August 15, 2011 at 16:05 PM EDT
SGOCO Group, Ltd. Announces Solid Growth in Revenues and Earnings for 2011 Second 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 LCD/LED monitors, TVs, and application specific products, today announced its unaudited operating results for the three month and six month periods ended June 30, 2011.

Financial Highlights Second Quarter 2011 vs. Second Quarter 2010:

  • 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.

Revenue

Revenue for the second quarter of 2011 was $85.6 million, an increase of 100% from $42.9 million in the second quarter of 2010. Over the past year, the Company has seen an increase in both the number of large regional distributors and the size of the orders placed.

Compared to the first quarter of 2011, the increase in revenue was mainly due to increased sales of its own higher margin branded products and OEM products relative to resale products. In the second quarter of 2011, sales of SGOCO’s own brands represented 61% of total revenues, OEM represented 34%, and other products including electronic components represented 5%.

Sales of the Company’s own brands increased by 68% in the second quarter of 2011 compared to the second quarter of 2010. The Company’s own brand sales have been aided by the expansion of the SGOCO Image partner network. The Company had 705 partners as of June 30, 2011 compared to 364 partners as of June 30, 2010.

Gross Margin

With the increase in revenues, especially for SGOCO’s own brands, gross profit for the second quarter of 2011 increased 68% to $10.7 million from $6.4 million for the second quarter of 2010.

The gross margin for the second quarter of 2011 decreased to 12.6% compared to the 15.0% for the same period of last year. The decline was mainly due to downward pressure on own brand product prices.

However, when compared to the gross margin for 2011 first quarter, the Company, as expected, was able to improve gross margins for both its own brand and OEM products. The sequential increase in gross margin was also aided by stronger sales of the Company’s high margin application specific Edge 10 brand which is exported to the U.K. and earns gross margins of approximately 20%.

Operating Expenses

Selling, general and administrative expenses for the second quarter of 2011 were $1.8 million, a $0.7 million increase over the second quarter of 2010, with most of the increase due to higher professional fees associated with being a public company.

Other Income (Expenses)

In the second quarter of 2011, SGOCO benefited from several tax rebate programs offered by the State Administration of Taxation and the local customs department. These rebates totaled $0.8 million and should be considered as non-recurring.

Provision for Income Taxes

Income tax for the second quarter of 2011 was $1.3 million compared to $0.7 million during the three months ended June 30, 2010.

Net Income and EPS

Net income for the second quarter of 2011 was $7.1 million, an increase of 87%, compared to $3.8 million recorded for the same period last year. Diluted EPS was $0.45 in the second quarter of 2011, compared to $0.40 in the second quarter of 2010. Of note, diluted EPS for the second quarter of 2011 was calculated based on 16,032,343 weighted average number of common shares as compared to 9,566,229 weighted average number of common shares for the second quarter of 2010.

Cash and Working Capital

As of June 30, 2011, the Company had cash and restricted cash of $50.5 million compared to $30.0 million as of December 31, 2010. Working capital also increased to $49.2 million, compared to $38.7 million at the end of 2010. The current ratio on June 30, 2011 was 1.31 compared to 1.44 on December 31, 2010.

During the first half of 2011, the Company saw large increases in notes payable, advances to suppliers and restricted cash. SGOCO uses notes payable to pay bills and make advances to suppliers. From December 31, 2010 to June 30, 2011 SGOCO increased its advances to suppliers by $53.6 million as a means of ensuring a reliable supply of panels so the Company can meet customer demand. The banks guaranteeing the notes payable require a security deposit from SGOCO of restricted cash which continues to earn interest for the Company. From December 31, 2010 to June 30, 2011, notes payable increased by $37.6 million and restricted cash increased during the same period by $25.1 million for a net increase of $12.5 million. The management team considers these increases to be in a reasonable range considering the fast growth of the business.

Subsequent Events

Since the close of the second quarter, the Company announced the appointment of David Xu as Chief Financial Officer and Head of its Beijing office.

