factoring
all receivables in 2006 to improve cash flow, and paying penalties twice during
the year for failing to meet the factor's minimum volume requirements. As a
result of these penalties, the Company terminated the contract with the factor
in February 2007.
Interest Income. Interest income was $10,561 in 2006 as compared to $5,301 in
2005. The increase was due to the Company's increased cash flow throughout the
year.
Other Income (Expense). Other income/miscellaneous revenue (expense) was a loss
of ($106,262) as compared to a profit of $150,456 in 2005.
Income Tax Expense. The Company calculated its income tax expense at $53,000 for
2006 after using net operating loss carryforwards to offset most of its taxable
income. The provision for income taxes was $800 in 2005.
Net Income/Loss. The net income before preferred dividends was $468,670 for the
year ended December 31, 2006, as compared to $540,310 for the year ended
December 31, 2005. The reasons for the turnaround are discussed in detail in the
above paragraphs.
Preferred Stock Dividends. Accreted and deemed preferred stock dividends were
$216,488 in 2006, as compared to accreted and declared dividends of $1,173,753
in 2005. The accreted dividends were actually $174,753 during 2005.
Additionally, the Company made a $999,000 adjustment to the carrying value of
the Class A preferred stock during the year. From the Company's inception, the
Class A preferred stock was carried on the books at its basis of $1,000. Prior
to the conditional redemption of the Class A preferred stock to common stock on
October 24, 2005, the carrying value was adjusted to the face value of
$1,000,000. This resulted in an adjustment to the preferred stock account of
$999,000, and the offsetting journal entry to preferred stock dividends raised
the amount recorded during the year to $1,173,753. No such adjustments were
required in 2006.
Results of Operations:
Years Ended December 31, 2005 and 2004-
Net Revenues. Net revenues increased by $5,836,618 or 18.0% to $38,263,032 in
2005 as compared to $32,426,414 in 2004. The increase in net revenues was
primarily attributable to the birth of the consumer products division, which
changed the core offerings for sale. The Company sold over $18.8 million in LCD
monitors and televisions in 2005.
On a comparable basis, revenues declined in N. America and Central America in
2005 vs. 2004. There were several reasons for this. During the first part of
2005, the Company had made a commitment to its new product lines, but did not
have much inventory to sell. While waiting for the initial inventory shipments,
the Company entered into a short term agreement to make sales of computer
components to a vendor in Hong Kong (E23). The sales had relatively low margin,
and not a business that the Company planned to be in long term. Nevertheless,
the sales of such products in 2005 represented a significant portion of the
Company's business. For this reason, sales to Hong Kong were very strong in
2005, where they had never been before. When the initial inventory of the
consumer electronics products began to arrive, the Company put its efforts into
selling those products and establishing those markets, which led to increased
sales throughout the rest 2005 and through the present. However, when taken on a
comparable basis, due to that period of inactivity, sales in 2005 decreased in
2005 vs. 2004 for the N. American and Central American markets.
During the years ended December 31, 2005 and 2004, the Company offered price
protection to certain customers under specific programs aggregating $140,828 and
$295,998 respectively, which reduced net revenues and accounts receivable
accordingly. Price protection offered to customers was significantly decreased
in 2005, as the new products did not require the same level of price protection
since the sales cycle was much quicker for the Company's customers.
Gross Margin. Gross margin was $4,692,970 or 12.3 % in 2005, as compared to
$2,216,372 or 6.8 % in 2004. Gross margin increased in 2005 as compared to 2004,
both on an absolute and percentage of revenue basis, as the Company changed its
core sales offerings from hardware, motherboards and barebones systems to a
greater emphasis on computer peripherals and consumer electronics. The demand
for the new products, specifically the LCD monitors and televisions, was great
enough that the Company was able to earn higher margins than in past years sales
of computer peripherals.
At the start of the year, the Company was holding inventory that had been
purchased during 2004 that was significantly different in appearance and
functionality than the products the Company had sought to purchase. For this
reason, the Company could not sell the products through normal sales channels.
The Company thus continued to negotiate with suppliers to return the products.
Subsequently, the negotiations were completed, and the Company booked the
results as prior years' purchase discounts and allowances. This decreased the
cost of revenues, thereby, increasing the gross margin.
The gross margin was a little over 4% before taking into account the settlement
of the prior year's purchase discounts and allowances. The Company believes that
gross margin increased by about 4% due to the settlement of the prior year's
purchase discounts and allowances, and that gross margin was over 8% because the
settlement was included in the calculation.
Sales and Marketing Expenses. Selling and marketing expenses decreased by
$666,570 or 42.2 %, to $911,039 in 2005, as compared to $1,577,609 in 2004. The
decrease was entirely due to an expensive Co-op marketing campaign run in 2004
that was not repeated in 2005.
General and Administrative Expenses. General and administrative expenses
increased by $98,628 or 2.8%, to $3,659,338 in 2005, as compared to $3,560,710
in 2004. There were several reasons for the increase. First, the problems
associated with the 2003 audit resulted in a cost of over $400,000 in legal and
accounting fees in 2004 that were not repeated. However, the Company did spend
over $150,000 in legal fees to defend itself against the two legal cases filed
against it, and described in section 4 of this report. Additionally, the Company
created an Employee Stock Option Plan in 2005 at a cost exceeding $25,000. The
Company began factoring invoices to improve cash flow in 2005. That resulted in
higher expenses, but the Company obtained the services of experts in evaluating
customer credit, which led to a huge reduction in bad debt expense. The set up
and approval of the program cost the Company over $25,000. As the Company
redesigned itself primarily as a distributor of electronics rather than consumer
peripherals, the "launch costs" of the new products, especially travel and
entertainment, increased significantly in 2005. The Company's travel and
entertainment expenses for 2005 increased by over $100,000. Finally, the Company
had a large turnover in personnel relative to the new product offerings. By
bringing in specialists to manage the different departments and sell the new
products, the Company substantially upgraded its management and sales staffs, at
an incremental cost of approximately $90,000.
Provision for Doubtful Accounts. The provision for doubtful accounts was
decreased to $34,513 in 2005, as compared to $956,738 in 2004. The decrease is
due to the improved quality of the Company's credit accounts, and the increased
use of experts in evaluating customer credit applications.
Depreciation and Amortization. Depreciation and amortization of property and
equipment was $35,394 in 2005 as compared to $34,998 in 2004.
Income (Loss) from Operations. The income from operations was $514,920 for the
year ended December 31, 2005, as compared to a loss from operations of
($3,913,683) for the year ended December 31, 2004. The income from operations in
2005 was due to the Company's improved operations, successful new product lines
and streamlined expenses. In addition, the Company booked over $1.3 million of
offsets to purchases from vendors for price protection and product returns as
prior years' purchase discounts and allowances settled in 2005.
Interest Expense. Interest expense increased substantially to $129,567 in 2005,
as compared to $23,371 in 2004. The 454% increase is due to the Company
factoring receivables in 2005 to improve cash flow. There was no such activity
in 2004.
Interest Income. Interest income was $5,301 in 2005. There was no interest
income in 2004.
Other Income. Other income/miscellaneous revenue was $150,456 in 2005, as
compared to $17,609 in 2004.
Provision for Income Taxes. Provision for income taxes of $800 was booked for
both 2005 and 2004.
Net Income/(Loss). The net income before preferred dividends was $540,310 for
the year ended December 31, 2005, as compared to a net loss of ($3,920,245) for
the year ended December 31, 2004. The reasons for the turnaround are discussed
in detail in the above paragraphs.
Preferred Stock Dividends. Accreted and deemed preferred stock dividends were
$1,173,753 in 2005, as compared to accreted and declared dividends of $223,733
in 2004. The accreted dividends were $174,753 during the year. Additionally, the
Company made a $999,000 adjustment to the carrying value of the Class A
preferred stock during the year. From the Company's inception, the Class A
preferred stock was carried on the books at its basis of $1,000. Prior to the
conditional redemption of the Class A preferred stock to common stock on October
24, 2005, the carrying value was adjusted to the face value of $1,000,000. This
resulted in an adjustment to the preferred stock account of $999,000, and the
offsetting journal entry to preferred stock dividends raised the amount recorded
during the year to $1,173,753.
Net Operating Loss Carryforwards:
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. No deferred tax benefit for these
operating losses has been recognized in the consolidated financial statements
due to the uncertainty as to their realizability in future periods. As of
December 31, 2006, there were no state operating loss carryforwards available to
the Company.
Net deferred tax assets of $1,570,000 at December 31, 2004 resulting from net
operating losses and other temporary differences have been offset by a 100%
valuation allowance since management cannot determine whether it is more likely
than not that such assets will be realized.
