Filing summary
Entity and period: The supplied filing is SGOCO Group, Ltd.’s Form 20-F annual report for the fiscal year ended December 31, 2016, not a filing for Troops, Inc. or a standalone 2016 fourth quarter. Financial amounts below are in U.S. dollars; unless indicated, figures are in thousands.
Business context and reporting period
SGOCO reported a light-asset business focused on designing, branding and distributing LCD/LED products, with a new energy-saving business acquired through Boca International in March 2016. LCD/LED sales remained the main source of 2016 revenue; Boca generated only $2,000 of reported revenue. The company had sold its former manufacturing businesses and used outsourced suppliers.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $5,069 | $1,921 |
| Gross profit / margin | $202 / 4.0% | $95 / 4.9% |
| Operating loss | $(3,968) | $(1,534) |
| Net loss | $(5,047) | $(2,418) |
| Basic and diluted loss per share | $(0.68) | $(0.55) |
| Cash from operating activities | $(1,079) | $(762) |
| Cash and cash equivalents at year-end | $29 | $345 |
| Total assets | $100,272 | $86,882 |
| Total liabilities | $13,593 | $9,046 |
| Shareholders’ equity | $86,679 | $77,836 |
Revenue rose 163.9% year over year, primarily due to a large LCD/LED order. Gross margin declined despite higher sales. General and administrative expenses increased to $4,115 from $1,498, mainly due to share-based compensation and amortization of Boca’s acquired intangible assets. The 2016 net loss also included a $1,500 loss from changes in the fair value of convertible notes.
Investing cash flow was $(6,750), including $6,743 advanced to an unrelated third party; financing cash flow was $7,520, including $7,001 from share issuance. The company also reported a $33,280 refund of a deposit for an abandoned acquisition and a $33,288 deposit payment related to the proposed Century Skyway acquisition. The $6,457 advance to the unrelated party bore 6% interest, was unsecured, and was no longer outstanding by the filing date.
Working capital was reported as a deficit of approximately $0.7 million. The filing gives a current ratio as “(0.91),” which is not clearly presented; the balance-sheet amounts imply a ratio of approximately 0.91. Debt and obligations included a $342 secured loan with no fixed repayment term and $221 in unsecured, interest-free advances from an unrelated party. Convertible notes were fully converted into shares during 2016. Taxes payable of $6,241 remained at year-end and were paid in April 2017.
Material changes and notable items
- Revenue remained far below 2014’s $43,230, principally following the December 2014 sale of SGOCO (Fujian); 2016 growth from the lower 2015 base came from a significant customer order.
- The Boca acquisition cost $52 million in cash plus 1,162,305 shares. SGOCO recognized $25,290 of net intangible assets and $36,504 of goodwill at year-end; Boca’s minimal reported revenue underscores execution and impairment risk.
- In May 2017, after the reporting period, SGOCO completed the Century Skyway acquisition for $32.6 million plus 1.5 million shares. The company also raised capital through share sales in March and April 2017.
- SGOCO reported one customer generated 85.1% of 2016 revenue. One vendor represented 86.1% of purchases.
- The company reported ineffective disclosure controls and internal control over financial reporting at December 31, 2016, citing insufficient qualified accounting personnel and inadequate review capacity. Management described remediation plans, but gave no assurance they would succeed.
Outlook, risks and contingencies
Management said cash and expected financing would be sufficient for anticipated needs for at least 12 months, while acknowledging that additional financing might not be available on acceptable terms. The company had very low year-end cash, operating cash outflow and a working-capital deficit. It does not expect to pay dividends in the foreseeable future.
Key risks include customer and supplier concentration, continued losses and weak display-product demand, dependence on successful integration and performance of acquisitions, possible impairment of Boca goodwill and intangible assets, financing needs and dilution, RMB/U.S. dollar movements, PRC regulatory and foreign-exchange restrictions, and the identified material weakness in financial reporting controls. SGOCO described no material pending litigation and no off-balance-sheet arrangements. Its auditor issued an unqualified opinion on the financial statements but did not attest to internal control effectiveness. The company changed auditors in September 2016.
Important facts for investors to verify
- Confirm the issuer: this filing names SGOCO Group, Ltd., not Troops, Inc.; it is an annual report, not a fourth-quarter filing.
- Review the large 2016 customer order, customer concentration, and whether sales recur; verify the reported 85.1% customer share.
- Assess liquidity, including the $29,000 year-end cash balance, working-capital deficit, subsequent financing, and repayment status of the $342,000 secured loan and $221,000 advances.
- Track Boca’s commercial progress against its $36.5 million goodwill and $25.3 million intangible-asset carrying values, and review the completed Century Skyway acquisition’s final purchase-price allocation.
- Check the status of control-remediation efforts and whether qualified accounting staff and effective review procedures were added.
- Confirm settlement of the $6.241 million tax payable in April 2017 and the filing’s stated current-ratio presentation.