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TROOPS(TROO) - 2022 Q4 - Annual Report
TROOPSTROOPS(US:TROO)2023-04-30 16:00

PART I Key Information This section presents selected financial data for 2020-2022, highlighting a significant net loss reduction in 2022, and outlines comprehensive business and share-related risks Selected Financial Data Net loss significantly decreased to $0.35 million in 2022, primarily due to reduced goodwill impairment, while revenues slightly increased to $3.88 million Consolidated Statement of Income (In thousands of U.S. Dollars) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | REVENUES | 3,875 | 3,683 | 4,293 | | GROSS PROFIT (LOSS) | 822 | 360 | (1,066) | | OPERATING LOSS | (536) | (8,805) | (67,342) | | NET LOSS | (346) | (8,413) | (67,918) | | Basic and Diluted Loss per share | (0.01) | (0.08) | (0.69) | Consolidated Balance Sheet Data (In thousands of U.S. Dollars) | | As of Dec 31, 2022 | As of Dec 31, 2021 | As of Dec 31, 2020 | | :--- | :--- | :--- | :--- | | Total assets | 69,686 | 70,346 | 90,130 | | Total liabilities | 7,482 | 7,822 | 19,503 | | Total equity | 62,204 | 62,524 | 70,627 | Risk Factors The company faces significant business, operational, and share-related risks, including intense competition, regulatory scrutiny, and potential delisting - The company's financial services arm, GFS, is subject to increasing regulatory scrutiny regarding privacy and data protection, particularly under the PRC Data Security Law, which could lead to significant fines or operational changes5356 - The money lending subsidiaries (FAF and Giant Credit) face significant credit risks from borrowers, intense competition in the Hong Kong market, and are subject to the Money Lenders Ordinance, which caps interest rates767983 - The company identified several material weaknesses in its internal control over financial reporting as of December 31, 2021, including insufficient controls in loan risk assessment and a lack of qualified accounting personnel with U.S. GAAP and SEC reporting experience9394 - The company is exposed to risks related to the Holding Foreign Companies Accountable Act (HFCAA); while its current auditor is PCAOB-inspected, its predecessor was not, and recent legislation has reduced the non-inspection period for delisting from three to two years, increasing the risk to investors105110 - The PRC government may intervene in business operations or exert more control over overseas listings; if future approval from authorities like the CSRC or CAC is needed and denied, the company may be unable to continue listing on U.S. exchanges122130 Information on the Company TROOPS, Inc. is a Hong Kong-based conglomerate with a history of strategic acquisitions, operating in money lending, property investment, and fintech services History and Development of the Company TROOPS, Inc. originated as a blank check company in 2007, evolving through strategic acquisitions and disposals to focus on money lending, property investment, and fintech - The company was incorporated in 2007 as a blank check company and acquired Honesty Group in 2010180 - The company transitioned to a "light-asset" model by selling its manufacturing arm, Honesty Group, in 2011 and SGOCO (Fujian) in 2014192196198 - From 2017 to 2020, the company built its current portfolio by acquiring several businesses in money lending (Giant Credit, First Asia Finance), property investment (11 Hau Fook Street, Paris Sky, Vision Lane), and fintech (Giant Financial Services, Apiguru)207208209211213 Business Overview TROOPS, Inc. operates three main segments: money lending, property investment, and fintech/IT services, leveraging technology for an online financial marketplace - The company's business is divided into three main segments: money lending, property investment, and fintech/IT services215 - The money lending business is conducted through licensed Hong Kong subsidiaries, Giant Credit Limited and First Asia Finance Limited216217 - The fintech arm, Giant Financial Services (GFS), provides an online financial marketplace leveraging technologies like AI, big data, and blockchain218219 Organizational Structure TROOPS, Inc., a Cayman Islands parent, operates through wholly-owned subsidiaries in Hong Kong, including SGOCO International, Giant Financial