Liquidity and Capital Resources - December 31, 2006:
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. SOYO Taiwan forgave debt in an
amount equal to the difference between $12,000,000 and the value of the
preferred stock. This forgiveness was treated as a capital transaction. Payment
was received by SOYO Taiwan in February and March 2004. An agreement was reached
in the first quarter of 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 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-transferrable.
Based on the terms of the agreement between SOYO Taiwan and the third party, and
specifically the limitation on the purchaser not collecting more than $1,630,000
of the $12,000,000 from the Company without the prior consent of SOYO Taiwan,
the Company has determined that this transaction was in substance a capital
transaction. 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 an increase in the loss attributable to common stockholders,
and is being accreted from April 1, 2004 through December 31, 2008.
For the year ended December 31, 2006, the Company recorded aggregate dividends
of $216,488, based on the accretion of the discount on the Class B Convertible
Preferred Stock. The Company did not declare or accrue any additional dividends
on the Class B Preferred Stock.
For the year ended December 31, 2005, the Company recorded aggregate dividends
of $1,173,753, based on the accretion of the discount on the Class B Convertible
Preferred Stock of $174,753, and the adjustment of $999,000 to the carrying
value of the Class A preferred stock, which is described above. The Company did
not declare or accrue any additional dividends on the Class B Preferred Stock.
Through March 31, 2007, none of the Class B preferred stock had been converted
to common stock, and the Company had not repurchased any of the shares of Class
B preferred stock.
Operating Activities. The Company utilized cash of $2,941,820 from operating
activities during the year ended December 31, 2006, compared to utilizing cash
of $178,088 from operating activities during the year ended December 31, 2004,
and utilizing cash of $183,925 from operating activities during the year ended
December 31, 2004.
The use of cash in 2006 was due primarily to the Company's large increase in
receivables in 2006. As the Company used factors to assist in credit decisions,
the Company extended credit to more customers, resulting in large receivable
balances. The reasons for the usage of cash in 2005 were the large increases in
inventories an receivables, partially offset by the decrease in payables, which
were settled with common stock. The primary reasons for the usage of cash in
2004 were the Company's large operating loss and the paydown of the balance due
to SOYO Taiwan.
At December 31, 2006 the Company's cash and cash equivalents had increased by
$672,746 to $1,501,040, as compared to $828,294 at December 31, 2005.
The Company had working capital of $5,706,047 at December 31, 2006, as compared
to working capital of $689,141 at December 31, 2005, resulting in current ratios
of 1.28 to 1 and 1.04:1 at December 31, 2006 and 2005, respectively.
Accounts receivable increased to $16,467,135 at December 31, 2006, as compared
to $7,278,520 at December 31, 2005, an increase of $9,188,615, or 76.9%. The
large increase was due to several factors. Most importantly, net revenues
increased by $18,495,656 during the year. Another factor is the increased
diversity of the Company's customer list. The Company used a factor throughout
the year to increase cash flow, and the factor approved all customers for credit
lines and limits. As a result of the Company's faith in the ability of the
factor's credit analysis, credit lines were approved for a larger number of
customers, resulting in larger credit sales and receivables balances.
Inventories decreased to $7,792,621 at December 31, 2006, as compared to
$7,991,030 at December 31, 2005, a decrease of $198,409 or 2.4%. The inventory
balances included inventory in transit of $4,005,265 at December 31, 2006 and
$2,686,298 at December 31, 2005. Those figures indicate that inventory in the
warehouse was under $4,000,000 at December 31, 2006. The physical inventory on
hand was very low due to high sales volume in the 4th quarter, and
correspondingly, the inventory in transit was very high as the Company fills
orders for products and attempts to stock products for future sales.
Accounts payable increased by $2,096,038 to $16,073,617 at December 31, 2006 as
compared to $13,977,579 at December 31, 2005. The reason for the increase is the
increased business volume. The increase corresponds to an increase in
receivables for the same time period. The increase would have been larger, but
the Company came to an agreement in 2006 with a supplier to pay a balance due
over time, resulting in that being reclassified to a long term payable. For more
information, see the Form 8-K filed by the Company on December 27, 2006.
Accrued liabilities decreased to $572,457 at December 31, 2006, as compared to
$1,287,108 at December 31, 2005, a decrease of $714,651 or 55.5%. The decrease
is primarily due to the Company having a better understanding of the amount of
RMA accruals that were needed at year end. In 2005, the Company had been selling
LCD televisions and monitors for only a short time. As a result, there was no
historical data available to determine the amount of the accrual necessary to
cover repairs and returns. In keeping with the Company's conservative policy,
the Company reserved a large amount for those future expenses. With another year
of data to analyze, the Company believes that the current accrual is adequate,
although smaller than the 2005 accrual.
Receivables sold with recourse increased to $3,588,403 in 2006 from $0 in 2005
since receivables were sold with recourse in 2006 to Accord Financial Services.
Long Term Debt increased to $3,735,198 in 2006 from $0 in 2005.
The Form 8-K dated December 27, 2006 was intended to document two unusual events
that resulted in the Company expanding payment terms for two vendors. The
situations were independent, but were reported together on a single Form 8-K.
On December 15, 2006, the Company entered into a Forebearance and Debt Payment
Agreement with Eastech Electronics Inc., a Taiwan Company. The Company had
purchased consumer electronics products from Eastech in 2006 which failed the
Company's quality control inspections. Some of the products contained mold, some
of the products did not work properly, and some of the parts were damaged. When
the Company received the products, it notified Eastech of the problems, and
refused to pay for the shipment. The Company was going to return a majority of
the products to Eastech, which would have caused a substantial hardship for
Eastech. Eventually, the two companies reached an agreement whereby SOYO would
not return the products, but would keep the shipment. Eastech agreed to furnish
at least $50,000 worth of spare parts to repair damaged products, and SOYO
agreed to pay for the shipment over time, thereby allowing itself time to find
any other damaged goods, account for sales and returns, and make sure that it
would not be stuck with unsellable or returned merchandise that could not be
liquidated.
On October 19, 2006, the Company entered into an agreement with Corion
Industrial Corp. governing SOYO's repayment of debt. The debt arose from
inventory SOYO purchased from Corion during the period from January to March
2006.
There were several problems with the inventory. First, a substantial portion of
the inventory was being purchased to be sold on QVC. As such, these products
required that the QVC bar code be affixed to each piece. That process was not
completed correctly by Corion, forcing QVC to hire contractors to affix the
proper documentation to each piece of inventory. These problems led to delays,
and the "product window" during which the TV's were to be sold by QVC was
missed. As a result, QVC ended up returning almost $1 million worth of products.
The second problem with one of the inventory models was that the casing for the
TV's was not made according to specifications. As a result, the televisions
could not be wall mounted with the external tuner attached. These televisions
could not be sold through the retail chains, and were instead deeply discounted
to the Shop at Home television network, causing losses of over $600,000.
The third and final problem with a portion of the inventory was due to the LCD
panel itself. Although SOYO purchased a certain level of panel, some of the
inventory was delivered with inferior panels. This led to high return rates,
discounted products, and revenue shortfalls.
All of the problems with the shipments could be traced back to the manufacturer.
As such, SOYO refused to pay for the products until the exact worth of the
inventory and the true losses from the subpar inventory could be determined.
Eventually, the Companies agreed on a reduced price for the inventory, with SOYO
paying for the products in installments through October 2008. The portion of the
debt not due to be paid in 2007 is listed on the balance sheet as long term
debt.
Investing Activities
The Company expended $48,891, $621,970 and $158,670 In 2006, 2005 and 2004
respectively, for the purchase of property and equipment. The large expenditure
in 2005 is for the purchase of telephone lines and equipment in China to support
the VoIP division, while the amount in 2004 is due to the move to Ontario,
California and the resulting leasehold improvements.
Financing Activities
The Company began factoring its invoices in 2005 to improve cash flow. The
Company's initial factor was Wells Fargo PLC. In February 2006, the Company
signed a one year contract with Accord Financial Services of North Carolina for
factoring services. The agreement expired in February 2007 and was not renewed.
At December 31, 2006, $3,407,463 of the Company's receivables had been bought by
Accord Financial Services. At December 31, 2005, $580,363 of the Company's
receivables had been factored and were owned by Wells Fargo.
Under the Accord agreement, all of our receivables were sold with recourse. As
such, the Company continues to evaluate each of these receivables monthly in
regard to its allowance for bad debts. The original factor, Wells Fargo, bought
all accounts without recourse. When the switch over to Accord occured, those
transactions were "with recourse". For more information, please see the
contract, which is included as exhibit 10.3 to this report.
In 2006, the Company 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, then has the option to either pay for the goods or sell the
receivable (from the customer) to our factor, who paid GE Capital. For more
information, please see the contract, which is included as exhibit 10.4 to this
report.
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. For
more information, please see the form 8-K, filed by company on March 2, 2007.
