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YOSEN GROUP, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

August 14, 2014

Forward Looking Statements

We have included and from time to time may make in our public filings, press releases or other public statements, certain statements, including, without limitation, those under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7. In some cases these statements are identifiable through the use of words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project," "target," "can," "could," "may," "should," "will," "would" and similar expressions. You are cautioned not to place undue reliance on these forward-looking statements. In addition, our management may make forward-looking statements to analysts, investors, representatives of the media and others. These forward-looking statements are not historical facts and represent only our beliefs regarding future events, many of which, by their nature, are inherently uncertain and beyond our control.

The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that may cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q.

18 Overview



Yosen owns 100% of Capital and Capital owns 100% of Joy & Harmony and Sanhe. Until August 14, 2007, when it made the change to its ownership structure described in the next paragraph to comply with certain requirements of the PRC law, Capital owned 100% of the capital stock of Zhejiang. Zhejiang owns 90% and Yiwu owns 10% of Wang Da. Zhejiang owns 90% and Wang Da owns 10% of Yiwu. On March 10, 2009Zhejiang set up a new operating entity, Hangzhou Letong Digital Technology Co., Ltd. ("Letong") to establish an electronic retail franchise operation for Yosen. On July 6, 2009, Zhejiang and Yiwu completed the acquisition of Jinhua Baofa Logistic Ltd ("Jinhua"). Jinhua was incorporated under the laws of PRC on December 27, 2001.

On December 21, 2005, Capital became a wholly owned subsidiary of Yosen through a merger with a wholly owned subsidiary of the Company (the "Merger Transaction"). Yosen acquired all of the issued and outstanding capital stock of Capital pursuant to a the Merger Agreement dated at December 21, 2005 by and among Yosen, XY Acquisition Corporation, Capital and the shareholders of Capital (the "Merger Agreement"). Pursuant to the Merger Agreement, Capital became a wholly owned subsidiary of Yosen and, for the Capital shares, Yosen issued 7,000,000 shares of its common stock to the shareholders of Capital, representing 93% of the issued and outstanding capital stock of Yosen at that time and cash of $500,000. On August 15, 2007, we executed a series of contractual agreements between Capital and Zhejiang. The contractual agreements gave Capital and its equity owners an obligation, and having ability to absorb, any losses, and rights to receive returns; however, these contractual agreements did not change the equity ownership of Zhejiang. We did not dispose Capital's equity ownership of Zhejiang when we executed the contractual agreements. Capital entered into share-holding entrustment agreements with five individuals: Zhenggang Wang, Yimin Zhang, Huiyi Lv, Xiaochun Wang and Zhongsheng Bao to hold 35%, 20%, 20%, 15% and 10%, respectively, of the equity interest of Zhejiang on behalf of Capital on November 21, 2005. The entrustment agreements confirm that Capital is the actual owner of Zhejiang. Capital enjoys the actual shareholder's rights and has the right to obtain any benefits received by the nominal holders. Zhenggang Wang is the CEO and shareholder of Yosen. Yimin Zhang, Huiyi Lv, Xiaochun Wang and Zhongsheng Bao have no other relationship with Yosen. No consideration was given to these individuals who held the equity of Zhejiang on behalf of Capital.

As a result of the Merger Agreement, the reorganization was treated as an acquisition by the accounting acquiree, accounted for as a recapitalization and reverse merger by the legal acquirer for accounting purposes. Pursuant to the recapitalization, all capital stock shares and amounts and per share data were retroactively restated. Accordingly, the financial statements include the following:

(1) The balance sheet consists of the net assets of the accounting acquirer at historical cost and the net assets of the legal acquirer at historical cost.

(2) The statements of operations include the operations of the accounting acquirer for the period presented and the operations of the legal acquirer from the date of the merger.

Pursuant to a share exchange agreement, dated August 3, 2006, we issued 183,150 shares of restricted common stock to the former shareholders of Sanhe, valued at $3,750,000, which was the fair value ("FV") of the shares at the date of the share exchange agreement. This amount is included in the cost of net assets and goodwill purchased.

Pursuant to a share exchange agreement, dated November 28, 2006, we issued 544,622 newly issued shares of common stock to the former shareholders of Joy & Harmony, valued at $11,000,000, which was the FV of the shares at the date of exchange agreement. This amount is included in the cost of net assets and goodwill purchased.

