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TROOPS(TROO) - 2020 Q4 - Annual Report
TROOPSTROOPS(US:TROO)2021-07-06 16:00

Part I Key Information This section summarizes the company's financial data, capitalization, and significant risk factors, highlighting a history of strategic shifts, substantial net losses from impairment charges, and key risks including COVID-19, regulatory scrutiny, and internal control weaknesses Selected Financial Data The company has undergone significant strategic changes through numerous acquisitions and disposals, shifting its focus towards money lending, property investment, and fintech, resulting in a substantial net loss of $67.9 million in 2020 primarily due to a $59.4 million goodwill impairment - The company has a complex history of acquisitions and disposals, reflecting a significant and ongoing strategic transformation, with key recent acquisitions including Giant Financial Services (GFS) in 2020, Vision Lane Limited in 2019, and Paris Sky Limited in 2018, pivoting towards fintech, money lending, and property investment15 Selected Consolidated Statement of Operations Data (in thousands of U.S. Dollars) | Indicator | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net revenues | 4,293 | 5,115 | 1,570 | | Gross profit (loss) | (1,066) | 2,734 | 313 | | Operating loss from continuing operations | (67,342) | (732) | (2,461) | | Impairment loss of goodwill | (59,440) | - | - | | Net loss attributable to ordinary shareholders | (67,918) | (19,402) | (12,372) | | Loss per share (Basic & Diluted) | (0.69) | (0.24) | (0.35) | Selected Consolidated Balance Sheet Data (in thousands of U.S. Dollars) | Indicator | 2020 | 2019 (Restated) | 2018 | | :--- | :--- | :--- | :--- | | Total assets | 90,130 | 139,717 | 189,380 | | Total liabilities | 19,503 | 19,952 | 22,667 | | Total equity | 70,627 | 119,765 | 166,713 | Risk Factors The company faces a multitude of risks across its business segments, including adverse effects from COVID-19, increased regulatory scrutiny for its fintech and money lending operations, significant financial risks, identified material weaknesses in internal controls, and challenges for investors protecting rights under Cayman Islands law - The business is exposed to significant risks from health epidemics like COVID-19, which could reduce customer budgets, delay payments, and disrupt partner operations, materially impacting revenue and financial condition22 - The company's fintech (GFS) and money lending (FAF, Giant Credit) subsidiaries face substantial regulatory risks, including increased oversight, potential fines for non-compliance with anti-money laundering and data privacy laws, and the need to maintain money lenders licenses232541 - The company has identified several material weaknesses in its internal control over financial reporting, including a lack of documented loan risk assessment, insufficient controls for credit risk monitoring, and inadequate procedures for handling past-due loans and related-party transactions5859 - The company faces a risk of being delisted from NASDAQ for failing to timely file its Annual Report on Form 20-F for the year ended December 31, 2020, having received a deficiency notice on May 18, 20216263 - As a Cayman Islands company, shareholders may have difficulty protecting their interests, as their rights are governed by a less developed body of securities law compared to the U.S., and the company can follow home country governance practices that may offer less protection6769 Information on the Company SGOCO Group, Ltd. is a Hong Kong-based conglomerate that evolved from a blank check company into a diversified holding company, focusing on money lending, property investment, and fintech services, with a property portfolio valued over $52 million as of December 31, 2020 History and Development of the Company SGOCO, originally a blank check company, underwent significant transformation through strategic M&A, divesting manufacturing to pivot into finance and property with key acquisitions like Giant Credit, Paris Sky, Vision Lane, GFS, and Apiguru, reflecting a dynamic growth strategy - The company transitioned from a manufacturing-focused entity to a 'light-asset' model after selling Honesty Group in 2011 and SGOCO (Fujian) in 20147677 - From 2017 to 2020, the company aggressively expanded into financial services and property investment through multiple acquisitions, including Giant Credit (money lending), Paris Sky (property), Vision Lane (property and money lending), and Giant Financial Services (fintech)83858788 - In 2020, the company acquired Giant Financial Services Limited (GFS) for $64.34 million and Apiguru Pty Ltd for $0.59 million to build out its fintech capabilities, including an online financial marketplace and API consulting services8889 Business Overview SGOCO Group operates as a conglomerate with three principal business lines: money lending in Hong Kong, property investment for rental income, and fintech services through Giant Financial Services (GFS) and its subsidiary Apiguru - The company's business is structured as a conglomerate with three main pillars: Money lending in Hong Kong, Property investment for rental income, and Fintech solutions