In October 2005, the Company borrowed $165,000 from an individual for working
capital purposes. The Company repaid $65,000 of the loan during the year. The
balance at the end of 2006 was $100,000.
On March 29, 2004, LGT Computer, Inc. loaned the Company $213,750 pursuant to an
unsecured note payable due March 28, 2005, with interest at 4% per annum. On May
29, 2004, LGT Computer, Inc. loaned the Company an additional $700,000 pursuant
to an unsecured note payable due May 29, 2005, with interest at 4% per annum. On
March 28, 2005, by mutual agreement of the parties, the due dates of the notes
were extended one year at the same interest rate. On September 2, 2005, the two
loans and accrued interest of $51,251 were repaid through the issuance of
1,286,669 shares of our restricted common stock. On that date, the market price
of the stock was $0.75.
On March 28, 2005 Ever-Green Technology (Hong Kong) Co., Ltd., purchased 500,000
unregistered shares of our common stock, $0.001 par value per share (the
"Shares") and common stock purchase warrants to purchase 100,000 shares of our
common stock exercisable at $1.50 per share at any time until March 22, 2008
(the "Warrants"). The total offering price was $500,000, which was paid in cash.
During March 2003, Nancy Chu, the Company's Chief Financial Officer, director
and major shareholder, made short-term advances to the Company of $360,000 for
working capital purposes, of which $120,000 was repaid during September 2003.
The remaining $240,000 was paid during 2005.
Principal Commitments:
A summary of the Company's contractual cash obligations as of December 31, 2006,
is as follows:
Less than 1
Contractual Cash Obligations year 2-3 years 4-5 years Over 5 years
---------------- ---------------- ------------------- ----------------
Operating Leases $ 212,692 $ 194,967 N/A N/A
Advances from Directors N/A N/A N/A N/A
Notes Payable/ Short Term Loan $ 100,000 N/A N/A N/A
Purchase Commitments $4,005,265 N/A
Royalty Payments Due $ 353,000 $1,047,000 $1,480,000 $960,000
Long Term Debt -- $3,735,198 -- --
---------------- ---------------- ------------------- ----------------
Total $4,670,957 $4,977,165 $1,480,000 $960,000
================ ================ =================== ================
|
At December 31, 2006, 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 $4,005,265.
At December 31, 2006, the Company had trade payables to Corion and Eastech. By
prior agreement of the companies (see explanation above) the payment of those
balances was stretched so that the balances were to be paid in equal
installments through October 2008. As a result, balances totaling $3,735,198
were to be paid by the Company during the time period from January 2008 through
October 2008, and have been classified as long term debt as of December 31,
2006.
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. Minimum royalty payments due under the agreement are
$184,000 through December 31, 2007, and $424,000 in 2008. For a complete
schedule of minimum royalty payments due, see the Trademark License Agreement,
which is included as an exhibit to this Form 10-K Amended.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
(a) Financial Statements
The following financial statements are set forth at the end hereof.
1. Report of Independent Registered Public Accounting Firm
2. Consolidated Balance Sheets as of December 31, 2006 and 2005
3. Consolidated Statements of Operations for the years ended December 31,
2006, 2005 and 2004
4. Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended December 31, 2006, 2005 and 2004
5. Consolidated Statements of Cash Flows for the years ended December 31,
2006, 2005 and 2004
6. Notes to Consolidated Financial Statements.
SOYO Group, Inc. and Subsidiary
Index to Consolidated Financial Statements
Page
----
Report of Independent Registered Public Accounting Firm -
Vasquez & Company LLP F-2
Consolidated Balance Sheets - December 31, 2006 and 2005 F-3 - F-4
Consolidated Statements of Operations -
Years Ended December 31, 2006, 2005 and 2004 F-5 - F-6
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 2006, 2005 and 2004 F-7
Consolidated Statements of Cash Flows -
Years Ended December 31, 2006, 2005 and 2004 F-8 - F-10
|
Notes to Consolidated Financial Statements -
Years Ended December 31, 2006, 2005 and 2004 F-11 - F-33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Soyo Group, Inc. and Subsidiary
Ontario, California
We have audited the accompanying consolidated balance sheets of Soyo Group, Inc.
and Subsidiary as of December 31, 2006 and 2005, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years
ended December 31, 2006. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 11, the accompanying consolidated financial statements have
been restated.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Soyo Group, Inc.
and Subsidiary as of December 31, 2006 and 2005, and the consolidated results of
its operations and its cash flows for the years ended December 31, 2006 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Vasquez and Company
-----------------------
Vasquez and Company, L.P
Los Angeles, California
March 30, 2007 (except for Note 11 as to which the date is February 28, 2008)
|
SOYO Group, Inc. and Subsidiary
Consolidated Balance Sheets
December 31,
----------------------------
2006 2005
------------ ------------
(Restated)
ASSETS
Current Assets
Cash and cash equivalents $ 1,501,040 $ 828,294
Accounts receivable, net of allowance for doubtful accounts of
$388,958 and $589,224 at December 31, 2006 and 2005, respectively 16,467,135 7,278,520
Inventories 7,792,621 7,991,030
Prepaid expenses 36,633 20,984
--
Deposits 243,095 36,920
------------ ------------
Total current assets 26,040,524 16,155,748
------------ ------------
Property and equipment 711,015 867,122
Less: accumulated depreciation and amortization (159,300) (115,480)
------------ ------------
551,715 751,642
------------ ------------
Total Assets $ 26,592,239 $ 16,907,390
============ ============
LIABILITIES
Current Liabilities
Accounts payable $ 16,073,617 $ 13,977,579
Accrued liabilities 572,457 1,287,108
Receivables sold with Recourse 3,588,403 --
Short term loan 100,000 165,000
------------ ------------
Total current liabilities 20,334,477 15,429,687
------------ ------------
Long term payable 3,735,198 --
------------ ------------
Total liabilities 24,069,675 15,429,687
------------ ------------
EQUITY
Class B Preferred stock, $0.001 par value,
authorized - 10,000,000 shares, Issued
and outstanding - 2,614,195 shares in 2006
and 2005 1,918,974 1,702,486
Preferred stock backup withholding (149,945) (84,999)
Common stock, $0.001 par value.
Authorized - 75,000,000 shares, Issued and
outstanding - 49,025,511 shares (48,681,511 shares - 2005) 49,026 48,682
Additional paid-in capital 17,866,531 17,225,738
Accumulated deficit (17,162,022) (17,414,204)
------------ ------------
Total shareholders' equity 2,522,564 1,477,703
------------ ------------
Total Liabilities and Shareholders' Equity $ 26,592,239 $ 16,907,390
============ ============
|
See accmpanying notes to consolidated financial statements.
SOYO Group, Inc. and Subsidiary
Consolidated Statements of Operations
Year Ended December 31
--------------------------------------------
2006
restated 2005 2004
------------ ------------ ------------
Net revenues $ 56,758,688 $ 38,263,032 $ 32,426,414
------------ ------------ ------------
Cost of revenues, including inventory purchased from
Soyo Computer, Inc. of $0, $0, and $14,0004,259 in
2006, 2005 and 2004, respectively 47,534,249 34,905,874 30,210,042
Prior years' purchase discounts and allowances settled
In 2005 -- (1,335,812) --
------------ ------------ ------------
Cost of revenues - net 47,534,249 33,570,062 30,210,042
------------ ------------ ------------
Gross margin 9,224,439 4,692,970 2,216,372
------------ ------------ ------------
Costs and expenses:
Sales and marketing 1,143,475 911,039 1,577,609
General and administrative 5,610,810 3,659,338 3,560,710
Bad debts 907,065 34,513 956,738
Adjustment of allowance -- (462,234) --
Depreciation and amortization 43,818 35,394 34,998
------------ ------------ ------------
Total cost and expenses 7,705,168 4,178,050 6,130,055
------------ ------------ ------------
Income (loss) from operations 1,519,271 514,920 (3,913,683)
------------ ------------ ------------
Other income (expenses):
Interest income 10,561 5,301 --
Interest expense (901.900) (129,567) (23,371)
Other income (expenses) (106,262) 150,456 17,609
------------ ------------ ------------
Other income (expenses) - net (997,601) 26,190 (5,762)
------------ ------------ ------------
Income(loss) before provision (benefit)
for income taxes 521,670 541,110 (3,919,445)
Provision (benefit) for income taxes
Current income tax (53,000) 800 800
-- --
------------ ------------ ------------
Net income (loss) 468,670 540,310 (3,920,245)
Less: Dividends on Convertible Preferred Stock (216,488) (1,173,753) (223,733)
------------ ------------ ------------
Net income (loss) attributable to
common shareholders $ 252,182 $ (633,443) $ (4,143,978)
============ ============ ============
Net loss per common share - basic and diluted $0.01/$0.01 ($0.01)/$0.01) ($0.10)/$0.10)
Weighted average number of shares of 49,025,511/ 48,511,681/ 40,000,000/
common stock outstanding - basic and diluted 59,786,042 52,868,673 40,000,000
|
See accmpanying notes to consolidated financial statements.
