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TROOPS(TROO) - 2019 Q4 - Annual Report
TROOPSTROOPS(US:TROO)2020-06-15 20:33

Part I Key Information The company's financial performance is marked by significant net losses and impairment charges, driven by strategic acquisitions and disposals across money lending, property, and fintech, alongside various operational and financial risks Selected Financial Data The company transformed into a conglomerate through acquisitions and disposals, experiencing volatile revenues and consistent net losses, primarily due to significant impairment charges - The company has a history of frequent and significant acquisitions and disposals, fundamentally changing its business focus over the years, including key transactions in energy saving, money lending, property, and fintech, alongside manufacturing divestitures1415 Consolidated Statement of Income (In thousands of U.S. Dollars) | | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net revenues | 5,525 | 1,580 | 51 | | Gross profit (loss) | 1,406 | (1,055) | (1,292) | | Operating loss from continuing operations | (41,673) | (14,318) | (9,126) | | Impairment loss of intangible assets | (18,893) | - | - | | Impairment loss of goodwill | (20,556) | (10,330) | (5,618) | | Net loss from continuing operations | (37,052) | (13,551) | (8,803) | | Net loss | (37,059) | (21,064) | (11,214) | | Net loss attributable to ordinary shareholders | (19,402) | (12,372) | (11,214) | | Loss per share (Basic) | (0.24) | (0.35) | (0.99) | Consolidated Balance Sheet Data (In thousands of U.S. Dollars) | As of December 31, | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total assets | 140,578 | 190,841 | 98,453 | | Total liabilities | 19,952 | 22,667 | 14,638 | | Total equity | 120,626 | 168,174 | 83,815 | Risk Factors The company faces substantial operational, regulatory, financial, and market risks, including COVID-19 impacts, increased scrutiny on fintech, significant impairment losses, and challenges to its NASDAQ listing - Business and Industry Risks: - COVID-19 Impact: The company's revenues, substantially generated in Hong Kong, are vulnerable to the economic effects of pandemics, potentially leading to reduced customer budgets, payment delays, and loss of customers21 - Regulatory Scrutiny: The newly acquired GFS (fintech) business faces increasing regulatory oversight in areas like anti-money laundering, data privacy, and licensing, which could lead to significant fines and operational changes2224 - Acquisition & Impairment Risk: Acquisitions like Boca have not produced anticipated benefits, leading to significant goodwill and intangible asset impairment losses ($20.6 million goodwill impairment in 2019). Future acquisitions carry similar risks3235 - Lending & Property Risks: The money lending business (FAF, Giant Credit) is subject to significant credit risk, interest rate fluctuations, and intense competition. The property investment business is sensitive to downturns in the Hong Kong real estate market4051 - Internal Controls: Management identified a material weakness in internal controls due to a lack of sufficient qualified accounting personnel with U.S. GAAP and SEC reporting experience57 - Share-Related Risks: - NASDAQ Listing: The company faces the risk of failing to meet NASDAQ's continued listing requirements, such as the minimum $1.00 bid price, which it previously failed to meet in 2018. Delisting would severely impact liquidity and share price62 - No Dividends: The company does not expect to pay dividends, meaning shareholder returns depend solely on share price appreciation, which is not guaranteed65 - Foreign Issuer Status: As a foreign private issuer incorporated in the Cayman Islands, the company is exempt from certain SEC reporting and governance rules, offering less protection to shareholders compared to U.S. domestic companies5367 Information on the Company SGOCO Group evolved into a Hong Kong-based conglomerate, operating in energy saving, money lending, property investment, and fintech, with intellectual property and operations subject to various regulations History and Development of the Company SGOCO transitioned from manufacturing to a diversified holding company through a series of strategic acquisitions in energy saving, money lending, property, and fintech from 2015 to 2020 - The company has a complex history of corporate restructuring, marked by a pivot away from manufacturing towards a diversified holding company structure707677 - A series of major acquisitions occurred between 2015 and 2020, shaping the current business focus: - Boca International (Mar 2016): Energy saving for $52 million cash and 1.16 million shares81 - Giant Credit Limited (Dec 2017): Money lending for 2.22 million shares83 - Paris Sky Limited (June 2018): Property investment, involving cash, shares, and asset transfers86 - Vision Lane Limited (Mar 2019): Property investment and money lending for $7.5 million cash and 4.52 million shares87 - Giant Financial Services (Jan 