As filed with the Securities and Exchange Commission on August 4, 2010

Registration No. 333-146147

  UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Amendment No. 1

FORM F-1

AND

POST-EFFECTIVE AMENDMENT NO. 1

ON

FORM F-1

TO

FORM S-1

 

SGOCO Technology Park, Luoshan

Jinjiang City, Fujian, China 362200

+86 (595) 8200-5598

(Address, Including Zip Code, and Telephone Number, Including Area Code, of

Registrant’s Principal Executive Offices)

Corporation Service Company

2711 Centerville Road, Suite 400

Wilmington  DE 19808

(Address, Including Zip Code, and Telephone Number, Including Area Code, of

Agent for Service)

With a copy to:

Ralph V. De Martino, Esq.

Cavas S. Pavri, Esq.

Cozen O’Connor

1900 Market Street

Philadelphia, Pennsylvania 19103

Telephone: (215) 665-5542

Facsimile: (215) 701-2478

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:   x

 

If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:   ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:   ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:   ¨

 

(1)	Estimated solely for the purpose of calculating the registration fee.

(2)	No fee pursuant to Rule 457(g).

(3)	Pursuant to Rule 416, there is also being registered such indeterminable number of additional ordinary shares as may be issued to prevent dilution resulting from share splits, share dividends or similar transactions.

(4)

Previously Paid.  On September 18, 2007, the registrant previously paid a filing fee of $1,964.80 in connection with the registration of 4,600,000 Units on Registration Statement No. 333-146147.  This filing serves as Post-Effective Amendment No. 1 to Registration Statement No. 333-146147 and the registration fee previously paid by the registrant will continue to apply to these securities.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

EXPLANATORY NOTE

This Post-Effective Amendment No. 1 is being filed in order to update the prospectus included in the registration statement originally filed on Form S- 1, file no. 333-146147.

  

  

PRELIMINARY PROSPECTUS

SUBJECT TO COMPLETION, DATED AUGUST 4, 2010

SGOCO TECHNOLOGY, LTD.

1,816,027 Ordinary Shares underlying 1,816,027 Warrants

Certain units, ordinary shares, and warrants subject to a purchase option

This prospectus is being filed by SGOCO Technology, Ltd. (“SGOCO”, “we,” “us,” “our,” or the “Company”), a corporation organized under the laws of the Cayman Islands, and relates to the sale of up to 1,816,027 ordinary shares underlying the 1,816,027 redeemable warrants to purchase ordinary shares that were issued as a component of the units sold by the Company in its initial public offering.  This prospectus also relates to 280,000 ordinary shares and warrants comprising units subject to a purchase option issued to the underwriter in the Company’s initial public offering.  This prospectus also relates to the issuance of 280,000 ordinary shares and 280,000 warrants (as well as the 280,000 additional shares underlying the warrants) comprising units subject to a purchase option issued to the underwriter in the Company’s initial public offering, which purchase option permits the underwriter to purchase the units at $10.00 per unit.  The warrants have an exercise price of $8.00 per share.

Our ordinary shares and warrants are currently traded on the Over-the-Counter Bulletin Board (“OTCBB”) under our new trading symbols SGTLF and SGTWF, respectively.  On August 2, 2010, the closing sale price of ordinary shares and warrants was $8.00 and $1.00, respectively.

This prospectus is not an offer to sell any securities other than the ordinary shares underlying the warrants and the ordinary shares and warrants comprising the units subject to the purchase option.  This prospectus is not an offer to sell securities in any circumstances in which such an offer is unlawful.

  

You should rely only on the information contained in this prospectus.  We have not authorized anyone to provide you with different information.  We are not making an offer of these securities in any state where the offer is not permitted.  You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.

Investing in our securities involves a high degree of risk.  See “Risk Factors” beginning on page 8 for a discussion of information that should be considered in connection with investing in our securities.

Neither the Securities and Exchange Commission nor any state securities regulator has approved or disapproved of these securities or determined if this prospectus is truthful or complete.  Any representation to the contrary is a criminal offense.

The date of this prospectus is __________, 2010

TABLE OF CONTENTS

 

  

 

PROSPECTUS SUMMARY

 

This summary highlights key information contained elsewhere in this prospectus and is qualified in its entirety by the more detailed information and financial statements included elsewhere in this prospectus.  It may not contain all of the information that is important to you.  You should read the entire prospectus, including “Risk Factors,” our consolidated financial statements and the related notes thereto and condensed consolidated financial statements and the related notes thereto, before making an investment decision.

Unless otherwise indicated in this prospectus:

·

“Acquisition” refers to the business combination transaction consummated on March 12, 2010, as provided by the Share Exchange Agreement, dated as of February 12, 2010, by and among the Hambrecht Asia, Honesty Group and each of the shareholders signatories thereto, as amended by Amendment No. 1 to Share Exchange Agreement, dated March 11, 2010.

·

“Honesty Group” refers to Honesty Group Holdings Limited, a subsidiary of the Company, acquired in the Acquisition, and the entity through which the Subsidiaries and operating business are held after the consummation of the Acquisition.

·

“SGOCO”, “we,” “us,” “our,” or the “Company” refers to SGOCO Technology, Ltd., a company organized under the laws of the Cayman Islands, which changed its name from Hambrecht Asia Acquisition Corp. and, after the completion of the Acquisition described below on March 12, 2010, its consolidated subsidiaries: Honesty Group and its Subsidiaries.

·

“Subsidiaries” refers to Honesty Group’s subsidiaries: Guanke (Fujian) Electron Technological Industry Co. Ltd. (“Guanke”), Guanwei (Fujian) Electron Technological Company Limited (“Guanwei”), and Guancheng (Fujian) Electron Technological Company Limited (“Guancheng”).

All references to “U.S. dollars,” “US$,” “dollars” and “$” are to the legal currency of the United States.  When the term “including” is used, it is used inclusively and should be read to mean “including, without limitation.”

Under the laws of the Cayman Islands and our Amended and Restated Memorandum and Articles of Association as currently in effect, we are authorized to issue ordinary shares and holders of our ordinary shares are referred to as “members” rather than “shareholders.”  In this prospectus, references that would otherwise be to members are made to shareholders, which term is more familiar to investors on the OTCBB, which is where our shares are quoted.

Overview

 

The Company was a blank check corporation organized under the laws of the Cayman Islands on July 18, 2007.  The Company was originally incorporated as “Hambrecht Asia Acquisition Corp.” but changed its name to SGOCO Technology, Ltd. on  March 16, 2010.   The Company  was formed for the purpose of acquiring one or more operating businesses in the People’s Republic of China (“China” or “PRC”) through a merger, stock exchange, asset acquisition or similar business combination or control through contractual arrangements.

In March 2008, the Company completed its initial public offering for an aggregate offering of 4,239,300 units (the “IPO”).  Each unit consisted of one ordinary share and one redeemable ordinary share purchase warrant, resulting in a total of 4,239,300 shares and 4,239,300 warrants which were publicly held.  The units were sold at an offering price of $8.00 per unit.  In addition, 1,550,000 warrants to purchase the Company’s ordinary shares were issued to the Company’s sponsors immediately prior to the IPO at an offering price of $1.00 per warrant.  Net proceeds of $33,527,396 from the IPO and the private placement were placed in a trust account for certain expenses of locating and acquiring an acquisition target (the “Trust Fund”).  Before its acquisition of all of the outstanding capital stock of Honesty Group, the prices of the Company’s ordinary shares, warrants to purchase ordinary shares and units (each unit consisting of one ordinary share and a warrant to purchase one ordinary share) were quoted on the Over-the-Counter Bulletin Board.  Other than its initial public offering and the pursuit of a business combination, the Company did not engage in any business prior to the Acquisition.

Pursuant to its Amended and Restated Articles of Incorporation, the Company was required to enter into a “Business Combination” transaction to acquire control of a business with its primary operation in the PRC with a fair market value of at least 80% of the Trust Fund (excluding certain deferred underwriting commissions) prior to March 12, 2010, or dissolve and liquidate.  The approval of the Business Combination transaction required the approval of a majority of the outstanding shares and was conditioned, among other matters, on not more than 30% of the outstanding shares being properly tendered for redemption under the Articles of Incorporation.  Each ordinary share issued in the IPO was entitled to be redeemed if it was voted against the acquisition transaction at a price equal to the amount in the Trust Fund divided by the number of shares issued in the IPO outstanding at the time, estimated to be approximately $7.98 as of February 17, 2010.  The Company entered into various forward purchase agreements with various hedge funds and other institutions for the Company to repurchase a total of 2,147,493 of its shares for an aggregate purchase price of $17,285,811 immediately after the closing of the Business Combination.

On March 12, 2010, the Company acquired all of the outstanding capital stock of Honesty Group Holdings Limited.  In addition, at the meeting to approve the acquisition, the holders of the Company’s outstanding warrants approved an amendment to the warrant agreement under which the warrants were issued to increase the exercise price per share of the warrants from $5.00 to $8.00 and to extend by one year the exercise period, and to provide for the redemption of the publicly-held warrants, at the option of the holder, for $0.50 per warrant upon the closing of the acquisition. After payment of various fees and expenses, the redemption prices of shares and warrants and the forward purchase contracts, the balance of approximately $5.4 million in the Trust Fund was released to the Company upon consummation of its acquisition of Honesty Group.  After the closing of the acquisition and the settlement of related transactions, the Company had outstanding 16,094,756 ordinary shares, of which 859,668 shares were initially issued in its IPO, and warrants to purchase 1,816,027 shares at a price of $8.00 per share, of which 1,566,027 were initially issued in its IPO.

Business Overview of SGOCO

 

 SGOCO, following the consummation of the acquisition of all of the outstanding capital stock of Honesty Group, is now a liquid crystal display solution branded designer, manufacturer and distributor in China.  The Company is engaged in the design, manufacture and distribution of LCD consumer products including LCD PC monitors, LCD TV and application-specific products focused on providing high quality, branded electronics at affordable prices to the emerging Chinese consumer.  Management’s vision is to offer high quality LCD products under brands that it controls such as “SGOCO” and “Edge 10”, and the “Buick” brand which it expects to license in 2010, at reasonable prices to consumers residing in China’s Tier 2, Tier 3 and Tier 4 cities. Management of SGOCO believes that end-users in its target market are less brand-conscious and more price sensitive than consumers typically found in China’s Tier 1 cities.  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’s management believes that the LCD products, in general, have very short-shelf lives. This is because new technologies and features are constantly introduced into the marketplace by international brands. However, these new technologies and features are typically marketed first to Tier 1 cities, where brand recognition is the key driver to sales. SGOCO’s goal is to offer its branded products with similar features at affordable pricing points and establish a dominant market position to selected Tier 2, Tier 3 and Tier 4 cities before competitor brands reach these markets.

In 2009, the Company initiated an effort to convert select specialty retailers and large end customers into Direct Store Delivery (DSD) partners via a strategy referred to as “SGOCO Clubs.” A network of SGOCO Clubs allow the Company to (a) rapidly build a brand presence in multiple markets; and (b) allow operators of SGOCO Clubs to offer differentiated branded products at reasonable prices where they enjoy higher gross margins. DSD partners are encouraged to build and manage their own business to sell products carrying SGOCO brands. DSD members benefit by purchasing products at wholesale prices from SGOCO, as manufacturer, and selling them at retail prices. Management believes a network of DSD partners is an effective way to distribute products in dispersed markets because the DSD partners engage in localized person-to-person product education and after-sales servicing, which is not readily available through traditional distribution channels.

SGOCO believes that this personal touch enhances end users’ awareness of the benefits and value of SGOCO products. Additionally, SGOCO believes that a DSD approach appeals to a cross-section of potential partners, such as entrepreneurial operators of specialty retailers (mom-and-pop retail stores) who may want a differentiated branded retail presence, and internet café operators who may already use a large number of LCD products in their business, and who may be seeking to supplement their income by selling products. Management considers SGOCO’s high-quality products, compact product lines, and higher potential gross margins (at MSRP) to be attractive components of SGOCO Club marketing system.

Some of the primary risks and challenges SGOCO faces include:

•

SGOCO has a limited operating history, as it commenced its business in 2005.  In addition, it has grown rapidly in recent years, and may not be successful in managing any future growth.

•

As discussed above, in 2009, Guanke started distributing its LCD products principally through its “SGOCO Club” network of retail distributors. If this strategic move cannot be successfully implemented, SGOCO’s future growth may be significantly affected.

•

SGOCO derives a significant portion of its sales from several large distributors. For 2007, 2008 and 2009, sales to its top three customers accounted for approximately 46%, 69%, and 73%, respectively, of its total revenue and, for the three months ended March 31, 2010, sales to its top four customers accounted for approximately 38%, 17%,14% and 12%, respectively.

•

SGOCO pays significant advances to certain vendors for inventory purchases which amounted to $11,950,074, $4,357,239 and $178,798 as of December 31, 2009, 2008 and 2007, respectively, and $28,726,525 at March 31, 2010. The amount of the advance is negotiated between the vendor and SGOCO. These advance payments require a substantial commitment of SGOCO’s working capital. In the future, suppliers may demand higher levels of advances for future purchases as demand grows for the LCD panels.

For additional discussion of risks that could adversely affect SGOCO, see the section below entitled “Risk Factors.”

Recent Development

 

In the first quarter of 2010, the Company significantly expanded the “SGOCO Club” network increasing the total number of exclusive retailers within the network to 206 as of March 31, 2010, up from 70 as of December 31, 2009.  Management believes that the expanding SGOCO Club network will be a solid foundation for the Company’s continued rapid growth.  SGOCO Club model helps business owners with initial setup costs as SGOCO reimburses a portion of store set-up costs upon SGOCO Club operators meeting sales quotas. This ties personal success to that of a national brand portfolio to provide incentives for the business owners to promote brand in local regions. SGOCO Club also provides mutually beneficial economics to SGOCO and to operators by offering direct purchases from the manufacturer to eliminate national and regional distributor margins, more flexible order terms, just-in-time deliveries and performance-based incentives. SGOCO provides not only multiple branded product lines, but also sales, marketing and management assistance to help local operators succeed.

Warrants

 

 On March 12, 2008, Hambrecht Asia Acquisition Corporation, now known as SGOCO, sold an aggregate of 4,239,300 units in its initial public offering. Each unit consists of one ordinary share, $0.001 par value, and one warrant.  Each warrant entitles the holder to purchase one ordinary share.  Simultaneously with the shareholder approval of the Acquisition, the warrantholders approved an increase in the warrant exercise price to $8.00 per share and the redemption of outstanding warrants at the option of the holders.  After the redemptions in connection with the Acquisition, 1,816,027 warrants remain outstanding.

 

 The warrants will not be exercisable until the effective date of the registration statement of which this prospectus forms a part, and will expire at 5:00 p.m. New York City time, on March 7, 2014 or earlier upon redemption.  Beginning on the effective date of the registration statement of which this prospectus forms a part, we may redeem the warrants at a price of $0.01 per warrant upon a minimum of 30 days’ prior written notice of redemption if, and only if, the last sale price of our ordinary share equals or exceeds $11.50 per share (subject to adjustment for splits, dividends, recapitalization and other similar events) for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption.

 

Corporate Information

 

Following the consummation of the Acquisition of all the outstanding capital stock of Honesty Group.  Honesty Group becomes the only wholly-owned subsidiary of SGOCO.  Honesty Group is a limited liability company registered in Hong Kong on September 13, 2005.  Honesty Group owns 100% of Guanke Electron Technological Industry Co., Ltd (“Guanke”), Guanwei Electron Technological Co., Ltd (“Guanwei”), and Guancheng Technological Industry Co., Ltd. (“Guancheng”). Guanke, Guanwei and Guancheng are limited liabilities companies established in Jinjiang City, Fujian Province under the corporate laws of the People’s Republic of China (“PRC” or “China”) and have business operating licenses.  All three companies qualify as wholly foreign-owned enterprises under PRC law.  Guanke was formed on January 16, 2006 with a registered capital of $11,880,000. Guanwei and Guancheng were formed on June 22, 2007 with registered capital of $11,880,000 and $7,800,000, respectively, of which $3,130,000 and $2,259,970, respectively, had been invested by Honesty Group as of September 30, 2009. The remaining registered capital of $8,750,000 and $5,540,030 has to be fulfilled by December 31, 2010. Guanwei and Guancheng are under development stage and have no operations as of the date of this prospectus.