SOYO Group, Inc. and Subsidiary
Consolidated Statements of Shareholders' Equity (Deficit)
Years Ended December 31, 2006, 2005 and 2004
Additional Total
Common Stock Preferred Stock Paid In Accumulated Shareholders
Shares Par Value Shares Par Value Capital Deficit Deficiency
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2001 28,182,750 28,183 1,000,000 1,000 470,817 (918,737) (418,737)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Shares of common stock
retained by
shareholders
in October 2002
transaction 11,817,250 11,817 (11,817)
Net loss for the year
ended December 31, 2002 -- -- -- -- -- (10,733,458) (10,733,458)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2002 40,000,000 40,000 1,000,000 1,000 459,000 (11,652,195) (11,152,195)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss for the year
ended December 31, 2003 -- -- -- -- (984,588) (984,588)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2003 40,000,000 40,000 1,000,000 1,000 459,000 (12,636,783) (12,136,783)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Issuance of Preferred
Stock for Long Term Debt 2,500,000 1,304,000 10,696,000 12,000,000
Dividends 14,195 114,195 114,195
Accretion of Discount 109,538 109,538
Net loss for the year
ended December 31, 2004 -- -- (4,143,978) (4,143,978)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2004 40,000,000 40,000 3,614,195 1,528,733 11,155,000 (16,780,761) (4,057,028)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Issuance of Common
Stock for Private Placement 500,000 500 499,500 500,000
Issuance of Common
Stock for Payment of Services 30,000 30 30
Issuance of Common
Stock for Payment of Accounts
Payable 5,645,330 5,645 3,608,744 3,614,389
Issuance of Common
Stock for Payment of Loan 1,286,669 1,287 963,714 965,001
Issuance of Common
Stock for Conversion of
Preferred Stock 1,219,512 1,220 (1,000,000) (1,000) 998,780 999,000
Accretion of Discount 174,753 174,753
Preferred Stock Backup
Withholding (84,999) (84,999)
Net Income 540,310 540,310
Preferred Stock Dividends (1,173,753) (1,173,753)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2005 48,681,511 48,682 2,614,195 1,617,487 17,225,738 (17,414,204) 1,477,703
=========== =========== =========== =========== =========== =========== ===========
Issuance of Common Stock 39,000 39 24,531 24,570
Issuance of Common Stock 267,000 267 80,100 80,367
Issuance of Common Stock 38,000 38 12,502 12,540
Accretion of Discount 216,488 216,488
Preferred Stock Backup
Withholding (64,946) (64,946)
To book FAS 123 adjustment 506,221 506,221
Misc. Adjustment 17,439 35,694 53,133
Net Income 216,488 216,488
----------- ----------- ----------- ----------- ----------- ----------- -----------
49,025,511 49,026 2,614,195 1,769,029 17,866,531 (17,162,022) 2,522,564
=========== =========== =========== =========== =========== =========== ===========
|
SOYO Group, Inc. and Subsidiary
Consolidated Statements of Cash Flows
--------------------------------------------
Years Ended December 31,
--------------------------------------------
2006 2005 2004
restated
------------ ------------ ------------
OPERATING ACTIVITIES
Net Income (loss) $ 252,182 540,310 $ (3,920,245)
Adjustments to reconcile net
income(loss) to net cash provided
by (used in) operating activities:
Depreciation 43,818 35,394 34,998
Provision for doubtful accounts 907,065 34,513 956,738
Conversion of accounts payable to long-term debt 3,735,198 --
Stock compensation for employees 506,222
Stock compensation paid for
professional services 134,915
Changes in operating assets
and liabilities:
(Increase) decrease in:
Accounts receivable (10,095,680) (5,236,151) 3,785,110
Inventories 198,409 (4,128,119) 1,173,214
Prepaid expenses (15,649) 51,432 18,557
Deposits (206,175) (2,109) (9,776)
Increase (decrease) in:
Accounts payable trade & others 2,096,038 8,017,326 (2,458,580)
Accrued liabilities (714,651) 509,316 236,059
------------ ------------ ------------
Net cash provided by (used in) operating activities (2,731,953) (178,088) (183,925)
------------ ------------ ------------
INVESTING ACTIVITIES
Purchase of property and equipment (48,891) (621,970) (158,670)
Disposal of Fixed Assets 205,000
------------ ------------ ------------
Net cash Supplied (used) in investing activities 156,109 (621,970) (158,670)
------------ ------------ ------------
FINANCING ACTIVITIES
Advances from officer, directors and major shareholder 165,000
Proceeds from accounts receivable discounting 15,611,928 913,750
Repayments of accounts receivable discounting (12,023,525)
Repayment of advances from officer, director
and major shareholder (65,000) (240,000)
500,000
Payment of backup withholding
taxes on accreted dividends (64,946) (84,999)
on preferred stock
------------ ------------ ------------
Net cash provided by financing activities 3,458,457 340,001 913,750
------------ ------------ ------------
|
CASH AND CASH EQUIVALENTS:
Net increase (decrease) 672,746 (460,057) 571,155
At beginning of year 828,294 1,288,351 717,196
------------ ------------ ------------
At end of year
1,501,040 828,294 1,288,351
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest 901,900 97,783 23,371
Cash paid for income taxes 20,310 800 800
NON-CASH INVESTING AND FINANCING
ACTIVITIES
Settlement of business loan of
$913,750 and accrued interest of
$51,251 through issuance of common stock 965,001
Settlement of accounts payable
through issuance of common stock 3,614,419
Conversion of Class A preferred
stock to common stock 1,000
Accretion of discount on Class B 216,488 174,753 109,538
preferred stock
Deemed dividend on Class A 999,000
preferred stock
Noncash dividend on Class B
preferred stock 114,195
|
SOYO Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005 and 2004
1. Organization and Business
a. 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 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 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, and pro forma information has
not been presented, as this transaction is not a business combination.
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 MingTung
Chok, the Company's President, Chief Executive Officer and Director, and Nancy
Chu, the Company's Chief Financial Officer, Secretary and Director. 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".
b. Nature of Business
SOYO Group, Inc. is a distributor of consumer electronics, computer products and
communications services and products. The Company radically changed its core
offerings for sale in 2004. Through the consumer electronics division, SOYO
offers a full line of LCD display televisions and monitors, as well as Bluetooth
wireless devices. Through the communications division, SOYO offers discount
telephone service through VoIP protocol. The services can be purchased through
different types of plans and rates, making the service very flexible for the
user. The hardware to create and run VoIP services is also available for sale.
Lastly, the Company offers a full line of designer motherboards and related
peripherals for intensive multimedia applications, corporate alliances,
telecommunications and specialty market requirements. The breadth of the product
line also includes Bare Bone systems, flash memory as well as small hard disk
drives for corporate and mobile users, internal multimedia reader/writer and
wireless networking solutions products for any home and office (SOHO) users.
SOYO Group's products are sold through an extensive network of authorized
distributors to resellers, system integrators, and value-added resellers (VARs).
These products are also sold through major retailers, mail-order catalogs and
e-tailers to consumers throughout North America and Latin America.
During the years that the Company operated through October 24, 2002, SOYO Nevada
was a wholly-owned subsidiary of SOYO Taiwan.
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, then has
the option to either pay for the goods or sell the receivable (from the
customer) to our factor, who pays GE Capital. For more information, please see
the contract, whch is included as exhibit 10.4 to this report.
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. For
more informaiton, please see the Form 8-K filed by the company on March 2,2007.
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.
2. Basis of Presentation and Summary of Significant Accounting Policies
a. Presentation
The consolidated financial statements include the accounts of SOYO and SOYO
Nevada. All significant intercompany accounts and transactions have been
eliminated in consolidation. The financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America.
b. Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
c. Cash and Cash Equivalents
Cash and cash equivalents include all highly-liquid investments with an original
maturity of three months or less at the date of purchase. The Company minimizes
its credit risk by investing its cash and cash equivalents with major banks and
financial institutions located primarily in the United States.
d. 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
will reduce the computed average cost if it exceeds the component's marketvalue.
During the years ended December 31, 2006, 2005 and 2004, the Company wrote-down
the value of its inventory by $0, $0 and $47,084 respectively.
e. Property and Equipment
Property and equipment are stated at cost. Major renewals and improvements are
capitalized; minor replacements and maintenance and repairs are charged to
operations. Depreciation is provided on the straight-line method over the
estimated useful lives of the respective assets (three to seven years).
