SGOCO Group, Ltd. — FY 2014 Form 20-F
Entity note: The request metadata names Troops, Inc., but the supplied filing is for SGOCO Group, Ltd. This is an annual report for the year ended December 31, 2014, not a standalone fourth-quarter filing. Financial statements are prepared under U.S. GAAP; dollar amounts below are U.S. dollars.
Business context and reporting period
SGOCO sold its wholly owned subsidiary SGOCO (Fujian) to Apex Flourish Group Limited, effective December 31, 2014. The divested business sold traditional flat-panel display products; its results remain included in FY 2014 through the disposal date. The company now describes itself as a light-asset business focused on branded product design, sourcing, marketing and distribution, while seeking new products and acquisition opportunities. It had no production facility after the sale.
Financial performance and position
| Metric | FY / year-end 2014 | FY / year-end 2013 |
|---|---|---|
| Revenue | $43.2 million | $201.0 million |
| Gross profit; gross margin | $2.0 million; 4.7% | $15.9 million; 7.9% |
| Operating income (loss) | $(1.3) million | $11.1 million |
| Net income (loss); basic/diluted EPS | $(2.3) million; $(0.13) | $8.4 million; $0.49 |
| Operating cash flow | $(10.8) million | $1.4 million |
| Cash and cash equivalents | $0.092 million | $13.5 million |
| Total assets; total liabilities; equity | $92.6 million; $7.4 million; $85.2 million | $104.7 million; $16.9 million; $87.8 million |
Revenue fell 78.5%, primarily due to lower traditional monitor sales amid weak industry demand and consumers’ shift toward mobile devices. Management attributed the lower gross margin mainly to increased price competition. Operating expenses declined less quickly than revenue, contributing to the operating loss. Income tax expense was $1.3 million despite a pretax loss; this included approximately $0.9 million related to the SGOCO (Fujian) sale. Comprehensive loss was $3.1 million, including foreign-currency translation effects.
Working capital was $85.2 million and the reported current ratio was 12.6 at year-end. However, cash was only $92,000; current assets included a $91.4 million receivable from the subsidiary sale. The company reported no bank loans outstanding after the sale. A $0.1 million unsecured, non-interest-bearing shareholder loan was repayable on demand. The cash-flow statement shows a $13.4 million decrease in cash, including a $10.8 million operating cash outflow, with supplier advances a major use of operating cash.
Material changes, outlook and risks
- Sale proceeds and collection: The sale consideration was $11.0 million, and Apex also assumed $80.4 million of amounts owed to SGOCO and affiliates. The resulting receivable was reported at $91.4 million. The filing says $75.9 million had been received by April 30, 2015 (elsewhere, by May 10); the remaining $15.5 million was scheduled for June 2015. Payments were secured by pledges, with contractual remedies for nonpayment.
- Business outlook: Management intended to use sale proceeds and collections for new investments, potential acquisitions in electronic or internet-related businesses, and product development. The filing provides no quantified earnings or revenue guidance and says future results may not resemble historical results after the disposal.
- Concentration and operations: The top two distributors generated 51.7% of FY 2014 revenue, versus 36.5% in 2013. The company relies on a limited supplier base, including former affiliate Honesty Group, and has no long-term supplier agreements generally. Management also reported a 207-day average collection period in 2014, compared with 98 days in 2013.
- Tax exposure: Taxes payable were $6.2 million at year-end, including unpaid amounts related to the prior Honesty Group sale and the 2014 SGOCO (Fujian) sale. The company said relevant documents had been submitted to the PRC tax bureau. PRC tax treatment of offshore transfers and the company’s possible PRC tax-resident or PFIC status remain risks.
- Listing and governance: After year-end, Nasdaq notified the company that its share price did not meet the $1.00 minimum bid requirement. The stated compliance deadline was August 10, 2015; the company planned to seek shareholder approval for a possible reverse split. The chairman’s affiliate held approximately 51.9% of shares. No dividends were expected in the foreseeable future.
- Controls and audit: Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2014. The auditor gave an unqualified opinion on the financial statements but did not attest to internal controls. The filing notes that the auditor was not subject to PCAOB inspection in China.
Most important facts for investors to verify
- Whether Apex paid the remaining $15.5 million on schedule and whether any collection, enforcement or recovery issue arose.
- The post-disposal company’s actual operating results, cash generation, acquisitions and funding needs; FY 2014 includes SGOCO (Fujian) through December 31.
- The reported sale receivable and customer-credit disclosures: the filing’s narrative reports about $0.7 million due from the two major customers, while a note appears to state $22.334 million, an apparent inconsistency with reported year-end trade receivables of $0.910 million.
- Resolution and payment status of the $6.2 million tax payable, including taxes associated with both subsidiary sales.
- Nasdaq minimum-bid compliance outcome and any reverse split, as well as customer and supplier concentration after the restructuring.