2020): Fintech solutions for $64.3 million, paid via cash, shares, and a promissory note88 Business Overview SGOCO operates as a conglomerate across four main segments: energy saving (Boca), money lending (Giant Credit, FAF), property investment, and fintech services (GFS) - The company's business is diversified across four main segments: 1. Energy Saving: Boca's PCM-TES storage systems for cooling and heating90 2. Money Lending: Personal and corporate loans in Hong Kong via Giant Credit and First Asia Finance (FAF)90 3. Property Investment: Holds four real properties and a 19-storey building in Hong Kong for rental income90 4. Fintech & IT Services: Development of a financial technology platform via Giant Financial Services (GFS)9092 Organizational Structure SGOCO Group, a Cayman Islands holding company, operates through multi-layered subsidiaries in Hong Kong, PRC, and US, managing energy, money lending, and property investment businesses - The company operates through a multi-layered holding structure with the parent company in the Cayman Islands and key operating subsidiaries based in Hong Kong, the Republic of Seychelles, and the Marshall Islands, which in turn hold the business assets in Hong Kong and the PRC103 Operating and Financial Review and Prospects Revenue growth from acquisitions is offset by substantial operating losses due to impairment charges, with the company relying on external financing and facing challenges in financial comparability due to frequent business transformations Operating Results In 2019, revenues grew significantly due to money lending and property acquisitions, but a substantial net loss of $37.06 million was driven by massive impairment charges on intangible assets and goodwill, primarily from the Boca segment Revenue by Major Product Line (In thousands of U.S. Dollars) | Product Line | 2019 | 2018 | | :--- | :--- | :--- | | Interest on loans | 3,930 | 980 | | Property lease and management | 1,185 | 590 | | Provision of energy saving services | 402 | - | | Product sales | 8 | 10 | | Total | 5,525 | 1,580 | - The company recorded significant impairment losses in 2019, which were the primary drivers of its net loss: - Impairment of intangible assets: $18.89 million, primarily related to the proprietary technology of Boca145 - Impairment of goodwill: $20.56 million, also primarily attributable to the underperformance of the Boca (green energy) reporting unit146 - General and administrative expenses increased by 81.9% to $4.35 million in 2019 from $2.39 million in 2018, mainly due to the administrative costs of newly acquired subsidiaries Vision Lane and FAF144 - Loss from discontinued operations, related to the Century Skyway (VR) business, was $0.01 million in 2019, down from $7.51 million in 2018. The 2018 loss was mainly due to amortization and goodwill impairment of Century Skyway148 Liquidity and Capital Resources As of December 31, 2019, the company had $5.16 million in cash and $40.74 million in working capital, relying on external financing, with operating cash flow turning positive in 2019 despite significant debt obligations Summary of Cash Flows (In thousands of U.S. Dollars) | | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | 3,115 | (36,174) | (7,977) | | Net cash (used in) provided by investing activities | (19,265) | (10,402) | 7,400 | | Net cash provided by financing activities | 6,964 | 56,146 | 5,325 | | (DECREASE) INCREASE IN CASH | (9,186) | 9,570 | 4,748 | - The company relies on external financing. In 2019, it secured a bank loan of $6.4 million. In 2018, it raised approximately $50.15 million from a rights offering and $5.78 million from convertible notes155157161 - As of Dec 31, 2019, the company had significant debt obligations, including $6.4 million in bank loans, $4.26 million in other loans from unrelated parties, and a liability component of convertible notes161 Contractual Obligations As of December 31, 2019, total contractual obligations were $15.28 million, with the majority ($7.91 million) due in more than five years, primarily long-term bank loans Contractual Obligations as of December 31, 2019 (In thousands of U.S. Dollars) | | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term bank loans | 6,410 | 155 | 334 | 360 | 5,561 | | Future interest payment on bank loans | 3,480 | 246 | 456 | 431 | 2,347 | | Other loan - unsecured | 3,877 | 3,877 | - | - | - | | Other Obligations | 1,508 | 954 | 109 | 66 | - | | Total | 15,275 | 5,612 | 899 | 857 | 7,908 | Directors, Senior Management and Employees This section outlines the company's leadership, compensation, and governance, noting recent changes, a five-member board, 11 employees, and concentrated share ownership among key principal shareholders - As of December 31, 2019, the company had 11 full-time employees, all in management and administration192 Principal Shareholders (as of June 10, 2020) | Name | Number of Shares | Percent | | :--- | :--- | :--- | | Victor Or | 16,356,500 | 17.0% | | Prime Ocean Holdings Limited | 29,000,000 | 