UP Fintech Holding Limited — FY2019 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2019, with quarterly operating data including the three months ended December 31, 2019. The filing is an annual Form 20-F, not a standalone quarterly filing. Financial statements are prepared under U.S. GAAP and presented in U.S. dollars. UP Fintech is a Cayman Islands holding company operating an online brokerage platform primarily for global Chinese investors through subsidiaries and PRC variable interest entities.
Business Context and Operating Metrics
- The platform offers global securities brokerage, margin financing, securities borrowing and lending, wealth-management products, institutional services, IPO distribution and investor-education tools.
- Fourth-quarter 2019 trading volume was approximately $21.8 billion, compared with $25.8 billion in the third quarter of 2019 and $36.9 billion in the fourth quarter of 2018.
- As of December 31, 2019, customer accounts totaled approximately 649,000, customers with deposits totaled approximately 113,000, and trading customers totaled approximately 99,000.
- Total customer account balances were approximately $5.1 billion at year-end, compared with $2.4 billion at December 31, 2018.
Financial Performance and Liquidity
| Metric | FY2018 | FY2019 | Change |
|---|---|---|---|
| Total revenues | $33.6 million | $58.7 million | Up 74.8% |
| Total net revenues | $33.6 million | $54.6 million | Interest expense reduced 2019 net revenues by $4.1 million |
| Commissions | $26.0 million | $26.7 million | Up 2.5% |
| Financing service fees | $6.4 million | $7.9 million | Up 23.0% |
| Interest income | $0.1 million | $16.5 million | Significant increase from consolidated-account margin activities |
| Other revenues | $1.0 million | $7.5 million | Up 661.0% |
| Operating costs and expenses | $80.5 million | $64.7 million | Down 19.5% |
| Loss before income taxes | $46.2 million | $9.3 million | Loss materially reduced |
| Net loss | $44.3 million | $5.9 million | Loss reduced 86.6% |
| Adjusted net loss | $10.1 million | $1.1 million | Excludes share-based compensation and equity-investment impairment |
| Net cash from operating activities | $(21.2) million | $243.3 million | Driven primarily by customer and broker-related balances |
- Reported net loss attributable to UP Fintech shareholders was $6.6 million in 2019, or approximately $0.004 per ordinary share and $0.056 per ADS. One ADS represents 15 Class A ordinary shares.
- Gross revenue growth was driven primarily by a $16.4 million increase in interest income and a $6.5 million increase in other revenue. Commission revenue grew only modestly despite the larger customer base.
- Employee compensation and benefits decreased to $35.8 million from $55.7 million, principally because 2018 included approximately $32.4 million of one-time share-based compensation. Excluding that item, employee compensation increased substantially in 2019.
- Cash and cash equivalents were $59.4 million at year-end. Cash segregated for regulatory purposes increased to $317.9 million, and term deposits totaled $65.6 million.
- Total assets increased to $809.1 million from $115.2 million, while total liabilities increased to $594.0 million from $17.0 million. The increase largely reflected customer funds and related broker balances rather than conventional corporate debt.
- Payables to customers were $512.5 million, and receivables from customers were $106.1 million, primarily related to margin financing. Receivables from brokers, dealers and clearing organizations totaled $194.3 million, including $185.0 million due from Interactive Brokers.
- Financing cash flow was $114.9 million, principally reflecting approximately $114.8 million of net IPO proceeds. Investing cash flow was negative $22.0 million, including term-deposit placements and the Marsco acquisition.
- The filing does not present a consolidated debt total described as corporate borrowings; it does disclose a $1.1 million Marsco bank-loan repayment in 2019 and regulatory capital requirements for broker-dealer subsidiaries.
Material Changes Versus the Prior Comparable Period
- Revenue composition shifted materially from commissions toward interest income, financing activities and other services. Commissions declined from 77.6% of revenue in 2018 to 45.5% in 2019, while interest income increased to 28.1% of revenue.
- Trading volume declined to $99.8 billion for full-year 2019 from $119.2 billion in 2018, even as customer accounts increased from approximately 502,000 to 649,000.
