By Mak Yuen Teen
On March 1, YuuZoo Corporation (YuuZoo) announced its 2017 4Q and full year results. Four days later, SGX issued a list of queries and a notice of compliance relating to these results. SGX also asked YuuZoo to correct errors in its results announcement.
The notice of compliance relates to two items. First, “other income” increased from $159,000 in 4Q 2016 to $8 million in 4Q 2017. YuuZoo had recognised a gain of nearly $8m from the “bargain purchase of assets” for YuuLog France. During 4Q 2016, it had paid $135,000 to purchase property, plant and equipment. Second, while impairment of assets available for sale (AFS) has increased from $4.46 million to $17.53 million between 4Q 2016 and 4Q 2017 (and between FY 2016 and FY2017), AFS on the balance sheet for the full year has increased from $33.25 million to $$54.24 million. AFS are shares issued by franchisees for network sales. If there is such a large increase in impairment of AFS this quarter and FY, the question arises as to whether AFS on the balance sheet are overstated. I would expect the auditors to challenge these when they audit the annual financial statements, so I am pleased that SGX is asking them to get the auditors to review these now.
Copyright for cartoon belongs to Mak Yuen Teen
If we compare the unaudited 4Q 2016 results which the company has shown as comparatives in its latest results announcement with the 4Q 2016 results the company announced last year, the numbers are totally different. The unaudited full year numbers announced by the company last year are also very different from the audited numbers that eventually appeared in the annual report. This suggests that the company’s unaudited results cannot be relied upon. I was surprised that last year, the auditors only raised two emphasis of matter issues and did not modify its opinion even though it highlighted a long list of key audit matters. The company may not be so lucky this year.
There are other big changes in the numbers between 4Q 2017 and 4Q 2016, and between FY2017 and FY2016, that need to be explained.
We also see a tax expense in the income statement for 4Q 2017 and the FY 2017. This is the first time that it has shown any tax expense. Why was there no tax expense shown in previous years?
Note 1(d)(ii) on page 8 shows the changes in the share capital account. The note mentions the issuance of shares which has to do with YuuZoo’s drawdown arrangement with GEM Global Yield Fund. On October 26, 2017, YuuZoo had announced the issue of 10 million shares but this is not reflected in the changes in capital. YuuZoo had been issuing shares below its par value of US$0.10. It is incorporated in Bermuda, where shares must have a par value and issue of shares below par value is not allowed. What happened to the 10 million shares that the company announced that it had issued on October 26? And what about the past issuances that it had made that were apparently not in compliance with the Bermuda Companies Act?
The company said on page 10 that the decrease in revenue for 4Q 2017 was mainly due to reduced franchise and celebrity branded network sales. If we look at the segmental breakdown for 2017 (the company had typos there, stating them as 2016 and 2015, instead of 2017 and 2016), it shows that e-commerce revenue was $3.861m. That’s a huge drop from the $51.827m in the audited FY2016 results. Why is there no explanation for the huge year-on-year drop in e-commerce revenue?
There have been other recent announcements where information was lacking. For example, on December 21, the company issued a one-paragraph announcement about signing some framework agreement in China with a PRC company for the development of a real estate project in Harbin. There was no other information given. This looks like possible diversification into a totally new business. On December 28, it responded to queries from SGX about a new JV it was forming in Harbin – basically its response to SGX was “we have nothing more to tell you”. How are investors supposed to interpret such announcements? Without sufficient information, disclosures can be misleading.
From time to time, the company announces very positive information about downloads of its games. One of them was a game called “Unstoppable Rex”. The company talked about number of downloads/users and average revenue per paying user. How many users actually pay? How much revenues did YuuZoo actually earn from such games?
The company continues to have turnover of directors and key officers. Last October, it made a big deal about the appointment of two additional independent directors from Finland. One of them has now resigned after less than 5 months, citing lack of time and the fact that YuuZoo’s operations are located outside the country where he resides. They also have a new head of legal. Its latest CFO – the 7th one since its listing – does not appear to have an accounting background.
On March 7, YuuZoo held a dialogue session that was moderated by SIAS. At the session, it announced that its real estate project in Harbin with a PRC joint venture partner could have a market value exceeding $4 billion when fully completed. It also said that revenue from YuuZoo’s French operations could reach $600 million annually from the current entertainment products alone. These sound even more epic than the Relativity Media deal that sunk without a trace. All these from a company with a market cap of $30 million. Some company may have to make way for YuuZoo on the Straits Times Index soon. Clearly, these numbers must be queried by SGX.
Meanwhile, as the market eagerly awaits the completion of the third party review by Ernst & Young, YuuZoo continues to explore new frontiers, going where no company has gone before.
