Taoping Inc. — FY2023 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2023; filed April 25, 2024. This is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared under U.S. GAAP and audited by PKF Littlejohn LLP. The audit opinion is unqualified but includes a substantial-doubt going-concern paragraph.
Business context
Taoping is a BVI holding company whose operating businesses are primarily in China. It provides cloud-based technology, IoT and digital advertising products and services. The cloud-based technology (CBT) segment generated nearly all 2023 revenue; traditional IT (TIT) is being phased out. Cryptocurrency mining ceased by December 2022 and is reported as discontinued operations. The company is developing AI-related offerings and exploring smart-community and wastewater-treatment businesses.
Key financial metrics
| Metric | FY2023 | FY2022 |
|---|---|---|
| Revenue | $38.64 million | $24.23 million |
| Gross profit / margin | $8.85 million / 22.9% | $7.23 million / 29.8% |
| Operating loss | $0.20 million | $3.17 million |
| Net loss from continuing operations | $0.23 million | $0.58 million |
| Net loss from discontinued operations | $0.47 million | $6.50 million |
| Net loss | $0.70 million | $7.08 million |
| Operating cash flow | $(2.33) million | $(7.51) million |
| Cash and cash equivalents at year-end | $1.30 million | $1.02 million |
- Revenue increased 59.4%, mainly from product and software sales. CBT revenue was $38.42 million; TIT revenue was $0.21 million.
- Product sales were $24.24 million, software $8.80 million, advertising $5.00 million and other revenue $0.60 million. One customer represented 16% of revenue; the five largest represented 30%.
- Cost of revenue increased 75.2% to $29.78 million, faster than sales, reducing gross margin by 6.9 percentage points. Management cited lower margins in software and advertising; product gross margin was also low.
- Administrative expense was $5.60 million, R&D $2.97 million and selling expense $0.48 million. The 2023 administrative expense included $1.0 million more share-based compensation than in 2022, according to management.
- Other income fell to $0.27 million from $3.31 million; 2022 included about $3.0 million from a subsidiary disposition. The smaller discontinued-operations loss also contributed to the lower consolidated net loss in 2023.
- Cash flow: investing activities used $1.21 million and financing activities provided $3.84 million in 2023. Financing included $8.77 million of short-term loan proceeds, $7.23 million of repayments, $1.75 million from share issuance and $0.55 million net proceeds from the convertible note.
- Year-end current assets were $25.25 million and current liabilities $20.06 million, yielding working capital of approximately $5.19 million, versus a $0.18 million deficit in 2022. Short-term bank loans were $8.55 million; amounts due to related parties were $3.04 million; the convertible note’s carrying value was $0.45 million.
- Liquidity-quality items include $12.02 million in advances to suppliers, up from $5.85 million, and $25.59 million in total allowance for credit losses. Net trade and related-party receivables were $8.69 million combined.
Material changes and unusual items
- Management reported revenue growth and improved losses, but gross margin declined and operating cash flow remained negative.
- The company issued shares in 2023 and completed a one-for-ten reverse share split effective August 1, 2023. Year-end shares outstanding were 2,891,822, after the split and subsequent 2023 issuances.
- A September 2023 unsecured convertible note had $609,000 original principal, 8% annual interest and a 12-month maturity. After six months, the holder could convert at $8 per share or redeem specified amounts at 80% of the lowest VWAP over the preceding 10 trading days, subject to terms and limitations. The discounted conversion feature could materially dilute shareholders.
- The company had standby equity purchase agreements of up to $11 million in total. It reported raising $3.3 million through the equity line as of April 2024. Subsequent-event disclosures report $1.58 million of share-sale proceeds from January through March 2024 under the private agreement.
- A 2023 lawsuit over a 2017 subcontract agreement was settled in January 2024; the company agreed to pay approximately $32,200 in three installments and had accrued the amount.
- Management identified material weaknesses in internal control over financial reporting: no formal going-concern assessment process and insufficient procedures for impairment assessment of property and long-lived assets. Management said remediation efforts are underway, but controls were not effective at year-end.
Outlook, risks and contingencies
- Management expects moderate 2024 revenue growth from product sales, digital advertising and new cloud-based intelligent solutions. It expects 2024 R&D spending to be broadly consistent with 2023; administrative expense to decline as share-based compensation falls; and selling expense to rise with revenue. These are expectations, not guarantees.
- The auditor and management cite substantial doubt about the company’s ability to continue as a going concern, principally due to $8.55 million in short-term bank loans repayable within one year and uncertainty over future financing. Management points to renewed bank facilities and equity-line funding, but states financing availability and sufficiency are not assured.
- China-related risks include regulatory uncertainty over overseas listings, data and advertising rules, foreign-exchange controls, restrictions on moving cash from China, and potential changes in government policy. PRC subsidiaries have not paid dividends to the holding company; statutory reserves and approval or registration requirements may constrain distributions and funding transfers.
- Other material risks include customer concentration, competition and margin pressure, technology and cybersecurity risks, foreign-exchange exposure, possible Nasdaq listing noncompliance, and potential dilution from equity financing and convertible securities. The company regained Nasdaq’s minimum-bid-price compliance in August 2023 after the reverse split.
- The company says its current auditor is based in the UK and subject to PCAOB inspection. It warns that future limits on PCAOB inspection access could create delisting risk under the HFCA Act.
- Management states the company has obtained regular business licenses for its PRC subsidiaries and believes current operations are not on the foreign-investment Negative List; future regulatory interpretations or requirements remain uncertain.
Most important facts for investors to verify
- Whether the company can refinance or repay its short-term bank loans and sustain operations without further financing, and the current status and terms of available bank and equity facilities.
- Whether reported revenue growth converts into positive operating cash flow, and whether the lower 2023 gross margin stabilizes or improves.
- Collectability of receivables and supplier advances, including the $25.59 million credit-loss allowance and $12.02 million supplier advances.
- The actual dilution from the convertible note, standby equity agreements and post-year-end share issuances; reconcile share counts given the reverse split and later issuance activity.
- Progress in remediating internal-control weaknesses and the auditor’s continuing assessment of going-concern assumptions.
- Customer concentration and the contribution, profitability and execution status of new AI, smart-community and wastewater-treatment initiatives.
- Compliance with PRC overseas-listing filing, data, advertising and cash-transfer rules, and continued PCAOB access to audit work.