Services, and Giant Connection Limited - The company's corporate structure consists of the parent, TROOPS, Inc. (Cayman Islands), with multiple layers of wholly-owned subsidiaries primarily based in Hong Kong, Seychelles, Samoa, and the Marshall Islands228 Property, Plant and Equipment As of December 31, 2022, the company holds significant property, plant, and equipment assets in Hong Kong through its subsidiaries, with total carrying value primarily concentrated in Suns Tower Limited Carrying Value of Property, Plant and Equipment by Subsidiary (as of Dec 31, 2022) | Subsidiary | Carrying Value (in millions of U.S. Dollars) | | :--- | :--- | | Suns Tower | $44.58 | | 11 Hau Fook Street Limited | $2.51 | | Vision Lane | $1.03 | | Giant Credit | $0.52 | Operating and Financial Review and Prospects This section analyzes the company's financial performance, highlighting increased 2022 revenue, reduced net loss, and liquidity, alongside critical accounting policies Operating Results For FY2022, revenue increased to $3.88 million, gross profit improved, and net loss significantly reduced to $0.35 million due to lower impairment charges Revenue by Major Product Line (In millions of U.S. Dollars) | Product Line | 2022 | 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Interest on loans | $2.45 | $1.67 | +46.7% | | Property lease and management | $1.11 | $1.07 | +3.7% | | Financial technology solutions and services | $0.32 | $0.94 | -66.0% | | Total Revenue | $3.88 | $3.68 | +5.4% | - General and administrative expenses decreased by 20.1% to $2.19 million in 2022, mainly because no share-based compensation or system development fees were incurred, unlike in 2021302 - The company recorded a reversal of provision for loan losses of $0.97 million in 2022, compared to a provision of $1.39 million in 2021303428 - There were no impairment losses on goodwill or intangible assets in 2022, compared to a combined $4.94 million in such charges in 2021, which was a primary driver for the reduced net loss305 Liquidity and Capital Resources As of December 31, 2022, the company held $2.95 million in cash and $9.35 million in working capital, with liquidity primarily from operations, expecting sufficiency for the next 12 months - As of December 31, 2022, the company held $2.95 million in cash and cash equivalents and had working capital of $9.35 million315 Summary of Cash Flows (In millions of U.S. Dollars) | Cash Flow Activity | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Operating Activities | (0.37) | 12.29 | 21.64 | | Investing Activities | (0.16) | (5.59) | (27.17) | | Financing Activities | 0.00 | (6.24) | 3.43 | - The company believes its current cash and available funds will be sufficient to meet its cash needs for at least the next 12 months325 Contractual Obligations As of December 31, 2022, the company's contractual obligations totaled approximately $0.41 million, all due in less than one year, primarily from advances and convertible note interest Contractual Obligations as of December 31, 2022 | Obligation | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Advances from unrelated parties | $409,414 | $409,414 | $— | $— | $— | | Convertible notes – future interest payment | $4,582 | $4,582 | $— | $— | $— | | Total | $413,996 | $413,996 | $— | $— | $— | Directors, Senior Management and Employees This section details the company's leadership, compensation, and governance, including executive team, board structure, employee count, and concentrated share ownership Directors and Senior Management The company's leadership team includes Raleigh Siu Lau as CEO, Chung Hang Lui as CFO, and Tommy Wing Ling Lui as CTO, with a board of five directors, three of whom are independent - Key executive officers include Raleigh Siu Lau (CEO), Chung Hang Lui (CFO), and Tommy Wing Ling Lui (CTO)334335336 Compensation Executive compensation for FY2022 totaled approximately $0.27 million, with the company's 2016 Omnibus Equity Plan authorizing up to 2,500,000 ordinary shares for equity awards - Aggregate cash compensation for executive officers was approximately $0.27 million for the fiscal year 2022344 - The company has a 2016 Omnibus Equity Plan authorizing up to 2,500,000 ordinary shares for equity compensation awards to employees, directors, and consultants347 Board