Leasehold improvements are amortized over the shorter of the useful life of the
improvement or the life of the related lease.
f. Impairment or Disposal of Long-Lived Assets
Effective January 1, 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". The Company assesses potential impairments to
its long-lived assets when events or changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable. If required, an
impairment loss is recognized as the difference between the carrying value and
the fair value of the assets. No impairment losses associated with the Company's
long-lived assets were recognized during the years ended December 31, 2006 and
2005.
g. 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.
h. Vendor Programs
Funds received from 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.
i. Warranties
The Company's suppliers generally warrant the products distributed by the
Company and allow returns of defective products, including those that have been
returned to the Company by its customers. The Company does not independently
warrant the products that it distributes, but it does provide warranty services
on behalf of the supplier.
j. Concentration of Cash and Credit Risk
The Company maintains its cash in bank accounts which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts to date. Management believes that the Company is not exposed to any
significant risk on the Company's cash balances.
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of trade accounts receivable.
The Company performs ongoing credit evaluations with respect to the financial
condition of its debtors, but does not require collateral. The Company maintains
credit insurance for a portion of this credit risk.
In order to determine the value of the Company's accounts receivable, the
Company records a provision for doubtful accounts to cover probable credit
losses. Management reviews and adjusts this allowance periodically based on
historical experience and its evaluation of the collectibility of outstanding
accounts receivable.
k. Advertising
Advertising costs are charged to expense as incurred. The Company has not
incurred direct advertising costs. However, the Company may participate in
cooperative advertising programs with certain of its customers by paying a
stipulated percentage of the sales invoice price. Cooperative advertising costs
paid for the years ended December 31, 2006, 2005, and 2004 were $834,616,
$849,897, and $1,481,441 respectively, and are presented under sales and
marketing costs in the accompanying consolidated statements of operations.
l. Income Taxes
The Company accounts for income taxes using the asset and liability method
whereby deferred income taxes are recognized for the tax consequences of
temporary differences by applying statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of certain assets and liabilities. Changes in deferred tax assets and
liabilities include the impact of any tax rate changes enacted during the year.
A valuation allowance is provided for the amount of deferred tax assets that,
based on available evidence, are not expected to be realized.
m. Income (Loss) Per Common Share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share",
requires presentation of basic earnings per share ("Basic EPS") and diluted
earnings per share ("Diluted EPS"). Basic income (loss) per share is computed by
dividing net income (loss) available to common shareholders by the weighted
average number of common shares outstanding during the period. Diluted income
per share gives effect to all dilutive potential common shares outstanding
during the period. Potentially dilutive securities consist of the outstanding
shares of preferred stock, and stock options granted to employees in 2005. The
stock options were not included in the calculation of fully diluted EPS for the
year ended December 31, 2006, since the strike price of the outstanding options
is below the market price of the Company's common stock. None of the potentially
dilutive securities were included in the calculation of loss per share for the
years ended December 31, 2005, and 2004 because the Company incurred a loss
attributable to common shareholders during such periods and their effect would
have been anti-dilutive. Accordingly, basic and diluted loss per share is the
same for the years ended December 31, 2006, 2005 and 2004.
n. Comprehensive Income
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 or loss for the years ended December 31, 2006,
2005 and 2004.
o. Fair Value of Financial Instruments
The Company believes that the carrying value of its cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities as of December 31,
2006 and 2005 approximate their respective fair values due to the short-term
nature of those instruments.
p. 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"), as amended by SFAS No.148 "Accounting for
Stock-Based Compensation--Transition and Disclosures." 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. Under the intrinsic value method, the
Company has recognized stock-based compensation common stock on the date of
grant.
Effective January 1, 2006 the Company adopted SFAS 123(R) using the modified
prospective approach and accordingly prior periods have not been restated to
reflect the impact of SFAS 123(R). Under SFAS 123(R), 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 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
three years.
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. Stock-based compensation expense has been recorded net of
estimated forfeitures for the year ended December 31, 2006 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.
SFAS 123 requires the Company to provide pro-forma information regarding net
loss as if compensation cost for the stock options granted to the Company's
employees had been determined in accordance with the fair value based method
prescribed in SFAS 123. Options granted to non-employees are recognized in these
financial statements as compensation expense under SFAS 123 (See Note 11) using
the Black-Scholes option-pricing model.
If the fair value based method under FAS 123 had been applied in measuring
stock-based compensation expense for the year ended December 31, 2005, the pro
forma on net income (loss) and net income (loss) per share would have been as
follows:
Year Ended
December 31,
2005
----------------
Net income (loss) attributable to common shareholders, as reported $ (633,443)
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effect --
Deduct: Total stock-based employee compensation expense
determined under fair-value based method for all awards
not included in net income (loss) (224,919)
----------------
Pro forma net income (loss) attributable to common shareholders $ (858,362)
================
Income (loss) per share:
Basic/diluted - as reported ($0.01)/($0.01)
Basic/diluted - pro forma ($0.02)/($0.02)
|
q. 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.
r. 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 of adopting SFAS 159 on its financial position, cash
flows, and results of operations.
In October 2006, the Emerging Issues Task Force ("EITF") issued EITF 06-3, "How
Taxes Collected from Customers and Remitted to Governmental Authorities Should
Be Presented in the Income Statement (that is, Gross versus Net Presentation)"
to clarify diversity in practice on the presentation of different types of taxes
in the financial statements. The Task Force concluded that, for taxes within the
scope of the issue, a company may adopt a policy of presenting taxes either
gross within revenue or net. That is, it may include charges to customers for
taxes within revenues and the charge for the taxes from the taxing authority
within cost of sales, or, alternatively, it may net the charge to the customer
and the charge from the taxing authority. If taxes subject to EITF 06-3 are
significant, a company is required to disclose its accounting policy for
presenting taxes and the amounts of such taxes that are recognized on a gross
basis. The guidance in this consensus is effective for the first interim
reporting period beginning after December 15, 2006 (the first quarter of the
Company's fiscal year 2007). The Company does not expect the adoption of EITF
06-3 to have a material impact on our results of operations, financial position
or cash flow.
In September 2006, the United States Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"). This SAB provides guidance on the consideration of the
effects of prior year misstatements in quantifying current year misstatements
for the purpose of a materiality assessment. SAB 108 establishes an approach
that requires quantification of financial statement errors based on the effects
on each of the company's balance sheets, statements of operations and related
financial statement disclosures. The SAB permits existing public companies to
record the cumulative effect of initially applying this approach in the first
year ending after November 15, 2006 by recording the necessary correcting
adjustments to the carrying values of assets and liabilities as of the beginning
of that year with the offsetting adjustment recorded to the opening balance of
retained earnings. Additionally, the use of the cumulative effect transition
method requires detailed disclosure of the nature and amount of each individual
error being corrected through the cumulative adjustment and how and when it
arose. The Company is currently evaluating the impact SAB 108 may have on its
results of operations and financial condition.
In September 2006, the FASB issued SFAS No. 158, "Employer's accounting for
Defined Benefit Pension and Other Post Retirement Plans". SFAS No. 158 requires
employers to recognize in its statement of financial position an asset or
liability based on the retirement plan's over or under funded status. SFAS No.
158 is effective for fiscal years ending after December 15, 2006. The Company is
currently evaluating the effect that the application of SFAS No. 158 will have
on its results of operations and financial condition.
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 July 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.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets" ("SFAS NO. 156"), which provides an approach to simplify
efforts to obtain hedge-like (offset) accounting. This Statement amends FASB
Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities", with respect to the accounting for
separately recognized servicing assets and servicing liabilities. The Statement
(1) requires an entity to recognize a servicing asset or servicing liability
each time it undertakes an obligation to service a financial asset by entering
into a servicing contract in certain situations; (2) requires that a separately
recognized servicing asset or servicing liability be initially measured at fair
value, if practicable; (3) permits an entity to choose either the amortization
method or the fair value method for subsequent measurement for each class of
separately recognized servicing assets or servicing liabilities; (4) permits at
initial adoption a one-time reclassification of available-for-sale securities to
trading securities by an entity with recognized servicing rights, provided the
securities reclassified offset the entity's exposure to changes in the fair
value of the servicing assets or liabilities; and (5) requires separate
presentation of servicing assets and servicing liabilities subsequently measured
at fair value in the balance sheet and additional disclosures for all separately
recognized servicing assets and servicing liabilities. SFAS No. 156 is effective
for all separately recognized servicing assets and liabilities as of the
beginning of an entity's fiscal year that begins after September 15, 2006, with
earlier adoption permitted in certain circumstances. The Statement also
describes the manner in which it should be initially applied. This Statement
does not affect the Company's financial statements.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments", which amends SFAS No. 133, "Accounting for Derivatives
Instruments and Hedging Activities" and SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities". SFAS No.