and services91 - The money lending business, operated via Giant Credit and First Asia Finance, targets personal and corporate loans, capitalizing on demand created by stringent policies from traditional financial institutions93 - The fintech arm, Giant Financial Services (GFS), provides an online financial marketplace and leverages technologies like AI, big data, and blockchain, with its subsidiary Apiguru specializing in API strategy and implementation to expand the customer base93 Organizational Structure SGOCO Group, Ltd., a Cayman Islands parent, holds a diverse portfolio of wholly-owned subsidiaries, including SGOCO International (HK) Limited (holding GFS and Apiguru) and Giant Connection Limited (holding money lending and property investment assets like Giant Credit and Paris Sky) Key Subsidiaries and Ownership | Subsidiary | Place of Incorporation | Ownership Percentage | | :--- | :--- | :--- | | SGOCO International (HK) Limited | Hong Kong | 100% | | Giant Financial Services Limited ("GFS") | Samoa | 100% | | Apiguru Pty Ltd. ("Apiguru") | Australia | 100% | | Giant Connection Limited | Republic of Seychelles | 100% | | Giant Credit Limited ("GCL") | Hong Kong | 100% | | Paris Sky Limited | Marshall Islands | 100% | Property, Plant, and Equipment The company's primary physical assets are investment properties in Hong Kong, held through subsidiaries, with a total carrying value of approximately $52.04 million as of December 31, 2020 Carrying Value of Land and Property by Subsidiary (as of Dec 31, 2020) | Subsidiary | Carrying Value (in millions of U.S. Dollars) | | :--- | :--- | | Suns Tower | $47.67 | | 11 Hau Fook Street Limited | $2.81 | | Vision Lane | $1.10 | | Giant Credit | $0.46 | | Total | $52.04 | Operating and Financial Review and Prospects This section details the company's financial performance, liquidity, and contractual obligations, highlighting a significant decline in 2020 revenue and a net loss of $67.9 million due to goodwill impairment, with liquidity sourced from operations and financing, and significant related-party transactions Operating Results In fiscal year 2020, revenue decreased 16.1% to $4.29 million, resulting in a gross loss and a net loss of $67.92 million primarily due to a $59.44 million goodwill impairment, contrasting with 2019's 226.1% revenue growth driven by money lending and property leases Revenue by Segment (2020 vs. 2019, in millions of U.S. Dollars) | Revenue Source | 2020 | 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Interest on loans | $1.67 | $3.93 | -57.5% | | Property lease and management | $1.13 | $1.19 | -5.0% | | Financial technology solutions and services | $1.50 | $0.00 | N/A | | Total Revenue | $4.29 | $5.12 | -16.1% | - The company recorded a goodwill impairment of $59.44 million and an intangible asset impairment of $1.23 million in 2020, both primarily related to the GFS acquisition, as its financial performance fell below original expectations158 - In 2019, revenue grew significantly by 226.1% to $5.12 million compared to 2018, mainly due to increased income from money lending services and property leases following recent acquisitions161 - Loss from discontinued operations was a major factor in 2019 results, totaling $36.12 million, primarily from impairment charges related to the Boca and Century Skyway businesses158164 Liquidity and Capital Resources As of December 31, 2020, the company held $3.03 million in cash and $18.21 million in working capital, with net cash from operating activities at $21.64 million, while investing activities used $27.17 million, and financing provided $3.43 million Summary of Cash Flows (in thousands of U.S. Dollars) | Cash Flow Activity | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net cash from Operating Activities | 21,639 | 3,349 | (36,882) | | Net cash used in Investing Activities | (27,170) | (18,825) | (7,960) | | Net cash from Financing Activities | 3,431 | 6,263 | 56,146 | | (Decrease) Increase in Cash | (2,133) | (9,186) | 9,570 | - As of December 31, 2020, the company had cash and cash equivalents of $3.03 million and working capital of $18.21 million166 - The company had significant related party transactions with Victor Or (seller of GFS), including providing multiple loans totaling $9.47 million outstanding as of year-end 2020, and issued a promissory note for the GFS acquisition which was fully repaid by March 2021174175 Contractual Obligations As of December 31, 2020, the company had total contractual obligations of approximately $8.45 million, primarily long-term bank loans and associated future interest payments, with over $6.3 million due in more than five years Contractual Obligations as of December 31, 2020 (in thousands of U.S. Dollars) | Obligation | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term bank loans (current & non-current) | 6,240.5 | 200.7 | 414.5 | 432.5 | 5,192.9 | | Future interest payment on bank loans | 1,752.5 | 122.1 | 252.4 | 234.4 | 1,143.6 | | Advances from other/unrelated parties | 445.2 | 445.2 | - | - | - | | Convertible notes – future interest payment | 16.0 | 4.6 | 11.4 | - | - | | Total | 8,454.2 | 772.6 | 678.3 | 666.9 | 6,336.5 | Directors, Senior Management, and Employees This section