Practices The Board of Directors consists of five members, three of whom are independent, and has established Audit, Compensation, and Nominating Committees with defined responsibilities - The board has five directors, three of whom are independent355 - The company has established an Audit Committee, a Compensation Committee, and a Nominating Committee with defined responsibilities and membership357358359 Employees As of December 31, 2022, TROOPS, Inc. had 19 full-time employees, all management and administrative staff, maintaining a good working relationship without union representation - The company had 19 full-time employees as of December 31, 2022367 Share Ownership As of April 28, 2023, the company had 101,597,998 ordinary shares outstanding, with directors and executive officers owning 2.1% and Prime Ocean Holdings Limited holding 28.7% Beneficial Share Ownership (as of April 28, 2023) | Shareholder | Number of Shares | Percentage | | :--- | :--- | :--- | | All directors and executive officers as a group (8 persons) | 2,129,581 | 2.1% | | Prime Ocean Holdings Limited | 29,000,000 | 28.7% | Financial Information This section refers to the full consolidated financial statements in Item 18, discloses two material legal proceedings in Hong Kong (one discontinued), and states no cash dividends are anticipated - The company and its subsidiaries are defendants in a lawsuit in Hong Kong (HCA 938 of 2022) involving allegations of unlawful means conspiracy, with injunctions placed on their Hong Kong assets; the company believes the lawsuit is without merit and is defending the case vigorously374375 - A separate lawsuit (HCA 1520 of 2021) against subsidiaries 11 Hau Fook Street Limited and Vision Lane Limited was wholly discontinued by the plaintiff in October 2022376 - The company does not expect to pay cash dividends in the foreseeable future, planning to retain earnings for business expansion377 Additional Information This section covers corporate and regulatory matters, including Cayman Islands exchange controls, tax regimes, and U.S. federal income tax implications, notably PFIC risk - The company is incorporated in the Cayman Islands, which currently levies no taxes on profits, income, gains, or appreciation383 - The company's Hong Kong subsidiaries are subject to a 16.5% profits tax, while PRC subsidiaries are subject to a 25% tax rate; dividends from PRC entities to foreign parents may be subject to a 10% withholding tax (or 5% for Hong Kong resident enterprises under the tax arrangement)384386387 - There is a risk that the company could be classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, which could result in adverse tax consequences for U.S. investors; the company believes it was not a PFIC for 2022 but notes the determination is not certain161401402403 Quantitative and Qualitative Disclosure About Market Risk The company's primary market risk is credit concentration in its money lending business, managed via collateral and provisions, alongside significant customer and geographic concentration - The company's main risk is credit risk from its lending activities, primarily concentrated in Hong Kong; this is managed via collateral and loan loss provisions425713 - In 2022, the company recognized a reversal of provision for loan losses of $0.97 million, compared to a provision of $1.39 million in 2021428716 - Significant customer concentration exists, with two customers representing 18% and 13% of total revenues in 2022; four loan customers accounted for 68% of the total loan receivable balance431433 - The majority of the company's cash is held in Hong Kong banks covered by the Deposit Protection Scheme, but as of March 31, 2023, $0.13 million was held in a bank in Vanuatu with no such protection437438 PART II Controls and Procedures Management concluded disclosure controls were ineffective as of December 31, 2022, due to material weaknesses in internal control over financial reporting, with remediation plans underway - Management concluded that disclosure controls and procedures were not effective as of the end of the reporting period443 - Material weaknesses were identified in internal control over financial reporting, including: - Limited documentation and policies for monitoring loan risk - Lack of controls for monitoring past-due