June 28, 2011 at 18:30 PM EDT
SGOCO Group, Ltd. Announces Record Revenue for 2011 First Quarter

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 its unaudited operating results for the three months ended March 31, 2011.

Financial Highlights First Quarter 2011 vs. First Quarter 2010:

  • 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; and,
  • The number of SGOCO Image retail partners was 665, compared to 206.

2011 First Quarter Overview

SGOCO started 2011 on a very strong note with record revenues of $87.0 million. Compared to the first quarter of 2010, revenues were up 347% and compared to the fourth quarter of 2010, revenues rose 4.5%. The SGOCO brands continue to gain recognition in the marketplace based on their high quality. The strong growth was the result of increased customer demand for the Company’s products and expanded production capacity. The Company believes its success stems from its continued focus on its multiple-brand, multiple channel strategy. With the addition of POVIZON and No.10, SGOCO now has 6 brands in its portfolio. The Company continues to target 1,000 SGOCO Image stores by the end of 2011.

Revenue

Revenue for the first quarter of 2011 was $87.0 million, an increase of 347% from $19.5 million in the first quarter of 2010. As SGOCO’s reputation for high quality products has grown, the Company has seen increasing orders from customers. Sales of the Company’s own brands increased by 225% in the first quarter of 2011 compared to the first quarter of 2010. The trend toward greater sales was also aided by the increased number of SGOCO Image stores with 665 stores as of March 31, 2011 compared to 206 stores as of March 31, 2010. SGOCO’s own brands represented 54% of total revenues. To meet the increased market demand for the Company’s products, the Company operated with expanded production capacity in the first quarter of 2011 compared with the first quarter of 2010. Aiming to improve factory utilization and reduce idle capacity, SGOCO added new OEM customers. OEM revenues accounted for 30% of total revenues in the first quarter of 2011. The remaining 16% of the Company’s revenues are made up of Company produced components and outsourced items such as LED products, network products, and control systems.

Gross Margin

With the increase in revenues, SGOCO’s gross profit for the first quarter of 2011 increased 133% to $7.3 million from $3.1 million for the first quarter of 2010. The gross margin as a percent of sales was 8.4% in the first quarter of 2011, compared to 16.1% in the first quarter of 2010 with the decline due to downward pressure on product prices, increased sales of lower margin OEM products and the growth of low margin component and outsourced item revenues. If general market prices stabilize and panel prices resume their declining trend, the Company expects gross margin improvement.

Operating Expenses

Selling, general and administrative expenses for the first quarter of 2011 were $1.6 million, a $0.2 million increase over the first quarter of 2010. The largest increase in selling, general and administrative expenses was for professional fees associated with being a public company.

Provision for Income Taxes

Income tax was $0.7 million compared to $0.3 million during the three months ended March 31, 2010.

Net Income and EPS

Net income for the first quarter of 2011 was $5.1 million, an increase of 826%, compared to $0.6 million recorded for the same period last year. Diluted EPS was $0.32 in the first quarter of 2011, compared to $0.06 in the first quarter of 2010. Of note, diluted EPS for the first quarter of 2011 was calculated based on 16,280,942 weighted average number of common shares as compared to 8,737,596 weighted average number of common shares for the first quarter of 2010.

Cash and Working Capital

As of March 31, 2011, the Company had cash and restricted cash of $33.0 million and working capital of $40.9 million, compared to $30.0 million and $38.7 million, respectively, as of December 31, 2010. The current ratio was 1.31 as of March 31, 2011 compared to 1.44 as of December 31, 2010.

Subsequent Events

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.

Conference Call

The Company will hold a conference call for investors tomorrow, Wednesday, June 29, 2011, at 10:00 a.m. ET. Interested parties may participate in the call by dialing (201) 493-6749; please call in 10 minutes before the conference call is scheduled to begin and ask for the SGOCO conference call. After opening remarks, there will be a question and answer period. The conference call will also be broadcast live over the Internet. To listen to the live call, please go to www.sgocogroup.com, click on the Investor Relations section, then to the Event Calendar where the conference call is posted. Please go to the website 15 minutes early to download and install any necessary audio software. If you are unable to listen live, the conference call will be archived and can be accessed for approximately 90 days. We suggest listeners use Microsoft Explorer as their browser.

About SGOCO Group, Ltd.