30.2% | | Leung Iris Chi Yu | 23,132,500 | 24.1% | Major Shareholders and Related Party Transactions Ownership is highly concentrated among three principal shareholders, with significant related party transactions, notably $21.3 million in loans receivable from shareholder Victor Or and payments for IT services - The company has significant related party transactions with shareholder Victor Or. The company's subsidiary, GCL, provided multiple loans to Mr. Or and other parties195 Loans to Shareholder Victor Or and other parties | Date | Amount | Status as of Dec 31, 2019 | | :--- | :--- | :--- | | Sep 26, 2018 | HK$11.5M ($1.5M) | Outstanding, term extended to Sep 2020 | | Sep 26, 2018 | HK$116.5M ($14.9M) | Outstanding, term extended to Sep 2020 | | Oct 3, 2018 | HK$20.0M ($2.6M) | Repaid in 2019 | | Mar 14, 2019 | HK$7.0M ($0.9M) | Repaid in 2019 | | Nov 1, 2019 | HK$38.0M ($4.9M) | Outstanding, maturing Oct 2020 | - As of December 31, 2019, total loans receivable due from Mr. Or and two other unrelated parties amounted to $21.3 million (HK$166.0 million)195 - In 2019, the company paid GFS (acquired from Victor Or in Jan 2020) $1.58 million for IT consultancy and support services195 Quantitative and Qualitative Disclosure about Market Risk The company faces significant market risks, including credit risk from concentrated lending, unhedged foreign exchange risk from RMB exposure, and interest rate risk from floating-rate borrowings, with a 100 basis point change impacting pre-tax loss by $0.06 million - Credit Risk: A significant risk from lending activities, concentrated geographically in Hong Kong. The company requires collateral to minimize risk, but has high customer concentration227228 - Foreign Exchange Risk: The company is exposed to fluctuations between the RMB and the USD, as a portion of its earnings and assets are in RMB. The company does not currently use hedging transactions to mitigate this risk229 - Interest Rate Risk: Arises from bank borrowings with floating rates. A 100 basis point (1%) change in interest rates is estimated to impact pre-tax loss by $0.06 million as of December 31, 2019230 Part II Controls and Procedures Management concluded that disclosure controls and procedures were not effective as of December 31, 2019, due to material weaknesses in internal control, including insufficient qualified accounting personnel and inadequate review functions, with remediation efforts underway - Management concluded that disclosure controls and procedures were not effective as of December 31, 2019232 - Material weaknesses in internal control were identified: - Lack of sufficient qualified accounting personnel with appropriate understanding of U.S. GAAP and SEC reporting requirements - Insufficient internal control personnel to set up adequate review functions at each reporting level - Limited written documentation on monitoring loan risk assessment on a regular basis233 - Remediation measures include seeking additional accounting staff, hiring a permanent CFO, providing further training, and implementing more stringent documentation for credit risk235 - The annual report does not include an attestation report from the registered public accounting firm on internal control over financial reporting, as the company is a non-accelerated filer236 Part III Financial Statements This section presents the audited consolidated financial statements for 2017-2019, prepared under U.S. GAAP with an unqualified opinion, reflecting the company's complex structure, discontinued operations, significant related party loans, and substantial goodwill impairments - The independent registered public accounting firm, Centurion ZD CPA & Co., provided an unqualified opinion on the consolidated financial statements252 Notes to Consolidated Financial Statements The notes detail discontinued operations (CSL), significant related party loans (Victor Or), a history of numerous acquisitions, substantial goodwill and intangible asset impairments (Boca, CSL), and a high concentration of credit risk - Note 3 - Discontinued Operations: The operations of Century Skyway Limited (CSL) were reported as discontinued operations following a plan to dispose of the remaining 51% interest, which was completed on December 31, 2019306 - Note 8 - Acquisitions: The company has engaged in numerous business combinations, acquiring Boca (energy), CSL (VR), GCL (lending), Paris Sky (property), Vision Lane (lending/property), and GFS (fintech), which has fundamentally reshaped its balance sheet and operations326331335 - Note 11 - Goodwill: The company recognized significant goodwill impairment losses from continuing operations (related to Boca) of $20.56 million in 2019, $10.33 million in 2018, and $5.62 million in 2017 due to underperformance of the green energy segment349351 - Note 25 - Concentration of Risks: There is a high concentration of credit risk. As of Dec 31, 2019, loans receivable due from one customer (shareholder Victor Or) accounted for 52% of the total loan receivable balance385