Sgoco Group (NASDAQ:SGOC)

BEIJING, May 21, 2012 /PRNewswire-Asia/ -- SGOCO Group, Ltd. (NASDAQ: SGOC), (the "Company" or "SGOCO"), a company focused on building its own brands and retail distribution network in the Chinese flat panel display market, including LCD/LED monitors, TVs, and application specific products, today announced that its independent auditor, Grant Thornton, the China member firm of Grant Thornton International, has resigned as of May 14, 2012.

SGOCO and members of the Audit Committee of the Board of Directors have been meeting with other qualified independent auditing firms to replace Grant Thornton and will announce the new independent auditor once one is engaged.

As a result of Grant Thornton's resignation, the Company has missed the May 15, 2012 filing deadline for its 2011 annual report on Form 20-F. SGOCO will work diligently with its new auditor to complete the audit of its financial statements for the year 2011 and file its annual report on Form 20-F as soon as practicable.

As a result of the Form 20-F filing delay, Nasdaq halted trading of the Company's ordinary shares. SGOCO is working with its advisors to have Nasdaq resume trading.

SGOCO remains fully operational, continues to make strides with its current business plan and believes its existing and future growth initiatives will maximize SGOCO's performance in 2012 and beyond.

Our premium research emailed to our members on 4/12/2012

Sgoco Group (NASDAQ:SGOC) shares are strong, maybe in anticipation of the closing of the sale of its assets mentioned in its November 16, 2011 announcement. Based on the press release, the deal is slated to be completed by the end of March and translates into a stock price of about $4.40 per share.

“The Company entered into an Agreement for Sale and Purchase (“SPA”) with the Buyer pursuant to which it sold all of the outstanding capital shares of Honesty Group (“Sale Shares”) for cash consideration of US$76 million. The transfer of the Sale Shares was effective on November 15, 2011. The cash consideration will be paid in installments over the next four months.  Payment of the cash consideration is secured by a pledge of the Sale Shares and the Group’s cash, accounts receivable and advances to suppliers.  In the event that the Buyer does not make the installment payments, SGOCO will have the right to take back ownership of the Sale Shares or force the Buyer to liquidate the Group’s cash, accounts receivable and advances to suppliers to have sufficient funds to make the payments to the Seller.”

While we can’t verify the transaction has taken place, our OTGDD has confirmed that SGOC does in fact own a big piece of land, which may justify the price of the SPA transaction on Nov. 16, 2011.  Based on the Nov. 16, 2011 announcement, SGOC should have already received a USD 76 million as cash consideration.   We are waiting for SGOC to issue an update regarding this transaction.

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BEIJING, Feb. 28, 2012 /PRNewswire-Asia/ -- SGOCO Group, Ltd. ("SGOCO," or the "Company") (Nasdaq: SGOC), a company focused on building its own brands and retail distribution network in the Chinese flat panel display market, including LCD/LED monitors, TVs, and application specific products, today announced that the Company has received a letter from Nasdaq, notifying that the Company is no longer deficient in the Minimum Market Value of Publicly Held Shares (MVPHS) requirement as originally reported by the Company on February 3, 2012.

Third Quarter 2011 Results

BEIJING, November 16, 2011 /PRNewswire-Asia/ -- SGOCO Group, Ltd. (NASDAQ: SGOC), (the "Company" or "SGOCO"), a company focused on building its own brands and retail distribution network in the Chinese flat panel display market, including LCD/LED monitors, TVs, and application specific products, today announced the sale of 100% of the shares of its Hong-Kong-based subsidiary, Honesty Group Holdings Ltd. ("Honesty Group") to Apex Flourish Group Limited (the "Buyer"), a BVI company, for US$76.0 million. Honesty Group and its subsidiaries (the "Group") represented SGOCO's core manufacturing facility along with the land, buildings and production equipment.

Mr. Or, President and Chief Executive Officer of SGOCO commented, "We believe the sale of our manufacturing facility is the right step for SGOCO's long-term growth and development. This transaction helps transition our company from a heavy asset business model to a lighter asset model with greater flexibility and scalability."

The Company entered into an Agreement for Sale and Purchase ("SPA") with the Buyer pursuant to which it sold all of the outstanding capital shares of Honesty Group ("Sale Shares") for cash consideration of US$76 million. The transfer of the Sale Shares was effective on November 15, 2011. The cash consideration will be paid in installments over the next four months. Payment of the cash consideration is secured by a pledge of the Sale Shares and the Group's cash, accounts receivable and advances to suppliers. In the event that the Buyer does not make the installment payments, SGOCO will have the right to take back ownership of the Sale Shares or force the Buyer to liquidate the Group's cash, accounts receivable and advances to suppliers to have sufficient funds to make the payments to the Seller.