SGOCO’s principal executive offices are located at SGOCO Technology Park, Luoshan, Jinjiang City, Fujian, China 362200 and our telephone number is 086-595-8200-5598. Our website address is www.sgoco.com.  The information on, or that can be accessed through, our website is not part of this prospectus.

 

The Company’s ordinary shares and warrants are traded on the OTCBB, under the symbols SGTLF and SGTWF, respectively.  They were previously traded on the OTCBB under the symbols HMAQF.OB and HMAQF.OB, respectively.  The Company’s units, each consisting of one ordinary share and one warrant, were traded on the OTCBB under the symbol HMAUF.OB.

 

Risks Affecting SGOCO

 

In evaluating purchasing securities in our Company, you should carefully read this prospectus and especially consider the factors discussed in the section below entitled “Risk Factors”.

RISK FACTORS

 

We have identified certain risks related to the our securities. If any of the following risks actually occurs, our business, financial condition and results of operation could be harmed.  In that case, the trading price of our warrants and ordinary shares could decline and you might lose all or part of your investment in our securities.  You should also refer to the other information set forth in this prospectus, including our financial statements and the related notes.

Risks Related to Our Business and Industry

 

SGOCO’s limited operating history in making, developing and selling LCD products may not provide an adequate basis to judge its future prospects and results of operations.

SGOCO has a limited operating history.  Honesty Group commenced its business in 2005 and has expanded its operations substantially in recent years principally through its Chinese operating subsidiary Guanke. In 2009, Guanke started distributing its LCD products principally through its “SGOCO Club” network of retail distributors. If this strategic move cannot be successfully implemented, the Company’s future growth will be significantly affected. In addition, the historical results of Honesty Group may not provide a meaningful basis for you to evaluate the Company’s business, financial performance, and prospects due, in part, to the strategic marketing and distribution change.

Competition in its industry is intense and, if SGOCO is unable to compete effectively, SGOCO may lose customers and its financial results will be negatively affected.

The LCD products industry in China is highly competitive, and SGOCO expects competition to persist and intensify.  SGOCO faces competition from distributors and LCD manufacturers that use their extensive brand-name value and manufacturing and marketing size, and in-house sales forces and exclusive sales agents to distribute their products.  SGOCO’s subsidiary Guanke competes for customers on the basis of, among other things, product offerings, customer services and reputation.  Some of SGOCO’s competitors may have greater financial, research and development and design, marketing, distribution, management or other resources.  SGOCO’s results of operations could be affected by a number of competitive factors, including entry by new competitors into its current markets, expansion by existing competitors, better marketing/advertising leading to stronger brand equity for the competitors, and competition with other companies for the production capacity of contract manufacturers. SGOCO’s results of operations and market position may be adversely impacted by these competitive pressures.

There can be no assurance that SGOCO’s strategies will remain competitive or that SGOCO will continue to be successful in the future. Increased competition could result in a loss of market share for SGOCO. In particular, if its competitors adopt aggressive pricing policies, SGOCO may be forced to adjust the pricing of their products to level their competitiveness. This could adversely affect SGOCO’s profitability and financial results.

If SGOCO is unable to respond in a timely and cost-effective manner to rapid technological changes in the LCD products industry, its business and results of operations may be adversely affected.

The rate of technological change in the consumer electronics industry generally, and in the LCD products industry specifically, is rapid, with frequent new product and service introductions and evolving industry standards. For example, LED (light-emitting diode) displays were only recently commercially marketable but Samsung reported selling 2.6 million devices in 2009. LED back-lit devices purport to be thinner, more power-efficient and produce better images than LCD products.  SGOCO believes that its future success will depend on its ability to continue to anticipate technological changes and to offer additional product and service opportunities that meet evolving standards on a timely and cost-effective basis. There is a risk that SGOCO may not successfully identify new product and service opportunities or develop and introduce these opportunities in a timely and cost-effective manner. In addition, product and service opportunities that SGOCO’s competitors develop or introduce may render SGOCO’s products and services noncompetitive. As a result, SGOCO cannot assure you that technological changes that may affect its industry in the future will not have a material adverse effect on its business and results of operations.

Honesty Group has unfulfilled registered capital obligation for its two subsidiaries, Guanwei and Guancheng.

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.  Under PRC law, the registered capital of a company is regarded as corporate property, and it is the shareholder’s obligation to fulfill its subscribed capital contribution according to the provisions of PRC law and the PRC company’s charter documents.  As of March 31, 2010, $3,130,000 and $2,259,970 had been invested by Honesty Group in the above subsidiaries.  According to an agreement reached with the local government agency, the Jinjiang Bureau of China’s State Administration of Industry and Commerce (“SAIC”), the remaining registered capital of $8,750,000 and $5,540,030 must be contributed by the end of 2010.  The SAIC provided Honesty Group with additional time to make the registered capital payments because Honesty Group is in the process of investing in infrastructure in the region.  If Honesty Group is unable to make the registered capital payments during 2010, 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. If it fails to reach such an agreement for deferral, the shareholders of the subsidiaries would have an obligation to fund these two subsidiaries or to apply for a reduction in the remaining registered capital, which may not be granted.  If the shareholders fail to contribute their registered capital, they may be penalized with fines of 5-15% over the amount of unpaid capital, and, in certain cases, the subsidiaries business licenses may be revoked, which may result in the inability of the subsidiaries 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.

SGOCO sells most of its products through a few customers with which SGOCO does not have long-term agreements, and, accordingly, SGOCO may have risks from its level of customer concentration.

SGOCO derives a significant portion of its sales from several large distributors. For 2007, 2008 and 2009, sales to its top three customers accounted for approximately 46%, 69%, and 73%, respectively, of its total revenue and, for the three months ended March 31, 2010, sales to its top four customers accounted for approximately 38%, 17%,14% and 12%, respectively.

The identity of SGOCO’s large customers has generally changed from period to period, such that only one of the customers that represented greater than 10% of SGOCO’s revenue during the three month period ended March 31, 2010, represented greater than 10% of SGOCO’s revenue during the year ended December 31, 2009.  The table below shows the changing nature of SGOCO’s customers that represented at least 10% of SGOCO’s revenues during the relevant period:

 

* This customer is a related party and is separately disclosed on the Consolidated Statements of Income and Other Comprehensive Income in the Company’s financial statements.

 The main reason for the increase in revenue from these customers is reduction in OEM revenue beginning in 2008. As a part of SGOCO’s strategy, production capacity is primarily focused on SGOCO’s own brand products. Because of demand for SGOCO’s own branded products, it could not take on any OEM contracts in 2009. While SGOCO expects current distributors to have similar or larger volume in 2010, SGOCO’s revenue mix will begin to change in 2010. As SGOCO completed a move to a new production facility in 2009 with increased production capacity, SGOCO expects that 2010 will have additional revenue from OEM/ODM customers. SGOCO also expects revenue to grow from direct sales to SGOCO Club members. Nonetheless, any substantial reduction in purchases from SGOCO’s top distributors, or any failure to renew their agreements with SGOCO, may result in a significant loss of sales and SGOCO’s business, financial condition and results of operation may be materially adversely affected. None of these customers have long-term contracts with SGOCO and they each order as needed based on purchase orders.  Sales to customers are entered into based on individual purchase orders.

The Company is exposed to the credit risks of its customer.

SGOCO’s accounts receivable aging period typically ranges from 30 to 60 days. SGOCO’s financial position and profitability is dependent on the creditworthiness of its customers.  Thus, the Company is exposed to the credit risks of its customers, and this risk increases the larger the orders are. The table below shows the number of customers that represented at least 10% of SGOCO’s accounts receivable during the relevant period:

Although there has not been any material collection problem for trade receivables or bad debts in the last three fiscal years, there is no assurance that SGOCO will not encounter doubtful or bad debts in the future. If SGOCO were to experience any unexpected delay or difficulty in collections from its customers, its cash flows and financial results may be adversely affected.

SGOCO may experience pressure from panel manufacturers to make greater prepayments for its inventory.

SGOCO pays advances to certain vendors for inventory purchases which amounted to $11,950,074, $4,357,239 and $178,798 as of December 31, 2009, 2008 and 2007, respectively, and $28,726,525 at March 31, 2010. The amount of the advance is negotiated between the vendor and SGOCO. These advance payments require a substantial commitment of SGOCO’s working capital. In the future, suppliers may demand higher levels of advances for future purchases as demand grows for the LCD panels.

The table below shows the number of suppliers that represented at least 10% of advances to suppliers, including related parties, during the relevant period:

* This supplier is a related party and is separately disclosed in the Related Party Transactions footnote in the Company’s financial statements

SGOCO’s successful operation relies upon an adequate supply of LCD panels, at acceptable prices and quantity in a timely manner.

 SGOCO has no production capability to manufacture LCD panels, and its operations are significantly dependent on the sufficient supply of LCD panels obtained at reasonable prices. SGOCO currently sources LCD panels from multiple distributors. SGOCO is exposed to the market risk of availability and price fluctuations for LCD panels. The price and availability of LCD panels may vary significantly from year to year due to factors such as global demand from end users, China’s import restrictions, producer capacity, market conditions and costs of raw materials. SGOCO does not have long-term contracts with its suppliers or guarantees of supply or price. If the prices of LCD panels rise too high or the supply of LCD panels becomes scarce, SGOCO’s profit margins may decline and it may be unable to fulfill order contracts placed prior to production. SGOCO is currently in negotiation directly with additional LCD panel suppliers as a strategy to diversify supply risks and reduce material costs.

SGOCO faces increasing labor costs and other costs of production in the PRC, which could reduce its profitability.

 Labor costs in China have been increasing in recent years and labor costs in the PRC could continue to increase in the future. If labor costs in the PRC continue to increase, production costs will likely increase. This may in turn affect the selling prices of SGOCO’s products, which may then affect the demand of such products and thereby adversely affect sales, financial condition and results of operations. SGOCO is actively reviewing manufacturing processes to continue to simplify its production processes and to continue to control and build more of its components internally.

SGOCO may not be able to retain, recruit and train adequate management, sales and marketing personnel, and its inability to attract and retain qualified personnel may limit its developments.

 SGOCO’s success is dependent to a large extent on its ability to retain the services of its executive management personnel, who have contributed to its growth and expansion and also recruit talented executives to lead new initiatives. The industry experience, entrepreneurial skills and contributions of its executive directors and other members of its senior management are essential to its continuing success. SGOCO’s future success will depend on the continued service of its senior management. In particular, Mr. Burnette Or, chairman of the board and President, has over 10 years’ experience in the consumer electronics industry and is responsible for the overall corporate strategies, planning and business development of Honesty Group. His experience and leadership is critical to SGOCO’s operations and financial performance. If SGOCO loses the services of Mr. Or or any of its key executive personnel and cannot replace them in a timely manner, such loss may reduce its competitiveness, and may adversely affect its financial condition, operating results and future prospects. SGOCO requires the services of a chief financial officer with substantial experience in U.S. GAAP and public company reporting requirements and the ability to speak Mandarin Chinese fluently. The pool of candidates meeting these criteria is small and delay in obtaining the services of qualified chief financial officer may hinder SGOCO’s ability to timely comply with its reporting requirements as a U.S. public company. In addition, SGOCO’s retail expansion plan and SGOCO Club DSD model are dependent upon its ability to identify and recruit adequate sales force in China. Given the current rate of economic growth in China, competition for qualified personnel will be substantial.

SGOCO does not currently have a full-time chief financial officer with experience as a chief financial officer of a United States publicly traded company.

Mr. Lv Zhongsheng is currently SGOCO’s Treasurer, chief accountant and acting chief financial officer.  SGOCO is actively seeking a chief financial officer with substantial experience in U.S. GAAP and public company reporting requirements and the ability to speak Mandarin Chinese fluently.  The pool of candidates meeting SGOCO’s criteria is small.  As of the date of this prospectus, SGOCO has entered into discussions with a small number of candidates to assume the chief financial officer position, but has not finalized an agreement with a candidate and can provide no assurance that it will do so in a timely manner.  The delay in obtaining the services of qualified chief financial officer may hinder SGOCO’s ability to timely comply with its reporting requirements as a U.S. public company.

SGOCO may not be able to manage its growth effectively and its growth may slow down in the future.

 SGOCO has been expanding its business rapidly and intends to continue to do so either through organic growth or through acquisitions and investments in related businesses as it deems appropriate. Such expansion may place a significant strain on the Company’s managerial, operational and financial resources. SGOCO will need to manage its growth effectively, which may entail devising and implementing business plans, training and managing its growing workforce, managing its costs and implementing adequate control and reporting systems in a timely manner. There can be no assurance that SGOCO’s personnel, procedures and controls will be managed effectively to support its future growth adequately. Failure to manage its expansion effectively may affect its success in executing its business plan and adversely affect its business, financial condition and results of operation. In addition, SGOCO’s growth in percentage terms may slow in the future. Accordingly, you should not rely on its historic growth rate as an indicator for its future growth rate.

SGOCO may not be successful in its future expansion plans and may be unable to secure sufficient funding for such plans to further grow its business.

 SGOCO’s business expansion plans will require it to increase investments in, and devote significant resources to, its brand promotion efforts, its internal production capacities, its research and design capabilities, the sales distribution network operated by its distributors, and the buildout of SGOCO Technology Park.  If the Company fails to implement its future expansion plans, it may not achieve its growth target. Furthermore, the Company’s ability to obtain adequate funds to finance its expansion plans depends on its financial condition and results of operations, as well as other factors that may be outside its control, such as general market conditions, the performance of the PRC LCD industry, and political and economic conditions in China. If additional capital is unavailable, SGOCO may be forced to abandon some or all of its expansion plans.

SGOCO Technology Park is subject to a purchase option which may limit SGOCO’s ability to fully realize on its plans to develop SGOCO Technology Park for its benefit.

 As a condition to the execution of the Share Exchange Agreement, Honesty Group has entered into a two-year purchase option in favor of SGOCO’s President, Mr. Burnette Or which allows Mr. Or, or a company designated by him, to purchase SGOCO Technology Park for cost at any time prior to March 18, 2011, and also allows Honesty Group to put the property to Mr. Or thereafter if he fails to exercise his option. The option may be extended by one year at the request of Mr. Or. Mr. Or’s exercise of the purchase option is conditioned on Mr. Or, or the designated company, agreeing with Guanke for a long-term (not less than 20 years) lease of the property at the prevailing market price. The ability of SGOCO to fully develop SGOCO Technology Park and benefit from that development may be limited if the option is exercised by Mr. Or.

SGOCO currently enjoys certain preferential tax treatment in China; there is no assurance that this will continue.

 Pursuant to the PRC Income Tax Laws, prior to January 1, 2008, Chinese companies are subject to Enterprise Income Taxes (“EIT”) at a statutory rate of 33%, which comprises 30% national income tax and 3% local income tax. Beginning January 1, 2008, the new EIT law replaced the existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”). The new standard EIT rate of 25% replaced the 33% rate currently applicable to both DES and FIEs, except for High Tech companies who pay a reduced rate of 15%. Companies established before March 16, 2007 will continue to enjoy tax holiday treatment approved by local government for a grace period of the next 5 years or until the tax holiday term is completed, whichever is sooner.