Conference Call

The Company will hold a conference call for investors on Tuesday, August 16, 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 effectiveness of the Company’s multiple-brand, multiple channel strategy and the reasonableness of the increases in notes payable, advances to suppliers and restricted cash. 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, requirements or changes adversely affecting the LCD and LED market in China; fluctuations in customer demand for LCD and LED products generally; our success in promoting our brand of LCD and LED products in China and elsewhere; our success in expanding our “SGOCO Image” model; our success in manufacturing and distributing products under brands licensed from others; management of rapid growth; changes in government policy including policy regarding subsidies for purchase of consumer electronic products and local production of consumer goods in China; the fluctuations in sales of LCD and LED products in China; China’s overall economic conditions and local market economic conditions; our ability to expand through strategic acquisitions and establishment of new locations; changing principles of generally accepted accounting principles; compliance with government regulations; legislation or regulatory environments; geopolitical events and other events and factors described in the “Key Information – Risk Factors" section in the Company's annual report on Form 20-F filed with the U.S. Securities and Exchange Commission on April 29, 2011. The Company assumes no obligation to update any of the information contained or referenced in this press release.

See accompanying tables

SGOCO GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME

(UNAUDITED)

Three Months Ended

June 30,

Six Months Ended

June 30,

2011 2010 2011 2010
REVENUES:
Revenues $ 85,580,821 $ 33,051,201 $ 172,556,445 $ 49,825,810
Revenues - related parties - 9,813,817 - 12,514,816
Total revenues 85,580,821 42,865,018 172,556,445 62,340,626
COST OF GOODS SOLD:
Cost of goods sold 74,834,917 28,392,300 154,511,022 42,595,971
Cost of goods sold - related parties - 8,063,550 - 10,201,637
Total cost of goods sold 74,834,917 36,455,850 154,511,022 52,797,608
GROSS PROFIT 10,745,904 6,409,168 18,045,423 9,543,018
OPERATING EXPENSES:
Selling expenses 270,124 104,210 486,496 183,425
General and administrative expenses 1,548,481 1,035,719 2,911,407 2,354,856
Total operating expenses 1,818,605 1,139,929 3,397,903 2,538,281
INCOME FROM OPERATIONS 8,927,299 5,269,239 14,647,520 7,004,737
OTHER INCOME (EXPENSES):
Interest income 45,966 19,917 60,805 42,762
Interest expense (536,898) (127,872) (933,050) (392,520)
Other income (expense), net 651,902 (122,662) 415,955 (289,088)
Change in fair value of warrant derivative liability (596,040) (546,288) 132,345 (1,024,828)
Total other income (expenses), net (435,070) (776,905) (323,945) (1,663,674)
INCOME BEFORE PROVISION FOR INCOME TAXES 8,492,229 4,492,334 14,323,575 5,341,063
PROVISION FOR INCOME TAXES 1,348,785 662,909 2,042,725 956,843
NET INCOME 7,143,444 3,829,425 12,280,850 4,384,220
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment 1,044,966 169,379 1,384,963 166,876
COMPREHENSIVE INCOME $ 8,188,410 $ 3,998,804 $ 13,665,813 $ 4,551,096
EARNINGS PER SHARE:
Basic $ 0.45 $ 0.40 $ 0.76 $ 0.48
Diluted $ 0.45 $ 0.40 $ 0.76 $ 0.48
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Basic 16,032,343 9,527,932 16,100,378 9,124,710
Diluted 16,032,343 9,566,229 16,216,126 9,151,044

SGOCO GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

June 30, December 31,
2011

(Unaudited)