On July 6, 2009, Yosen's subsidiaries, Zhejiang and Yiwu completed acquisition of Jinhua, a company organized under the laws of the PRC. Zhejiang acquired 90% and Yiwu acquired 10% of the equity interests in Jinhua from the shareholders of Jinhua for RMB120,000,000 ($17,500,000) in cash.

Sanhe and Letong ceased operations in 2011. Joy & Harmony ceased operation in 2011 and dissolved in 2013. Yiwu closed all its stores in stores locations in 2012. Jinhua ceased operation in October 2012

On December 21, 2012, we received confirmation from the Secretary of State of the State of Nevada that the Certificate of Change Pursuant to NRS 78.209 (the "Certificate of Change") to our Amended and Restated Articles of Incorporation to effect a reverse split of our common stock, $0.001, par value per share (the "Common Stock"), at a ratio of 1-for-5 with all fractional shares rounded up to the next whole share (the "Reverse Stock Split") was duly filed on December 21, 2012. Immediately prior to the Reverse Stock Split, we had 93,911,327 shares of Common Stock outstanding. After the Reverse Stock Split, we had 18,782,356 shares outstanding. Pursuant to the Reverse Stock Split, the number of authorized shares of our Common Stock was reduced from 100,000,000 to 20,000,000 shares of Common Stock. Each shareholder's percentage ownership interest in the Company and proportional voting power remained unchanged after the Reverse Stock Split except for minor changes and adjustments resulting from rounding up the fractional shares.

19



Immediately, following the consummation of the Reverse Stock Split, on December 21, 2012, we filed a Certificate of Amendment to our Amended and Restated Articles of Incorporation pursuant to NRS 78.385 and 78.390 (the "Certificate of Amendment") to increase our number of authorized shares of Common Stock from 20,000,000 to 50,000,000 shares (the "Capital Increase Amendment") and to approve the amendment of our Articles of Incorporation to change our name to "Yosen Group, Inc." (the "Name Change Amendment)". The Reverse Stock Split, Capital Increase Amendment and the Name Change Amendment were approved by the board of directors ("BOD" or "Board") of the Company on October 10, 2012. In addition, the actions taken by the BOD with respect to the Capital Increase Amendment and the Name Change Amendment were subsequently adopted by the written consent dated as of October 10, 2012 of our stockholders entitled to vote a majority of the shares of Common Stock then outstanding. The Reverse Stock Split was also ratified by these stockholders.

Following the filing of the Name Change Amendment, we changed our stock symbol to "YOSN" effective as of the opening of trading on January 30, 2013 on the OTCBB.

On January 6, 2014 the Company established a US based wholly-owned subsidiary, Yosen Trading, for the purpose of engaging primarily in international trade and wholesale business, initially with tile, kitchen cabinet, granite and marble products.

Results of Operations for the Three and Six Months Ended June 30, 2014 and 2013

Reportable Operating Segments

In 2011, Sanhe closed all its 210 stores in stores, Joy & Harmony closed all its 196 stores in stores, and Letong closed its direct retail and franchise operation. In 2012, Yiwu closed all its 178 stores in stores, and Jinhua closed its logistics operations. In 2014, Wang Da closed all its store in stores. As such, Sanhe, Letong, Yiwu, Jinhua and Wang Da were reported as discontinued operations in the financial statements.

The Company reports financial and operating information in continuing operations through two segments, mobile phones segment by Zhejiang and international trade by Yosen Trading:

a) Mobile phones b) International trade a) Mobile phones



Zhejiang focuses on distribution of Samsung and Apple brand products.

Three Months Ended June 30, Percentage Mobile phones 2014 2013 Change Revenue $ 2,464,488$ 2,834,839 (13.1 )% Gross Profit $ 175,664$ 171,641 2.3 % Profit Margin 7.1 % 6.1 % 1.0 % Operating Loss $ (20,941 )$ (186,605 ) 88.8 % Six Months Ended June 30, Percentage Mobile phones 2014 2013 Change Revenue $ 6,119,537$ 5,997,873 2.0 % Gross Profit $ 391,392$ 311,108 25.8 % Profit Margin 6.4 % 5.5 % 0.9 % Operating Income (Loss) $ 30,505$ (488,985 ) - %



For the three months ended June 30, 2014, Mobile phones generated revenue of $2,464,488, a decrease of $370,351 or 13.1% compared to $2,834,839 for the three months ended June 30, 2013. The decrease in revenue was primarily due to lack of new products introduced by Apple and Samsung in the second quarter of 2014. For the six months ended June 30, 2014, Mobile phones generated revenue of $6,119,537, an increase of $121,664 or 2.0% compared to $5,997,873 for the six months ended June 30, 2013.