SGOCO Group, Ltd. is focused on developing its own brands and distribution in the Chinese flat panel display market. Our main products are LCD/LED monitors, TVs, and other application specific products. Our target markets are Tier 3 and Tier 4 cities where we compete by providing high quality products at competitive prices.

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". Forward-looking statements in this release include, without limitation, the Company’s continued success from its focus on its multiple-brand, multiple channel strategy, the Company’s ability to achieve its target of 1,000 SGOCO Image stores by the end of 2011, the future stabilization of general market prices for the Company’s products, the resumption of the declining trend for panel prices, and whether the repurchase and retirement of outstanding warrants will benefit shareholders in the long-term. 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. These forward-looking statements can change as a result of many possible events or factors not all of which are known to the Company, which may include, without limitation, those events and factors described in the “Key Information – Risk Factors" section in the Company's most recently filed annual report on Form 20-F. The Company assumes no obligation to update any of the information contained or referenced in this press release.

SGOCO GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME

FOR THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(UNAUDITED)

2011 2010
REVENUES:
Revenues $ 86,975,624 $ 16,774,609
Revenues - related parties - 2,700,999

Total revenues

86,975,624 19,475,608
COST OF GOODS SOLD:
Cost of goods sold 79,676,105 14,203,671
Cost of goods sold - related parties - 2,138,087
Total cost of goods sold 79,676,105 16,341,758
GROSS PROFIT 7,299,519 3,133,850
OPERATING EXPENSES:
Selling expenses 216,372 79,215
General and administrative expenses 1,362,926 1,319,137
Total operating expenses 1,579,298 1,398,352
INCOME FROM OPERATIONS 5,720,221 1,735,498
OTHER INCOME (EXPENSES):
Interest income 14,840 22,845
Interest expense (396,151) (264,648)
Other income (expense), net (235,949) (166,426)
Change in fair value of warrant derivative liability 728,384 (478,540)
Total other income (expenses), net 111,124 (886,769)
INCOME BEFORE PROVISION FOR INCOME TAXES 5,831,345 848,729
PROVISION FOR INCOME TAXES 693,939 293,934
NET INCOME 5,137,406 554,795
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment 339,996 (2,503)
COMPREHENSIVE INCOME $ 5,477,402 $ 552,292
EARNINGS PER SHARE:
Basic $ 0.32 $ 0.06
Diluted $ 0.32 $ 0.06
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Basic 16,169,170 8,717,008
Diluted 16,280,942 8,737,596

SGOCO GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2011 AND DECEMBER 31, 2010

ASSETS

March 31, December 31,
2011

(Unaudited)

2010
CURRENT ASSETS
Cash $ 15,347,387 $ 23,493,805
Restricted cash 17,668,531 6,537,086
Accounts receivable, trade 60,643,251 55,985,013
Accounts receivable - related parties - 49,559
Other receivables 3,563,688 429,864
Inventories 19,618,755 17,291,123
Advances to suppliers 57,725,627 23,312,312
Other current assets - 46,615

Total current assets

174,567,239 127,145,377
PLANT AND EQUIPMENT, NET 17,618,943 16,886,297
OTHER ASSETS
Intangible assets, net 8,615,210 8,589,215
Total other assets 8,615,210 8,589,215
Total assets $ 200,801,392 $ 152,620,889

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable, trade $ 41,054,934 $ 31,958,430
Accrued liabilities 470,970 333,659
Bank overdraft 529,200 1,492,226
Notes payable 43,831,961 17,784,899
Short-term loan 36,727,548 26,864,059
Short-term loan - shareholder 2,109,392 2,545,439
Other payables 2,562,033 1,755,881
Customer deposits 5,351,475 3,278,269
Taxes payable 1,008,533 2,449,939
Total current liabilities 133,646,046 88,462,801
OTHER LIABILITIES
Warrant derivative liability 677,184 1,530,569
Put option derivative liability - 2,000,000
Total other liabilities 677,184 3,530,569
Total liabilities 134,323,230 91,993,370
COMMITMENT AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, $0.001 par value, 1,000,000 shares authorized,
nil issued and outstanding as of March 31, 2011 and
December 31, 2010 - -
Common stock, $0.001 par value, 50,000,000 shares authorized,
17,258,356 and 17,428,089 issued and outstanding as of
March 31, 2011 and December 31, 2010 17,258 17,428
Paid-in-capital 24,555,414 24,182,003
Statutory reserves 4,074,142 3,560,838
Retained earnings 33,675,881 29,051,779
Accumulated other comprehensive income 4,155,467 3,815,471
Total shareholders' equity 66,478,162 60,627,519
Total liabilities and shareholders' equity $ 200,801,392 $ 152,620,889

