Filing Summary
Entity and period: The supplied filing identifies the registrant as SGOCO Group, Ltd., a Cayman Islands company, not Troops, Inc. It is a Form 20-F annual report for the fiscal year ended December 31, 2017, not a standalone 2017 fourth-quarter report. Financial statements are prepared under U.S. GAAP and presented in U.S. dollars; amounts below are in millions unless noted.
Key Financial Metrics
| Metric | FY 2017 / Dec. 31, 2017 | Comparison |
|---|---|---|
| Revenue | $0.051 | $5.069 in 2016; down 99.0% |
| Gross profit (loss) | $(1.292) | $0.202 in 2016 |
| Operating loss | $(11.866) | $(3.968) in 2016 |
| Net loss | $(11.214); $(0.99) per basic and diluted share | $(5.047); $(0.68) per share in 2016 |
| Cash from operations | $(7.977) | $(1.079) in 2016 |
| Cash from investing | $7.400 | $(6.750) in 2016 |
| Cash from financing | $4.810 | $7.520 in 2016 |
| Cash and cash equivalents | $4.262 | $0.029 at Dec. 31, 2016 |
| Total assets / liabilities | $98.453 / $14.638 | $100.272 / $13.593 at Dec. 31, 2016 |
| Shareholders’ equity | $83.815 | $86.679 at Dec. 31, 2016 |
Cost of goods sold was $1.343 million, producing a gross loss despite very low reported revenue; the filing attributes much of the cost to $1.31 million of amortization of Boca technology. Goodwill impairment expense was $7.005 million in the audited statements. The filing reports $2.716 million of depreciation and amortization overall.
Working capital was approximately $2.3 million using reported current assets and current liabilities; the MD&A elsewhere states $2.6 million. Cash was supported by share issuances and borrowing, while operating cash use increased materially.
Business, Changes and Management Commentary
SGOCO describes a shift from LCD/LED product distribution toward acquisitions and a portfolio spanning display products, Boca’s energy-saving thermal storage systems, Century Skyway’s virtual-reality (VR) products and, following a December 2017 acquisition, Hong Kong money lending. Giant Credit contributed $0.67 million of loans receivable at year-end; it had three personal-loan customers, and $0.098 million of its loan portfolio was past due. No loan-loss provision was recorded.
- Revenue fell from $5.069 million to $0.051 million. Management says a large 2016 LCD/LED customer order did not recur; that customer represented about 85% of 2016 sales.
- Boca generated only $9,231 of revenue in 2017, and Century Skyway generated none. Management said commercialization and customer project planning took longer than expected.
- The company recorded $7.005 million of goodwill impairment: $5.618 million related to Boca and $1.387 million to Century Skyway, reflecting performance below expectations.
- G&A expense decreased to $3.312 million from $4.115 million, mainly due to lower share-based compensation. Selling expense rose to $0.257 million from $0.055 million.
- Outstanding ordinary shares increased to 16,164,855 from 9,387,928 during 2017, including shares issued in acquisitions, equity compensation and private placements.
Liquidity, Debt, Outlook and Risks
At year-end, the company reported $2.810 million of loans and advances from unrelated parties, including a $0.355 million secured loan and a $2.172 million unsecured loan, both bearing 5% interest and with no fixed repayment term; additional advances were unsecured and interest-free. Management believed available cash and financing would cover anticipated needs for at least 12 months, but warned that further financing might not be available on acceptable terms and could dilute shareholders or restrict operations.
There is no formal financial guidance. Management expected Boca and Century Skyway to begin generating revenue following project execution or VR product launches in the second or third quarter of 2018. These expectations were forward-looking and dependent on execution and market acceptance. A subsequent-event disclosure reports an April 2018 $5.780 million note at 2.5% interest, convertible at $1.50 per share and automatically convertible at maturity; it was not year-end cash or debt.
- Controls: Management concluded internal control over financial reporting and disclosure controls were ineffective at year-end, citing insufficient qualified U.S. GAAP and SEC-reporting personnel and inadequate review capacity. Remediation included recruiting and training; success was not assured.
- Concentration and execution: 2017 sales were highly concentrated: two customers represented approximately 85% of revenue. Acquired businesses had limited or no revenue, while goodwill and intangible assets made up a substantial share of total assets.
- Other material risks: Lending credit losses and regulation; acquisition integration and further impairments; competition and technology commercialization; PRC legal, regulatory, currency and capital-transfer restrictions; and NASDAQ listing and share-liquidity risks.
- Audit and contingencies: The independent auditor gave an unqualified opinion on the financial statements, but did not attest to internal-control effectiveness. The company reported no significant pending or threatened legal proceedings and no off-balance-sheet arrangements.
Most Important Facts to Verify
- Confirm the issuer: the supplied filing is for SGOCO Group, Ltd., not Troops, Inc.; confirm that this is the intended company and filing.
- Confirm the requested period: this is an annual report for the year ended December 31, 2017; it does not provide a separate fourth-quarter income statement or cash-flow statement.
- Reconcile the goodwill impairment disclosure: audited statements and the goodwill note report $7.005 million, while a risk-factor passage refers to $13.3 million.
- Reconcile working capital: the balance-sheet amounts imply approximately $2.321 million, while one MD&A passage says $2.6 million.
- Assess whether the 2018 revenue expectations for Boca and VR products were achieved, and whether the cash-flow and financing position proved adequate.
- Review loan aging, collateral and recoverability, the 5% borrowings’ repayment terms, the warrant-related dilution, and progress in remediating the disclosed control weaknesses.