155 amends SFAS No. 133 to narrow the scope exception for interest-only and
principal-only strips on debt instruments to include only such strips
representing rights to receive a specified portion of the contractual interest
or principle cash flows. SFAS No. 155 also amends SFAS No. 140 to allow
qualifying special-purpose entities to hold a passive derivative financial
instrument pertaining to beneficial interests that itself is a derivative
instrument. This Statement does not affect the Company's financial statements.
In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, "The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments"
("FSP 115-1 and 124-1"), which clarifies when an investment is considered
impaired, whether the impairment is other-than-temporary, and the measurement of
an impairment loss. It also includes accounting considerations subsequent to the
recognition of the other-than-temporary impairment and requires certain
disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. FSP 115-1 and 124-1 are effective for all
reporting periods beginning after December 15, 2005. The Company does not
anticipate that the implementation of these statements will have a significant
impact on its financial position, results of operations or cash flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS No. 154"). SFAS No. 154 is a replacement of Accounting
Principles Board Opinion No. 20 and SFAS No. 3. SFAS No. 154 provides guidance
on the accounting for and reporting of accounting changes and error corrections.
It establishes retrospective application as the required method for reporting a
change in accounting principle. SFAS No. 154 provides guidance for determining
whether retrospective application of a change in accounting principle is
impracticable and for reporting a change when retrospective application is
impracticable. SFAS No. 154 also addresses the reporting of a correction of an
error by restating previously issued financial statements. SFAS No 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The Company does not believe that it will
have a material impact on its financial position, results of operations or cash
flows.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No.
29, Accounting for Nonmonetary Transactions." The amendments made by Statement
153 are based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. Further, the
amendments eliminate the narrow exception for nonmonetary exchanges of similar
productive assets and replace it with a broader exception for exchanges of
nonmonetary assets that do not have commercial substance. Previously, Opinion 29
required that the accounting for an exchange of a productive asset for a similar
productive asset or an equivalent interest in the same or similar productive
asset should be based on the recorded amount of the asset relinquished. Opinion
29 provided an exception to its basic measurement principle (fair value) for
exchanges of similar productive assets. The FASB believes that exception
required that some nonmonetary exchanges, although commercially substantive, be
recorded on a carryover basis. By focusing the exception on exchanges that lack
commercial substance, the FASB believes this statement produces financial
reporting that more faithfully represents the economics of the transactions.
SFAS 153 is effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges occurring in fiscal periods beginning after the date
of issuance. The provisions of SFAS 153 shall be applied prospectively. The
Company has evaluated the impact of the adoption of SFAS 153, and does not
believe the impact will be significant to the Company's overall results of
operations or financial position.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4". The amendments made by Statement 151 clarify that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current period charges and require
the allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after November 23, 2004. This Statement does not affect the Company's
financial statements.
3. Accounts Receivable
The Company's accounts receivable at December 31, 2006 and 2005 are summarized
as follows:
2006 2005
------------------- ------------------
Accounts receivable $ 16,856,093 $ 7,867,744
Less: Allowance for doubtful accounts (388,958) (589,224)
------------------- ------------------
Balance, end of year $ 16,467,135 $ 7,278,520
=================== ==================
Changes in the allowance for doubtful accounts for the years ended December 31,
2006 and 2005 are summarized as follows:
2006 2005
------------------- ------------------
Balance, beginning of year $ 589,224 $ 1,074,550
Add: Amounts provided during the year 235,939 (427,721)
Less: Amounts written off during the year (436,205) (57,605)
------------------- ------------------
Balance, end of year $ 388,958 $ 589,224
=================== ==================
|
In 2006, there was a direct write off of $671,126 for sales transactions during
the year which turned out to be uncollectible.
Since 2004, the Company has used three different factors to increase cash flow.
As a result, credit policies and requirements have changed frequently in the
last few years. When the Company was prepared to sign the agreement for the $12
million finance line (see Form 8-K file March 2, 2007), it reexamined the
receivables and wrote off all balances over 90 days, and wrote down to present
value all balances over 90 days that were making monthly payments. This resulted
in a large write off taken in the fourth quarter. As a result, any balances
witheven a small question about collectivity have been written off. Because of
this aggressive stance, the allowance for bad debts has decreased, even though
the accounts receivables balance has increased by over $5 million.
The Company began factoring its invoices in 2005 to improve cash flow. The
Company's initial factor was Wells Fargo PLC. In February 2006, the Company
signed a one year contract with Accord Financial Services of North Carolina for
factoring services. The agreement expired in February 2007 and was not renewed.
Under the Accord agreement, all of our receivables were sold with recourse. As
such, the Company continues to evaluate each of these receivables monthly in
regard to its allowance for bad debts. The original factor, Wells Fargo, bought
all accounts without recourse. When the switch over to Accord occured, those
transactions were "with recourse".
In 2006, the Company 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, then has the option to either pay for the goods or sell the
receivable (from the customer) to our factor, who paid GE Capital. The terms and
conditions of each advance vary according to current market conditions. At
December 31, 2006, $3,407,463 of the Company's receivables had been bought by
Accord Financial Services. At December 31, 2005, $580,363 of the Company's
receivables had been factored and were owned by Wells Fargo.
4. Property and Equipment
At December 31, 2006 and 2005, property and equipment consisted of the
following:
December 31,
---------------------------------------------------- ----------------------
2006 2005
---------------------------------------------------- ----------------------
Computer and Equipment $567,642 $744,176
---------------------------------- ------------------ ----------------------
Furniture and Fixtures 40,357 27,943
---------------------------------------------------- ----------------------
Leasehold Improvements 91,941 83,928
---------------------------------------------------- ----------------------
Automobiles 11,075 11,075
---------------------------------------------------- ----------------------
Total 711,015 867,122
Less: Accumulated Depreciation (159,300) (115,480)
---------------------------------------------------- ----------------------
Net $551,715 $751,642
---------------------------------------------------- ----------------------
|
For the years ended December 31, 2006, 2005 and 2004, depreciation and
amortization expense related to property and equipment was $43,818, $35,394 and
$34,998, respectively.
5. Advances from Officer, Director and Major Shareholder
During March 2003, Nancy Chu, the Company's Chief Financial Officer, director
and major shareholder, made short-term advances to the Company of $360,000 for
working capital purposes, of which $120,000 was repaid during September 2003.
The remaining $240,000 was paid during 2005.
In October 2005, the Company borrowed $165,000 from an individual for working
capital purposes. During 2006, $65,000 of the loan was repaid. At December 31,
2006, the loan balance stands at $100,000.
6. Receivables Sold With Recourse
During 2006, the Company utilized the factoring services of Accord Financial
Services to improve its cash flow. All invoices sold by the Company and
purchased by Accord were sold with recourse. As of December 31, 2006, the
balance due to Accord for advances received was $3,588,403.
7. Long Term Debt
Soyo is indebted to Corion for products purchased between January 2006 and March
2006.
On October 19, 2006, the Parties reached a mutually beneficial settlement
relating to the outstanding balance as of that date amounting to $4,252,682,
whereby Soyo agrees to pay Corion the sum of Fifty Thousand dollars ($50,000)
each week until fully paid. Notwithstanding the foregoing, Soyo shall have the
right, at its sole discretion, to defer four (4) payments during each calendar
quarter. Two (2) of these payments shall be deferred until the calendar quarter
following their deferral on a date selected by Soyo, and the remaining two (2)
payments shall be paid in weekly installments following all regularly scheduled
payments, but in any event not later than October 1, 2008.
No interest shall be charged on the Debt. Soyo shall pay the Debt in full by no
later than October 1, 2008.
Until the Debt is paid in full, Soyo agrees not to give any other supplier a
consensual lien with priority senior than that of Corion, except for purchase
money liens and other similar interests.
8. Shareholders' Equity
a. Common Stock
As of December 31, 2002, the Company had authorized 75,000,000 shares of common
stock with a par value of $0.001 per share.
Effective October 24, 2002, the Company issued 28,182,750 shares of common stock
to Ming Tung Chok and Nancy Chu, who are members of SOYO Nevada management (see
Note 1). The shares of common stock were valued at par value, since the
transaction was deemed to be a recapitalization of SOYO Nevada. During October
2002, the management of SOYO Nevada also separately purchased 6,026,798 shares
of the 11,817,250 shares of common stock of VWHC outstanding prior to VWHC's
acquisition of SOYO Nevada, for $300,000 in personal funds. The 6,026,798 shares
represented 51% of the outstanding shares of common stock. When the transaction
was complete, and control of the Company was transferred, SOYO Nevada management
owned 34,209,548 shares of the 40,000,000 outstanding shares of the Company's
common stock. Subsequent to the transaction, management distributed 8,000,000
shares of common stock to various brokers, bankers and other individuals that
assisted with the transaction. No one individual or corporation other than those
named in Item 12 of this report ever owned more than 5% of the common shares
outstanding. As a result of this transaction, SOYO Group management currently
owns 26,209,548 of the 49,025,511 shares outstanding as of December 31, 2006.
b. Preferred Stock
As of December 31, 2005, the Company had authorized 10,000,000 shares of
preferred stock with a par value $0.001 per share.