With the sale of the manufacturing facility, the Company does not anticipate a material adverse impact to SGOCO's revenues. In the near term, the Company anticipates gross margin will be lower as a percent of sales as products will be sourced from Honesty Group, partially offset by reductions in depreciation, interest and general and administration costs. As a result, the Company anticipates that net profit margin as a percent of sales will be lower than recent reporting periods. In the future, gross margins may be higher if outsourcing production to other manufacturers proves more cost effective.

• Total revenues increased by 100% to $85.6 million, compared to $42.9 million;
• Gross profit increased by 68% to $10.7 million, compared to $6.4 million;
• Gross margin was 12.6%, compared to 15.0%;
• Operating income increased by 69% to $8.9 million, compared to $5.3 million;
• Net income increased by 87% to $7.1 million, compared to $3.8 million; and,
• Fully diluted EPS was $0.45, compared to $0.40.

Financial Highlights First Half 2011 vs. First Half 2010:

• Total revenues increased by 177% to $172.6 million, compared to $62.3 million;
• Gross profit increased by 89% to $18.0 million, compared to $9.5 million;
• Gross margin was 10.5%, compared to 15.3%;
• Operating income increased by 109% to $14.6 million, compared to $7.0 million;
• Net income increased by 180% to $12.3 million, compared to $4.4 million;
• Fully diluted EPS was $0.76, compared to $0.48; and,
• The number of SGOCO Image retail partners on June 30, 2011 was 705, compared to 364 a year earlier.

2011 Second Quarter Overview

SGOCO continued to show strong year-on-year growth into the second quarter of 2011. The high quality of SGOCO brands continues to distinguish it from low-end competitors in the marketplace. With continued strong demand from customers and the addition of monitor and TV production capacity over the past year, the Company was able to achieve significantly higher revenues. The Company believes its strategy of multiple brands and multiple channels continues to effectively penetrate the market.

BEIJING--(BUSINESS WIRE)--SGOCO Group, Ltd. (NASDAQ: SGOC), (the “Company” or “SGOCO”), a company focused on building its own brands and retail distribution network in the Chinese flat panel display market, including monitors, TVs, and application specific products, today announced that David Xu has been appointed Chief Financial Officer and Head of its Beijing Office.

David Xu’s career in finance and accounting spans nearly 20 years in both Asia and North America. His experience includes leading finance and risk management positions with some of the world’s best-known organizations such as General Electric and Yum! Brands. His nearly 10 years in GE includes Six Sigma Black Belt experience leading large scale strategic projects. He most recently served as CFO of China Maple Leaf Educational Systems and prior to that, he was CFO of the World Bank IFC/CUNA Mutual Insurance joint venture company. Mr. Xu has also acted as an independent financial reporting consultant advising clients including Manulife Financial, Zurich Financial Services and TD Bank Financial Group. Mr. Xu holds an MBA in Corporate Finance from University of Illinois at Chicago and a Bachelor’s in English and American Literature from Beijing Normal University.

“David brings the CFO expertise and hands-on experience in risk management and financial reporting of Fortune 500 companies," said Mr. Or, SGOCO’s President and CEO. "His strong combination of skills and experience will be an important addition to our executive management team and will support his success as CFO of SGOCO, a financially solid, fast-growing, marketing-driven company with multiple channels, multiple brands, and with a strong focus on retail distribution."

First Quarter Results:

• Total revenues increased by 347% to $87.0 million, compared to $19.5 million;
• Gross profit increased by 133% to $7.3 million, compared to $3.1 million;
• Gross margin was 8.4%, compared to 16.1%;
• Operating income increased by 230% to $5.7 million, compared to $1.7 million;
• Net income increased by 826% to $5.1 million compared to $0.6 million;
• Fully diluted EPS was $0.32, compared to $0.06

Since the close of the first quarter, the Company repurchased and retired a total of 867,177 of its publicly-traded warrants in private transactions, for an aggregate purchase price of $320,610.16 (or $0.37 per warrant). All of the terms of the remaining 0.7 million publicly-traded warrants remain the same. Additionally, the Company, in private transactions, repurchased and retired a total of 31,764 of the warrants issued to its underwriters in the December 2010 offering for an aggregate purchase price of $15,882 (or $0.50 per warrant). All of the terms of the remaining 34,903 warrants issued to its underwriters in the December 2010 offering remain the same. The Company believes that the repurchase and retirement of these warrants benefit shareholders in the long-term as it eliminates the dilution that would have occurred in the event these warrants were exercised.