 Guanke was established before March 16, 2007 and therefore is qualified to continue enjoying the reduced tax rate as described above.  Guanke was granted income tax exemption for two years commencing from January 1, 2007, and is subject to 50% of the 25% EIT tax rate, or 12.5%, from January 1, 2009 through December 31, 2011.  Guanke is currently applying for the High Technology company status.  Upon qualification as a High Technology company, SGOCO will be entitled to preferential tax treatment and enjoys the benefit of a reduced income tax rate at 15% starting 2012.

SGOCO may face risks related to health epidemics and other outbreaks, which could adversely affect its operations.

 SGOCO’s business could be materially and adversely affected by the outbreak of avian flu, severe acute respiratory syndrome or another epidemic. From time to time, there have been reports on the occurrences of avian flu in various parts of China, including a few confirmed human cases and deaths. Any prolonged recurrence of avian flu, severe acute respiratory syndrome or other adverse public health developments in China or elsewhere in Asia may have a material and adverse effect on the Company’s business operations.

SGOCO’s operations may be disrupted and its business, financial condition and/or results of operations may be adversely affected by a failure in its facilities for reasons beyond its control.

 SGOCO’s manufacturing operations, or that of its LCD panel suppliers, could be disrupted for reasons beyond its control. The causes of disruptions may include extreme weather conditions, landslides, earthquakes, fires, natural catastrophes, raw material supply disruptions, equipment and system failures, labor force shortages, energy shortages, workforce actions or environmental issues. Any significant disruption to SGOCO’s or its major suppliers’ operations could adversely affect its ability to make and sell products. In addition, the occurrence of any of these events could have a material adverse effect on the productivity and profitability of any of SGOCO’s manufacturing facilities and on its business, financial condition or results of operations, and/or the operations of its distributors.

Changes in existing laws and regulations or additional or stricter laws and regulations on environmental protection in the PRC may cause SGOCO to incur additional capital expenditures.

 SGOCO’s production facility is located in Jinjiang City, Fujian province and is subject to PRC environmental protection laws and regulations. These laws and regulations require enterprises engaged in manufacturing that may generate industrial waste to adopt effective measures to control and properly dispose of such waste. The relevant administrative department for environmental protection can levy fines for any violations of such environmental laws or regulations. For material violations, the PRC government may suspend or close any or all of SGOCO’s operations. Upon completion of construction of SGOCO’s facilities, an environmental report was prepared and approved by the Jinjiang Municipal Environment Protection Bureau but there is no assurance that the local municipal or central PRC government will not change the existing laws or regulations or impose additional or stricter laws or regulation. Compliance with any of these additional or stricter laws or regulations may cause SGOCO to incur additional capital expenditures, which it may be unable to pass on to its customers through higher prices for its products.

SGOCO’s current insurance coverage may not be sufficient to cover the risks related to its operations.

 SGOCO’s operations are subject to hazards and risks normally associated with manufacturing operations, which may cause damage to persons or property. Currently, SGOCO maintains insurance policies for damage to real property and for employer liability for personal injury of employees. The Company is not required under PRC law to maintain, and it does not maintain, any product liability insurance. If SGOCO was found liable for any product liability claim, it may be required to pay substantial damages. Even if the Company were successful in defending such a claim, it may incur substantial financial and other resources in defending such a claim. Under such circumstances, its financial results will be adversely affected. Depending on the outcome of any such claim, the reputation of SGOCO brands may also be adversely affected. Further, the Company does not maintain business interruption insurance or third party liability insurance against claims for property damage, personal injury and environmental liabilities. The occurrence of any of these events may result in interruption of SGOCO’s operations and subject it to significant losses or liabilities. Any losses or liabilities that are not covered by SGOCO’s current insurance policies may have a material adverse effect on its business, financial condition and results of operations.

SGOCO’s risk management and internal control systems improvements may not be adequate or effective, which could adversely affect its business, financial condition and results of operations.

 SGOCO has established risk management and internal control systems consisting of relevant organizational framework, policies, procedures and risk management methods that it believes are appropriate for its business operations, and it seeks to continue to improve such risk management and internal control systems from time to time. However, as a small company with a few non-production/sales employees and due to the inherent limitations in the design and implementation of risk management and internal control systems, there can be no assurance that SGOCO’s risk management and internal control systems will be sufficiently effective in identifying and preventing all such risks.

 In addition, as some of its risk management and internal control policies and procedures are relatively new, SGOCO may need to establish and implement additional risk management and internal control policies and procedures to further improve its systems from time to time.  Since SGOCO’s risk management and internal control systems also depend on their implementation by its employees, there can be no assurance that such implementation will not involve any human errors or mistakes. If SGOCO fails to timely adapt and implement its risk management and internal control policies and procedures, its business, results of operations and financial condition could be materially adversely affected.

We may not be able to predict or meet consumer preferences or demand accurately.

 SGOCO derives a significant amount of revenue from the LCD products that are subject to rapidly changing consumer preferences. SGOCO’s sales and profits are sensitive to these changing preferences and its success depends on its ability to identify, originate and define product and fashion trends as well as to anticipate, gauge and react to changing consumer demands in a timely manner. All of SGOCO’s products are subject to changing consumer preferences that it cannot predict with certainty. If SGOCO fails to anticipate accurately and respond to trends and shifts in consumer preferences it could experience lower sales, excess inventories and lower profit margins, any of which could have an adverse effect on its results of operations and financial condition.

Guanke, the principal operating subsidiary of the Company, failed to pay social insurance premiums with respect to approximately two-thirds of its employees and it may be liable for past due social insurance premiums and penalties.

 The Company has been advised that under PRC law, Guanke should have paid social insurance premiums for its employees covering endowment insurance, unemployment insurance, and medical insurance with respect to its employees. Guanke may be required to pay the administrative authority of labor and social security the unpaid premiums plus a surcharge of 2% of the overdue premiums. There may also be a fine levied against the employee of Guanke who was responsible for the filings. SGOCO plans to make necessary payments and does not consider the liability material.

Risks Relating to the Company

Following the Acquisition, we did not receive sufficient amounts from the Trust Account to fully fund our operations and execute our business plan.

Of the funds in the Trust Account, a substantial portion were used for repurchases of ordinary shares pursuant to forward purchase contracts, to redeem the ordinary shares of shareholders who elect to exercise their redemption rights, to redeem the warrants of warrantholders who elect to exchange their warrants for cash, or to pay other transaction expenses. We received approximated $5.4 million from the Trust Account. In order to fund our operations and grow our business, we will require additional working capital which the Trust Account did not provide. If we do not obtain equity or debt financing, we may not be able to operate our business or execute our business plan as expected.

The Company may not be able to secure financing needed for future operating needs on favorable terms, or on any terms at all.

From time to time, we may seek additional financing to provide the capital required to maintain our business if cash flow from operations is insufficient to do so.  SGOCO cannot predict with certainty the timing or amount of any such capital requirements. If such financing is not available on satisfactory terms, SGOCO may be unable to expand its business or to develop new business at the rate desired, and its results of operations may be adversely affected. If SGOCO is able to incur debt, it may be subject to certain restrictions imposed by the terms of the debt and the repayment of such debt may limit its cash flow and its ability to grow. If SGOCO is unable to incur debt, it may be forced to issue additional equity, which could have a dilutive effect on its current shareholders.

We may qualify as a passive foreign investment company, or “PFIC,” which could result in adverse U.S. federal income tax consequences to U.S. holders of our ordinary shares and warrants.

 In general, we will be treated as a PFIC for any taxable year in which either (1) at least 75% of our gross income (looking through certain 25% or more-owned corporate subsidiaries) is passive income or (2) at least 50% of the average value of our assets (looking through certain 25% or more-owned corporate subsidiaries) is attributable to assets that produce, or are held for the production of, passive income. Passive income generally includes, without limitation, dividends, interest, rents, royalties, and gains from the disposition of passive assets. If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. holder of our ordinary shares or warrants, the U.S. holder may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements. Our actual PFIC status for our 2010 taxable year or any subsequent taxable year will not be determinable until after the end of such taxable year. Accordingly, there can be no assurance as to our status as a PFIC for our 2010 taxable year or any future taxable year. U.S. holders of our ordinary shares or warrants are urged to consult their own tax advisors regarding the possible application of the PFIC rules.

SGOCO did not operate as a public company prior to the Acquisition. Fulfilling our obligations incident to reporting as a “foreign private issuer” will be expensive and time consuming.

Hambrecht Asia Acquisition Corporation was not an operating company prior to the Acquisition of Honesty Group, which was a private company. SGOCO has maintained a relatively small finance, accounting and internal auditing staff and, prior to the Acquisition, was not required to maintain and establish disclosure controls and procedures and internal control as required for a public company trading in the United States. Under the Sarbanes Oxley Act of 2002 and the related rules and regulations of the SEC, we need to implement additional corporate governance practices and adhere to a variety of reporting requirements and complex accounting rules. Compliance with these obligations will require significant management time, place significant additional demands on our finance and accounting staff and on our financial, accounting and information systems, and increase our insurance, legal and financial compliance costs. SGOCO has engaged consultants and added additional accounting and financial staff with appropriate public company experience and technical accounting knowledge.

Being a foreign private issuer exempts us from certain Securities and Exchange Commission requirements that provide shareholders the protection of information that must be made available to shareholders of United States public companies.

We are a foreign private issuer within the meaning of the rules promulgated under the Securities Exchange Act of 1934. As such, we are exempt from certain provisions applicable to United States public companies including:

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the rules requiring the filing with the Securities and Exchange Commission, or SEC, of quarterly reports on Form 10−Q or current reports on Form 8−K;

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the sections of the Securities Exchange Act regulating the solicitation of proxies, consents or authorizations with respect to a security registered under the Securities Exchange Act;

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provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information; and

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the sections of the Securities Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and establishing insider liability for profits realized from any “short swing” trading transactions (i.e., a purchase and sale, or a sale and purchase, of the issuer’s equity securities within less than six months).

Because of these exemptions, our shareholders will not be afforded the same protections or information generally available to investors holding shares in public companies organized in the United States.

Expansion of the business of the Company  may put added pressure on SGOCO’s management, which may impede its ability to meet any increased demand for its products and adversely affect its results of operations.

 The business plan of the Company is to significantly grow its operations. Growth in its business may place a significant strain on its personnel, management, financial systems and other resources. The evolution of its business also presents numerous risks and challenges, including:

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the continued acceptance of its LCD and LED products by consumers;

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the ability of the Company to successfully and rapidly expand its “SGOCO Club” locations to reach potential customers in response to potentially increasing demand;

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the costs associated with such growth, which are difficult to quantify, but could be significant;

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the competition from larger, better capitalized and well-known competitors and effect of rapid technological change;

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the highly competitive nature of its industry; and

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the continued availability and favorable pricing of the raw materials and components used in its products.

 If we are successful in obtaining rapid market growth of its SGOCO Club participants, we may be required to provide a large amount of financial support to potential members and deliver LCD products to customers on a timely basis at a reasonable cost to those customers. Such demands would require more capital than the Company currently has available and the Company may be unable to meet the needs of its customers, which could adversely affect its relationships with its customers and results of operations.

Under the EIT Law, SGOCO may be classified as a “resident enterprise” of the PRC. Such classification could result in tax consequences to the Company and its non-PRC resident shareholders.

 Under the EIT (PRC Enterprise Income Tax) Law, enterprises are classified as resident enterprises and non-resident enterprises. An enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define “de facto management bodies” as a managing body that in practice exercises “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise; however, due to the lack of specific authority governing SGOCO’s situation, it remains unclear whether the PRC tax authorities would deem our managing body as being located within China. On April 22, 2009, the PRC National Tax Administration issued a Circular 82 named “Certain Issue concerning Certain Enterprises Incorporated outside China but with Actual Control by China-originated Investments to be Deemed Resident Enterprise.” Circular 82 provides specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore incorporated enterprise is located in China.  However, since Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those controlled by PRC individuals, like SGOCO, the determining criteria set forth in Circular 82 is not directly applicable to SGOCO, and there is no other interpretative guidance that would be applicable to SGOCO’s situation.  Due to the short history of the EIT Law and lack of applicable legal precedents, the PRC tax authorities determine the PRC tax resident treatment of a foreign (non-PRC) company on a case-by-case basis.

 If the PRC tax authorities determine that the Company is a “resident enterprise” for PRC enterprise income tax purposes, a number of PRC tax consequences could follow. First, the Company may be subject to enterprise income tax at a rate of 25% on the Company’s worldwide taxable income, as well as PRC enterprise income tax reporting obligations. Second, under the EIT Law and its implementing rules, dividends paid between “qualified resident enterprises” are exempt from enterprise income tax. As a result, if both SGOCO and Honesty Group are treated as PRC “resident enterprises,” all dividends from the PRC operating subsidiaries to Honesty Group and from Honesty Group to SGOCO would be exempt from PRC tax.

 If SGOCO were treated as a PRC “non-resident enterprise” under the EIT Law, then dividends that SGOCO receives from the PRC operating subsidiaries (assuming such dividends were considered sourced within the PRC) (i) may be subject to a 5% PRC withholding tax, if the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the “PRC-Hong Kong Tax Treaty”) were applicable, or (ii) if such treaty does not apply (i.e., because the PRC tax authorities may deem Honesty Group to be a conduit not entitled to treaty benefits), may be subject to a 10% PRC withholding tax. Any such taxes on dividends could materially reduce the amount of dividends, if any, the SPAC could pay to its shareholders.

 Finally, the new “resident enterprise” classification could result in a situation in which a 10% PRC tax is imposed on dividends the SPAC pays to its non-PRC shareholders that are not PRC tax “resident enterprises” and gains derived by them from transferring the SPAC’s ordinary shares or warrants, if such income is considered PRC-sourced income by the relevant PRC authorities. In such event, we may be required to withhold the 10% PRC tax on any dividends paid to our non-PRC resident shareholders. Our non-PRC resident shareholders also may be responsible for paying PRC tax at a rate of 10% on any gain realized from the sale or transfer of our ordinary shares or warrants in certain circumstances. We would not, however, have an obligation to withhold PRC tax with respect to such gain. If any such PRC taxes apply, a non-PRC resident shareholder may be entitled to a reduced rate of PRC taxes under an applicable income tax treaty and/or a foreign tax credit against such shareholder’s domestic income tax liability (subject to applicable conditions and limitations). Prospective investors should consult with their own tax advisors regarding the applicability of any such taxes, the effects of any applicable income tax treaties, and any available foreign tax credits.

Intercompany loans from SGOCO to the operating subsidiary must be made in compliance with PRC law.

 Any loans we make to our Chinese subsidiaries, which are treated as foreign-invested enterprises under Chinese law, cannot exceed statutory limits and must be registered with the State Administration of Foreign Exchange, or SAFE, or its local counterparts. Under applicable Chinese law, the Chinese regulators must approve the amount of a foreign-invested enterprise’s registered capital, which represents shareholders’ equity investments over a defined period of time, and the foreign-invested enterprise’s total investment, which represents the total of the company’s registered capital plus permitted loans. The registered capital/total investment ratio cannot be lower than the minimum statutory requirement and the excess of the total investment over the registered capital represents the maximum amount of borrowings that a foreign invested enterprise is permitted to have under Chinese law. If we were to advance some funds to our China subsidiaries in the form of loans and such funds exceed the maximum amount of borrowings of the subsidiary, we would have to apply to the relevant government authorities for an increase in their permitted total investment amounts. The various applications could be time consuming and their outcomes would be uncertain. Concurrently with the loans, we might have to make capital contributions to the subsidiary in order to maintain the statutory minimum registered capital/total investment ratio, and such capital contributions involve uncertainties of their own, as discussed below. Furthermore, even if we make loans to our China subsidiaries that do not exceed their current maximum amount of borrowings, we will have to register each loan with SAFE or its local counterpart within 15 days after the signing of the relevant loan agreement. Subject to the conditions stipulated by SAFE, SAFE or its local counterpart will issue a registration certificate of foreign debts within 20 days after reviewing and accepting its application. In practice, it may take longer to complete such SAFE registration process.