Gross profit increased $4,023 or 2.3% from $171,641 for the three months ended June 30, 2013 to $175,664 for the three months ended June 30, 2014. Profit margin increased from 6.1% in the three months ended June 30, 2013 to 7.1% in the three months ended June 30, 2014, an increase of 1.0%. Gross profit increased $80,284 or 25.8% from $311,108 for the six months ended June 30, 2013 to $391,392 for the six months ended June 30, 2014. Profit margin increased from 5.5% in the six months ended June 30, 2013 to 6.4% in the six months ended June 30, 2014, an increase of 0.9%.

Operating loss was $20,941 for the three months ended June 30, 2014, a decrease of $165,664 or 88.8% compared to $186,605 for the three months ended June 30, 2013. Operating loss was $488,985 for the six months ended June 30, 2013, compared to operating income of $30,505 for the six months ended June 30, 2014. Operating loss decreased primarily due to control on general and administrative expenses to cut losses.

20 b) International Trade



Starting first quarter 2014, Yosen Trading is engaged in international trade and wholesale business, primarily selling tile, kitchen cabinet, granite and marble products in the New York Market.

Three Months Ended June 30, 2014 Revenue $ 588,647 Gross Profit $ 115,400 Profit Margin 19.6 % Operating Income $ 112,180 Six Months Ended June 30, 2014 Revenue $ 1,196,623 Gross Profit $ 228,930 Profit Margin 19.1 % Operating Income $ 225,569 Total Company Net Sales



Net sales for the three months ended June 30, 2014 increased by 7.7%, to $3,053,135 compared to $2,834,839 for the three months ended June 30, 2013. Net sales for the six months ended June 30, 2014 increased by 22.0%, to $7,316,160 compared to $5,997,873 for the six months ended June 30, 2013. The increase was primarily attributable to the new revenue generated from the international trade business.

Percentage of Sales



Percentage of sales from retail and wholesale operations for each segment is as follows in the three months ended June 30, 2014:

Mobile International Phones Trade Total Retail 95.2 % 28.3 % 61.7 % Wholesale 4.8 % 71.7 % 38.3 %



Percentage of sales from retail and wholesale operations for each segment is as follows in the six months ended June 30, 2014:

Mobile International Phones Trade Total Retail 97.6 % 23.7 % 60.6 % Wholesale 2.4 % 76.3 % 39.4 %



Percentage of sales from retail and wholesale operations for each segment is as follows in the three months ended June 30, 2013:

Mobile International Phones Trade Total Retail 96.2 % - % 96.2 % Wholesale 3.8 % - % 3.8 %



Percentage of sales from retail and wholesale operations for each segment is as follows in the six months ended June 30, 2013:

Mobile International Phones Trade Total Retail 98.1 % - % 98.1 % Wholesale 1.9 % - % 1.9 % 21 Cost of Sales



Cost of sales ("COS") for the three months ended June 30, 2014 was $2,762,071 compared to $2,663,198 for the three months ended June 30, 2013, an increase of 3.7%. COS for the six months ended June 30, 2014 was $6,695,838 compared to $5,686,765 for the six months ended June 30, 2013, an increase of 17.7%. The decreased COS for the three and six months was a result of the increase in sales from the comparable periods.

Gross Profit



Gross profit for the three months ended June 30, 2014 was $291,064 compared to gross profit of $171,641 for the three months ended June 30, 2013, an increase of 69.6%. Gross profit for the six months ended June 30, 2014 was $620,322 compared to gross profit of $311,108 for the six months ended June 30, 2013, an increase of 99.4%. The increased gross profit for the three and six months ended June 30, 2014 was due to gross profit generated from the international trade business.