payments and loan extensions - Insufficient controls over related-party loans - Lack of sufficient qualified accounting personnel with U.S. GAAP and SEC reporting experience445 - Remediation plans include hiring additional accounting and internal control staff, providing further training, and engaging professional consultants to improve controls, particularly in the money lending operations446447448 Principal Accountant Fees and Services The company's audit fees were $244,000 in 2022 and $255,000 in 2021, with no audit-related or tax fees billed by the principal accountant, and all services pre-approved by the Audit Committee Principal Accountant Fees (in U.S. Dollars) | Fee Category | 2022 | 2021 | | :--- | :--- | :--- | | Audit Fee | $244,000 | $255,000 | | Audit-Related Fees | $— | $— | | Tax fees | $— | $— | | Total | $244,000 | $255,000 | Changes in Registrant's Certifying Accountant The company experienced multiple changes in its independent registered public accounting firm, with Audit Alliance LLP performing the 2022 audit, and reported no disagreements with dismissed firms - On September 7, 2022, the company dismissed its auditor, Yu Certified Public Accountant, P.C., and appointed WWC, P.C458460 - On March 3, 2023, the company dismissed WWC, P.C. and appointed Audit Alliance LLP as its new independent auditor for the fiscal year 2022461463 - The company stated there were no disagreements with either of the dismissed auditors on accounting principles, financial statement disclosure, or auditing scope458462 PART III Financial Statements This section contains the audited consolidated financial statements for 2020-2022, prepared under U.S. GAAP, including the auditor's unqualified opinion and critical audit matters Report of Independent Registered Public Accounting Firm The auditor issued an unqualified opinion on the 2022 financial statements, identifying CECL and Property, Plant, and Equipment impairment as Critical Audit Matters due to subjective judgment - The auditor issued an unqualified (clean) opinion on the financial statements for the year ended December 31, 2022473 - Critical Audit Matters identified were: 1. Allowance for current expected credit losses (CECL) on receivables, due to the subjective judgment and estimates involved 2. Impairment of Property, Plant and Equipment, due to the complexity and judgment in fair value measurement477479482 Consolidated Balance Sheets As of December 31, 2022, total assets were $69.69 million, a slight decrease from $70.35 million in 2021, with total liabilities at $7.48 million and total equity at $62.20 million Consolidated Balance Sheet Highlights (In thousands of U.S. Dollars) | | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | 11,539 | 6,208 | | Total Non-Current Assets | 58,147 | 64,138 | | Total Assets | 69,686 | 70,346 | | Total Current Liabilities | 2,185 | 2,190 | | Total Non-Current Liabilities | 5,297 | 5,632 | | Total Liabilities | 7,482 | 7,822 | | Total Shareholders' Equity | 62,204 | 62,524 | Consolidated Statements of Comprehensive Income (Loss) For FY2022, net loss significantly improved to $0.35 million from $8.41 million in 2021, driven by a loan loss reversal and no goodwill impairment, with revenues increasing Key Income Statement Items (In thousands of U.S. Dollars) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | REVENUES | 3,875 | 3,683 | 4,293 | | GROSS PROFIT (LOSS) | 822 | 360 | (1,066) | | Impairment (reversal) loss of loan and interest receivable | (973) | 1,386 | 1,980 | | Impairment loss of goodwill | — | 4,740 | 59,440 | | OPERATING LOSS FROM CONTINUING OPERATIONS | (536) | (8,805) | (67,342) | | NET LOSS | (346) | (8,413) | (67,918) | Consolidated Statements of Cash Flows For FY2022, net cash used in operating activities was $0.37 million, a shift from $12.29 million provided in 2021, resulting in a $0.53 million decrease in cash, ending at $2.95 million Cash Flow Summary (In thousands of U.S. Dollars) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | (368) | 12,291 | 21,853 | | Net cash used in investing activities | (156) | (5,594) | (27,417) | | Net cash (used in) provided by financing activities | — | (6,241) | 3,431 | | Increase (Decrease) in Cash | (530) | 452 | (2,133) | | Cash and cash equivalent, end of year | 2,950 | 3,480 | 3,028 |