 We cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans by us to our China subsidiaries or affiliated entities or with respect to future capital contributions by SGOCO to its China subsidiaries. If SGOCO fails to complete such registrations or obtain such approvals, its ability to use such future loans or capital contributions to capitalize or otherwise fund its China operations may be negatively affected, which could adversely and materially affect its liquidity and its ability to fund and expand its business.

Risks Related to Doing Business in China

Adverse changes in political and economic policies of the Chinese government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for SGOCO’s products and adversely affect its competitive position.

 Our business operations will continue to be conducted in China, and almost all of its sales of products will continue to be made in China. Accordingly, our business, financial condition, results of operations and prospects will be affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including:

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the amount of government involvement;

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the level of development;

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the growth rate;

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the control of foreign exchange; and

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the allocation of resources.

 While the Chinese economy has experienced significant growth in the past 30 years, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a positive or negative effect on us.

 The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, the Chinese government still owns a   substantial portion of the productive assets in China. The continued control of these assets and other aspects of the national economy by the Chinese government could adversely affect our business. The Chinese government also exercises significant control over Chinese economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Any adverse change in the economic conditions or government policies in China could have a material adverse effect on overall economic growth in China, which in turn could lead to a reduction in demand for our products.

 

Investors may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on U.S. judgments against SGOCO, the Company, our subsidiaries and affiliates, officers, directors and shareholders, and others.

 Substantially all of SGOCO’s assets are located outside of the U.S. and most of its directors and executive officers reside outside of the U.S. As a result, it may not be possible for investors in the U.S. to effect service of process within the U.S. or elsewhere outside China on the Company, its subsidiaries, officers, directors and shareholders, and others, including with respect to matters arising under U.S. federal or state securities laws. China does not have treaties providing for reciprocal recognition and enforcement of judgments of courts with the U.S. and many other countries. As a result, recognition and enforcement in China of these judgments in relation to any matter, including U.S. securities laws and the laws of the Cayman Islands, may be difficult or impossible. Furthermore, an original action may be brought in China against the Company’s assets, its subsidiaries, officers, directors, shareholders and advisors only if the actions are not required to be arbitrated by Chinese law and the facts alleged in the complaint give rise to a cause of action under Chinese law and the actions satisfy certain prerequisite conditions prescribed by Chinese law. In connection with such an original action, a Chinese court may award civil liabilities, including monetary damages.  Notwithstanding the ability to bring original actions, the Company believes it is unlikely that the courts in China would entertain original actions brought in China against the Company or its directors or officers predicated upon the securities laws of the United States or any state or territory within the United States.

Future changes in laws, regulations or enforcement policies in China could adversely affect SGOCO’s business.

 Laws, regulations or enforcement policies in China are evolving and subject to future changes. Future changes in laws, regulations or administrative interpretations, or stricter enforcement policies by the Chinese government, could impose more stringent requirements on SGOCO, including fines or other penalties. Changes in applicable laws and regulations may also affect SGOCO’s operating costs. Compliance with these requirements could impose substantial additional costs or otherwise adversely affect our future growth. These changes may relax some requirements, which could be beneficial to our competitors or could lower market entry barriers and increase competition. In addition, any litigation or governmental investigation or enforcement proceedings in China may be protracted and result in substantial costs and diversion of resources and management attention.

Changes in Chinese Tax Laws could adversely affect the Company’s results.

 Our Chinese subsidiaries are governed by the Income Tax Law of the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax laws (the Income Tax Laws). Beginning January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the previous laws for Domestic Enterprises (“DEs”) and Foreign Invested Enterprises (“FIEs”). The new standard EIT rate of 25% has replaced the 33% rate previously applicable to both DEs and FIEs. Companies established before March 16, 2007 will continue to enjoy tax holiday treatment approved by local government for a grace period of the next 5 years or until the tax holiday term is completed, whichever is sooner. Guanke was established before March 16, 2007 and therefore is qualified to continue enjoying the reduced tax rate as described above. Guanke was granted income tax exemption for two years commencing from January 1, 2007, and is subject to 50% of the 25% EIT tax rate, or 12.5% from January 1, 2009, through December 31, 2011. Guanwei and Guancheng are under development stage and had no taxable income for the years ended December 31, 2009, 2008, and 2007. Future changes in Chinese tax law could change existing or future tax benefits or rates. Such changes could adversely affect the results of the Company.

Uncertainties with respect to the Chinese legal system could have a material adverse effect on us.

 The Chinese legal system is a civil law system based on written statutes. Unlike in the common law system, prior court decisions may be cited for reference but have limited precedential authority in China. Since 1979, Chinese legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. The Company conducts all of its business through its subsidiaries which are established in China. As a result, the Company will be subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to wholly foreign-owned enterprises. However, since the Chinese legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to us. For example, we may have to resort to administrative and court proceedings to enforce the legal protection that the Company or its subsidiaries enjoys either by law or contract. Since Chinese administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection the Company would enjoy in more developed legal systems. These uncertainties may impede the Company’s ability to enforce the contracts or other rights. Furthermore, intellectual property rights and confidentiality protections in China may not be as effective as in the U.S. or other countries. Accordingly, we cannot predict the effect of future developments in the Chinese legal system including the promulgation of new laws, changes to existing laws or the interpretation or enforcement of these laws, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to the Company and its shareholders. In addition, any litigation in China may be protracted and result in substantial costs and diversion of the Company’s resources and management attention.

The Chinese government exerts substantial influence over the manner in which the Company will conduct its business activities.

 The Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation, state ownership or otherwise. The Company’s ability to operate in China may be harmed by changes in its laws, regulations and policies of the Chinese government. We believe that the continuing company’s operations in China will be in material compliance with all applicable legal and regulatory requirements. However, the central or local governments may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure its compliance with such regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue to support economic and other reforms or regional or local variations in the implementation of economic and other policies, could have a significant effect on economic and social conditions in China or particular regions thereof, and could have an adverse effect on the manner in which the Company can do its business.

 The Chinese central government has a policy of aggressively subsidizing both consumption of domestic manufactured electronics and infrastructure building in smaller cities. The most recent plan is targeting rural area consumers through its rural subsidy scheme, which went into effect nationwide in February 2009. The Chinese government program encourages consumer spending on technology in rural areas by offering a 13% subsidy of the purchase price of designated home appliances (up to a capped price), which subsidy is split 80% / 20% between the central and local government. The PRC Ministry of Finance announced in March 2009 that the 2009 budget from the central government for this subsidy plan was RMB 20 billion, which would help increase household appliance sales by more than RMB 100 billion. Changes in their policies to reduce subsidies or promote competing technologies could negatively impact the Company’s operations.

If China imposes restrictions to reduce inflation, future economic growth in China could be curtailed which could adversely affect the business and results of our operation.

 While the economy of China has experienced rapid growth, this growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the supply of money and rising inflation. In order to control inflation, the Chinese government may impose controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. If similar restrictions are imposed, it may lead to a slowing of economic growth and decrease the interest in our LCD products leading to a decline in its profitability.

We may have difficulty establishing and maintaining adequate management, legal, and financial controls in the PRC.

 Prior to the Acquisition, our Chinese subsidiaries were operated to date as privately-held companies. As a result, we may experience difficulty in establishing and maintaining management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet the required U.S. regulatory and financial reporting standards.

Fluctuation in the value of the Renminbi (RMB) may reduce our profitability.

 The change in value of the RMB against U.S. dollars, Euro and other currencies is affected by, among other things, changes in China’s political and economic conditions. On July 21, 2005, the PRC government changed its policy of pegging the RMB to U.S. dollars. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in approximately 21.2% appreciation of RMB against the U.S. dollar from 2005 to 2009. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the Chinese government to adopt an even more flexible currency policy, which could result in a further and more significant fluctuation of the RMB against U.S. dollars. Any significant revaluation of the RMB may have a material adverse effect on our revenues and financial condition. For example, to the extent that we need to convert U.S. dollars we receive into RMB for our operations, appreciation of the RMB against U.S. dollars would reduce the RMB amount we receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our shares or for other business purposes, appreciation of U.S. dollars against the RMB would reduce the U.S. dollar amount available to us.

Exchange controls that exist in China may limit the Company’s ability to use our cash flows effectively.

 Most of our  revenues and expenses are denominated in Renminbi. We may need to convert a portion of SGOCO’s revenues into other currencies to meet our foreign currency obligations, including, among others, payment of dividends, if any, in respect of our shares. Under China’s existing foreign exchange regulations, SGOCO is able to purchase foreign exchange for settlement of current account transactions, including payment of dividends in foreign currencies, without prior approval from the State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, we cannot assure you that the Chinese government will not take further measures in the future to restrict access to foreign currencies for current account transactions. Any future restrictions on currency exchanges may limit our ability to use cash flows for the distribution of dividends to our shareholders or to fund operations we may have outside of China.

 Foreign exchange transactions by us under capital accounts continue to be subject to significant foreign exchange controls and require the approval of or registration with the Chinese governmental authorities, including SAFE. In particular, if Honesty Group borrows foreign currency loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance Honesty Group by means of additional capital contributions, these capital contributions must be approved by certain government authorities, including the Ministry of Commerce or its local counterparts. These limitations could affect the ability of Honesty Group to obtain additional foreign exchange through debt or equity financing.

Changes in foreign exchange regulations in China may affect our operating subsidiary’s ability to pay dividends in foreign currency or conduct other foreign exchange business.

 RMB is not a freely convertible currency currently, and the restrictions on currency exchanges may limit our ability to use revenues generated in RMB to fund our business activities outside China or to make dividends or other payments in U.S. dollars. In China, the State Administration for Foreign Exchange, or the SAFE, regulates the conversion of RMB into foreign currencies. Over the years, foreign exchange regulations in China have significantly reduced the government’s control over routine foreign exchange transactions under current accounts (e.g., remittance of foreign currencies for payment of dividends, etc.). But conversion of RMB for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is still subject to the approval of the SAFE. Under China’s existing foreign exchange regulations, Honesty Group’s Chinese operating subsidiary, Guanke, is able to pay dividends in foreign currencies, without prior approval from the SAFE, by complying with certain procedural requirements. However, we cannot assure you that the Chinese government will not take measures in the future to restrict access to foreign currencies for current account transactions.

Chinese government ownership of all real property may limit SGOCO’s ability to fully develop its licensed real estate.

 Chinese laws prohibiting the private ownership of land and limiting “land use rights” may hamper our ability to maximize our Subsidiaries’ property. All land in the PRC is owned by the Chinese government. Guanke, Guancheng, and Guanwei have “land use rights” to use the land for 50 years, beginning June 29, 2007. The Chinese government must not recall the land use right during the term of the land use agreement, unless that is for legitimate public interests with due process and compensation including but not limited to compensation for the facilities on the land and the foreseeable losses to the holder in the remaining years. Once the land use right fee has been fully paid up, the holder is entitled to dispose of the land use right to her or his discretion such as transferring, leasing, and mortgaging the land to others. One year before the expiration of the term, if the holder intends to extend the term, unless the land is required for then current public interests, the government is obliged to renew the land use right agreement upon re-negotiated terms and land use right fee.

Risks Relating to Our Securities

The former Honesty Group shareholders own approximately 89% of our ordinary shares, and this voting control may limit your ability to influence the outcome of matters requiring shareholder approval, including the election of our directors.

              As of July 1, 2010, the former shareholders of Honesty Group own over 89% of our voting shares. These shareholders can control substantially all matters requiring approval by our shareholders, including the election of directors and the approval of other business transactions. This concentration of ownership could have the effect of delaying or preventing a change in control of us or discouraging a potential acquirer from attempting to obtain control of us, which could prevent our shareholders from realizing a premium over the market price for their ordinary shares.

We do not expect to pay dividends, so our shareholders will only benefit from an investment in our shares if such shares appreciate in value.

 We do not expect to pay dividends to our shareholders in the foreseeable future. The board of directors may determine to pay dividends in the future, depending upon results of operations, financial condition, contractual restrictions including restrictions in credit agreements, restrictions imposed by applicable law, including the laws of China governing dividend payments, currency conversion and loans, and other factors our board of directors deems relevant. Accordingly, realization of a gain on shareholders’ investments will depend on the appreciation of the price of our shares. There is no guarantee that our shares will appreciate in value or even maintain the price at which shareholders purchased their shares.

Shares to be potentially issued may have an adverse effect on the market price of our shares.

 As of May 21, 2010, there were 16,094,756 shares and 1,816,027 warrants outstanding. We also issued an option to purchase up to a total of 280,000 units at $10 per unit to the underwriters which, if exercised, will result in the issuance of an additional up to 280,000 warrants and an additional up to 280,000 shares. In addition, assuming all the net income targets set forth therein are met,  shares currently outstanding but held in escrow pursuant to the Share Exchange Agreement and other closing agreements may be released to the former shareholders of Honesty Group and certain founders.

 The board of directors of the Company expects to adopt a stock incentive plan or similar compensation plan that provides for the issuance of stock options, restricted stock or other awards up to 7% of the fully diluted outstanding shares to the employees, directors and consultants of the Company and its subsidiaries.

 Also, the Company has authorized capital stock under its Charter, consisting of 50,000,000 ordinary shares and 1,000,000 preferred shares. Subject to any restriction of a stock exchange on which the Company’s shares may be listed in the future, the shares may be issued without shareholder approval. The sale, or even the possibility of sale, of the shares could have an adverse effect on the market price for our securities or on our ability to obtain future public financing. Upon the issuance of the additional shares, you may experience dilution to your holdings.

Due to the lack of unrestricted ordinary shares available to be sold, there is severely limited liquidity for our ordinary shares.

As of July 1, 2010, we had 16,094,756 shares outstanding.  Of these shares, 859,668 shares are held by persons not affiliated with us and are freely eligible to be resold in the public market.  The remaining shares are either being held in escrow or are “restricted” securities not eligible to be resold in the public market.  As a result of the lack of unrestricted securities available to be resold in the public market, there is limited liquidity in our ordinary shares, which may limit your ability to sell our ordinary shares or reduce the price at which the shares may be sold.

Our securities are quoted on the OTC Bulletin Board, which limits the liquidity and price of our securities more than if our securities were listed on the Nasdaq Stock Market or the New York Stock Exchange. There may not be an active, liquid trading market for our securities, and the trading price for our securities may fluctuate significantly.

 Our ordinary shares, warrants, and units are quoted on the OTC Bulletin Board. We believe that the quotation of our securities on the OTC limits the liquidity and price of our securities more than if our securities were listed on the Nasdaq Stock Market or the New York Stock Exchange. While we intend to file an application for listing on the Nasdaq Stock Market, we cannot assure you that we will satisfy the applicable listing requirements and our listing application may not be accepted. If we do not succeed in securing a listing on the Nasdaq Stock Market, the failure to move up to a regular securities exchange from the OTC market could limit the ability to trade our securities.

 Compliance with all of the applicable provisions of the Sarbanes Oxley Act will likely be a further condition of continued listing or trading. There is no assurance that if we are granted a listing on the Nasdaq Stock Market we will always meet the Nasdaq Stock Market listing requirements, or that there will be an active, liquid trading market for our ordinary shares in the future. Failure to meet the Nasdaq Stock Market listing requirements could result in the delisting of our ordinary shares from the Nasdaq Stock Market, which may adversely affect the liquidity of our shares, the price that can be obtained for them, or both.

FORWARD-LOOKING STATEMENTS

 

This prospectus contains “forward-looking statements” that represent our beliefs, projections and predictions about future events.  All statements other than statements of historical fact are “forward-looking statements” including any projections of earnings, revenue or other financial items, any statements of the plans, strategies and objectives of management for future operations, any statements concerning proposed new projects or other developments, any statements regarding future economic conditions or performance, any statements of management’s beliefs, goals, strategies, intentions and objectives, and any statements of assumptions underlying any of the foregoing.  Words such as “may”, “will”, “should”, “could”, “would”, “predicts”, “potential”, “continue”, “expects”, “anticipates”, “future”, “intends”, “plans”, “believes”, “estimates” and similar expressions, as well as statements in the future tense, identify forward-looking statements.

These statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements described in or implied by such statements.  Actual results may differ materially from expected results described in our forward-looking statements, including with respect to correct measurement and identification of factors affecting our business or the extent of their likely impact, the accuracy and completeness of the publicly available information with respect to the factors upon which our business strategy is based or the success of our business.

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of whether, or the times by which, our performance or results may be achieved.  Forward-looking statements are based on information available at the time those statements are made and management’s belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements.

Important factors that could cause actual performance or results to differ materially from those contained in forward-looking statements include, but are not limited to, those factors discussed under the headings “Risk Factors”, including, among others:

·

requirements or changes adversely affecting the LCD market in China;

·

fluctuations in customer demand for LCD products generally;

·

the success of the Company in promoting its brand of LCD products in China and elsewhere;

·

the success of the Company 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 products in China;

·

China’s overall economic conditions and local market economic conditions;

·

the Company’s 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, and

·

geopolitical events.

Further, the forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, collaborations or investments made by the Company.  Information set forth in this Prospectus is as of the date hereof.  The Company does not assume any obligation to update any forward-looking statements.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Directors and Senior Management

 

On March 12, 2010, the board of directors of the Company elected: David Hao Wu, Burnette Or, Tin Man Or, Weiwei Shangguan, Frank Wu, PikYue Teresa Hon, and Robert Eu as directors of the Company; and Burnette Or as Chairman of the board of directors, Chief Executive Officer, and President.

Except as otherwise provided, the address for each of the directors and executive officers is SGOCO Technology Park, Luoshan, Jinjiang City, Fujian, China 362200.  The business address of Robert Eu and David Hao Wu is 13/F Tower 2, New World Tower, 18 Queens Road Central, Hong Kong.

On April 18, 2010, our board members appointed by unanimous written resolutions  Mr. Zhongsheng Lv to serve as the Treasurer and Ms. Xiaoling Xu as the Corporate Secretary of the Company until their successors are duly elected and qualified.  Following the election of Ms. Xiaoling Xu to the office of Corporate Secretary and Mr. Zhongsheng Lv to the office of Treasurer, the complete list of officers of the Company appointed to serve until their successors are duly elected and qualified are as follows:

Brief biographies of our directors and officers are set forth below in the Section titled “Directors, Senior Management and Employees – Directors and Senior Management”.

Advisers

 

Cozen O ’ Connor has acted as the Company’s principal United States legal counsel.  Cozen O ’ Connor ’s address is The Army and Navy Building, 1627 I Street, NW, Suite 1100, Washington, DC 20006.  Conyers, Dill and Pearman has acted as the Company’s Cayman Islands counsel.  They have offices at 2901 One Exchange Square, 8 Connaught Place Central, Hong Kong.  Cheng Wong Lam & Partners, with offices at 50 th Floor, Bank of China Tower, 1 Garden Road Central, Hong Kong, has acted as the Company’s Hong Kong counsel.  JunZeJun Law Offices have acted as the Company’s counsel in the People’s Republic of China.  JunZeJun has offices at 6/F South Tower, Financial Street Center, No.9 Financial Street, Xicheng District, Beijing, PRC.  RedBridge Group Ltd. (“RedBridge”) has acted as the Company’s financial advisor.  RedBridge’s address is 50 California Street, Suite 1500, San Francisco, CA 94111.

Auditors

 

Rothstein Kass & Company, P.C. audited the Company’s financial statements for the transition period ended June 30, 2009; and the years ended December 31, 2008 and 2007.  Rothstein Kass & Company, P.C.’s address is 4 Becker Farm Road, Roseland, New Jersey 07302.  Frazer Frost LLP audited Honesty Group’s financial statements for the years ended December 31, 2009, 2008 and 2007.  Frazer Frost LLP’s address is 135 South State College Blvd. Suite 300, Brea, California 92821.

SELECTED FINANCIAL DATA

 

The following table presents our summary historical consolidated financial information.  The selected financial data for each of the three fiscal years ended December 31, 2009, December 31, 2008 and December 31, 2007 and each of the three months ended March 31, 2010 and March 31, 2009 have been derived from our consolidated financial statements included elsewhere in this prospectus. We started operating during the fourth quarter of 2006, and as such, there is no comparative information available for the year ended December 31, 2006.  These historical results are not necessarily indicative of results to be expected in any future period.

 

 

CAPITALIZATION AND INDEBTEDNESS

 

The following sets forth certain items of liability and shareholders’ equity on an unaudited basis as of March 31, 2010 and should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus.

(1) $8.9 million of restricted cash was collateral for the $23.5 million notes payable.

(2) $17.0 million is guaranteed by affiliates of the Company and secured by a pledge of the land rights of certain of the Company’s Subsidiaries.

(3) Following the   closing of the Acquisition, the number of common stock outstanding is as follows:

 

INFORMATION ON THE COMPANY

 

SGOCO Technology, Ltd. is a corporation organized under the laws of the Cayman Islands on July 18, 2007.  The Company was originally named Hambrecht Asia Acquisition Corp.  Hambrecht Asia Acquisition Corporation was formed as a blank check special purpose acquisition company in the Cayman Islands on July 18, 2007.  On March 11, 2010, the Company’s shareholders approved a various transactions in connection with the Acquisition, including a change in the Company’s name to SGOCO Technology, Ltd. which was effective on March 16, 2010.

History and Development of the Company

 

Hambrecht Asia Acquisition Corporation

In March 2008, Hambrecht Asia Acquisition Corporation completed its initial public offering for an aggregate offering of 4,239,300 units.  Each unit consisted of one ordinary share and one redeemable ordinary share purchase warrant, resulting in a total of 4,239,300 shares and 4,239,300 warrants which are publicly held.  The units were sold at an offering price of $8.00 per unit.  In addition, 1,550,000 warrants to purchase ordinary shares were issued to the Company’s sponsors immediately prior to the IPO at an offering price of $1.00 per warrant.  Net proceeds of $33,527,396 from the IPO and the private placement were placed in the Trust Account.  Before its acquisition of all of the outstanding capital stock of Honesty Group, the prices of the ordinary shares, warrants to purchase ordinary shares and units (each unit consisting of one ordinary share and a warrant to purchase one ordinary share) were quoted on the Over-the-Counter Bulletin Board.  Other than its initial public offering and the pursuit of a business combination, Hambrecht Asia Acquisition Corporation did not engage in any business.

Pursuant to its Amended and Restated Articles of Incorporation, the Company was required to enter into a “Business Combination” transaction to acquire control of a business with its primary operation in the PRC with a fair market value of at least 80% of the Trust Fund (excluding certain deferred underwriting commissions) prior to March 12, 2010, or dissolve and liquidate.  The approval of the Business Combination transaction required the approval of a majority of the outstanding shares and was conditioned, among other matters, on not more than 30% of the outstanding shares being properly tendered for redemption under the Articles of Incorporation.  Each ordinary shares issued in the IPO was entitled to be redeemed if it was voted against the acquisition transaction at a price equal to the amount in the Trust Fund divided by the number of shares issued in the IPO outstanding at the time, estimated to be approximately $7.98 as of February 17, 2010.  The Company entered into various forward purchase agreements with various hedge funds and other institutions for the Company to repurchase a total of 2,147,493 of its shares for an aggregate purchase price of $17,285,811 immediately after the closing of the Business Combination.

On March 12, 2010, the Company acquired all of the outstanding capital stock of Honesty Group Holdings Limited.  In addition, at the meeting to approve the acquisition, the holders of the Company’s outstanding warrants approved an amendment to the warrant agreement under which the warrants were issued to increase the exercise price per share of the warrants from $5.00 to $8.00 and to extend by one year the exercise period, and to provide for the redemption of the publicly-held warrants, at the option of the holder, for $0.50 per share upon the closing of the acquisition. After payment of various fees and expenses, the redemption prices of shares and warrants and the forward purchase contracts, the balance of approximately $5.4 million in the Trust Fund was released to the Company upon consummation of its acquisition of Honesty Group.  After the closing of the acquisition and the settlement of related transactions, the Company had outstanding 16,094,756 ordinary shares, of which 859,668 shares were initially issued in its IPO, and warrants to purchase 1,816,027 shares at a price of $8.00 per share, of which 1,566,027 were initially issued in its IPO.

Honesty Group and its Subsidiaries

Honesty Group, a limited liability company registered in Hong Kong, was incorporated on September 13, 2005.  Honesty Group owns 100% of the equity interests of three subsidiaries: Guanke, Guanwei, and Guancheng.  Guanke, Guanwei, and Guancheng are limited liability companies established in Jinjiang City, Fujian Province under the corporate laws of the PRC.  All three companies qualify as wholly foreign-owned enterprises under PRC law and have business operating licenses.  Guanke was formed on January 16, 2006, with a registered capital of $11,880,000.  Guanwei and Guancheng were formed on June 22, 2007, with registered capital of $11,880,000 and $7,800,000, respectively, of which $3,130,000 and $2,259,970, respectively, had been invested by Honesty Group as of December 31, 2009.  According to an agreement reached with the SAIC, the remaining registered capital of $8,750,000 and $5,540,030 must be fulfilled by end of 2010.  The SAIC provided Honesty Group with additional time to make the registered capital payments because Honesty Group is in the process of investing in infrastructure in the region.  If Honesty Group is unable to make the registered capital payments during 2010, 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. If it fails to reach such an agreement for deferral, the shareholders of the subsidiaries would have an obligation to fund these two subsidiaries or to apply for a reduction in the remaining registered capital, which may not be granted.  If the shareholders fail to contribute their registered capital, they may be penalized with fines of 5-15% over the amount of unpaid capital, and, in certain cases, the subsidiaries business licenses may be revoked, which may result in the inability of the subsidiaries 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. Guanwei and Guancheng are development stage companies and have no operations as of March 31,2010.  These subsidiaries do, however, hold certain land use rights for SGOCO Technology Park in Fujian Province, China.

Guanke, the operating subsidiary of Honesty Group, was founded in 2005 by Burnette Or and Guoxiong Ding, initially to develop and manufacture as an OEM (original equipment manufacturer) and ODM (original development manufacturer) for domestic and international brands for LCD TV and PC monitors. In cooperation with these customers, Guanke qualified themselves as a high quality manufacturer with developments of efficient manufacturing processes and high quality control standards. Guanke’s management soon identified the market demand in 2 nd , 3 rd  and 4 th  tier cities for high quality, valued products under a locally recognized brand. This provided an opportunity for Guanke to build its brands portfolios and sell products under its own brands, directly to end consumers through wholesale and retail distribution channels controlled by the company.

Guanke’s management believes that the LCD products, in general, have very short shelf-lives. This is because new technologies and features are constantly introduced into the marketplace by international brands. However, these new technologies and features are typically marketed first to Tier 1 cities, where brand recognition is the key driver to sales. China classifies its cities based upon population size, income and GDP. While Tier 1 cities include metropolitan cities like Beijing, Shanghai, Guangzhou and Shenzhen, which are currently major points of demand, Guanke believes the market opportunities and sales growth potentials in these Tier 2, Tier 3, and Tier 4 cities are significant. In particular, the 3 rd  and 4th tier cities and their adjoining rural areas, which are largely ignored by the international brands due to the high overhead cost, are target opportunities. According to a research by Displaybank, there are over 260 Tier 2 cities, and over 2,000 Tier 3 and Tier 4 cities in China. Although Tier 1 cities currently record market share of 64% in LCD TV sales, the demand is decreasing over time. In contrast, Tier 3 and Tier 4 cities recorded increases in LCD demand from 3% in 2006 to 9% in 2008, and the growth is expected to continue for the coming years. Guanke’s goal is to offer its branded products with similar features at affordable pricing points and establish a dominant market position to selected Tier 2, Tier 3 and Tier 4 cities before competitor brands reach these markets.

The principal objective of Guanke’s management is for Guanke 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 and their adjoining rural areas in China to distribute its products. The strategy is to capitalize on Guanke’s operating strengths, which include a product development program; in-house manufacturing capability; value priced, feature rich products marketed under brands SGOCO controls; an attractive compensation plan for SGOCO Club members; a scalable business model; and an experienced management team. With this vision in mind, from 2007 to 2008, Guanke focused on building world-class manufacturing facilities and enhancing design engineering expertise to foster stronger product development and lower production costs for the ready expandable production capacity. Guanke’s vertically integrated business model enables the company to capture advantages from the entire value chain and to manufacture with flexibility and cost efficiency for quicker response to market demand changes.

Guanke differentiates itself by providing branded value products, where “value” equates to higher quality at affordable price points reasonably less than foreign labels, and “brand” equates to products with reputations for consistent and reliable qualities. Therefore, even as new features are introduced by competitors rapidly, Guanke is still poised to build up market share by fulfilling demand of value preferred customers with consistent high quality.

In 2009, Guanke initiated an effort to convert select specialty retailers and large end customers into Direct Store Delivery (DSD) partners via a strategy referred to as “SGOCO Clubs.” A network of SGOCO Clubs allow Guanke to (a) rapidly build a brand presence in multiple markets; and (b) allow operators of SGOCO Clubs to offer differentiated branded products at reasonable prices where they can enjoy higher gross margins. Through its national chain of independent retail outlets licensed under the name “SGOCO Club”, Honesty Group is able to reach the end consumer and provide consumer satisfaction. As of March 31, 2010, Honesty Group has approximately 206 retail stores with network covering the following 11 municipalities and provinces in China: Hohhot (provincial capital of Inner Mongolia), Hangzhou, Jinan, Xuzhou, Nanchang, Zhengzhou, Changsha, Hefei, Harbin, Haikou, and Guangzhou, with retailing floor space ranging from 10 square meters to 30 square meters.

While Guanke’s primary focus is to manufacture in support of its own brands, when manufacturing capacity allows, it will temporarily use spare capacity for OEM/ODM customers. For example, in 2007, approximately 50% of its revenue was derived from OEM customers such as Haier, G-tech, Benteq, Cruise, Hyundai MultiCAV and Brimax. In 2008 and 2009, OEM revenue decreased to less than 10% of total revenue because the production focus had switched to Guanke’s own brands. In 2009, Guanke moved all of the production to the newly built facility in SGOCO Technology Park. Due to this expansion in production capacity, Guanke expects its OEM/ODM revenue to increase in 2010. 

Pursuant to the terms of the Company’s Amended and Restated Memorandum of Association, public shareholders who voted against the transaction were entitled to elect to have their shares redeemed at $7.98 per share. Following the transaction, holders of 1,232,139 shares elected to have their shares redeemed for $7.98 per share.

In addition, on March 11, 2010, holders of the Company’s outstanding warrants to purchase ordinary shares approved the amendment to the warrant agreement under which the warrants were issued to (a) increase the exercise price per share of the warrants from $5.00 to $8.00, (b) extend by one year to March 7, 2014 the exercise period, and (c) provide for the redemption of the publicly-held warrants, at the option of the holder, for $0.50 per warrant upon the closing of the Acquisition.  The vote of the warrantholders was as follows:

Following the transaction, holders of 2,673,273 of the 4,239,300 publicly-held warrants elected to have their warrants redeemed at $0.50 each.  Holders of the remaining 1,566,027 publicly-held warrants elected to retain their warrants, as amended, with the new exercise price of $8.00 per share and March 7, 2014 expiration date.

On March 12, 2010, the Company completed the acquisition of Honesty Group’s outstanding capital stock, pursuant to the terms of the Share Exchange Agreement, dated as of February 12, 2010, as amended on March 11, 2010 (together, the “Share Exchange Agreement”).  The Acquisition resulted in the issuance of: (i) 8,500,000 of the ordinary shares of the Company to former shareholders of Honesty Group, and (ii) 5,800,000 of the ordinary shares of the Company to the former shareholders of Honesty Group, to be held in escrow and released if certain income milestones are met by the combined company.  The former shareholders of Honesty Group are Sun Zone Investments Limited, a company organized under the laws of the British Virgin Islands, and Mr. Sze Kit Ting, a resident of Hong Kong.