The Board of Directors is vested with the authority to divide the authorized
shares of preferred stock into series and to determine the relative rights and
preferences at the time of issuance of the series.
Effective October 24, 2002, the Company issued 1,000,000 shares of Class A
convertible preferred stock to SOYO Taiwan (see Note 1) with a stated
liquidation value of $1.00 per share. The shares of Class A preferred stock were
valued at par value, since the transaction was deemed to be a recapitalization
of SOYO Nevada. Each share of Class A preferred stock has one vote per share.
The Class A preferred stock has no stated dividend rate. The shares of Class A
preferred stock are convertible, in whole or in part, into common stock at any
time during the three-year period subsequent to their issuance, based on the
average closing bid price of the common stock for a period of five business days
prior to conversion. On October 24, 2005, the one million shares of preferred
stock were converted to 1,219,512 shares of common stock. The price of our
common stock on that day was $0.82.
During the first quarter of 2004, SOYO Taiwan entered into an agreement with an
unrelated third party to sell the $12,000,000 long-term payable due it by the
Company. As part of the agreement, SOYO Taiwan required that the purchaser would
be limited to collecting a maximum of $1,630,000 of the $12,000,000 from the
Company without the prior consent of SOYO Taiwan. SOYO Taiwan forgave debt in an
amount equal to the difference between $12,000,000 and the value of the
preferred stock. This forgiveness will be treated as a capital transaction.
Payment was received by SOYO Taiwan in February and March 2004. An agreement was
reached whereby 2,500,000 shares of Class B 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 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-transferrable.
For the year ended December 31, 2006, the Company recorded accreted dividends of
$216,488. For the year ended December 31, 2005, the Company recorded aggregate
dividends of $1,173,753, based on the accretion of the discount on the Class B
Convertible Preferred Stock of $174,753, and an adjustment of $999,000 to the
carrying value of the Class A preferred stock. From the Company's inception, the
Class A preferred stock was carried on the books at its basis of $1,000. Prior
to the conditional redemption of the Class A preferred stock to common stock on
October 24, 2005, the carrying value was adjusted to the face value of
$1,000,000. This resulted in adjustments to the preferred stock and th e
preferred stock dividends account of $999,000 The Company did not declare or
accrue any additional dividends on the Class B Preferred Stock.
c. Stock Options and Warrants
As of December 31, 2006, the Company had both warrants and options outstanding.
The outstanding warrants were those issued to Evergreen Technology as part of
the private placement completed in March 2005, and described above.
On July 22, 2005, the Company issued 2,889,000 option grants to employees at a
strike price of $0.75. One third of those options vested and were available for
purchase on July 22, 2006, one third will vest on July 22, 2007, and one third
will vest on July 22, 2008. The grants will expire if unused on July 22, 2010.
The Company did not grant any stock options to employees, officers or directors
in 2006. As of December 31, 2006, 13 individuals had left the Company, resulting
in the forfeiture of 510,000 options. As of December 31, 2006, 2,379,000 of the
2,889,000 options granted were still outstanding, and 793,000 had vested. As of
December 31, 2006, none of the options outstanding had been exercised.
Stock Based Compensation
Upon the adoption of SFAS123(R), the Company recorded $506,222 in compensation
costs relating to stock options granted to employees. The amounts recorded
represent equity-based compensation expense related to options that were issued
in 2005. The compensation costs are based on the fair value at the grant date.
There was no such expense recorded during 2005.
The fair value of the options expensed during the year ended December 31, 2006
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 during the year was approximately $1.5 million.
9. Income Taxes
The components of the provision for income taxes for the years ended December
31, 2006, 2005 and 2004 are as follows:
2006 2005 2004
-------------------------------------------
Current:
U.S. federal $ 1,000 $ $
State 52,000 800 800
-------------------------------------------
Total 53,000 800 800
-------------------------------------------
Deferred:
U.S. federal --
State --
-------------------------------------------
Total --
-------------------------------------------
|
Total $ 53,000 $ 800 $ 800
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets as of December 31, 2006, 2005 and 2004 are as
follows:
2006 2005 2004
------------------------------------------
Net operating loss carryforwards $ 1,310,000 $ 1,576,000 $
Depreciation 288,000 344,000
Reserves and allowances 214,000 304,000
State income taxes 69,000 52,000
------------------------------------------
Total deferred tax assets 1,881,000 2,276,000
Valuation allowance (1,881,000) (2,276,000)
------------------------------------------
Net deferred tax assets $ -- $ -- $
==========================================
|
The reconciliation between the income tax rate computed by applying the U.S.
federal statutory rate and the effective rate for the years ended December 31,
2006, 2005 and 2004 is as follows:
2006 2005 2004
----------------------------------------
U.S. federal statutory tax rate 34.0% 34.0% 34.0%
Stock-based compensation 33.0%
State income taxes 6.5% 9.0% 9.0%
Non-deductible expenses 2.9%
Change in valuation allowance (67.2%)
Other 0.8% (43.0%) (43.0%)
----------------------------------------
Effective tax rate 10.0%
========================================
|
At December 31, 2006, the Company has available net operating loss carryforwards
for federal income tax purposes of approximately $3,852,000 which, if not
utilized earlier, expire beginning in 2022.
10. Commitments and Contingencies
a. Operating Lease
The Company leases its office and warehouse premises under a five-year
non-cancelable operating lease that expires on November 30, 2008, with a five
year renewal option. The lease provides for monthly payments of base rent and an
unallocated portion of building operating costs. The minimum future lease
payments are as follows:
Years Ending December 31,
2007 212,692
2008 194,967
Rent expense for the years ended December 31, 2006, 2005 and 2004 was $229,540,
$238,836 and $229,718 respectively.
11. Restatement and Reclassification
The Company is restating its previously issued 2006 consolidated financial
statements for the following reasons: error in not recording a valuation
allowance for the deferred tax asset arising from temporary timing differences
between tax accounting and GAAP accounting.
In 2006, the Company recognized a deferred income tax asset in reflecting the
net tax effect of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income
tax purposes. The resulting deferred tax asset was carried on the Company's
balance sheet without a valuation allowance. The Company now believes that the
appropriate treatment of the asset includes a valuation allowance to reduce the
carrying amount to zero. The additional income taxes payable have been recorded
as an accrued liability.
The effect on the Company's previously issued 2006 financial statements is
summarized as follows:
As Previously
Reported
In Report 10-K/A
filed August 7, Increase
2007 (Decrease) Restated
------------ ------------ ------------
Balance Sheet Data
Deferred income tax assets $ 177,177 $ (177,177) $ 0
Total current assets 26,217,701 (177,177) 26,040,524
Total Assets 26,769,416 (177,177) $ 26,592,239
Accrued Liabilities $ 539,767 32,690 572,457
Total current liabilities 20,301,787 32,690 20,334,477
Total Liabilities $ 24,036,985 32,690 24,069,675
Total Shareholders' Equity $ 2,732,431 (209,867) 2,522,564
Statement of Operations Data
Current Income Tax (20,310) (32,690) (53,000)
Deferred Income Tax 177,177 (177,177) 0
Net Income $ 678,537 $ (209,867) 468,670
Cash Flow Statement
Net Income $ 678,537 $ (209,867) 468,670
Deferred Income Tax Asset $ 177,177 $ (177,177) $ 0
Accrued Liabilities $ 747,341 $ (32,690) $ 714,651
Net Cash Used in Operating Activities $ (2,941,820) $ 209,867 $ (2,731,953)
|
12. Significant Concentrations
a. Customers
The Company sells to both distributors and retailers. Revenues through such
distribution channels for the years ended December 31, 2006, 2005 and 2004 are
summarized as follows:
Year Ended December 31
2006 % 2005 % 2004 %
Revenues
Distributors $35,510,804 62.6 $22,312,488 58.3 $14,704,452 45.3
Retailers 15,187,152 26.8 15,742,332 41.2 17,721,962 54.7
Others 6,060,732 10.6 208,212 0.5 N/A N/A
Total $56,758,688 100.0 $38,263,032 100.0 $32,426,414 100.0
|
During the year ended December 31, 2006, no customer accounted for more than 8%
of sales.
