UP Fintech Holding Ltd. FY2020 Filing Summary
Business context and reporting period
UP Fintech, commercially known as Tiger Brokers, filed its annual Form 20-F for the fiscal year ended December 31, 2020. The company operates a cross-market digital brokerage and financial technology platform serving retail, institutional and corporate customers, primarily through subsidiaries in New Zealand, the United States, Singapore, Australia and Hong Kong, and through PRC variable interest entities. The audited consolidated financial statements are presented in U.S. dollars under U.S. GAAP.
Although the requested period is 2020 Q4, the filing is an annual report. Fourth-quarter operating data include trading volume of US$65.4 billion, 1.104 million customer accounts, 258.7 thousand customers with deposits, 222.0 thousand trading customers and total account balances of US$16.0 billion.
Financial performance and key metrics
| Metric | 2019 | 2020 | Change |
|---|---|---|---|
| Total revenue | US$58.7 million | US$138.5 million | +136.1% |
| Net revenue after interest expense | US$54.6 million | US$128.4 million | +135.4% |
| Net income | Net loss of US$5.9 million | US$19.2 million | Turned profitable |
| Net income attributable to UP Fintech shareholders | Net loss of US$6.6 million | US$16.1 million | Turned profitable |
| Adjusted net income | Net loss of US$1.1 million | US$25.4 million | Turned profitable |
| Operating costs and expenses | US$64.7 million | US$107.4 million | +65.8% |
| Operating costs as a percentage of revenue | 110.4% | 77.5% | Improved |
| Net income margin | Negative | 13.8% | Improved |
| Operating cash flow | US$243.3 million | US$535.3 million | +120.0% |
Revenue growth was led by commissions of US$77.6 million, up 190.8%; interest income of US$31.8 million, up 92.4%; and other revenue of US$22.5 million, up 199.2%, primarily from IPO distribution services. Financing service fees declined 17.0% to US$6.6 million because of lower interest rates.
Interest expense increased to US$10.1 million from US$4.1 million. Share-based compensation was US$6.1 million, and the company recorded a US$0.2 million impairment loss from investments. Research and development expense was US$22.5 million, expensed as incurred.
Cash flow, liquidity, capital and debt
- Cash and cash equivalents were US$79.7 million at December 31, 2020, compared with US$59.4 million at December 31, 2019.
- Cash segregated for regulatory purposes increased to US$867.9 million from US$317.9 million. Cash, cash equivalents and restricted cash totaled US$947.6 million.
- Operating cash flow of US$535.3 million was driven largely by higher customer payables and broker-related balances, rather than by net income alone. Customer payables increased to US$1.70 billion.
- Investing cash flow was positive at US$43.6 million, primarily because term-deposit maturities exceeded purchases.
- Financing cash flow was negative US$8.4 million, primarily reflecting a US$10.5 million payment relating to the sponsored fund and US$2.2 million of share repurchases.
- The filing does not identify material conventional corporate debt at year-end. Lease liabilities totaled US$7.2 million, and undiscounted operating lease commitments totaled US$7.7 million.
- Broker-dealer subsidiaries met applicable regulatory capital requirements. Aggregate excess net capital was US$57.8 million at December 31, 2020.
Material changes versus the prior comparable period
- Customer accounts increased from 649.0 thousand to 1.104 million, while trading volume increased from US$21.8 billion in Q4 2019 to US$65.4 billion in Q4 2020.
- Growth in consolidated accounts increased gross commission recognition but also increased execution and clearing costs, which rose 401.9% to US$12.6 million.
- IPO distribution expanded materially. The company participated in 28 U.S. IPOs in 2020, compared with 18 in 2019; its subsidiaries acted as underwriter in 14 and distributor in 14.
- Self-clearing expanded following the Marsco acquisition; the company reported self-clearing more than 20% of U.S. cash equity trades in Q4 2020.
- Marketing and branding expense increased 123.4% to US$15.9 million, while employee compensation and benefits increased 39.8% to US$50.0 million.
- The company repurchased 10.4 million Class A ordinary shares for US$2.2 million under a US$20 million authorization.
- The sponsored ETF was delisted and liquidated in November 2020, resulting in deconsolidation of the sponsored fund.
Guidance, outlook, commentary, risks and unusual items
Management did not provide specific numerical revenue or earnings guidance. Its stated strategy is to expand internationally, grow retail and institutional customers, broaden brokerage, IPO distribution, ESOP, asset-management and wealth-management offerings, and continue investing in technology and U.S. self-clearing capabilities.
- Regulatory exposure: Tiger Brokers (NZ) Limited’s NZX Advising Firm and Market Participant accreditations were suspended from July 1, 2020 because it lacked a required trading agreement. The company was required to apply to lift the suspension by May 5, 2021, with potential revocation if it failed to meet the criteria.
- AML investigation: New Zealand’s FMA issued a formal warning in April 2020 concerning historical AML/CFT control weaknesses. Required remediation was completed by September 30, 2020, but the filing states that further enforcement, including civil penalties of up to NZ$2 million per pecuniary penalty, remained possible.
- Internal controls: Management concluded that disclosure controls and internal control over financial reporting were not effective at December 31, 2020. The filing identifies material weaknesses involving U.S. GAAP accounting resources and the lack of a systematic risk-assessment process.
- Counterparty concentration: Interactive Brokers executed and cleared 74.8% of 2020 net revenue-related activity. Amounts due from Interactive Brokers were US$761.7 million at year-end, while amounts due to it were US$218.6 million.
- VIE structure: The company relies on contractual arrangements with PRC VIEs because of foreign-ownership restrictions. Changes in PRC regulation or enforcement could restrict operations, impair control of the VIEs or prevent access to their economic benefits.
- Customer and market risk: Margin financing, securities lending, short selling, market volatility, customer defaults, liquidity needs and collateral declines may produce losses not fully covered by customer collateral.
- COVID-19: Management reported remote-work and project-efficiency effects but stated that daily operations continued online. A prolonged or renewed pandemic could disrupt exchanges, employees, vendors and trading activity.
- Subsequent financing: The filing reports planned or completed 2021 private placements of convertible notes totaling US$155 million, maturing in 2026 unless converted. These transactions occurred after year-end and may create future dilution or debt obligations.
- Commitment: The company had an unpaid capital commitment of US$1.1 million related to an acquisition of a Hong Kong company, subject to regulatory approval.
Most important facts for investors to verify
- Whether the NZX suspension was lifted or the accreditation was revoked after the filing date.
- The outcome of the FMA AML/CFT investigation and any related penalties or remediation costs.
- Progress in remediating the two material weaknesses and whether future filings conclude that internal controls are effective.
- The sustainability of exceptional 2020 trading volumes, commission growth and IPO distribution revenue.
- The size, collateral quality and counterparty concentration of balances involving Interactive Brokers and customer margin accounts.
- The terms, conversion features, dilution potential and closing status of the US$155 million 2021 convertible-note financings.
- Developments in PRC regulation affecting the VIE structure, cross-border data, foreign exchange and provision of brokerage-related support.
- The filing’s apparently inconsistent cover-page accounting-basis checkbox versus the audited financial statements, which state that they are prepared under U.S. GAAP.