Background

I do not and have never owned shares in YuuZoo (and do not short shares). I attended the YuuZoo AGM held on July 7, 2017, as a proxy of a small retail shareholder and prepared a number of questions relating to the financial statements and auditors’ report, most of which I did ask.

For the benefit of YuuZoo shareholders who were not present at the AGM, I have reproduced the questions below.

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A. Return of franchises from YZ Group

According to the 2016 AR, YuuZoo sold franchises to YZ Group in 2013 before the RTO and recorded receivables. There was no repayment of the receivables in 2014.  There was partial “repayment” through unquoted shares issued to settle $2.12m of the receivables in 2015 (p 46, note B (iii))

YZ Group is controlled by Mark Cramer-Roberts, who is director of YuuZoo Nigeria, a subsidiary of YuuZoo.

The AR says that YZ Group returned franchises valued at $14.8 million in 2015. It appears that these were not recorded in the 2015 accounts and hence the 2015 FS are now restated for “correction of errors”.

YZ Group received full credit for the returned franchises against its receivables.

The remaining receivables of $2.4m from YZ Group are now impaired.

The returned intangible assets (basically platforms) are then put back on the balance sheet under the restated 2015 FS.

Questions:

  1. How was such a large transaction (return) missed by management and the auditors in preparing the accounts in 2015?
  2. Did YZ Group have essentially an unlimited right of return with full credit when they bought the franchises in 2013? If so, should revenues have been recognised in 2013 before the RTO?
  3. If not, why are they now allowed to return franchises that are intangible assets with a useful life of 2 years (based on amortisation period) and to offset that fully against receivables?
  4. Can you explain what the return of a franchise and platforms actually entail? What are the customers actually returning as they are intangible assets? Are they returning the right to use the platform? Can they actually be resold to someone else? If not, should they not be fully written off upon return? (not asked)
  5. Are other franchise sales done on similar terms with full right of return?
  6. When the franchises were returned, they were recorded as additions to intangible assets (essentially under platforms). However, no corresponding impairment charge was made in 2015. About half the amount was amortised in 2016. How can such assets that fall so rapidly in value not be impaired in 2015 when they were “returned”?

 

B. Other Questions – EOMs and KAMs

YZ recognises revenue from YuuCollect on a gross basis. Under EOM1, the auditor has stated that significant judgement is required in assessing whether revenue should be recognised on a gross basis, or a net basis, based on the requirements in FRS18.

  1. You seem to agree with management judgement that the conditions for recognising revenue on a gross basis are satisfied. Is this a fair statement? (question to the auditors)
  2. Can you explain how YuuCollect is different from other e-commerce platforms for which only the commission is recognised as revenue? How have you challenged management’s judgement on this matter? (questions to the auditor)

The AFS amount stood at $33.3 m and represents the fair value of unquoted shares issued by franchisees determined using the cost approach. The EOM states that they relate to 11 entities, 9 formed in 2015 and 2 in 2016. There was no impairment because management feels that it will take time to assess the performance and/or impairment.

  1. Clearly, the ability of the franchisees to generate future income would depend on their track record and capabilities. Did you assess these aspects to satisfy yourself that no impairment is necessary? Based on past record of franchisees that were sold for cash/credit before 2015, have they being able to meet expectations in terms of generating future income? (questions to the auditors)

There is a full impairment of $4.68m for the investment in RS Media and Entertainment Group (RSMEG). The investment was made only a year ago – in October 2015 through the purchase of a 5% stake.

There have been numerous impairments for investments shortly after their investment – RSMEG, IAH, Etisalat, possibly Relativity.

  1. What is the process for making such investment decisions? Are such investments deliberated and approved by the board? Why is there often full impairment just one year after the investment?
  2. RSMEG – Full impairment is taken because it was felt that the other shareholder of RSMEG may not be in a financial position to re-acquire the 5% back. Is this the only way that the investment can realise its fair value? Can’t the 5% be sold to another party? Is RSMEG profitable or does it have reasonable prospects for being profitable, in which case, surely its value in use/recoverable amount should not be zero?  (questions to the auditors)

Mak Yuen Teen