During the year ended December 31, 2005, the Company had one customer (E23) that
accounted for revenues of $13,552,324, equivalent to 35% of net revenues.
b. Geographic Segments
Revenues by geographic segment are summarized as follows:
Year Ended December 31
2006 % 2005 % 2004 %
Revenues
United States $42,628,547 75.2 $20,686,944 54.1 $25,936,978 80.0
Other N. America 2,472,209 4.4 983,606 2.6 N/A N/A
Central and South America 10,253,665 18.0 2,993,532 7.8 6,317,907 19.5
Hong Kong 0.2 13,598,950 35.5 0.5
139,490 171,529
Other locations 1,264,777 2.2 N/A N/A N/A N/A
Total $56,758,688 100.0 $38,263,032 100.0 $32,426,414 100.0
|
During the year 2004 segment data on the "Other N. America Business" segment was
not kept as it was very small in relation to the size of the United States
business at that time, no compilations of the data were made as there were no
internal decision process that would have been governed by such information and
the compilation of this information would have been impractical and offered no
value to the organization.
During the first part of 2005, the Company had made a commitment to its new
product lines, but did not have much inventory to sell. While waiting for the
initial inventory shipments, the Company entered into a short term agreement to
make sales of computer components to a vendor in Hong Kong (E23). The sales had
relatively low margin, and not a business that the Company planned to be in long
term. Nevertheless, the sales of such products in 2005 represented a significant
portion of the Company's business.
Revenues by product line are summarized as follows:
Year Ended December 31
2006 % 2005 % 2004 %
Revenues
Consumer electronics $27,543,873 48.5 $18,739,719 49.0 N/A N/A
Computer parts and
peripherals 29,204,792 51.5 18,906,367 49.4 N/A N/A
Voice and communication 10,023 -- 616,946 1.6 N/A N/A
Total $56,758,688 100.0 $38,263,032 100.0 $32,426,414 100.0
|
The breakdowns to segregate sales by product line is not available for years
prior to 2005. During the years prior to 2005, the Company sold primarily
computer parts and peripherals. The dollar volume of sales of both consumer
electronics and voice and communication products were very small and immaterial
in the scope of the Company's business. As sales of consumer electronics and
voice and communication products have grown, the Company has begun recognizing
the sales in each category, and will continue to segregate the sales for
reporting purposes in the future.
c. Suppliers
From the Company's inception through December 31, 2003, over 80% of the products
sold were produced by SOYO Taiwan. In 2004, the Company went through a partial
reorganization, changing the sales mix. The decision was made to focus more on
peripherals, VoIP, and other products, while deemphasizing sales of hardware and
motherboards, which are much more mature markets. As a result, the Company
significantly reduced its reliance on SOYO Taiwan.
During the years ended December 31, 2006 and 2005, the Company did not purchase
any products from SOYO Taiwan. As of December 31, 2006, no more than 44% of the
products distributed by the SOYO Group are supplied by any one supplier. As
started in 2004, SOYO Group, Inc. is aggressively establishing new partnerships
with other OEM manufacturers in the North America and Asia Pacific Regions in
order to provide innovative products for consumers.
The following is a summary of the Company's transactions and balances with SOYO
Taiwan as of and for the years ended December 31, 2006, 2005 and 2004:
December 31,
----------------------------------------------- --------------- ----------------
2006 2005 2004
----------------------------------------------- --------------- ----------------
Accounts payable to SOYO Taiwan $0 $0 $1,314,910
----------------------------------------------- --------------- ----------------
Long-term payable to SOYO Taiwan $0 $0 $0
----------------------------------------------- --------------- ----------------
|
Years Ended December 31,
----------------------------------------------- --------------- ----------------
2006 2005 2004
----------------------------------------------- --------------- ----------------
Purchases from SOYO Taiwan $0 $0 $14,004,259
----------------------------------------------- --------------- ----------------
Payments to SOYO Taiwan $0 $873,050 $19,154,603
----------------------------------------------- --------------- ----------------
|
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.
13. Quarterly Results (Unaudited)
Presented below is a summary of the quarterly results of operations for the
years ended Dcember 31, 2006 and 2005.
Three months ended:
----------------------- ---------------- ---------------- ---------------- ----------------- ----------------
March 31, 2006 June 30, 2006 Sept 30, 2006 Dec 31, 2006 Total
restated
----------------------- ---------------- ---------------- ---------------- ----------------- ----------------
Net revenues $ 11,548,187 $ 10,787,515 $ 10,005,084 $ 24,417,902 $ 56,758,688
----------------------- ------------ ------------ ------------ ------------ ------------
Gross margin 1,651,088 2,306,753 2,233,361 3,033,237 9,224,439
----------------------- ------------ ------------ ------------ ------------ ------------
Income (loss) from (209,526) 635,182 526,909 566,706 1,519,271
Operations
----------------------- ------------ ------------ ------------ ------------ ------------
Other Income (64,609) (73,968) (207,338) (651,686) (997,601)
(Expense), Net
----------------------- ------------ ------------ ------------ ------------ ------------
Income (loss) before (274,135) 561,214 319,568 (84,977) 521,670
taxes
----------------------- ------------ ------------ ------------ ------------ ------------
Income taxes 0 0 0 (53.000) (53,000)
----------------------- ------------ ------------ ------------ ------------ ------------
Net Income (loss) (274,135) 561,214 319,568 (137,977) 468,670
----------------------- ------------ ------------ ------------ ------------ ------------
Dividends (49,856) (52,598) (55,491) (58,543) (216,488)
----------------------- ------------ ------------ ------------ ------------ ------------
Net Income(Loss) (323,991) 508,616 264,077 (196,520) 252,182
Attributable to
Common Shareholders
----------------------- ------------ ------------ ------------ ------------ ------------
Net income
(loss) per
common share -
Basic
Diluted (.01) .01 (.00) (.01) (.01)
(.01) .01 (.00) (.01) (.01)
----------------------- ------------ ------------ ------------ ------------ ------------
Weighted average
number of
common
shares
outstanding -
Basic 48,834,511 48,834,511 48,853,511 48,853,511 49,025,511
Diluted 51,857,043 55,342,474 55,515,583 57,238,826 59,786,042
----------------------- ------------ ------------ ------------ ------------ ------------
|
Three months ended:
----------------------- ---------------- ----------------- -------------- ------------------ ----------------
March 31, 2005 June 30, 2005 Sept 30, 2005 Dec 31, 2005 Total
----------------------- ---------------- ----------------- -------------- ------------------ ----------------
Net revenues $ 3,962,520 $ 8,494,311 $ 9,233,430 $ 16,572,771 $ 38,263,032
----------------------- ------------ ------------ ------------ ------------ ------------
Gross margin $ 1,522,035 $ 1,054,872 $ 206,771 $ 1,909,292 $ 4,692,970
----------------------- ------------ ------------ ------------ ------------ ------------
Income (loss) from $ 308,724 $ 36,760 ($ 482,407) $ 651,843 $ 514,920
Operations
----------------------- ------------ ------------ ------------ ------------ ------------
Other Income $ 77,951 $ 65,359 $ 120,215 ($ 237,335) $ 26,190
(Expense), Net
----------------------- ------------ ------------ ------------ ------------ ------------
Income (loss) before $ 386,675 $ 102,119 ($ 362,192) $ 414,508 $ 541,110
taxes
----------------------- ------------ ------------ ------------ ------------ ------------
Income taxes (800) (800)
----------------------- ------------ ------------ ------------ ------------ ------------
Net Income (loss) $ 386,675 $ 102,119 ($ 362,192) $ 413,708 $ 540,310
----------------------- ------------ ------------ ------------ ------------ ------------
Dividends $ 39,213 $ 42,458 $ 42,935 $ 1,049,147 $ 1,173,753
----------------------- ------------ ------------ ------------ ------------ ------------
Net Income(Loss) $ 347,462 $ 59,661 ($ 405,127) ($ 635,439) ($ 633,443)
Attributable to
Common Shareholders
----------------------- ------------ ------------ ------------ ------------ ------------
Net income
(loss) per
common share -
Basic .01 -- (.01) (.01) (.01)
Diluted .01 -- (.01) (.01) (.01)
----------------------- ------------ ------------ ------------ ------------ ------------
Weighted average
number of
common
shares
outstanding -
Basic 48,681,511 48,681,511 48,681,511 48,681,511 48,511,681
Diluted 52,736,204 52,736,204 48,681,511 48,681,511 48,511,681
----------------------- ------------ ------------ ------------ ------------ ------------
|
During the year 2005, the Company booked approximately $1,000,000 in the first
quarter and $300,000 in the second quarter to miscellaneous income. During the
fourth quarter, the Company determined that the correct classification of the
amounts was as a reduction to cost of sales, and not to miscellaneous income.
The amounts are placed above as they should have been booked, which will not
agree with the 10Q reports issued as of March 31, June 30, and September 30,
2005.