In connection with the transactions, the Company entered into agreements to purchase 2,147,493 ordinary shares from the holders thereof in a series of transactions for an aggregate price of $17,285,811.  Also, as described in the Share Exchange Agreement, the original shareholders of the Company who acquired ordinary shares prior to the Company’s initial public offering, the Honesty Shareholders, and the Company entered into a Sponsor Agreement, dated as of February 12, 2010, which was amended by Amendment No. 1 to Sponsor Agreement, dated March 11, 2010, pursuant to which the Sponsors agreed to forfeit 124,738 of their Sponsor Shares and 1,300,000 of their warrants to acquire ordinary shares.  The remaining 250,000 Sponsor Warrants were transferred without consideration by the sponsors to Pope Investments II, LLC.  Concurrently, Mr. Burnette Or granted Pope Investments II, LLC a put option, guaranteed by Messrs. Robert Eu (former Chairman of the Board of Hambrecht Asia and current director) and John Wang (former Chief Executive Officer of Hambrecht Asia) to purchase 250,000 ordinary shares at $8.00 exercisable for a three month period commencing February 15, 2011.  In connection with the foregoing, Pope Investments agreed to purchase 250,000 shares of the Company. There is no relationship between Pope Investments and the Company or its affiliates.

In addition, 766,823 Sponsor Shares were placed in escrow pending satisfaction of certain conditions described in Amendment No. 1 to the Share Exchange Agreement.  Those conditions include the Company reaching certain milestones for “Income from Existing Operations” as defined in the Share Exchange Agreement, as well as: (i) Messrs. Robert Eu and John Wang providing 30 hours per month in services to the Company in connection with investor relations, listing on the Nasdaq Global Stock Market or Nasdaq Global Select Stock Market, introducing investors and advisors; (ii) listing of the Company on such stock markets if the Company acts in good faith to obtain such a listing once the listing criteria are met; and (iii) providing the opportunity for the Company to raise an additional $15 million in equity subject to meeting certain prescribed pricing criteria.

In connection with the issuance of the 5,800,000 escrowed shares and the 766,823 escrowed sponsors shares, the Company, the Sponsors, and the Honesty Shareholders entered into an escrow agreement (“Escrow Agreement”) with Grand Pacific Investment Limited as escrow agent, pursuant to which the escrow agent will hold the Escrow Shares and the escrowed Sponsor Shares pending satisfaction of certain conditions within the applicable time periods.  If the conditions are not met, some or all of the Escrow Shares and/or the escrowed Sponsor Shares, will be delivered to the Company and canceled and returned to the status of authorized and unissued ordinary shares.

As a condition to the completion of the transactions under the Share Exchange Agreement, the Company entered into a Registration Rights Agreement, dated March 12, 2010, with the Honesty Shareholders pursuant to which the Company agreed to register for resale on request shares issued to the Honesty Shareholders.  The Registration Rights Agreement is filed as Exhibit 10.4 to the Company’s Current Report on Form 6-K filed with the SEC on March 16, 2010.

Effective upon completion of certain filings in the Cayman Islands on March 16, 2010, the Company changed its name from Hambrecht Asia Acquisition Corp. to SGOCO Technology, Ltd. As part of implementing the name change, the Company applied to the Financial Industry Regulatory Authority (FINRA) to change the trading symbols for the Company’s Ordinary Shares and Warrants to purchase Ordinary Shares to reflect the Company’s new name. Effective on May 25, 2010, the Company’s symbols changed from HMAQF.OB to SGTLF for the Ordinary Shares and from HMAWF.OB to SGTWF for the Warrants. The Trust Fund was released to the Company upon consummation of its acquisition of Honesty Group. Although the Share Exchange Agreement required that at least $6.5 million remain in the Trust Fund at the closing of the business combination, the Honesty Group shareholders waived this condition, and approximately $5.4 million from the Trust Fund remained with SGOCO after shareholders and public warrantholders redeemed their securities.

Industry Overview

 

China’s Economy

Large, Fast Growing Chinese Economy.  China is the world’s most populous country, with a population of 1.3 billion as of the end of 2008 according to the Census Bureau of China. China’s gross domestic product, or GDP, grew from $1.8 trillion in 2003 to $4.3 trillion in 2008, representing a compound annual growth rate, or CAGR, of 19.0%. Despite the recessionary environment in the global economy, the Chinese economy’s pace of expansion reached double-digits (10.7% year-in-year) in the last quarter of 2009.

Demographics Fueling Consumption Growth.  The Chinese central government has a policy of aggressively subsidizing both consumption of domestic manufactured electronics and infrastructure building in smaller cities. The most recent plan is targeting rural area consumers through its rural subsidy scheme, which went into effect nationwide in February 2009. The Chinese government program encourages consumer spending on technology in rural areas by offering a 13% subsidy of the purchase price of designated home appliances (up to a capped price), which subsidy is split 80% / 20% between the central and local government. The PRC Ministry of Finance announced in March 2009 that the 2009 budget from the central government for this subsidy plan was RMB 20 billion, which would help increase household appliance sales by more than RMB 100 billion. According to a rural home appliance consumer survey published by Sunning Appliance, one of the largest home appliance retail stores in China, TV is still the most popular home appliance in rural China with 43.6% of surveyed households intending to make a purchase.

Urbanization Trend.  China has witnessed a growing trend toward urbanization in the past decade. According to the China Statistical Yearbook, the urban population represented approximately 45% of the overall population in China as of December 31, 2008 compared to approximately 20% in the early 1980s. Furthermore, according to an article by Xinhau News Agency, the official press agency of China, the urban population will represent approximately 50% of China’s total population by the end of 2020.

Increasing Consumption.  China has recently overtaken Germany to become the world’s third largest economy behind the U.S. and Japan but is ranked the fifth in terms of consumer spending. Private consumption in China currently accounts for 36% of total GDP, the lowest percentage of any major economy of the world. Consumption is expected to grow over 8% annually over the next 15 years and is expected to become the world’s third-largest consumer market by 2020 according to an estimate by McKinsey Global Institution. According to a January 2010 report released by Credit Suisse, China’s consumer market is expected to rise from US$1.72 trillion in 2009 to US$15.94 trillion in 2020, and the share of global consumption to rise from 5.2% in 2009 to 23.1% in 2020, overtaking the US as the largest consumer market in the world. The Credit Suisse survey also observed a rising interest in LCD televisions.

Global LCD Industry

In 2008, the global LCD industry was negatively impacted by the global economic crisis. In 2009, unit shipments of LCD monitors were up by 3.8%, and global LCD monitor shipments rose to 176.5 million units in 2009, up from 170.1 million in 2008.  Global LCD TV shipments reached 146 million units in 2009, and flat panel TV technologies like LCD enjoyed better growth in 2009 on a unit basis than during 2008, rising 37% vs. 34%, respectively.  The global TV market is expected to reach 228 million units in 2010, up from the previous forecast of 218 million units, due to the rapid transition to flat panel technologies in emerging markets, the robust level of growth even in mature markets and the positive influence of new technology introductions such as 3D and LED, according to DisplaySearch.  According to DisplaySearch, LCD TVs are now projected to exceed 180 million units in 2010, a 24% increase over 2009, such growth to be helped by the introduction of new technologies like 3D, as well as the expansion of newer features like LED backlights and internet connectivity.  DisplaySearch also noted that price erosion was the major factor contributing to the excellent growth in 2009, with LCD TV average prices falling 24% from 2008, much more than any preceding year.

The global PC market grew 22.4% in the second quarter of 2010, according to IDC. The factors leading to the growth include an aging commercial installed base, a proliferation of low-cost media-centric PCs, and low PC penetration through much of the world, which will remain to be key drivers going forward.

China’s LCD Industry

The domestic Chinese PC market already ranks second globally.  DisplaySearch forecasts the Europe, the Middle East and Africa region, which is currently the top LCD monitor market, will continue to dominate in the years to come, but by 2011 China is expected to pass the United States as the second largest market and hold over 21% of the market.  China's share in the LCD monitor market is expected to grow from 18.4% in 2008 to 21.1% in 2011 and 22.1% in 2012.

SGOCO believes the demand for PCs and LCD monitors is accelerating due to increasing popularity of the Internet. As of June 2010, the population of China's Internet users climbed to 420 million, 36 million more than the end of 2009. The penetration rate of Internet users rose to 31.8%, as compared to more than 70% in mature markets. It was 28.9% at the end of 2009.

Government Subsidy for Consumer Electronics in Rural Area

The Chinese central government has a policy of aggressively subsidizing both consumption of domestic manufactured electronics and infrastructure building in Tier 2 and Tier 3 cities. The most recent plan is targeting rural area consumers through its rural subsidy scheme, which went into effect nationwide in February 2009. The Chinese government program encourages consumer spending on technology in rural areas by offering a 13% subsidy of the purchase price of designated home appliances (up to a capped price), which subsidy is split 80% / 20% between the central and local government. The PRC Ministry of Finance announced in March 2009 that the 2009 budget from the central government for this subsidy plan was RMB 20 billion, which would help increase household appliance sales by more than RMB 100 billion. According to a rural home appliance consumer survey published by Sunning Appliance, one of the largest home appliance retail stores in China, TV is still the most popular home appliance in rural China with 43.6% of surveyed households intending to make a purchase.

SGOCO Products

 

SGOCO offers a wide range of LCD products with designs and feature sets primarily targeting retail and commercial customers in the China market. Its current product line includes: LCD monitors with a full range of screen sizes up to 32 inches; LCD TVs with screen sizes up to 60 inches; and LCD Monitor-DVD combination products in sizes ranging from mini 9” portable to 32” full-size multi media monitors. Additionally, SGOCO also provides custom manufacturing for application-specific LCD monitors, such as rotating screens (self-adjusting on a horizontal-vertical axis), CCTV monitors for security systems, billboard monitors for advertising and public notice systems and touch screens for non-keyed entries, ideal for retail applications.

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. In 2009, sales of SGOCO product lines represented 90% of total sales.

Through its research and development group, SGOCO engineers are developing new all-in-one (or “AIO”) e-reader notebook and mobile internet device (or “MID”) product lines and provide LCD systems solutions for industry clients such as medical centers, educational institutions, government complexes, public emergency response systems, and corporate offices. These are customized hardware and software solutions for turnkey delivery to industry clients.

SGOCO’s products (including custom systems) are subject to statutory warranty obligations. Generally, these requirements obligate SGOCO to a one-year repair or replace obligation. Products returned within seven days of the invoice date must be refunded, repaired or replaced at the customer’s option. Products returned after the first week but within the 15-days following the invoice date must be repaired. If the product cannot be repaired after two attempts during the one-year warranty period, the manufacturer must offer the customer a replacement or refund. SGOCO does not provide additional contractual warranties for any of its products.

Properties and Manufacturing Facility

 

SGOCO’s principal manufacturing operations and headquarters are located at the recently constructed SGOCO Technology Park, Jinjiang City, Fujian Province, China. SGOCO Technology Park has a total area of over 242,811 square meters (approximately 60 acres), strategically located in Jinjiang’s new city center, 10 km away from the Jinjiang airport. SGOCO entered into a SGOCO Technology Park Investment Agreement with the Municipal Government of Jinjiang City on March 31, 2006, as amended on July 7, 2006. Pursuant to this investment agreement, the government was responsible for providing infrastructure such as water, power, and roads available for construction and development. SGOCO is committed to investing not less than US$50 million in development of the Technology Park and has to date invested approximately $17.9 million on building infrastructure and purchasing equipment.  There is no compulsory schedule or deadline by which SGOCO must complete its investment commitment.

To date, the property consists of three parcels, occupying 204,113 square meters in total. The industrial land use rights of such property were purchased by Guanke, Guancheng, and Guanwei, respectively. Pursuant to PRC laws, the land use rights are renewable upon expiration at a renegotiated reasonable compensation. Guanke, Guanwei, and Guancheng intend to apply before the Municipal Government of Jinjiang City to renew the land use right one year prior to the expiration date. The Municipal Government of Jinjiang City is expected to agree to renew the land use rights unless there are legitimate public interest considerations that weigh against renewal at that time. Unlike the land use rights, Guanke, Guancheng, and Guanwei own the facilities constructed on the land and can dispose of them at their sole discretion. If Guanke, Guancheng, and Guanwei decide not to renew their land use rights, or their application is denied by the Municipal Government of Jinjiang City, they are entitled to a claim to the fair monetary value of the facilities from the Municipal Government of Jinjiang City.

Guanke purchased a 50-year land use right of a 65,331 square meter parcel of land for RMB12,631,748.00 on June 30, 2007. Guanke fully paid in the consideration for this land use right on July 11, 2008. A land use right certificate for this land was issued by the Municipal Government of Jinjiang City on October 14, 2008.

Guancheng purchased a 50-year land use right for a 68,002 square meter parcel of land for RMB13,148,187.00 on June 30, 2007. Guancheng paid the purchase price for this land use right in full on April 20, 2009. A Land Use Right Certificate for this land was issued by the Municipal Government of Jinjiang City on April 24, 2009.

Guanwei purchased a 50-year land use right for a 70,780 square meter parcel of land for RMB13,685,313.00 on June 30, 2007. Guancheng paid the purchase price for this land use right in full on February 5, 2009. Guanwei’s Land Use Right Certificate was issued by the Municipal Government of Jinjiang City on February 16, 2009.

Guanwei purchased a 50-year land use right for a 28,688 square meter parcel of land for RMB5,546,825.00 on June 30, 2007. Guancheng paid the purchase price for this land use right in full on November 12, 2009. Guanwei’s Land Use Right Certificate was issued by the Municipal Government of Jinjiang City on January 20, 2009.

The land use rights have been mortgaged to various lenders as security for various loans.

In addition to the above land use rights obtained from the Municipal Government of Jinjiang City, Guanke also reached agreements regarding the development plan and land reservation matters with the government for its future expansion. Guanke has entered into an agreement for reserving the land use right of a up to a 210,793.30 square meter parcel of land immediately on the west side of SGOCO Technology Park on May 24, 2006. The term and conditions of the future purchase of this reserve land are subject to the then-current negotiation between Jinjiang Land Reservation Center and Guanke. The land plan for construction on this parcel of land was approved by the Planning, Construction, and Real Estate Management Bureau of Jinjiang City on May 19, 2006.  Guanke is not required to purchase the land use right.  If it did reach agreement on price with the JinJiang Land Reservation Center and purchased the right, that right would not be subject to the current agreement granting Mr. Or a purchase option on the land described below.

To date, the Company has invested US $17.9 million for infrastructure, and the construction of the first factory building and two employee dormitories.  The Company will continue to construct, maintain and operate additional facilities to meet its increasing production capacity.   In addition, SGOCO plans to include developing the parcels with supply chain partners (such as LCD upstream suppliers of glass, backlights, polarizers, and lamps), at its own cost or share such costs with those partners, in order to provide just on time delivery of components to SGOCO’s manufacturing facilities, reducing the Company’s inventory and overhead costs. Once suppliers co-locate at SGOCO Technology Park, the Company expects to achieve significant synergies with reduced transportation costs and time and additional contract manufacturing capabilities to provide increased economies of scale. In the meantime, as owner, the Company may also collect rents for leasing such facilities to its partners. The Company is in the process of negotiating long term lease agreements with those partners. A total of 19 buildings are planned.