We have been making these types of credit arrangements since our inception and expect to be able to renew these facilities in the future. Based on our current expectations, we believe the amounts available to us from our credit facilities will be sufficient to fund our operations during the next twelve months. The foregoing assumes that we are able to renew these facilities when they expire, that our accounts receivables are converted to cash on a timely basis and that we do not encounter any unforeseen costs or expenses.

One of Honesty Group’s subsidiaries, Guanwei, has registered capital of $11,880,000. As of December 31, 2010, $3,130,000 had been invested by Honesty Group in Guanwei. According to an agreement reached with the local government agency, the Jinjiang Bureau of China’s State Administration of Industry and Commerce, or SAIC, the remaining registered capital of $8,750,000 for Guanwei must be contributed by the end of 2011. The SAIC provided Honesty Group with this additional time to make the registered capital payments because Honesty Group is in the process of investing in infrastructure in the region through its investment in the Guanke Technology Park. If Honesty Group is unable to make the registered capital payments during 2011, it believes it will be able to reach agreement with the SAIC to further defer its obligation to pay the remaining registered capital, provided that the SAIC believes Honesty Group is progressing with the timetable for making its infrastructure investments in the Technology Park. If it fails to reach such an agreement for deferral, Honesty Group would have an obligation to fund Guanwei or to apply for a reduction in the remaining registered capital, which may not be granted. If Honesty Group fails to contribute the registered capital, it may be penalized with fines of 5 – 15% over the amount of unpaid capital, and, in certain cases, the business license for Guanwei may be revoked, which may result in its inability to conduct business in China. If Honesty Group is required to fund the remaining registered capital in full, SGOCO or Honesty Group will need to raise external financing, for which they have no commitments.

2010 Year End Results:

Third Quarter 2010 vs. Third Quarter 2009

• Total revenue increased by 295.0% to $71.7 million, compared to $18.2 million;

• Gross margin was 13.6%, compared to 24.4%;

• Operating income increased by 114.5% to $8.9 million, compared to $4.2 million;

• Net income increased by 113.2% to $7.5 million compared to $3.5 million.

• Fully diluted EPS was $0.79, as compared to $0.42.

• Non-GAAP(1) diluted EPS, which excludes changes in fair value related to warrant derivative liability, was $0.77 up from $0.42.

"2010 has been a year of transformation as SGOCO became a public company. We have taken several steps to strengthen our position and take advantage of new business opportunities in the Chinese emerging markets. We are thrilled with the performance and strength of our business. The $71.7 million in revenue for the quarter and over $7.5 million in net income, both represent all-time records for SGOCO," said Mr. Or, CEO and President of SGOCO.

"We sold more in the three months ending September 30, 2010 than we did in the entire first six months of 2010.We have increased the number of SGOCO Club partners to 403 stores as of September 30, 2010. This is a proven record of our capability to capitalize on the growth opportunities in the markets. As we remain committed to our strategy of multiple brands and multiple channels, we expect more exciting developments for the remainder of the year," added Mr. Or.

Please note that SGOCO has warrants with an excercise price of $8.00. $5.00 had been the original excercise price.

Hambrecht Asia Acquisition is set to vote on a business combination proposal with the Chinese subsidiaries of Honesty Group: SGOCO Technology Ltd 

Company Snap Shot:

• The company designs and manufactures SGOCO brand LCD products in China
  
• SGOCO currently sells its products via multiple channels including computer stores, distributors and specialty retailers, but is focused on developing a more vertically integrated Direct Store Delivery system, via a strategy referred to as SGOCO Clubs.
• SGOCO currently sells products from two primary branded product lines: SGOCO, which includes high-quality, feature rich LCD products, and Edge 10, a unique line of products currently aimed at the educational marketplace in the U.K.
  
• The principal objective of the Target’s management is for SGOCO to be a leading developer and manufacturer of LCD products and to create a network of SGOCO Clubs in Tier 2, Tier 3 and Tier 4 cities in China to distribute its products. The strategy is to capitalize on SGOCO’s operating strengths, which include a product development program; in-house manufacturing capability; value priced, feature rich products marketed under brands the Target controls; an attractive compensation plan for SGOCO Club members; a scalable business model; and an experienced management team.
  