details the company's governance and human capital structure, including its five-member Board of Directors, executive compensation for 2020, board committees, and major shareholders, noting 14 full-time employees at year-end 2020 Directors and Senior Management As of December 31, 2020, the company's leadership consisted of a five-member Board of Directors and a senior management team including Raleigh Siu Lau as CEO & President, Tommy Wing Ling LUI as CTO, and Xiao-Ming HU as Interim CFO - The Board of Directors consists of five members: Jason Che Wai AU, Lai Man CHEUNG, Wood Shing Kei SZE, Wang Tai Dominic LI, and Mark Leonard TAN180 - Key executive officers include Raleigh Siu LAU (Chief Executive Officer and President), Tommy Wing Ling LUI (Chief Technology Officer), and Xiao-Ming HU (Interim Chief Financial Officer)180183 Compensation Executive compensation for 2020 included approximately $0.1 million in cash and $0.68 million in share-based compensation, utilizing the 2010 and 2016 Omnibus Equity Plans to attract and retain talent through various equity incentives Executive and Director Compensation (FY 2020) | Compensation Type | Amount (in millions of U.S. Dollars) | | :--- | :--- | | Aggregate Cash Compensation (Executive Officers) | ~$0.1 | | Share-Based Compensation (Directors & Executive Officers) | $0.68 | - The company has two primary equity incentive plans: the 2010 Equity Incentive Plan and the 2016 Omnibus Equity Plan, which allow for granting options, restricted shares, and other awards to eligible persons187191 Board Practices The Board of Directors comprises five members, with three independent directors meeting NASDAQ standards, and maintains Audit, Compensation, and Nominating Committees, all composed of independent directors, with Mr. Sze designated as the audit committee financial expert - The Board has five directors, three of whom (Mr. Sze, Mr. Au, Mr. Li) are considered independent under NASDAQ rules195199 - The company maintains three board committees: Audit, Compensation, and Nominating, all composed of independent directors201 - Mr. Sze serves as the Audit Committee Chairperson and is designated as the 'audit committee financial expert'201 Share Ownership As of June 30, 2021, the company's ownership was concentrated among major shareholders, with Prime Ocean Holdings Limited holding 28.7% and Leung Iris Chi YU 22.8%, while executive officers held less than 1% each Principal Shareholders (as of June 30, 2021) | Shareholder | Number of Shares | Percentage | | :--- | :--- | :--- | | Prime Ocean Holdings Limited | 29,000,000 | 28.7% | | Leung Iris Chi YU | 23,132,500 | 22.8% | - Beneficial ownership for executive officers and directors was generally less than 1% each, with CEO Raleigh Siu LAU holding 1,000,000 shares and CTO Tommy Wing Ling LUI holding 500,000 shares204 Major Shareholders and Related Party Transactions This section details the company's concentrated ownership and significant related party transactions, particularly the extensive financial relationship with Victor Or, the GFS seller, including $9.47 million in outstanding loans as of year-end 2020, highlighting concentrated credit risk - The company has significant related party transactions with Victor Or, the seller of its GFS subsidiary, including a promissory note issued to him as part of the acquisition and multiple loans extended to him by the company208 - As of December 31, 2020, loans receivable from Mr. Or and two other unrelated parties totaled HK$73.84 million ($9.47 million), representing 39.9% of the company's total loans receivable209408 - The company also had cash deposits of HK$6.74 million ($0.86 million) in Alpen Baruch Bank Limited, an international bank in which Mr. Or owned a 75% stake211 Financial Information This section confirms the full consolidated financial statements are in Item 18, notes no significant pending legal proceedings, and states the company has no plans for cash dividends, intending to retain earnings for expansion, subject to PRC regulations - The company is not currently party to any pending legal proceedings expected to have a significant effect on its business213 - The company has no plans to pay cash dividends in the foreseeable future and intends to retain earnings for business operations and expansion, with payments also restricted by PRC regulations on subsidiary profit distribution213 Additional Information This section covers legal and regulatory matters, including the company's Cayman Islands incorporation, taxation for shareholders in various jurisdictions, and the significant risk of being classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes - The company is incorporated in the Cayman Islands, which currently levies no taxes on corporate profits, income, or gains218 - For U.S. federal income tax purposes, there is a significant risk that the company could be treated as a Passive Foreign Investment Company (PFIC), potentially resulting in adverse tax consequences for U.S. Holders, including gains taxed at ordinary income rates plus an interest charge56233 - The company believes it was likely a PFIC for its 2008 and 2009 taxable years and that there is a risk it could be treated as a PFIC for 2018 and 2019, though