In May 2009, Guanke  moved its existing production lines to the new factory at SGOCO Technology Park. SGOCO Technology Park currently contains one manufacturing building and two dormitories occupying 19,948 square meters of land. The current manufacturing building has 4 production lines with maximum capacity for 8 production lines. The current manufacturing building has two monitor production lines with maximum annual capacity of 3 million units, two television production lines with maximum annual capacity of 2 million units, and one SMT production line with maximum annual capacity of 22 million print points. Upon full utilization of the current manufacturing building, SGOCO expects to be able to double its current production capacity. The Company is currently in negotiation with some of its key supply vendors to relocate and become tenants of SGOCO Technology Park. The Company could then benefit from the just-in-time delivery of supplies, lower inventory requirements, and faster product time-to-market with reduced logistics and transaction costs.

SGOCO Technology Park is subject to an option to Mr. Burnette Or to purchase the land-use rights and the facilities at the original cost to the Company at any time prior to March 18, 2011, subject to entering into a long-term fair market value lease to Guanke for the entire facility.  The terms of such lease will be negotiated at the time, if any, that the option is exercised, which terms will address the party responsible for the continued development of the land and facilities.  The option may be extended by one year at the request of Mr. Or. See “SGOCO Technology Park Option Agreement” under the heading “The Share Exchange Agreement” above.  The option does not include the land use right for the 210,793.30 square meter parcel of land immediately on the west side of SGOCO Technology Park that Guanke has an agreement to acquire.

As an incentive to the development of SGOCO Technology Park, the Fujian provincial government built up a 110kW transformer substation on site at a cost of US$5 million. Guanke, Guancheng, Guanwei and tenants located in SGOCO Technology Park have priority to obtain stable power supply for their manufacturing.

Research and Development

 

As a result of its internal product development and in-house manufacturing capabilities, SGOCO has developed a focused and compact line of high-quality LCD-based electronic products. SGOCO focuses its research and development in appearance design, utilities, and major components such as mother boards and high voltage switchboards. In order to have a more cost efficient R&D process, SGOCO currently outsources certain non-core R&D projects, such as plate driver and circuit board research, to local R&D design houses.  SGOCO will then purchase those parts developed by outsourced design houses upon qualifying the products to met SGOCO standards.

In order to strengthen product development capabilities. SGOCO expects to further invest industrial production lines for LED lighting equipment, digital audio/video recording devices, and advanced digital camcorders. All digital components and devices are utilizing rooted technologies that help progress into the production era of digitalized products.

Manufacturing

 

The new manufacturing facility at SGOCO Technology Park has been designed to meet world class standards and certified to meet ISO 9001-2000 standards. Its environmental management meets ISO 14001-2004 standards. Workflow, parts, inventory and costs are managed through an ERP system. Other than the LCD panels and flat panel glass, the major components such as electronic boards, main boards, monitor casings, LED backlights on certain LCD products, high voltage switchboards, power cords, and transformers are manufactured and assembled by SGOCO.

SGOCO procures LCD panels from reputable third parties supplier (independent distributors of LCD panels manufacturer) located in Fujian Province. The contract value ordered by SGOCO from its top ten LCD panels supplier ranged from US$ 133,377 to US$1,165,527 during 2008 and 2009.   Since the beginning of 2010,  to date, the change of raw materials prices has been within 3% above or below normal market prices.  SGOCO has been able to procure sufficient flat panel glass for its LCD related products manufacture at the normal market price as usual.

SGOCO’s Printed Circuit Board Assembly (“PCBA”) factory has a Surface Mounting Technology (“SMT”) production line, which produces main board, display card, key-press board, set-top boxes, as well as cameras, cell phone boards, and other components. The SMT production system is equipped with high-speed SMT production lines, lead-free wave soldering, plug-in, repair welding, assembly lines, and other facilities. The SMT production line has a capacity of 22 million print points per year. SGOCO produces plastic and metal frames in its molding factory, where injection, stamping, plastic painting, and printing are processed. To make its products more cost efficient, SGOCO purchases some cables (signal cables, power cables, and audio and video cables) from local suppliers.

Management believes that SGOCO’s ability to manufacture its own products is a significant competitive advantage for the following reasons:

·

SGOCO has better control the quality of finished products;

·

SGOCO has better management of the underlying costs associated with manufacturing our products;

·

SGOCO has better control over production schedules to increase the likelihood of maintaining an uninterrupted supply of products for our customers; and

·

SGOCO is able to manufacture most development phase prototypes in-house to expedite product commercialization period.

Marketing and Distribution

 

While SGOCO initially utilized a network of distributors, since 2009 it has been building a “Direct Store Delivery” (DSD) model, which the Company calls SGOCO Clubs, as it enters new markets. Under SGOCO Club model the Company seeks to convert existing small specialty retailers (mom-and-pop stores) into exclusive retailers of SGOCO-owned brands. The conversion entails the re-decoration of the retail space or a portion within existing stores based upon SGOCO’s specification. SGOCO would provide direct store distribution to the retail stores and a selective line of products (of different screen size and features) under one or multiple brands owned by SGOCO. Through regular interaction with SGOCO Club operators, management is able to better understand the needs of end-consumers in the market place and is able to respond quicker to market demands. SGOCO then endeavors to quickly design and add new features to its future product offerings. SGOCO Club model is designed to (a) take advantage of existing sales networks that specialty retailers already have; (b) reduce intermediary cost in order to offer higher gross margins (at MSRP) to SGOCO Club operators; (c) ensure value and competitively priced products to-end consumers in the Tier 2 and Tier 3 cities in China; and (d) obtain end-consumer feedback on product features to ensure that SGOCO’s products meet the needs of this rapidly developing marketplace. Unlike currently competitors with multi-layer distributors who do not have control over pricing, SGOCO products are sold at fixed MSRP price, which appears to be more competitive over well-known international brands. As of March 31, 2010, SGOCO has over 206 retail stores covering 11 provinces and municipalities in China. SGOCO plans to reach approximately 600 and 1,000 SGOCO Club locations in 2010 and 2011, respectively.

SGOCO Clubs are currently classified into 3 different types:

·

Type A stores are exclusive flagship stores to promote branding, with larger retail space and location requirement of within the first to second floor of electronic malls.

·

Type B stores are non-exclusive dealerships for shops within first to third floor of technology malls with minimum 10 square meter retail space and no competitive products.

·

Type C stores are non-exclusive dealerships for shops within first to third floor of technology malls with minimum 5 square meter retail space and no competitive products.

As of July 21, 2010, SGOCO has signed contracts for 364 stores, including 4 Type A stores, 76 Type B stores and 284 Type C stores.

The Company sets sales targets for each type of the SGOCO Club members. If the target is reached, the Company reimburses its SGOCO Club members in future periods for marketing materials and/or storefront improvements, with such reimbursement based on the amount of products such SGOCO Club member purchases from the Company. Such reimbursement takes place once only and is standardized among the three types of SGOCO club stores. The minimum term for the Company ’ s agreements with SGOCO Club members is one year.

Management believes that it will be able to expand quickly with SGOCO Club model. SGOCO Club model helps business owners with initial setup costs as SGOCO reimburses a portion of store set-up costs upon SGOCO Club operators meeting sales quotas. This ties personal success to that of a national brand portfolio to provide incentives for the business owners to promote brand in local regions. SGOCO Club also provides mutually beneficial economics to SGOCO and to operators by offering direct purchases from the manufacturer to eliminate national and regional distributor margins, more flexible order terms, just-in-time deliveries and performance based incentives. SGOCO provides not only multiple branded product lines, but also sales, marketing and management assistance to help local operators succeed.

DSD partners are encouraged to build and manage their own business to sell products carrying SGOCO brands. DSD members benefit by purchasing products at wholesale prices from SGOCO, as manufacturer, and selling them at retail prices. Management believes a network of DSD partners is an effective way to distribute products especially in Tier 2 and Tier 3 cities because the DSD partners engage in localized person-to-person product education and after sales servicing, which is not readily available through traditional distribution channels. This personal touch may enhance end users’ awareness of the benefits and value of SGOCO products. Additionally, management believes that a DSD approach appeals to a cross-section of potential partners, such as entrepreneurial operators of specialty retailers (mom-and-pop retail stores) who may want a differentiated branded retail presence, or internet café operators who may already use a large number of LCD products in their business, and who may be seeking to supplement their income by selling products. Management considers SGOCO’s high-quality products, compact product lines, and higher potential gross margins (at MSRP) to be attractive components of SGOCO Club marketing system.

This direct sales model helps create brand identity and trust relationship that can be leveraged in the future to sell other consumer electronics with the ability to provide better sales and service supports in an efficient and timely manner. It also provides valuable and timely intelligence on shifting consumer tastes and demands and allows the company to have a faster response to the market. Retail presence also becomes a marketing vehicle to increase awareness of the brand in China’s emerging consumer market.

Competition

 

The LCD industry has evolved through rapid innovation and evolved over the last decade to enable the commercialization of LCD products. Because of increasingly affordable prices, the industry is at an inflection point at which the growth of consumer applications can take-off exponentially, especially in this emerging China market.

SGOCO is competing in this increasingly dynamic and demanding market along with international players and approximately 120 Chinese LCD products companies. Among those companies, many of them are panel makers, equipment vendors, application developers, and product distributors. Companies who directly compete with SGOCO should be system integrators that have their own distribution channel and focus on providing quality branded products. Most Chinese companies such as the largest LCD display manufacturer TPV technology are more focused on producing high volume OEM products, which have lower margin, higher fixed cost and are more vulnerable to fluctuations in key material cost changes.

The Company’s current major competitors include:

·

KTC Computer Tech is a LCD monitor and LCD TV manufacturer. It is primarily a contract manufacturer for OEMs. It is starting to sell products in the domestic market but without a distinct brand strategy.

·

HKC Electronics manufactures PC components and accessories for low-end OEMs serving emerging markets worldwide. The Company believes HKC Electronics sells ralatively low-end LCD monitors domestically but has no stand-out products of high quality.

·

Huipu Science manufactures plasma display panels primarily under contract to Samsung for international markets. Domestic product is limited by size due to current manufacturing limitations and cost.

All of these companies have limited productions for their brand name.

Recently, large LCD panel makers from Japan and South Korea have announced plans to build manufacturing plants in China. Sharp Corporation announced a preliminary agreement with China Electronics Nanjing for an eighth generation fabrication plant, and LG Display signed a preliminary agreement with the Guangzhou government to build an LCD manufacturing plant. Samsung Electronics Co, the largest LCD maker by revenue has indicated an interest in building a manufacturing plant in China. Although previously prohibited by government regulation from technology investments in China, Taiwanese companies have recently reported possible easing of restrictions on bans on setting up manufacturing plants in China. AU Optronics Corporation, the world’s third-largest flat panel maker by revenue after Samsung and LG Display Co, announced that it would apply to set up a flat panel plant in China to be nearer to its assembly plants in China’s Suzhou, Xiamen, Shanghai and Sichuan Provinces as soon as the Taiwan government allowed such investments.

Regulatory

 

Chinese government subsidies

Guanke has been granted subsidies by the Municipal Government of Jinjiang City due to its operation in the high and new technology business sector. For the years ended December 31, 2008 and 2009, Guanke received grants of approximately $1,975,000 (RMB 13,700,000) and $3,372,000 (RMB 23,000,000), respectively. The Grant was based on a research and development agreement between the Science & Technology Bureau of Jinjiang City and Guanke. Pursuant to the agreement, Guanke must use the Grant to research and develop certain technologies applicable to LCD products. To date, the governmental agency has reviewed and accepted those technologies, and confirmed Guanke’s due performance of the agreement and proper use of the Grant. The work-out technologies will be deemed as state-owned assets; however, Guanke has the right to use and operate them.

Fujian Province, in which Guanke is located, has been supportive of LCD related industries by granting public financial grants to companies, universities, and academies. From 1991 to 2008, the Fujian provincial government approved twelve such grants to the LCD monitor related industry, and eight of those grants have gone to companies.

Guanke obtains benefits from the PRC government’s efforts to promote its relationship with Taiwan. On May 14, 2009, the PRC State Council promulgated several opinions to support Fujian Province’s endeavors to boost its economy as the region at the west side of the Taiwan Strait (Guo Fa [2009] No. 24). Those opinions have given the Fujian Province more authority and funding to support its development. On October 10, 2009, the Ministry of Industry and Information Technology implemented the opinions and recognized LCD related consumer electronics as one of Fujian’s pillar industries, and also delegated Fujian Province’s government more authority to develop such industries.

Environmental

 

Guanke obtained approval from Jinjiang Environmental Protection Bureau on the environmental impact evaluations for its current facilities in SGOCO Technology Park on September 25, 2009.  The approvals concluded that (i) Guanke’s project is in accordance with the national industrial policies; and (ii) by proper operation, management, and supervision, the construction and normal operation of the project will not incur material negative impact on environment.

Guancheng and Guanwei engaged Xiamen New Green Environment Development Co., Ltd. to conduct construction project environmental impact evaluations on May 3, 2007, and May 5, 2007, respectively. The evaluation reports were approved by Jinjiang Environment Protection Bureau on June 20, 2007. The approval concluded that the construction and operations in SGOCO Technology Park were acceptable from an environmental protection perspective.

Intellectual Property

 

The Company does not own any patents of invention. Mr. Or Wenpu (no relation to Burnett or Tin Man Or), SGOCO’s vice president of business affairs, has five appearance design patent applications and four utilities patent applications before the State Intellectual Property Office. To date, all of the foregoing applications are pending. Or Wenpu has orally committed to transfer such patents to SGOCO once the applications are approved.

The Company owns the trademarks “SGOCO” and “Guanke.” Pursuant to a license from BORO (Fujian) Electronic Co., Ltd., a PRC company and a sister company to the Company owned by Sun Zone Investment Ltd., Guanke has non-exclusive rights to use the following trade marks from February 1, 2008, to January 31, 2017: (i) “EDGE10;” (ii) a mark comprised of two Chinese characters which together mean “warrior;” (iii) a figurative mark which is a shield with a British Union Jack in the middle; and (iv) a figurative mark which is a circle with a number “10” in the middle. The Company does not pay any royalties to the owner. These trade mark licenses are in the process of being filed with the Trade Mark Office of State Administration of Industry and Commerce.

The Company requires SGOCO Club store owners to comply with the standard version image. There are no legal disputes currently pending or threatened against the Company for any claimed intellectual property infringement.

In 2010, SGOCO expects to introduce a “Buick”® line of products in China, which SGOCO believes will complement the SGOCO brand. In 2009, SGOCO reached an agreement in principle to license the Buick brand for sales of LCD products in China from General Motors Corporation and expects to finalize the license agreement in 2010. General Motors, selling vehicles under the Buick, Chevrolet, Opel and Cadillac names, is the best-selling foreign automaker in China. The Buick brand is especially strong in China with a long history since the 1930s. General Motors and its local partners sold a record 1,826,424 vehicles in China in 2009, pushing the automaker’s market share in the country to 13.4 percent. Since 1999, a Chinese version of the Buick Century/Regal has been produced and sold in China by Shanghai GM and has proven to be popular among upscale, professional families, establishing Buick as one of the most popular vehicle brands in China with 447,011 vehicles sold in 2009.

In 2010, SGOCO expects to reach an agreement to license the “Buick”® brand for sales of LCD products in China from General Motors Corporation.  The Company has tentatively agreed on a term sheet for an exclusive license with the General Motors Corporation to use the brand name “Buick” for use on LCD related consumer electronic products in China.  The term sheet contemplates that SGOCO would pay royalties based on the net sales of certain products sold under the brand with annual minimum royalties.  Although the negotiations over the license have been substantially delayed due to General Motors bankruptcy and reorganization, and its current intentions to raise capital in the equity markets, the Company continues to expect to enter into the license in 2010.  The exact terms of the license remain subject to negotiation.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with the consolidated financial statements and related notes which appear elsewhere in this prospectus.  This discussion contains forward-looking statements that involve risks and uncertainties.  Our actual results could differ material from those anticipated in these forward-looking statement as a result of various factors, including those discussed elsewhere in this prospectus, particularly under the heading “Risk Factors”.

