TROOPS, Inc. — FY2021 Form 20-F summary
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter filing; quarterly results are not provided in the supplied filing text. Financial amounts below are in U.S. dollars, generally millions unless stated otherwise.
Business context
TROOPS is a Cayman Islands holding company whose substantial operations are conducted through subsidiaries, primarily in Hong Kong. Its businesses are money lending, property investment and fintech/API services. Its indirect PRC subsidiary, Beijing SGOCO, is described as currently non-operating.
Financial performance and position
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $3.683 million | $4.293 million |
| Gross profit (loss) | $0.360 million | $(1.066) million |
| Gross margin | 9.8% | (24.8%) |
| Operating loss | $(8.805) million | $(67.342) million |
| Net loss | $(8.413) million | $(67.918) million |
| Basic and diluted loss per share | $(0.08) | $(0.69) |
| Net cash from continuing operating activities | $12.291 million | $21.639 million |
Revenue fell 14.2%. Loan interest income was broadly flat at $1.673 million; property lease and management revenue declined to $1.068 million from $1.130 million; and fintech revenue declined to $0.942 million from $1.496 million. The gross-profit improvement chiefly coincided with cost of revenue falling to $3.323 million from $5.359 million, including lower amortization expense.
FY2021 operating expenses included $4.740 million of goodwill impairment, $1.386 million of loan and interest-receivable impairment, $0.202 million of intangible-asset impairment and $2.744 million of general and administrative expense. The company reported $0.247 million of noncash warrant fair-value gain and $0.103 million of interest expense.
At December 31, 2021, total assets were $70.346 million, liabilities $7.822 million and equity $62.524 million, compared with $90.130 million, $19.503 million and $70.627 million, respectively, a year earlier. Cash was $3.480 million; working capital was approximately $4.018 million. Net loans receivable were $10.636 million, including $8.190 million classified as long-term, and the loan-loss allowance was $3.558 million. Loans due from four borrowers represented 11%, 15%, 21% and 26% of the portfolio.
The company generated $12.291 million in continuing operating cash flow, used $5.594 million in investing activities and used $6.241 million in financing activities, leaving cash up $0.452 million for the year. Management attributed operating cash generation in part to a $11.695 million decrease in loans receivable. The filing says the company believes cash and financing resources will cover anticipated needs for at least 12 months.
The $6.241 million bank borrowing outstanding at year-end 2020 was repaid in March 2021. Year-end 2021 liabilities included $0.125 million of convertible notes and $0.448 million in unsecured, interest-free advances from unrelated parties with no fixed repayment terms. A related-party promissory note issued for the GFS acquisition was fully repaid by March 30, 2021.
Material changes, outlook and risks
- Net loss narrowed substantially from 2020, when the company recorded $59.440 million in goodwill impairment; FY2021 goodwill impairment was $4.740 million. Goodwill was $0.385 million at year-end.
- Loan receivables fell from $23.717 million net to $10.636 million net. The filing says loans from seven borrowers were assigned to an unrelated party in early 2021 and the consideration was settled in March and April. Management also reports that COVID-19 affected revenue, loan collections and asset valuations; the 2022 impact was not estimable.
- No quantitative revenue or earnings guidance is provided. Management’s stated liquidity view is that resources should be sufficient for at least the next 12 months, but it warns additional financing may be needed and may not be available on acceptable terms.
- Management found internal control over financial reporting ineffective as of December 31, 2021, citing weaknesses in loan monitoring and related-party controls and insufficient U.S. GAAP/SEC-reporting personnel. Disclosure controls were also reported ineffective. Remediation plans include hiring and training accounting and lending-control staff; completion is not assured. The auditor did not attest to internal controls.
- Key exposures include borrower concentration and credit losses, Hong Kong property-market and lending-license risks, competition and weaker fintech performance, cybersecurity/privacy regulation and evolving PRC oversight of overseas listings. The company reported no CAC cybersecurity investigation or inquiry as of the report date. Its predecessor auditor’s work through 2019 was subject to PCAOB inspection limitations; the current auditor is based in New York.
- A Hong Kong civil action involving the alleged 2015 sale of a property between subsidiaries remained at a preliminary stage. No damages amount was specified; management cited counsel’s view that an unfavorable outcome or loss was not likely at that stage.
- The filing reports a Nasdaq filing-compliance deficiency in 2021 that was closed on July 12, 2021. It also reports a restatement of 2019 financial statements related to accounting for unvested restricted shares.
Important facts for investors to verify
- Reconcile the filing’s goodwill impairment disclosures: the financial statements report $4.740 million for 2021 and $59.440 million for 2020, while portions of the MD&A contain apparent year-labeling errors.
- Review the loan portfolio’s borrower concentrations, collateral values, past-due status, expected-credit-loss assumptions and details of loan assignments and collections.
- Assess progress on internal-control remediation, particularly lending and related-party loan monitoring, and the adequacy of financial-reporting staffing.
- Confirm the status and financial implications of the Hong Kong property lawsuit and the company’s PRC cybersecurity, data-protection and overseas-listing compliance obligations.
- Evaluate the quality and accessibility of cash: $0.58 million was held at a related-party-owned Vanuatu bank where the filing says no deposit-protection scheme applies.
- Check subsequent cash, borrowing and share-count changes. The filing reports 101,597,998 ordinary shares outstanding as of May 5, 2022.