SGOCO GROUP, LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

Ordinary Shares Retained Earnings Accumulated
Other
Comprehensive
Income
Paid-in Statutory
Shares Par Value Capital Reserves Unrestricted Total
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
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 554,795 554,795
Adjustment for statutory reserve 225,032 (225,032 ) -
Foreign currency translation adjustment (2,503 ) (2,503 )
BALANCE, March 31, 2010 (Unaudited) 16,094,756 $ 16,095 $ 19,037,683 $ 1,511,974 $ 11,723,849 $ 2,040,905 $ 34,330,506
Shares issued for secondary offering 1,333,333 1,333 5,293,062 5,294,395
Reclassification of warrants to derivative liabilities (148,742 ) (148,742 )
Net income 19,376,794 19,376,794
Adjustment for statutory reserve 2,048,864 (2,048,864 ) -
Foreign currency translation adjustment 1,774,566 1,774,566
BALANCE, December 31, 2010 17,428,089 $ 17,428 $ 24,182,003 $ 3,560,838 $ 29,051,779 $ 3,815,471 $ 60,627,519
Shares issued for secondary offering 80,267 80 373,161 373,241
Shares repurchased (250,000 ) (250 ) 250 -
Net income 5,137,406 5,137,406
Adjustment for statutory reserve 513,304 (513,304 ) -
Foreign currency translation adjustment 339,996 339,996
BALANCE, March 31, 2011 (Unaudited) 17,258,356 $ 17,258 $ 24,555,414 $ 4,074,142 $ 33,675,881 $ 4,155,467 $ 66,478,162

SGOCO GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(UNAUDITED)

2011 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,137,406 $ 554,795
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization 410,269 254,290
Change in fair value of warrant derivative liability (728,384) 478,540
Change in operating assets and liabilities
Accounts receivables, trade (4,348,693) 6,010,971
Accounts receivables - related parties 49,657 (1,021,801)
Other receivables (3,273,446) (3,465)
Inventories (2,229,114) (2,804,757)
Advances to suppliers (34,177,948) (16,770,734)
Advances to suppliers-related parties - 1,275,697
Other current assets 46,707 (256,431)
Accounts payable, trade 8,898,697 3,160,719
Accrued liabilities 135,336 282,406
Notes payable 25,868,180 4,822,668
Other payables 856,681 30,874
Other payables - related parties - 2,742,309
Customer deposits 2,049,178 1,362,210
Customer deposits - related parties - (279,809)
Taxes payable (1,449,558) (763,589)
Net cash used in operating activities (2,755,032) (925,107)
CASH FLOWS FROM INVESTING ACTIVITIES:
Long term prepayment - (66,872)
Purchase of equipments and construction-in-progress (932,747) (1,594,383)
Purchase of intangible assets (7,320) (89,493)
Cash received from legal acquirer - 5,913
Net cash used in investing activities (940,067) (1,744,835)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in restricted cash (11,060,588) (3,264,800)
Bank overdraft (967,712) 728,762
Proceeds from government - 733,250
Proceeds from short-term loan 23,862,082 11,792,912
Payments on short-term loan (14,172,137) (12,647,096)
Shareholder contribution - 366,780
Payments from shareholder loan (436,047) -
Proceeds from recapitalization - 5,388,083
Payments on repurchase of warrants (125,000) -
Payments on repurchase of put option (2,000,000) -
Proceeds from shares issuance 373,242 -
Payments of financing costs - (666,468)
Net cash (used in) provided by financing activities (4,526,160) 2,431,423
EFFECT OF EXCHANGE RATE ON CASH 74,841 (4,650)
DECREASE IN CASH (8,146,418) (243,169)
CASH, beginning of period 23,493,805 5,808,013
CASH, end of period $ 15,347,387 $ 5,564,844
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest expenses paid (net of amount capitalized) $ 396,151 $ 264,648
Income taxes paid $ 2,006,593 $ 331,700

Contacts:

For investor and media inquiries:
SGOCO Group, Ltd. (China)
Bill Krolicki, + 86-10-8587-0173
VP of Finance
bill@sgoco.com
or
The Equity Group Inc. (US)
Lena Cati, 212-836-9611
lcati@equityny.com
or
Linda Latman, 212-836-9609
llatman@equityny.com
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