• Profitable and strong growth since founding in 2006. Strong revenue and profit growth continued in 2009 despite world economic downturn.
  
• Focusing primarily on consumer markets in Tier 2, Tier 3 and Tier 4 cities in China, SGOCO has benefited from the strong economic growth and has been consistently profitable in operating results over the past three years, demonstrated by strong revenue, earnings, and cash flow performance. In 2009, SGOCO’s total sales value has reached $67.9 million, representing a 3-year compound annual growth rate, or CAGR, of 154.3%. SGOCO plans to continue focusing its market penetration in these areas using its brand value strategy offering quality consumer electronic products at affordable pricings with highest customer satisfaction standards.

Post Merger Share Calculation:(Max dilution scenario)

• 4,239,300 : Pre merger outstanding shares
• 4,239,300 : Existing Warrants
•  1,555,000: Management warrants
• 8,500,000 : Newly issued shares of Common Stock )

GeoTeam® best effort calculation of total post reverse merger outstanding shares assuming full conversions:  18,532,600

Note: The share count can diverge from this amount for several reasons

• Decrease as a result of a warrant amendment that gives warrant holders the option to have their warrants redeemed for $0.50.
  
• Decrease if shares have to be redeemed from no-vote shareholders in order to increase the chances of the approval of the proposed merger.
  
• Increase if the company must seek financing, post merger.

Also, keep in mind that the treasury method is normally applied to calculate fully diluted shares outstanding. This would decrease the share calculation assumption.

Financial Snap Shot:

^a EPS figures were not provided by the company. Non-GAAP EPS Figures exclude certain non-operating gains and losses as well as certain non-cash items. Non-GAAP information should not be viewed in isolation or as a substitute for reported, or GAAP information . For a more complete explanation of the company's definition of non-GAAP please refer to its financial press releases. The GeoTeam® non-GAAP figures may, from time to time, differ from company supplied figures.

^b Note that the company used 13,799,125 shares for its 2009 EPS calculation of $0.52 as it did not factor in any warrant assumption. 2011 share count increase due to incentive shares earned if the company achieves net income targets.

The potential of the warrant strategy we had highlighted has drastically changed due to a proposed amendment to increase the exercise price to $8.00.

Source: SEC Form 6K (February 18, 2010)

We asked Drexion for his take on this deal. Recall, he was very instrumental in helping GeoReaders profit from the CCME warrant arbitrage:

Read through it... So-So terms...

• 12.7M shares outstanding after the transaction (assuming no liquidation in acquisition vote).
• 4.24M warrants -- Let us ignore this for now
• 1.55M management warrants -- Let us ignore this for now

Earn outs:

• 5M if management makes 15M net income in 2010
• 800k if management makes 20M net income in 2010 (or 5.8M if they make 2011 but not 2010 numbers).
  

Even ignoring the warrants, if they make 15M in 2010 their share count will go up to 17.7M.

15/17.7 = $0.847 EPS -- Shares hit in 2011 though, so official 2010 EPS would be 15/12.7 = 1.18.

At the strike of $8 and $0.50 warrant price, that means the break even is roughly P/E of 10X the first EPS above and 7.2X the 'official 2010' EPS.

If they make 2011's earn-out of 20M they get another 800k shares. 20/18.5 = $1.08 EPS -- shares hit in 2012 though, so official 2011 EPS would be 20/17.7 = $1.13

At the strike of $8 and $0.50 warrant price, that means the break even is roughly P/E of 7.9X the first EPS above and 7.5X the 'official 2011' EPS.

Note that the 'official eps' actually went DOWN for 2011 versus 2010, even though net income went from 15M to 20M.

Also note that this does not take into account the 6M warrants which would make the situation worse.

There is one further complication: All warrant holders that do not explicitly choose to keep their shares, will have their warrants redeemed for $0.50 after the acquisition. So if we bought warrants tomorrow, what happens to them? Its too late to vote... Would we buy tomorrow and then suddenly have them be redeemed for $0.50 in a few days?

 5,800,000 newly issued SPAC Shares, will to be held in an escrow account by an affiliate of Honesty Group’s Hong Kong counsel, and delivered to the former shareholders of

Honesty Group if the Combined Company meets certain net income targets contained in the Share Exchange Agreement. The 5,800,000 escrowed SPAC Shares will be delivered to the former shareholders of Honesty Group in 2011 and 2012 as follows:

• 5,000,000 SPAC Shares will be released from escrow if the Combined Company reports income from existing operations of US $15 million for the fiscal year ended December 31, 2010, excluding costs associated with the transactions contemplated by the Share Exchange Agreement.
  