Our financial statements are prepared in US$ and in accordance with accounting principles generally accepted in the United States. See “Foreign Exchange Risk” below for information concerning the exchanges rates at which Renminbi (“RMB”) were translated into US$ at various pertinent dates and for pertinent periods.

Overview

 

SGOCO is a Chinese company that designs, manufactures and distributes LCD-related products including LCD monitors, LCD TVs, LED back-light modules and application-specific LCD systems. SGOCO’s focus is on providing high-quality, branded LCD products at affordable prices to consumers in China’s emerging middle class.

SGOCO’s strategy is to manufacture high quality, lower cost, branded products and sell them through wholesale and retail channels focused on 2 nd , 3 rd , 4 th  tier cities and their adjoining rural areas. SGOCO’s management believes these smaller, less sophisticated, more price-sensitive markets are under-served by the large global consumer electronics brands. Its mission is to establish a dominant position in LCD electronics products within these markets based upon its cost-efficient, rapid response to changing demand, our intimate knowledge of the Chinese middle-class consumer’s price/performance requirements, and localized distribution channels that most effectively serve this consumer.

SGOCO’s business model is marketing-driven with multiple channels and multiple brands. It has three principal elements: (1) a proprietary Direct Store Delivery distribution channel in the form of a national network of independent retail outlets operating under the “SGOCO Club” name; (2) an actively-managed portfolio of brands, comprised of both in-house trademarks like “SGOCO” as well as trademarks expected to be licensed like “Buick”, that have strong local appeal; and (3) a world-class manufacturing, design engineering, and product development capability to support its distribution channel and brand portfolio. By integrating these three elements, SGOCO is able to leverage opportunities across the entire value chain and create a competitive advantage for itself. Most of SGOCO’s competitors who are also focused on emerging domestic markets are relatively unsophisticated and typically have one or two of these elements in their business model, based upon whether their core competency is distribution/logistics, sales and marketing, or manufacturing/engineering. Management of SGOCO believes that integration of these three elements requires a level of managerial capability that few of the companies in our market segment have and that our vertically integrated business model can be effectively used to address the requirements of early-stage consumers in other emerging markets outside China, thus creating a pathway for SGOCO’s future international expansion.

Guanke, Guanwei, and Guancheng (“the Subsidiaries”) maintain their books and records in Renminbi (“RMB”), the lawful currency of China. In general, for consolidation purposes, we translate the Subsidiaries’ assets and liabilities into US$ using the applicable exchange rates prevailing at the balance sheet date, and the statement of income is translated at average exchange rates during the reporting period. Adjustments resulting from the translation of the Subsidiaries’ financial statements are recorded as accumulated other comprehensive income.

The exchange rates used to translate amounts in RMB into US$ for the purposes of preparing the consolidated financial statements or otherwise stated in this MD&A were as follows:

The balance sheet amounts with the exception of equity were translated 6.82 RMB to $1.00 at March 31, 2010 and December 31, 2009. The equity accounts were stated at their historical exchange rates. The average translation rates applied to the income and cash flow statement amounts for the three months ended March 31, 2010 and 2009 were 6.82 RMB and 6.83 RMB to $1.00, respectively.

The balance sheet amounts with the exception of equity were translated 6.82 RMB, 6.82 RMB and 7.29 RMB to $1.00 at December 31, 2009, 2008 and 2007, respectively. The equity accounts were stated at their historical exchange rates. The average translation rates applied to the income and cash flow statement amounts for the years ended December 31, 2009, 2008 and 2007 were 6.82 RMB, 6.94 RMB and 7.59 RMB to $1.00, respectively.

 

Critical Accounting Estimates

 

The Company’s plan of operation is based in part upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including the recoverability of tangible and intangible assets, disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of expenses during the periods covered. A summary of accounting policies that have been applied to the historical financial statements can be found in the notes to the consolidated financial statements.

 

The Company’s management evaluates its estimates on an on-going basis. The most significant estimates relate to collectability of receivables and the fair value of financial instruments. The Company bases its estimates on its historical and industry experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from those estimates.

 

The following is a brief discussion of these critical accounting policies and methods, and the judgments and estimates used by the Company in their application:

 

Accounts receivable and other receivables

 

Management reviews the composition of receivables and analyzes historical bad debts, customer concentration, customer credit worthiness, current economic trends and changes in customer payment patterns to determine if the allowance for doubtful accounts is adequate.  An estimate for doubtful accounts is made when collection of the full amount is no longer probable.  Delinquent account balances are written-off after management has determined that the likelihood of collection is not probable, known bad debts are written off against allowance for doubtful accounts when identified.  As the Company continues to expand its business, the Company may loosen credit terms with customers with long term relationships.  The Company also performs credit checks on new customers to ensure new customers have strong financial conditions.  Further, as a part of the allowance assessment, management reviews payment history.  The aforementioned procedures all rely on historical performance; however, historical results are not indicative of future collection performance, which may expose the Company to adjustments that could have material impact.

 

Fair value of financial instruments

 

We generally do not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks. However, certain financial instruments, such as warrants, which are indexed to our common stock, are classified as liabilities.  Determining the fair value on derivative financial instruments involves judgment and the use of certain relevant assumptions including, but not limited to, interest rate risk, credit risk, and equivalent volatility.  The use of different assumptions could have a material effect on the estimated fair value amounts.

Analysis of Operations Results

 

Comparison of Three Months Ended March 31, 2010 and 2009

Revenue

Revenue for the first quarter ended March 31, 2010 was US$19.5 million, up 786.4 % from US$2.2 million in the first quarter of 2009.  The significant increase in sales was due to the expansion of production capacity after the Company relocated to a new manufacturing facility in mid-year of 2009.  In addition, the Company increased its market share in LCD monitors through expansion of “SGOCO Club” retail network.

The number of SGOCO Club retailers increased substantially in recent periods.  The Company has utilized its many distributor relationships to assist it in locating suitable candidates to become SGOCO Club members, which has allowed the Company to rapidly increase the number of SGOCO Club members in recent periods.  When the Company enters into new arrangements with SGOCO Club members, its primary initial costs are supplying a showcase with SGOCO’s logo for the retailers to use in their stores.  The cost of such showcases are not material.  The Company does not incur any other material upfront costs when it adds a SGOCO Club member.  The Company does reimburse its SGOCO Club members in future periods for marketing materials and/or storefront improvements, with such reimbursement based on the amount of products such SGOCO Club member purchases from the Company. Such reimbursement takes place once only and is standardized among the three types of SGOCO club stores.

Gross Margins

As a percentage of total sales, the overall gross margin was 16.1% for the three months ended March 31, 2010, compared to 31.3% for the three months ended March 31, 2009.  The decrease was due to certain projects that the Company undertook in the first quarter of 2009 which generated smaller revenues but larger gross margins.  The Company 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.  Since products sold in the U.K. are within a unique line of product, the Company has more negotiation power, which impacts gross margin.  For the three month period ended March 31, 2009, sales to the U.K. comprised 41% of total sales, as compared to the three month period ended March 31, 2010, in which sales to the U.K. comprised 3.4% of total sales.  The increased proportion of sales to the U.K. during the three month period ended March 31, 2009, which sales had a higher gross margin, accounts for the increased gross margin during the period as compared to the three month period ended March 31, 2010.

General and Administrative Expenses

General and administrative expenses amounted to approximately US$1.32 million for the three months ended March 31, 2010, an increase of approximately US$1.17 million, or 780.0% compared to approximately US$0.15 million in the three months ended March 31, 2009. The increase was due to costs related to the Acquisition, which attributed to approximately US$1 million of the increase.

Income taxes

The amount of income tax was US$0.29 million for the three months ended March 31, 2010 compared with US$3,500 in income taxes during the three months ended March 31, 2009.  The change was due to the increased revenues in the first quarter of 2010.

Net Income

Net income for the first quarter of 2010 was US$0.6 million, up 100.0% from US$0.3 million recorded for the same period last year.  Fully Diluted EPS was US$0.06, up by 100.0% year-over-year.  The impact to the net income is primarily due to increase in the general and administrative expenses related to the acquisition as noted above.

Seasonality

The Company’s operating results are influenced by seasonal factors, including the timing of local holidays, such as the Chinese New Year during the first quarter of the year, and other events affecting consumer demand.  These factors may cause the Company’s sales and operating results to fluctuate on a quarterly basis.  Although it is difficult to make broad generalizations with respect to seasonality, the Company’s sales tend to be lower in the first quarter of each fiscal year compared to sales in the second, third and fourth quarters.  Due to seasonal factors, interim results may not be indicative of annual results.

Comparison of Fiscal Years Ended December 31, 2009 and 2008

Revenue

Sales increased by $24.08 million, or 55.0%, to $67.87 million in the year ended December 31, 2009, from $43.79 million in the year ended December 31, 2008. The significant increase in sales was primarily due to increased market share in LCD monitors through additional SGOCO Club retail locations.

 

Cost of goods sold

Cost of goods sold increased by $20.05 million, or 53.2%, to $57.76 million in the year ended December 31, 2009 from $37.71 million in the year ended December 31, 2008. The cost of LCD sales is primarily composed of the cost of direct raw materials, direct labor and other overhead expenses. The increase in cost of goods sold was mainly due to the increase in sales volume and a corresponding increase in cost of raw materials to manufacture products.

Honesty Group’s main production materials are LCD panels, main boards, plastic parts, speakers, packing materials, metal parts and cables.

Gross margin

As a percentage of total sales, the overall gross margin was 14.9% for the year ended December 31, 2009, compared to 13.9% for the same period the previous year. The one percentage point increase in gross margin was primarily due to more efficient cost control and greater pricing power in the distribution channel.

Selling expenses  

In the year ended December 31, 2009, selling expenses were approximately $0.12 million, a decrease of $0.09 million, or 44.6%, from $0.21 million the year before. The decrease was due to reduced export business expenses such as customs fees, docking fees and other export related expenses offset by increased sales and distribution expenses in expanding the network of SGOCO Club retail locations.

General and administrative expenses   

General and administrative expenses amounted to approximately $0.89 million for the year ended December 31, 2009, an increase of approximately $0.33 million, or 58.2% compared to approximately $0.56 million the previous year. The increase also reflected the increase in employee benefits to $0.25 million in fiscal 2009 from $0.20 million in fiscal 2008, a net increase of 25.0%.

Interest e xpense

Net interest expense was approximately US$0.83 million, an increase of US$0.77 million, from US$0.06 million the year before. The increase was due to the increase in debt necessary to support sales growth and investment in new production capacity.

Income before income taxes

 

As a result of the foregoing factors, income before tax increased by $2.97 million, or 56.9%, to $8.19 million in the year ended December 31, 2009, compared with $5.22 million for fiscal 2008.

Income taxes

Income tax was $1.03 million in fiscal 2009 compared with none for fiscal 2008 due to an income tax holiday.  Guanke was granted income tax exemption for two years commencing from January 1, 2007, and is subject to 50% of the 25% EIT tax rate, or 12.5%, from January 1, 2009 through December 31, 2011.

Net income

Net income increased $1.93 million, or 37.2%, to $7.16 million in fiscal year 2009 from $5.22 million in fiscal year 2008, as a result of the various factors described above. The net income margins were 10.6% and 11.9% for the fiscal years ended December 31, 2009 and 2008, respectively. The lower margin in 2009 was attributable to income taxes from which the Company was exempt in 2008; without the income tax effect, the comparable margin (pre-tax income) in 2009 was 12.1%.

Analysis of Financial Condition

 

Comparison as of March 31, 2010 and December 31, 2009

The advance to supplier increased to $28,726,525 as of March 31, 2010 from $11,950,074 as of December 31, 2009.  Such increase was to secure raw materials to support the growth of the Company's production output. The Company is in the process of building additional production lines and anticipates starting production on the new lines by the third quarter of 2010.  Advances are made based on future projection and will fluctuate throughout the year.  The Company evaluates new suppliers prior to conducting business.  The Company has not experienced situation where suppliers were not able to fulfill their obligations or where the Company was unable to recover the advances from the suppliers.

As of March 31, 2010, the Company had US$5.6 million in unrestricted cash and US$13.0 million in working capital.  As of December 31, 2009, the Company has US$5.8 million in unrestricted cash and US$7.8 million in working capital.  The current ratios were 1.22 as of March 31, 2010 and 1.17 as of December 31, 2009.

The Company’s plan is to increase liquidity and equity capitalization during 2010 through continued profitability and through an increase in capital, by issuing capital stock, an acquisition or other transaction.

Product Development

 

In 2009, Gunake initiated several product development initiatives aimed at meeting evolving market demand and at strengthening its position as a value-priced producer of branded LCD products:

(a)           Manufacturing plan for cost-efficient migration to larger screen sizes for LCD monitors and TVs up to a maximum of 52 inches. Management expects SGOCO’s market’s “sweet-spot” to move for monitors from 19” to 22” in 2009, to 22” to 29” in 2010, and for televisions from 22” to 26” in 2009, to 28” to 32” in 2010.

(b)           Design engineering and testing on several new products for future introduction based on market demand: All-In-One PC (PC integrated into LCD monitor); Internet TV (LCD TV with web browsing capability); Mobile Internet Devices such as Netbooks; Multi-Touch Screen Monitors; E-Readers; 3D LCD TVs; LED-backlit monitors; Large-scale, muti-screen Display Systems for advertising, public announcement, and other institutional uses.

(c)           Prototyping its own LED backlight module to replace conventional CFL backlights in a new family of thin LCD monitors. SGOCO also began work on developing a module design suitable for mass production on its existing tools.

Guanke has historically outsourced a significant portion of its product development to third-party design houses working on a project basis. This has allowed it to control engineering expenses while it increased revenues to a larger base. In 2010 and going forward, management anticipates bringing more of these critical engineering functions in-house. The scale of its future product development allows greater cost-efficiency in-house and also requires more control over its intellectual property.

 

The amount of research and development spending in recent periods are as follow:

Liquidity and Capital Resources

 

In 2009, Guanke’s aggressive sales and distribution expansion activities, coupled with its investment in a new manufacturing facility within SGOCO Technology Park, resulted in a significant increase in expenses. It met this requirement through a combination of additional capital contributions, bank financing, and government subsidies.

The 55% increase in revenues in 2009 was accompanied by a material slowing of accounts receivable turnover to 5.1x (i.e., 71 days average collection period or “ACP”) from 10.4x (i.e., 35 days ACP) in 2008. This was the result of modifying the previous years’ policy of requiring payment from customers at the time Guanke ships them products. In 2009, as a means of encouraging more sales, Guanke began allowing certain customers to defer payment until its products are delivered to them. However, Guanke maintained control over credit quality of its customers and, consequently, it was able to significantly increase sales without experiencing any losses on its accounts receivables.

Honesty Group’s 2009 inventory turnover rate improved significantly to 9.6x (i.e., 38 days on hand or “DOH”) from 6.4x (i.e., 57 DOH) in 2008. This was the result of better coordination between our sales and manufacturing departments and a revamping of its logistics system. The overall cash conversion cycle in 2009 was 109 days (ACP plus DOH). While this represents a reasonable cycle time, Guanke plans to manage its accounts receivable and inventory within a tighter, 90 to 100 days conversion cycle, in the future. Accounts payable turnover in 2009 was relatively stable at about 20.7x (i.e., 18 days average payment period) compared to the previous year. The relative speed with which SGOCO pays our vendors is largely a function of our desire to maintain continued, timely access to quality supplies of LCD panels, the critical component in all our products. To further ensure LCD panel supply, SGOCO secures allocations of future production by paying advances to key LCD panel suppliers, directly as well as through related entities that serve as our purchasing agents.

Honesty Group’s working capital requirement in 2009 was approximately $6.6 million, broken out as follows:

Also in 2009, Guanke undertook a significant scale-up of its manufacturing capacity in order to support rapid future growth. This required heavy investment in equipment, building, and the acquisition of land use rights for SGOCO Technology Park. The cash required by this investment program in 2009 was approximately $19.5 million broken out as follows: