Sgoco Group, Ltd. Announces Record Revenue and Net Income for 2010 Third Quarter

News provided by

SGOCO Technology, Ltd.

Nov 18, 2010, 02:13 ET

JINJIANG CITY, China, Nov. 18, 2010 /PRNewswire-Asia-FirstCall/ -- SGOCO Group, Ltd. (OTC Bulletin Board: SGTLF), (the "Company" or "SGOCO"), a national distributor, designer and manufacturer of flat panel displays, including liquid crystal display ("LCD") and LED PC Monitors, TVs and application-specific display solutions in China, today announced its unaudited operating results for the three and nine months ended September 30, 2010.

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.

Nine Months 2010 vs. Nine Months 2009

  • Total revenue increased by 304.8% to $134.1 million, compared to $33.1 million;
  • Gross margin was 14.4%, compared to 15.2%;
  • Operating income was $15.9 million, compared to $4.4 million;
  • Net income increased by 252.7% to $11.9 million, compared to $3.4 million.
  • Fully diluted EPS was $1.28, as compared to $0.40.
  • Non-GAAP(1) diluted EPS, which excludes changes in fair value related to warrant derivative liability, was $1.37, up from $0.40.

(1) The non-GAAP measures and related reconciliations to GAAP measures are described in the accompanying sections of "About Non-GAAP Financial Measures" and "Reconciliations of Non-GAAP Financial Measures to Comparable GAAP Measures."

Management's Discussion & Analysis of the Results of Operations for the Three Months Ended September 30, 2010

The following analysis compares the results of operations for the third quarter of 2010 with those of the third quarter of 2009.

Revenue

Revenue for the third quarter ended September 30, 2010 was $71.7 million, an increase of 295.0% from $18.2 million in the third quarter of 2009. The Company saw strong sales growth as it expanded its sales base with new customers. Additionally, the improved economic environment and strong growth in exports supported the trend.

Gross Margin

The gross margin as a percent of sales was 13.6% for the three months ended September 30, 2010, compared to 24. 4% for the three months ended September 30, 2009. The gross margin in the third quarter 2009 was exceptionally high due to a firming of average selling prices while at the same time the Company sold inventory that had been acquired at depressed prices during the financial crisis.  The costs related to SGOCO Club were $0.3 million for the three months ended September 30, 2010. We did not incur any costs during the three months ended September 30, 2009, as the SGOCO Club model was established in the fourth quarter of 2009.

Net Income and EPS

Net income for the third quarter of 2010 was $7.5 million, compared to $3.5 million recorded for the same period last year. Non-GAAP net income which excludes changes in fair value related to warrant derivative liability was $7.3 million, compared to $3.5 million a year ago. Diluted EPS was $0.79 in the third quarter of 2010, compared to $0.42 in the third quarter of 2009. Non-GAAP diluted EPS, which excludes changes in fair value of warrant derivative liability, was $0.77 in the third quarter of 2010, compared to $0.42 in the third quarter of 2009.

Operating Expenses

Selling, general and administrative expenses amounted to approximately $0.9 million for the three months ended September 30, 2010, an increase of approximately $0.6 million, or 202. 2% compared to $0.3 million for the three months ended September 30, 2009. As the Company's sales increased, selling expenses increased accordingly.  The increase in general and administrative expenses was mainly due to: (i) additional costs related to professional fees including audit and legal fees associated with being a public company as it completed its reverse merger in March 2010 and (ii) increase in headcount to meet production growth and the hiring of new officers.

Provision for Income Taxes

Income tax was $1.1 million for the three months ended September 30, 2010 compared to $0.5 million, during the three months ended September 30, 2009. The increase in income taxes resulted from the Company's greater profits.

Cash and Working Capital

As of September 30, 2010, the Company had cash and cash equivalents of $11.8 million and working capital of $24.8 million, compared to $5.8 million and $7.9 million, respectively, as of December 31, 2009. The Current Ratio was 1.29 as of September 30, 2010 compared to 1.17 as of December 31, 2009.

"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.

About SGOCO Group, Ltd.

SGOCO Group, Ltd. is a national distributor, designer and manufacturer of branded flat panel displays, including LCD/LED PC monitors, LCD/LED TVs and application-specific display products in China. SGOCO is dedicated to providing high quality, branded flat panel display solutions at affordable prices for Chinese consumers and emerging markets worldwide.

For more information about SGOCO, please visit http://www.sgocogroup.com.

Safe Harbor and Informational Statement

This press release contains "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical fact, including, without limitation, those with respect to the objectives, plans and strategies of the Company set forth herein and those preceded by or that include the words "believe," "expect," "anticipate," "future," "intend," "plan," "estimate" or similar expressions, are "forward-looking statements". Although the Company's management believes that such forward-looking statements are reasonable, it cannot guarantee that such expectations are, or will be, correct. These forward-looking statements involve a number of risks and uncertainties, which could cause the Company's future results to differ materially from those anticipated. The Company assumes no obligation to update any of the information contained or referenced in this press release.

About Non-GAAP Financial Measures

We use non-GAAP adjusted net earnings to measure the performance of our business internally by excluding non-cash charges related to warrants and shared-based compensation. We believe that the non-GAAP adjusted financial measure allows us to focus on managing business operating performance because the measure reflects our essential operating activities and provides a consistent method of comparison to historical periods. We believe that providing the non-GAAP measures that we use internally is useful to investors for a number of reasons. The non-GAAP measure provides a consistent basis for investors to understand our financial performance in comparison to historical periods without variation of non-recurring items and non-operating related charges. The Company believes that both management and investors benefit from referring to these non-GAAP financial measures in assessing the Company's performance and when planning and forecasting future periods. Non-GAAP measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment regarding which charges are excluded from the non-GAAP financial measure. However, we compensate for these limitations by providing the relevant disclosure of the items excluded.

The following table provides a non-GAAP financial measure and a reconciliation of that non-GAAP measure to the GAAP net income:

SGOCO GROUP, LTD.


Reconciliations of Non-GAAP Financial Measures to Comparable GAAP Measures

(US dollars in thousands, except per share data and percentages)


Three Months Ended September 30, 2010

Three Months Ended September 30, 2009


GAAP

Adjustments

Non-GAAP

GAAP

Adjustments

Non-GAAP

Net income

$

7,531


(211)

(a)

$

7,320

$

3,533


-

(c)

$

3,533

Net margin

10.5%


(0.3)%

(a)

10.2%


19.5%


-

(c)

19.5%

Diluted EPS

$

0.79

$

(0.02)

(d)

$

0.77

$

0.42


-

(c)

$

0.42




Nine Months Ended September 30, 2010

Nine Months Ended September 30, 2009


GAAP

Adjustments

Non-GAAP

GAAP

Adjustments

Non-GAAP

Net income

$

11,915

$

814

(b)

$

12,729

$

3,378


-

(c)

$

3,378

Net margin

8.9%


0.6%

(b)

9.5%


10.2%


-

(c)

10.2%

Diluted EPS

$

1.28

$

0.09

(d)

$

1.37

$

0.40


-

(c)

$

0.40

A) Adjustment to exclude changes in fair value related to warrant derivative liability of $(211,000) from other
expense(income), which was reported in the unaudited consolidated statements of income and other
comprehensive income.


B) Adjustment to exclude changes in fair value related to warrant derivative liability of $814,000 from other
expense (income), which was reported in the unaudited consolidated statements of income and other
comprehensive income.


C) Changes in fair value related to warrant derivative liability only incurred from the first quarter of 2010. No such
expense (income) was incurred in 2009.


D) Non-GAAP diluted EPS is computed by dividing Non-GAAP net income attributable to SGOCO Technology, Ltd.
by the weighted average number of dilutive ordinary shares outstanding for the respective periods.

For investor and media inquiries, please contact:

Company Contact

Investor Relations Representative

China

United States

SGOCO Group, Ltd.

The Equity Group, Inc.

Peggy Yuan

Lena Cati

Tel: + 86-10-5879-7435 ext 808

Tel: 212 836-9611 / [email protected]

Email: [email protected]

Linda Latman

Tel: 212 836-9609 / [email protected]

SGOCO GROUP, LTD. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


September 30,

December 31,


2010

2009


(Unaudited)



ASSETS












CURRENT ASSETS





Cash

$

11,827,788

$

5,808,013

Restricted cash

6,325,444


5,596,699

Accounts receivable, trade

48,717,301


18,641,548

Accounts receivable - related parties

251,299


224,407

Other receivables

216,041


121,226

Other receivables - related parties

656,154


-

Inventories

25,375,216


4,011,505

Advances to suppliers

17,246,462


11,950,074

Advances to suppliers - related parties

27,315


8,954,051

Other current assets

374,080


20,746

Total current assets

111,017,100


55,328,269









PLANT AND EQUIPMENT, NET

17,228,019


15,729,350









OTHER ASSETS







Intangible assets, net

8,553,629


8,412,366

Other non-current assets

-


2,693

Total other assets

8,553,629


8,415,059









Total assets

$

136,798,748

$

79,472,678









LIABILITIES AND SHAREHOLDERS' EQUITY
















CURRENT LIABILITIES







Accounts payable, trade

$

36,074,666

$

3,490,937

Accrued liabilities

126,106


74,147

Bank overdraft

1,476,136


717,562

Notes payable

21,703,423


18,709,038

Short-term loan

22,177,905


19,230,756

Other payables

1,024,567


382,978

Other payables - related parties

-


198,875

Customer deposits

2,054,556


457,761

Customer deposits - related parties

-


335,056

Taxes payable

1,598,324


3,872,916

Total current liabilities

86,235,683


47,470,026









OTHER LIABILITIES







Warrant derivative liability

1,908,698


-

Put option derivative liability

2,000,000


-

Total other liabilities

3,908,698


-









Total liabilities

90,144,381


47,470,026









COMMITMENT AND CONTINGENCIES
















SHAREHOLDERS' EQUITY







Preferred stock, $0.001 par value, 1,000,000 shares authorized,nil issued and
outstanding as of September 30, 2010 and December 31, 2009 Ordinary shares,
$0.001 par value, 50,000,000 shares authorized, 16,094,756 and 14,300,000
issued and outstanding as of September 30, 2010 and December 31, 2009

16,095


14,300









Paid-in-capital

19,037,683


17,263,916

Statutory reserves

2,726,310


1,286,942

Retained earnings

21,870,055


11,394,086

Accumulated other comprehensive income

3,004,224


2,043,408

Total shareholders' equity

46,654,367


32,002,652









Total liabilities and shareholders' equity

$

136,798,748

$

79,472,678

SGOCO GROUP, LTD. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME

(UNAUDITED)







Three months ended September 30,

Nine months ended September 30,


2010

2009

2010

2009

REVENUES:










Revenues

$

55,901,224

$

12,922,389

$

97,032,397

$

25,974,808

Revenues - related parties

-


2,540,575


12,549,795


4,080,501

Other operating income

15,845,849


2,700,762


24,505,507


3,073,125

Total revenues

71,747,073


18,163,726


134,087,699


33,128,434
















COST OF GOODS SOLD:














Cost of goods sold

47,671,144


9,842,811


82,316,858


22,951,362

Cost of goods sold - related parties

-


2,061,702


10,230,151


3,003,741

Other operating expenses

14,306,692


1,821,043


22,228,435


2,143,474

Total cost of goods sold

61,977,836


13,725,556


114,775,444


28,098,577
















GROSS PROFIT

9,769,237


4,438,170


19,312,255


5,029,857
















OPERATING EXPENSES:














Selling expenses

182,922


38,810


366,347


76,677

General and administrative expenses

679,907


246,739


3,034,763


515,049

Total operating expenses

862,829


285,549


3,401,110


591,726
















INCOME FROM OPERATIONS

8,906,408


4,152,621


15,911,145


4,438,131
















OTHER INCOME (EXPENSES):














Interest income

20,422


2,022


63,184


3,618

Interest expense

(267,799)


(218,490)


(660,319)


(576,378)

Other income (expense), net

(274,813)


109,585


(563,901)


6,037

Change in fair value of warrant derivative liability

211,080


-


(813,748)


-

Total other income (expenses), net

(311,110)


(106,883)


(1,974,784)


(566,723)
















INCOME BEFORE PROVISION FOR INCOME TAXES

8,595,298


4,045,738


13,936,361


3,871,408
















PROVISION FOR INCOME TAXES

1,064,181


512,501


2,021,024


493,170
















NET INCOME

7,531,117


3,533,237


11,915,337


3,378,238
















OTHER COMPREHENSIVE INCOME:














Foreign currency translation adjustment

793,940


248,776


960,816


(22,765)
















COMPREHENSIVE INCOME

$

8,325,057

$

3,782,013

$

12,876,153

$

3,355,473
















EARNINGS PER SHARE:














Basic

$

0.79

$

0.42

$

1.29

$

0.40

Diluted

$

0.79

$

0.42

$

1.28

$

0.40
















WEIGHTED AVERAGE NUMBER OF COMMON SHARES:














Basic

9,527,932


8,500,000


9,260,594


8,500,000

Diluted

9,527,932


8,500,000


9,278,054


8,500,000

SGOCO GROUP, LTD. AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY






































Accumulated













Retained Earnings

Other




Ordinary Shares

Paid-in

Statutory




Comprehensive




Shares

Par Value

Capital

Reserves

Unrestricted

Income

Total

BALANCE, December 31, 2008

14,300,000

$

14,300

$

14,183,916

$

571,035

$

4,950,920

$

2,060,272

$

21,780,443




























Shareholder contribution









2,090,000














2,090,000

Net income

















3,378,238






3,378,238

Adjustment for statutory reserve













345,219


(345,219)






-

Foreign currency translation adjustment





















(22,765)


(22,765)




























BALANCE, September 30, 2009 (Unaudited)

14,300,000


14,300


16,273,916


916,254


7,983,939


2,037,507


27,225,916




























Shareholder contribution









990,000














990,000

Net income

















3,780,835






3,780,835

Adjustment for statutory reserve













370,688


(370,688)






-

Foreign currency translation adjustment





















5,901


5,901




























BALANCE, December 31, 2009

14,300,000


14,300


17,263,916


1,286,942


11,394,086


2,043,408


32,002,652




























Shares issued for recapitalization

1,027,933


1,028


4,501,937














4,502,965

Shares placed in escrow

766,823


767


















767

Payments of financing costs

























-

Shareholder contribution









366,780














366,780

Reclassification of warrants to derivative liabilities









(1,094,950)














(1,094,950)

Reclassification of put options to derivative liabilities









(2,000,000)














(2,000,000)

Net income

















11,915,337






11,915,337

Adjustment for statutory reserve













1,439,368


(1,439,368)






-

Foreign currency translation adjustment





















960,816


960,816




























BALANCE, September 30, 2010 (Unaudited)

16,094,756

$

16,095

$

19,037,683

$

2,726,310

$

21,870,055

$

3,004,224

$

46,654,367

SGOCO GROUP, LTD. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


Nine months ended

September 30,


2010

2009

CASH FLOWS FROM OPERATING ACTIVITIES:





Net income

$

11,915,337

$

3,378,238

Adjustments to reconcile net income to cash provided by (used in) operating activities:







Depreciation and amortization

721,805


448,129

Change in fair value of warrant derivative liability

813,748


-

Change in fair value of put option

-


-

Change in operating assets and liabilities:







Accounts receivable, trade

(29,182,600)


(21,833,913)

Accounts receivable - related parties

(21,915)


2,145,577

Other receivables

(105,946)


(975,496)

Inventories

(20,912,054)


(1,196,871)

Advances to suppliers

(4,964,267)


(4,862,812)

Advances to suppliers - related parties

8,951,625


(39,341)

Other current assets

(262,349)


34,300









Change in operating liabilities







Accounts payable, trade

31,947,666


425,168

Accrued liabilities

(84,554)


16,343

Notes payables

2,566,425


5,124,510

Other payables

622,750


(3,596,085)

Other payables - related parties

(900,754)


10,990,431

Customer deposits

1,559,863


1,142,742

Customer deposits - related parties

(335,970)


(29,680)

Taxes payable

(2,312,911)


964,889

Net cash provided by (used in) operating activities

15,899


(7,863,871)









CASH FLOWS FROM INVESTING ACTIVITIES:







Payments on equipments and construction-in-progress

(2,577,280)


(3,032,202)

Purchase of intangible assets

(6,384)


(4,897,543)

Cash received from legal acquirer

5,913


-

Net cash used in investing activities

(2,577,751)


(7,929,745)









CASH FLOWS FROM FINANCING ACTIVITIES:







Increase in restricted cash

(603,623)


(2,270,419)

Bank overdraft

730,979


1,268,282

Proceeds from government

735,500


2,492,030

Proceeds from short-term loan

23,376,595


12,313,560

Repayments on short-term loan

(20,867,069)


-

Shareholder contribution

366,780


2,090,000

Proceeds from recapitalization

5,388,083


-

Repayments on shareholder promissory notes

(100,000)


-

Payments of financing costs

(666,468)


-

Net cash provided by financing activities

8,360,777


15,893,453









EFFECT OF EXCHANGE RATE ON CASH

220,850


(23,742)









INCREASE IN CASH

6,019,775


76,095









CASH, beginning of period

5,808,013


352,568









CASH, end of period

$

11,827,788

$

428,663









SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:







Interest expenses paid (net of amount capitalized)

$

660,319

$

576,378

Income taxes paid

$

1,183,405

$

-

Non-cash investing activities







Construction-in-progress transferred to property plant and equipment

$

2,697,347

$

-

SOURCE SGOCO Technology, Ltd.

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