Troops, Inc. annual report, Q4 FY2015

Business context and reporting period

The supplied filing is SGOCO Group, Ltd.’s Form 20-F for the fiscal year ended December 31, 2015—not a Troops, Inc. filing or a quarterly report. It reports under U.S. GAAP. At year-end, SGOCO primarily developed and distributed branded LCD/LED monitors and computers through a light-asset model, sourcing products from outside manufacturers. In March 2016, after the reporting period, it completed its acquisition of Boca International, an energy-saving technology business.

Financial performance and position

Unless stated otherwise, amounts are U.S. dollars in thousands. The filing presents annual—not standalone fourth-quarter—results.

• Revenue fell 95.6%, mainly following the December 2014 sale of SGOCO (Fujian), weaker monitor demand, and consumers’ shift toward mobile devices. Gross margin edged up, but the very low sales base left gross profit insufficient to cover operating expenses.
• 2015 included a $1,041 loss from changes in the fair value of convertible notes. Comprehensive loss was $7,676, including a $5,258 foreign-currency translation loss.
• Cash increased by $253 to $345. Investing cash flow was positive $464, reflecting $89,766 received from the subsidiary disposal, substantially offset by $89,302 of acquisition deposits. Financing cash flow was positive $596.
• Year-end assets were $86,882, including $85,693 in deposits for acquisitions; liabilities were $9,046 and shareholders’ equity was $77,836. Current assets were $1,181 versus current liabilities of $9,046, implying a substantial shortfall. Management separately reported a $7.9 million working-capital deficit; its stated current ratio of “(0.13)” appears inconsistent in sign with those balance-sheet amounts.
• Convertible notes had $1,149 principal issued in 2015 and were carried at fair value of $2,169 at year-end. They were due within one year; the filing says all had been converted into 1,394,936 shares by the financial-statement approval date.
• Taxes payable were $6,241, including unpaid tax related to the Honesty Group and SGOCO (Fujian) sales. The filing says the amounts remained unpaid as of its May 16, 2016 date.

Material changes versus prior comparable periods

• Revenue dropped from $43,230 in 2014 and $200,974 in 2013 to $1,921 in 2015. Net losses were reported in both 2014 and 2015, compared with $8,444 net income in 2013.
• The sale of SGOCO (Fujian) took effect at the end of 2014. SGOCO received the full $11.0 million sale price and settlement of $80.4 million in related payables during 2015; the sale generated no accounting gain.
• Cash from operations improved versus 2014 but remained negative. The company’s cash balance was still low, and 2015 funding included convertible notes and shareholder advances.

Outlook, commentary, and risks

• Management’s strategy was to move beyond traditional display products and pursue acquisitions and new products. The Boca acquisition closed in March 2016 for $52 million cash plus 1,162,305 shares. The purchase-price allocation was preliminary and included $36,220 of goodwill and $26,179 of proprietary technology. Management described Boca’s phase-change thermal storage systems as energy-saving products; projected market opportunities and savings in the filing are forward-looking claims, not reported results.
• A potential Sola Green acquisition remained subject to due diligence and definitive agreements; the parties expected a possible closing by June 30, 2016. No completed acquisition was reported.
• The auditor’s report and management disclosed substantial doubt about the company’s ability to continue as a going concern, citing the working-capital deficit and 2015 loss. Investors had agreed to buy 1.9 million shares for $7 million by July 31, 2016; the company reported receipt of only the first $350,000 tranche by May 2016 and warned that the remaining financing was not assured.
• Management found internal control over financial reporting and disclosure controls ineffective at year-end, citing insufficient qualified accounting staff and inadequate review capacity. Remediation plans included hiring accounting personnel and a permanent CFO, but completion was not assured.
• Key risks include customer concentration (the top three customers generated 66.8% of 2015 revenue), supplier dependence and supplier advances, continued weakness in display demand, RMB depreciation, acquisition execution and integration, financing availability, and China-related regulatory and operating risks. The filing also notes limited public-share liquidity and controlling-shareholder influence.

Important facts for investors to verify

• Whether the remaining $6.65 million of the proposed share financing was received, and the resulting share issuance and dilution.
• Boca’s post-acquisition operating results, cash requirements, final purchase-price allocation, and progress in realizing the stated energy-saving business opportunity.
• The recoverability and restrictions, if any, on acquisition deposits and supplier advances, and the company’s actual near-term liquidity after the Boca transaction.
• Payment or resolution of the $6.241 million tax liability and any related interest, penalties, or regulatory outcomes.
• Completion of convertible-note conversions, reconciliation of issued and outstanding share counts, and the effects of those conversions and acquisition shares on existing holders.
• Progress in remediating the disclosed material weakness and any subsequent auditor or management updates on going concern.