Filing summary
Entity and period mismatch: The supplied filing is SGOCO Group, Ltd.’s audited annual report on Form 20-F for the fiscal year ended December 31, 2018 (ticker SGOC), filed May 14, 2019. It is not identified as a Troops, Inc. filing and does not provide standalone 2018 fourth-quarter results. The figures below are for the full fiscal year unless noted.
Business context and reporting period
SGOCO describes itself as a Hong Kong-headquartered conglomerate focused on energy-saving products and services, Hong Kong mortgage lending, and property investment. The report uses U.S. GAAP and U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Its business mix changed materially through acquisitions and disposals. 2018 results included newly acquired property companies and a lending business, while Century Skyway’s VR operations were classified as discontinued operations after management committed in Q4 to dispose of its remaining 51% interest. The company also completed a rights offering that substantially increased its share count.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $1.580 | $0.051 |
| Gross loss | $1.055 | $1.292 |
| Operating loss from continuing operations | $14.318 | $9.126 |
| Net loss from continuing operations | $13.551 | $8.803 |
| Loss from discontinued operations, net of tax | $7.513 | $2.411 |
| Consolidated net loss | $21.064 | $11.214 |
| Net loss attributable to SGOCO ordinary shareholders | $12.372 | $11.214 |
- 2018 revenue comprised $0.980 million of loan interest, $0.590 million of property lease and management income, and $0.010 million of product sales. The filing attributes the revenue increase mainly to the newly included lending and property businesses.
- Gross loss narrowed despite higher revenue; the filing says cost of revenues was largely technology amortization and building depreciation. Goodwill impairment was $10.330 million in continuing operations, primarily related to Boca; Century Skyway’s discontinued operations included a further $6.010 million goodwill impairment.
- Operating cash flow was negative $36.174 million, including $36.152 million used by continuing operations. The principal stated driver was a $36.396 million increase in loans receivable. Investing cash flow was negative $10.402 million; financing cash flow was positive $56.146 million, largely from the rights offering.
- Cash and cash equivalents were $14.342 million at year-end, versus $4.237 million a year earlier. Management reported working capital of $66.51 million and said available cash and financing were expected to meet anticipated needs for at least 12 months, while noting future financing might be needed.
- Total assets were $190.841 million, liabilities $22.667 million, and equity $168.174 million. Asset growth reflected, among other items, property, loans, and assets held for sale.
- Loans receivable totaled $37.066 million, with no loan-loss provision recorded. $2.569 million was 1–89 days past due; three borrowers represented 51%, 10%, and 10% of the portfolio.
- Debt and funding disclosures include a $5.780 million convertible note issued in 2018 at 2.5% interest, convertible at $1.50 per share and due in five years; $4.04 million of loans and advances from unrelated parties; and a $0.2 million short-term bank loan. The balance sheet also reports a $0.286 million warrant liability. Total liabilities include deferred tax liabilities.
Material changes versus the prior comparable period
- Revenue rose from $0.051 million to $1.580 million, but remained modest relative to the $14.318 million continuing-operations operating loss. The new lending and property activities supplied most 2018 revenue; Boca had no material revenue.
- Consolidated net loss widened to $21.064 million from $11.214 million, reflecting higher operating losses and $7.513 million of discontinued-operation losses.
- Operating cash use increased to $36.152 million from $8.001 million, principally as loans receivable expanded.
- Goodwill impairment in continuing operations increased to $10.330 million from $5.618 million. Century Skyway’s VR unit also remained loss-making and was classified as discontinued operations.
- The September 2018 rights offering issued 50,663,270 shares at $0.99 each, generating approximately $50.15 million gross proceeds. Issued and outstanding shares increased from 16,164,855 at year-end 2017 to 75,507,300 at year-end 2018.
- Total assets rose from $98.453 million to $190.841 million, and total equity from $83.815 million to $168.174 million. The company’s 2018 acquired property and lending businesses materially changed its asset and revenue mix.
Outlook, risks, contingencies, and unusual items
- Outlook: Management anticipated Boca customer projects could begin generating revenue in 2019; the filing gives differing timing references, including the second quarter and the second or third quarter. Management also expressed plans to expand mortgage lending and property investment. No formal numerical revenue or earnings guidance is provided.
- Disposal plans: In Q4 2018, management committed to sell its remaining 51% interest in Century Skyway. A subsequent April 2019 letter of intent proposed a $12.75 million sale, partly settled by surrender and cancellation of $3.76 million principal of the 2018 Notes; this was not a completed sale in the report’s year-end statements.
- Contingent guarantee: Property acquired through Paris Sky included land and buildings pledged to secure HK$215.32 million (approximately $27.61 million) of banking facilities for a company beneficially owned by a principal shareholder. The company recorded a $0.974 million guarantee allowance. This exposes company property to a third party’s credit risk.
- Controls: Management reported ineffective disclosure controls and material weaknesses in internal control over financial reporting, including insufficient qualified U.S. GAAP/SEC reporting personnel and limited written documentation for regular loan-risk assessments. Management described remediation plans. The auditor gave an unqualified opinion on the financial statements but did not attest to internal-control effectiveness.
- Credit and regulatory risks: The lending portfolio is concentrated, has limited operating history, and is subject to Hong Kong money-lending licensing and interest-rate rules. The filing warns that inadequate loss reserves, borrower defaults, funding-cost changes, or license renewal issues could harm results.
- Other risks: The company highlighted continued losses, goodwill and asset impairment, dependence on acquisitions, foreign-exchange exposure, China/Hong Kong regulatory and tax uncertainty, and Nasdaq listing and share-liquidity risks. It reported regaining Nasdaq minimum-bid-price compliance in February 2019.
- The company reported no significant pending or threatened legal proceedings and no dividends in arrears. It does not expect to pay cash dividends in the foreseeable future.
Most important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for SGOCO Group, Ltd., not Troops, Inc.; also confirm whether annual FY 2018 rather than standalone Q4 results were intended.
- Review the audited financial statements and notes for the source and sustainability of 2018 revenue, the continuing operating losses, and goodwill impairment assumptions.
- Assess loan-book quality, including the $2.569 million past-due balance, borrower concentration, collateral and guarantees, and the absence of a loan-loss provision.
- Verify the status and final terms of the proposed Century Skyway disposal and the reported cancellation of $3.76 million of convertible-note principal after year-end.
- Evaluate cash runway and financing needs against negative operating cash flow, contractual obligations, debt terms, and potential dilution from conversion or further equity issuance.
- Investigate the third-party bank-facility pledge, the $0.974 million guarantee allowance, and the related-party relationships and approvals.
- Track remediation of the disclosed control weaknesses and any subsequent auditor or regulatory findings.