2010
CURRENT ASSETS
Cash $ 18,863,720 $ 23,493,805
Restricted cash 31,656,385 6,537,086
Accounts receivable, trade 65,812,427 55,985,013
Accounts receivable - related parties - 49,559
Other receivables 818,368 429,864
Other receivable – shareholder 436,047
Notes receivable 46,410
Inventories 10,641,880 17,291,123
Advances to suppliers 76,946,171 23,312,312
Other current assets 146,247 46,615
Total current assets 205,367,655 127,145,377
PLANT AND EQUIPMENT, NET 17,733,408 16,886,297
OTHER ASSETS
Intangible assets, net 8,686,805 8,589,215
Total other assets 8,686,805 8,589,215
Total assets $ 231,787,868 $ 152,620,889
CURRENT LIABILITIES
Accounts payable, trade $ 35,933,865 $ 31,958,430
Accrued liabilities 549,998 333,659
Bank overdraft 1,506,173 1,492,226
Notes payable 55,339,554 17,784,899
Short-term loan 50,365,213 26,864,059
Short-term loan - shareholder - 2,545,439
Other payables 1,085,503 1,755,881
Customer deposits 8,060,987 3,278,269
Taxes payable 3,343,270 2,449,939
Total current liabilities 156,184,563 88,462,801
OTHER LIABILITIES
Warrant derivative liability 936,732 1,530,569
Put option derivative liability - 2,000,000
Total other liabilities 936,732 3,530,569
Total liabilities 157,121,295 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 June 30, 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
June 30, 2011 and December 31, 2010 17,258 17,428
Paid-in-capital 24,555,414 24,182,003
Statutory reserves 4,861,916 3,560,838
Retained earnings 40,031,551 29,051,779
Accumulated other comprehensive income 5,200,434 3,815,471
Total shareholders' equity 74,666,573 60,627,519
Total liabilities and shareholders' equity $ 231,787,868 $ 152,620,889

SGOCO GROUP, LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

Ordinary Shares Retained Earnings Accumulated
Other
Paid-in Statutory Comprehensive
Shares Par Value Capital Reserves Unrestricted Income Total

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
exercise of over
allotment related

80,267 80 373,161 373,241

Shares repurchased
and cancelled

(250,000) (250) 250 -
Net income 4,624,102 4,624,102

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

Shares issued for
exercise of over
allotment related

-

Shares repurchased
and cancelled

-
Net income 6,355,670 6,355,670

Adjustment for
statutory reserve

787,774 787,774

Foreign currency
translation adjustment

1,044,967 1,044,967

BALANCE, June 30, 2011
(Unaudited)

17,258,356 $ 17,258 $ 24,555,414 $ 4,861,916 $ 40,031,551 $ 5,200,434 $ 74,666,573

SGOCO GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

Six Months Ended

June 30,

2011 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,280,850 $ 4,384,220
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization 790,597 444,832
Change in fair value of warrant derivative liability 132,345 1,024,828
Change in operating assets and liabilities
Accounts receivables, trade (8,158,880) (11,811,110)
Accounts receivables - related parties 49,559 (1,137,858)
Other receivables (388,504) (188,950)
Other receivable-shareholder - -
Inventories 6,649,243 (7,333,795)
Advances to suppliers (53,633,859) (6,393,848)
Advances to suppliers-related parties - 8,542,234
Other current assets (99,632) (24,145)
Accounts payable, trade 3,975,435 7,381,981
Accrued liabilities 216,339 43,271
Notes payable 37,554,655 797,609
Other payables (670,377) 90,812
Other payables - related parties - (2,342,382)
Customer deposits 4,782,719 1,215,360
Customer deposits - related parties - (335,034)
Taxes payable (775,203) (1,069,014)
Net cash provided by (used in) operating activities 2,705,287 (6,710,989)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipments and construction-in-progress (465,469) (2,133,720)
Purchase of intangible assets (1,500) -
Cash received from legal acquirer - 5,913
Net cash used in investing activities (466,969) (2,127,807)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in restricted cash (25,119,299) (2,194,147)
Bank overdraft 13,946 745,998
Proceeds from government - 733,450
Proceeds from short-term loan 56,583,846 16,299,657
Payments on short-term loan (35,787,313) (15,674,758)
Shareholder contribution - 366,780
Payments on shareholder loan (2,981,486) -
Proceeds from recapitalization 5,388,083
Payments on repurchase of warrants (336,492)
Payments of financing costs (666,468)
Net cash (used in) provided by financing activities (7,626,798) 4,998,595
EFFECT OF EXCHANGE RATE ON CASH 758,395 12,759
DECREASE IN CASH (4,630,085) (3,827,442)
CASH, beginning of period 23,493,805 5,808,013
CASH, end of period $ 18,863,720 $ 1,980,571
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest expenses paid (net of amount capitalized) $ 933,050 $ 392,520
Income taxes paid $ 2,751,463 $ 331,700

Contacts:

For investor and media inquiries:
SGOCO Group, Ltd. (China)
Bill Krolicki, VP of Finance
+ 86-10-8587-0173
ir@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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