Profit Margin



Profit margin for the three months ended June 30, 2014 was 9.5% compared to 6.1% for the three months ended June 30, 2013. Profit margin for the six months ended June 30, 2014 was 8.5% compared to 5.2% for the six months ended June 30, 2013. The profit margin increase was mainly attributed to newly established international trade business having a higher profit margin.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended June 30, 2014 were $288,149 or 9.4% of net sales, compared to $546,646 or 19.3% of net sales for the three months ended June 30, 2013, a decrease of 47.3% of sales. Selling, general and administrative expenses for the six months ended June 30, 2014 were $576,361 or 7.9% of net sales, compared to $1,227,541 or 20.5% of net sales for the six months ended June 30, 2013, a decrease of 53.0% of sales. The decrease in selling, general and administrative expenses was primarily due to decrease in staff related cost and store management fees.

Operating Income (Loss) from Continuing Operations

Operating income for the three months ended June 30, 2014 was $2,915 or 0.1% of net sales compared to operating loss of $375,005 or (13.2)% of net sales for the three months ended June 30, 2013. Operating income for the six months ended June 30, 2014 was $43,961 or 0.6% of net sales compared to operating loss of $916,433 or (15.3)% of net sales for the six months ended June 30, 2013. higher gross profit and lower operating expense was the key factors for the decrease in operating loss from continuing operations during the three and six months ended June 30, 2014 compared to 2013.

Provision for Income Taxes



The provision for income taxes for the three and six months ended June 30, 2013 were $0 due to losses incurred by Zhejiang. The provision for income taxes the three and six months ended June 30, 2014 were $25,187 and $38,953 attributed to Yosen Trading.

Net Income (Loss) from Continuing Operations

Net income from continuing operations was $64,826 or 2.9% of net sales for the three months ended June 30, 2014 compared to net loss of $357,219 or (12.6)% of net sales for the three months ended June 30, 2013. Net income from continuing operations was $178,601 or 2.4% of net sales for the six months ended June 30, 2014 compared to net loss of $885,047 or (14.8)% of net sales for the six months ended June 30, 2013. Higher gross profit and lower operating expenses was the key factors for the decrease in net loss from continuing operations during the three and six months ended June 30, 2014 compared to 2013.

Net Loss from Discontinued Operations

Net loss from discontinued operations for the three months ended June 30, 2014 was $57,358 compared to $57,000 for 2013, an increase of $358. Net loss from discontinued operations for the six months ended June 30, 2014 was $146,975 compared to $168,649 for 2013, a decrease of $21,674. Net Loss from discontinued operations remained flat.

Net Income (Loss)



Net income was $7,468 for the three months ended June 30, 2014 compared to net loss $414,219 for the three months ended June 30, 2013. Net income was $31,626 for the six months ended June 30, 2014 compared to net loss of $1,053,696 for the six months ended June 30, 2013. The decrease in net loss was due to decrease in operating expenses as well as additional income attributable to Yosen Trading in 2014.

22



Foreign Currency Translation Adjustments

The impact of foreign translation from our accounts in RMB to US dollar on Yosen's operating results was not material. During the translation process, the assets and liabilities of all PRC subsidiaries are translated into US dollars at period-end exchange rates. The revenues and expenses are translated into US dollars at average exchange rates of the periods. Resulting translation adjustments are recorded as a component of accumulated other comprehensive income within stockholders' equity.

Six Months Ended June 30, 2014 2013 RMB/$ exchange rate at period end 0.1625 0.1618



Average RMB/$ exchange rate for the periods 0.1629 0.1605

Transaction gains or losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency were included in the consolidated results of operations. As a result of the translation, Yosen recorded a foreign currency gain of $1,541 in the three months ended June 30, 2014 and a foreign currency loss of $(408) in the comparable period in 2013. Yosen recorded a foreign currency gain of $11,727 in the six months ended June 30, 2014 and $23,211 in 2013, which is a separate line item on the Statements of Operations and Comprehensive Loss.

Liquidity and Capital Resources

During the six months ended June 30, 2014, cash has been mostly generated from financing activities. Operations and liquidity needs are funded primarily through cash flows from bank loans. Cash and equivalents were $1,742,504 at June 30, 2014, compared to $1,426,018 at December 31, 2013.