• 800,000 SPAC Shares released from escrow if the Combined Company reports income from existing operations of US $20 million for the fiscal year ended December 31, 2011.

In the event the First Earn-Out Milestone is not met but the Second Earn-Out Milestone is met, all 5,800,000 escrowed SPAC Shares will be released. If neither earn-out milestone is met, then the 5,800,000 escrowed SPAC Shares will be delivered to the Combined Company for cancellation and returned to the status of authorized but unissued SPAC Shares. The Sponsors have also agreed to escrow 311,696 of their shares to be released, if the Target meets the First or Second Earn-Out Milestones. 

Source: SEC Form 6K (February 18, 2010)

At the end of 2009, Honesty Group had $1.5 million remaining under its $7.4 million multi-year technology and manufacturing grant from Jinjiang City. Honesty Group also had $36.2 million in approved credit lines with its various banks. Because of our record of growth, profitability, and technology-based manufacturing, management is confident that the Jinjiang City government and its banking group will continue to support us with needed capital resources in the future.

Two of Honesty Group’s subsidiaries, Guanwei and Guancheng, were formed on June 22, 2007, with registered capital of $11,880,000 and $7,800,000. However, only $3,130,000 and $2,259,970 had been invested by Honesty Group as of December 31, 2009. According to an agreement reached with the local government, the remaining registered capital of $8,750,000 and $5,540,000 must be contributed by the end of 2010. However, Honesty Group believes that as long as the Target does not begin construction on the land held by those two subsidiaries, Honesty Group should be able to reach agreement with the governmental authority to further defer completing its obligation to inject the remaining registered capital. If it fails to reach such an agreement, the Combined Company would have an obligation to fund these two subsidiaries, which would limit the resources available for other working capital purposes.

Source: SEC Form 6K (February 18, 2010)

The GeoTeam® is monitoring the warrants of Hambrecht Asia Acquisition Corp. (OTCBB:HMAQF) and CS China Acquisition Corp. (OTCBB:CSAQF). Both companies have entered into business combination agreements with Asian firms.

We are hoping that the respective warrants will provide similar arbitrage opportunities as TMI and HOL warrants have thus far.

Investors need to be aware of possible amendments that could negatively effect the value of the warrants. One common example is an amendment to increase the warrant exercise price. Also, the arbitrage strategy fails if shareholders do not ultimately approve a business combination within a certain allotted time.

See research note for TMI arbitrage strategy
See research note for HOL arbitrage strategy

Hambrecht Asia Acquisition Details

We have emailed Hambrecht Asia Acquisition Corp. requesting information on its proposed business combination.

Underlying Symbol- HMAQF
Warrant Symbol- HMAWF

Possible arbitrage strategy if shareholders approve the proposed business combination

Data to be considered:

• Current Price of Common Stock: $7.73
• Current Ask Price of Warrants: $0.55 (warrants have a wide bid/ask spread)
• Strike price of Warrants: $5.00
• Implied intrinsic value of warrants: $7.73 - $5.00= $2.73

Strategy

• Buy the warrants at current price of $0.55.
• If the business combination is completed and the warrants become exercisable then the warrants should approach the implied intrinsic value.
• Profit = (New Value of Warrant, Properly Priced) minus $0.55.

CS China Acquisition Details

Underlying Symbol- AERCF
Warrant Symbol- AERLF

Target Firm- Asia Gaming & Resort Limited, (See Release)

Asia Gaming is an investment holding company. The principal business activities of its wholly owned subsidiaries are to hold Profit Agreements with VIP Room gaming promoter companies and to receive 100% of the profit streams from the Promoters. The Promoters currently participate in the promotion of two major luxury VIP gaming facilities in Macau, China, the largest gaming market in the world.

See incentive financial targets.

Possible arbitrage strategy if shareholders approve the proposed business combination

Data to be considered:

• Current Price of Common Stock: $5.70
• Current Ask Price of Warrants: $0.44 (warrants have a wide bid/ask spread)
• Strike price of Warrants: $5.00
• Implied intrinsic value of warrants: $5.70 - $5.00= $0.70

Strategy

• Buy the warrants at current price of $0.44
• If the business combination is completed and the warrants become exercisable then the warrants should approach the implied intrinsic value.
• Profit = (New Value of Warrant, Properly Priced) minus $0.44