Filing and reporting period
Entity mismatch: The request identifies Troops, Inc., but the supplied Form 20-F is for SGOCO Group, Ltd. This summary covers SGOCO Group, Ltd. The filing is an annual report for the fiscal year ended December 31, 2013, not a standalone fourth-quarter report; Q4-specific financial results are not provided clearly in the filing text. Financial amounts below are in U.S. dollars unless noted.
SGOCO sells branded and licensed LCD/LED displays and related products, primarily through distributors in China’s Tier 3 and Tier 4 cities. It operates a “light-asset” model, outsourcing most manufacturing, including to former subsidiary Honesty Group, now an independent supplier.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $201.0 million | $166.7 million |
| Gross profit / margin | $15.9 million / 7.9% | $12.5 million / 7.5% |
| Operating income | $11.1 million | $6.5 million |
| Net income / margin | $8.4 million / 4.2% | $4.2 million / 2.5% |
| Basic and diluted EPS | $0.49 | $0.25 |
| Operating cash flow | $1.4 million | $(13.9) million |
| Cash and cash equivalents at year-end | $13.5 million | $11.5 million |
| Total assets / liabilities | $104.7 million / $16.9 million | $105.6 million / $27.3 million |
At year-end 2013, working capital was $87.6 million and the current ratio was 6.2, compared with $78.1 million and 3.9 in 2012. Short-term loans totaled $6.7 million: a $4.1 million China Everbright Bank loan at 7.2%, due September 2014, and $2.6 million of receivables financing with recourse. No capital expenditures are reported as material; cash used in investing activities was $0.03 million.
Receivables were $48.1 million, supplier advances $33.8 million, and inventory $7.0 million at year-end. Receivable days rose to 98 from 87; inventory days rose to 13 from 9. The filing reports $5.0 million of outstanding registered-capital commitments for SGOCO Shenzhen, in addition to the short-term loans and lease obligations.
Changes versus the prior comparable period
- Revenue rose 20.6%, attributed to higher display-product volumes and contributions from new products, partly offset by lower average selling prices.
- Gross margin improved from 7.5% to 7.9%, which management attributed to product mix, sourcing and cost efficiency. Net income approximately doubled; lower professional fees also helped.
- Operating cash flow improved from negative $13.9 million to positive $1.4 million, but remained well below net income. Working-capital movements included lower receivables and accounts payable, alongside increased supplier advances and inventory.
- Liabilities declined year over year, although the company added a $4.1 million bank loan in 2013. Interest expense increased to $0.26 million from $0.06 million.
- Own-brand and licensed-brand sales were 69.2% of revenue, versus 70.6% in 2012. Two distributors represented 36.5% of 2013 revenue; the top ten represented 71.3%.
Outlook, risks, contingencies and unusual items
- No numerical financial guidance is provided. Management said it was monitoring market conditions and intended to continue supplier prepayments to secure supply and pricing. It also cautioned that demand for PCs and monitors could weaken as mobile-device adoption grows. The filing states management was not aware of other post-January 1, 2014 trends likely to materially affect results.
- Supplier and customer concentration are substantial: two vendors accounted for 71.0% of 2013 purchases, including 42.4% from Honesty Group. The company had $32.8 million of advances to two major vendors. Manufacturing arrangements lack broad long-term protections, and the Honesty Group supply agreement was due to expire in November 2014, with renewal under evaluation.
- SGOCO’s exclusive TCL distribution agreement was terminated by mutual agreement in June 2013 after the company missed sales targets for 2012 and 2013.
- A $5.363 million tax expense relating to the 2011 sale of Honesty Group remained unpaid as of the report date; the company had submitted documents to the PRC tax bureau. Separately, SGOCO disclosed potential exposure to an unpaid commitment for the Guanke Technology Park if Apex does not meet its assumed obligation; it had received no related notice by the report date.
- The $5.0 million SGOCO Shenzhen registered-capital commitment had not been funded at year-end. The company said it was arranging the initial $1.0 million payment; failure to contribute could result in fines or restrictions on the subsidiary’s operations.
- Management assessed internal control over financial reporting as effective at December 31, 2013 and said a prior weakness involving accounting personnel and review procedures had been remediated. The auditor did not provide an internal-control attestation. The financial statements received an unqualified audit opinion.
- Other risks include PRC regulatory, foreign-exchange and cash-repatriation constraints; RMB exposure; declining display-product prices and margins; and possible PFIC tax treatment for U.S. investors. The company does not expect to pay dividends in the foreseeable future.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is SGOCO Group, Ltd., not Troops, Inc.; confirm whether the desired period is FY 2013 or Q4 2013.
- Review the composition, collectability and subsequent settlement of $48.1 million in receivables and $33.8 million in supplier advances, including the exposures to major customers and vendors.
- Verify repayment or refinancing of the $4.1 million bank loan due September 2014 and settlement of the $2.6 million recourse receivables financing.
- Check the status of the unpaid $5.363 million sale-related tax expense and the $5.0 million Shenzhen capital contribution, as well as any claims concerning the Guanke Technology Park commitment.
- Assess cash conversion: FY 2013 operating cash flow was $1.4 million against $8.4 million of net income, and review whether improved collections and working-capital trends persisted.
- Confirm continuity of supply from Honesty Group and other concentrated vendors, particularly after the disclosed supply-agreement expiry and the TCL contract termination.