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

Six Months Ended June 30, 2014 2013



Net cash provided by (used in) operating activities $ 84,846$ (413,488 ) Net cash provided by financing activities

205,126 - Effect of exchange rate change on cash and equivalents 26,514 38,233 Net increase (decrease) in cash and equivalents 316,486 (375,255 ) Cash and equivalents at beginning of period 1,426,018 456,495 Cash and equivalents at end of period $ 1,742,504$ 81,240 Operating Activities



Net cash provided by operating activities was $84,846 for the six months ended June 30, 2014 compared to $413,488 used in operating activities for the six months ended June 30, 2013. Net cash used in operating activities was mainly attributable to several factors, including (i) decrease in net loss of $1,085,322, (ii) decrease in advance to suppliers of $292,864, (iii) increase in accrued expenses and other payables of $791,290, offset by the increase in accounts receivable of $452,025 and inventories of $566,606, add back of stock compensation of $186,452.

Six Months Ended June 30, Percentage 2014 2013 Change Sales, Net $ 7,316,160$ 5,997,873 22.0 % Accounts receivable $ 664,575$ 214,260 210.2 %



Accounts receivable increased 210.2% in the first six months of 2014 while sales increased 22.0%. Accounts receivable as a percentage of sales increased primarily due to the increase of accounts receivable in international trade business. Management monitors and periodically assesses the collectability of accounts receivable to ensure the allowance for bad debts account is reasonably estimated. Collection of accounts receivable is based on the terms of legally binding documents. Our accounts receivable department has periodically reviewed the allowance for doubtful accounts. The bad debts allowance is based on the aging of receivables, credit history and credit quality of the customers, the term of the contracts as well as the balance outstanding. If an account receivable item is considered probable to be uncollectible, it will be charged to bad debts accordingly.

23



Cash and equivalents as of June 30, 2014 and December 31, 2013 were solely bank accounts in US and China. Specifically, cash and equivalents for each subsidiary as of June 30, 2014 and December 31, 2013 included:

Name of Entities Region Currency June 30, 2014 December 31, 2013 Yosen US entity USD 230,697 135 Yosen Trading US entity USD 100,956 - Zhejiang Chinese entity RMB 135,114 167,678 Yiwu Chinese entity RMB 8,531,049 8,526,143 Wang Da Chinese entity RMB 17,104 17,694 Jinhua Chinese entity RMB 258 458 Sanhe Chinese entity RMB 543 743



Cash equivalents held in the PRC subsidiaries are not freely transferrable outside the country. The amounts not freely transferable as of June 30, 2014 and December 31, 2013 were RMB 8,684,068 ($1,410,851) (unaudited) and RMB 8,712,716 ($1,425,883).

Capital Expenditures



We did not have any capital expenditures for the first six months of 2014 and 2013.

Working Capital Requirements



Historically operations and short term financing have been sufficient to meet our cash needs. We believe we will be able to generate revenues from sales and raise capital through private placement offerings of our equity securities to provide the necessary cash flow to meet anticipated working capital requirements. However, our actual working capital needs for the long and short term will depend upon numerous factors, including operating results, competition, and the availability of credit facilities, none of which can be predicted with certainty. Future expansion will be limited by the availability of financing products and raising capital.

Off-Balance Sheet Arrangements

We have never entered into any off-balance sheet arrangements and have never established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimates are made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur, could materially impact the consolidated financial statements. We believe the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the consolidated financial statements.

Revenue Recognition



Our revenues are generated from sales of electronics products. All of our revenue transactions contain standard business terms and conditions. We determine the appropriate accounting for these transactions after considering (1) whether a contract exists; (2) when to recognize revenue on the deliverables; and (3) whether all elements of the contract have been fulfilled and delivered. In addition, our revenue recognition policy requires an assessment as to whether collection is reasonably assured, which inherently requires us to evaluate the creditworthiness of our customers. Changes in judgments on these assumptions and estimates could materially impact the timing or amount of revenue recognition.

Please refer to Note 2 in the footnotes to the financial statements for detailed description of our revenue recognition policy.

24 Inflation



Neither inflation nor changing prices has had a material impact on the Company's net sales, revenues or continuing operations during the past three fiscal years.

After Sales Service



The after-sales services we provide to our customers are primarily repair and maintenance. If a customer buys a product from us and needs repairs, we can usually arrange to have the manufacturer repair the product. In certain cases, clerks in our stores are able to make the repairs directly.

Tabular Disclosure of Contractual Obligations

Not applicable.


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