it does not expect to be for the year ended Dec 31, 2018233 Quantitative and Qualitative Disclosure About Market Risk The company's primary market risk is credit risk concentration in its money lending business, with significant exposure to a related party, Victor Or, and high geographical concentration of revenue in Hong Kong, alongside deposit institution risk in Vanuatu - The company has significant credit risk concentration, with loans to three customers representing 16%, 15%, and 39.9% of the total loan receivable as of December 31, 2020, and the largest exposure to a related party, Victor Or248 - There is also a high concentration of customer revenue, with two major customers accounting for 19% and 10% of total revenues in 2020, and one major customer (Victor Or) accounting for 21% of total revenues in 2019248 - The business is geographically concentrated, with 98.6% of its 2020 revenue ($4.235 million out of $4.293 million) generated in Hong Kong249 - The company faces deposit institution risk, with HK$8.17 million ($1.05 million) held in Alpen Baruch Bank in Vanuatu as of June 30, 2021, a jurisdiction without a deposit protection scheme250 Part II Controls and Procedures Management concluded that the company's disclosure controls and procedures were not effective as of December 31, 2020, due to several material weaknesses in internal control over financial reporting, primarily related to loan risk management, for which remediation measures are being implemented - Management concluded that the company's disclosure controls and procedures were not effective as of December 31, 2020252 - Several material weaknesses were identified in internal controls, primarily related to the money lending business, including limited written documentation for loan risk assessment, insufficient controls for post-loan credit risk monitoring, lack of controls for monitoring past-due principal and interest, insufficient policy on loan term extensions and troubled loan restructuring, and lack of controls on loans with related parties and monitoring concentration risk254 - Another material weakness identified was the lack of sufficient qualified accounting personnel with an appropriate understanding of U.S. GAAP and SEC reporting requirements254 - Remediation plans include hiring additional accounting staff, providing further training, engaging professional consultants, and implementing more stringent documentation and monitoring procedures for the money lending operations254 Principal Accountant Fees and Services The company paid its principal external independent registered public accounting firms $247,233 in 2020 and $230,376 in 2019, exclusively for audit services, with all services pre-approved by the Audit Committee Accountant Fees (in U.S. Dollars) | Fee Category | 2020 | 2019 | | :--- | :--- | :--- | | Audit Fee | $247,233 | $230,376 | | Audit-Related Fees | - | - | | Tax fees | - | - | | Total | $247,233 | $230,376 | Changes in Registrant's Certifying Accountant On January 11, 2021, SGOCO Group dismissed Centurion ZD CPA & Co. and appointed Yu Certified Public Accountant, P.C as its new auditor, with no disagreements reported, though material weaknesses in internal control were considered "reportable events" during the former auditor's tenure - On January 11, 2021, the company dismissed its auditor, Centurion ZD CPA & Co. ("CZD")259 - On the same day, the company appointed Yu Certified Public Accountant, P.C ("Yu CPA") as its new independent registered public accounting firm259 - There were no disagreements with the former auditor, but the previously disclosed material weaknesses in internal control were considered "reportable events" under SEC rules259 Part III Financial Statements The audited consolidated financial statements for 2020, audited by Yu Certified Public Accountant, P.C., reflect a net loss of $67.9 million and highlight critical audit matters including goodwill impairment and CECL, with 2018 and 2019 statements restated for share-based compensation errors - The auditor's report from Yu Certified Public Accountant, P.C. for FY2020 identified two Critical Audit Matters: Goodwill Impairment Assessment and Allowance for current expected credit losses ("CECL") on receivables277278281 - The financial statements for the years ended December 31, 2019 and 2018 were restated to correct an error in the accounting treatment of unvested restricted stock, which decreased additional paid-in-capital and total equity418419 Consolidated Balance Sheet Highlights (in thousands of U.S. Dollars) | Account | Dec 31, 2020 | Dec 31, 2019 (Restated) | | :--- | :--- | :--- | | Cash | 3,028 | 5,126 | | Loans receivable, net | 22,096 | 33,886 | | Goodwill | 5,107 | 3,906 | | Total Assets | 90,130 | 139,717 | | Total Liabilities | 19,503 | 19,952 | | Total Equity | 70,627 | 119,765 | Consolidated Statement of Comprehensive Loss Highlights (in thousands of U.S. Dollars) | Account | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Revenues | 4,293 | 5,115 | 1,570 | | Gross Profit (Loss) | (1,066) | 2,734 | 313 | | Impairment loss of goodwill | 59,440 | - | - | | Net Loss from Continuing Operations | (67,923) | (943) | (1,881) | | Net Loss | (67,918) | (37,059) | (21,064) |