- Consolidated accounts expanded significantly. This increased gross revenue recognition and customer-related balance-sheet items, but also increased execution and clearing costs and regulatory obligations.
- The company completed its March 2019 IPO, issued approximately $114.8 million of net IPO proceeds, and converted all outstanding convertible preferred shares into Class A ordinary shares.
- In July 2019, the company acquired Marsco Investment Corporation, a U.S. self-clearing broker-dealer, for total consideration of $9.3 million, including $6.3 million in cash and $3.0 million in Class A shares.
- Operating margin improved substantially, but remained negative. Management reported a negative operating margin of approximately 18.6% in 2019 versus 139.7% in 2018, using its stated calculation.
- Cash flow from operations turned strongly positive, but the filing attributes this primarily to increases in customer payables and broker-related balances. It should not be interpreted as equivalent to recurring earnings-based cash generation.
Guidance, Outlook, Risks and Unusual Items
- Management expects continued investment in technology, compliance, employee hiring, global expansion, institutional services, wealth management and new products. No quantitative revenue or earnings guidance is provided.
- The company approved a share-repurchase program on March 25, 2020, authorizing purchases of up to $20 million of ADSs over 12 months.
- Two material weaknesses in internal control over financial reporting remained identified for fiscal 2019: insufficient U.S. GAAP accounting resources and policies, and the absence of a systematic financial-reporting risk-assessment process. Management stated that disclosure controls and procedures were ineffective at December 31, 2019. The company remains exempt from auditor attestation under the emerging-growth-company transition rules.
- Tiger Brokers (NZ) Limited received an inspection report from New Zealand’s Financial Markets Authority concerning inadequate anti-money-laundering protections. A remediation plan was submitted on April 17, 2020; further enforcement remained possible.
- The company relies heavily on Interactive Brokers for execution, clearing and financing-related services. Interactive Brokers accounted for 78.4% of 2019 net revenues executed and cleared by one supplier, and the company had $185.0 million due from Interactive Brokers at year-end.
- The company operates through PRC VIE contractual arrangements rather than direct ownership of certain PRC operating entities. Regulatory changes or challenges to the VIE structure, licensing, foreign-exchange practices or cross-border data activities could restrict operations or the transfer of economic benefits.
- Margin financing, short sales and securities lending create customer-credit, collateral, liquidity and market risks. Client margin assets totaled $332.5 million at year-end, with $108.6 million of collateral repledged.
- The filing identifies COVID-19-related operational and market risks, including disruption to employees and counterparties, elevated volatility, potential customer losses and delayed IPO activity. The filing text does not provide a clear quantified FY2019 financial impact from COVID-19.
- Capital commitments included $1.1 million remaining under an agreement to acquire a Hong Kong company, subject to regulatory change-of-control approval. Operating lease commitments totaled $6.5 million.
- In 2019, the company recorded a $755,524 impairment of its Guangzhou 88 equity investment, which was subsequently dissolved in February 2020.
Most Important Facts for Investors to Verify
- Whether the sharp increase in operating cash flow is sustainable after excluding customer-fund movements and broker-related working-capital changes.
- The composition, credit quality and collateral coverage of the $106.1 million of customer receivables and the $185.0 million receivable from Interactive Brokers.
- Progress in remediating the two material weaknesses and the ineffective disclosure controls assessment.
- The status and financial consequences of the New Zealand FMA AML/CFT remediation process.
- Interactive Brokers concentration, contractual termination rights and the availability of effective alternative clearing arrangements.
- Regulatory exposure involving PRC securities-related activities, SAFE foreign-exchange requirements, VIE contractual arrangements and Internet or data licenses.
- The effect of declining trading volume and the increasing reliance on interest income, margin financing and other non-commission revenue.
- Potential dilution from outstanding options, restricted share units and future equity awards, as well as the controlling voting position of CEO Tianhua Wu through the dual-class structure.
- The company’s ability to achieve profitability: GAAP net loss remained $5.9 million in 2019 and adjusted net loss remained $1.1 million.