Taoping Inc. — FY2019 Form 20-F Summary
Period and context: This is an annual report for the fiscal year ended December 31, 2019, not a standalone fourth-quarter report. Taoping provides cloud-based digital advertising, display-terminal and IoT solutions primarily in China; its CBT segment generated 98.3% of 2019 revenue. Financial statements are prepared under U.S. GAAP. The filing was delayed due to COVID-19 disruptions and was signed June 12, 2020.
Key financial results
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $13.79 million | $20.58 million |
| Gross profit / margin | $6.60 million / 47.9% | $9.65 million / 46.9% |
| Operating income (loss) | ($4.17 million) | $0.17 million |
| Net income (loss) attributable to Taoping | ($3.58 million); $(0.09) per share | $1.69 million; $0.04 per share |
| Operating cash flow | ($1.68 million) | $2.47 million |
| Cash and cash equivalents at year-end | $1.52 million | $1.65 million |
| Working capital | Deficit of $6.98 million | $4.87 million surplus |
| Total assets / total liabilities | $40.62 million / $26.01 million | $41.62 million / $24.01 million |
- Cost of revenue fell 34.2% to $7.19 million, and gross margin improved by about one percentage point. Products accounted for 75.9% of revenue; software accounted for 16.3%.
- Administrative expense rose 54.8% to $6.66 million, principally because the doubtful-account provision increased by $2.8 million. The total allowance for doubtful accounts rose to $7.21 million from $3.68 million.
- R&D expense was $3.59 million, down from $4.76 million. Capital expenditures were $1.62 million. Investing cash flow was positive $0.15 million, mainly from collecting a loan receivable.
- Year-end short-term bank loans were $6.58 million, secured or guaranteed and bearing rates of 5.66%–9.00%; they matured at various dates from January through October 2020. The balance sheet also included a $0.92 million net convertible note payable.
Changes, outlook and material risks
- Revenue declined 33% year over year, which management attributed to weaker macroeconomic conditions and a slowdown in China’s out-of-home advertising market. Taoping’s attributable result swung from profit to loss, and operating cash flow turned negative.
- Related parties controlled by CEO Jianghuai Lin generated approximately $7.5 million of 2019 revenue. Net related-party receivables, current and non-current, totaled approximately $12.5 million at year-end. The company’s VIE structure and contractual arrangements with iASPEC are central to operations and carry legal and regulatory uncertainty in China.
- The auditor issued an unmodified opinion but highlighted substantial doubt about Taoping’s ability to continue as a going concern. The company cited its 2019 loss, operating cash outflow, working-capital deficit and accumulated deficit of $174.5 million. Management said March 2020 financing produced approximately $1.9 million net proceeds and reported that a $3.8 million short-term loan was extended in April. Management believed available cash and expected operating cash flows could support operations for 12 months, but acknowledged further financing might be needed.
- Management’s 2020 plan emphasized customer selection, receivables collection, inventory and payable management, and expansion into domestic and international markets. It aimed to extend the network from more than 200 Chinese cities in 2019 to around 300 in 2020. Management expected platform-service revenue to increase as the network expanded; no detailed financial forecast was provided.
- COVID-19 disrupted operations and customer demand in early 2020 and lengthened collection times. Unaudited first-quarter 2020 revenue was down approximately 26% year over year; management reported sales improving in the second quarter and expected no significant long-term effect if the outbreak remained contained. These statements are forward-looking and are not audited results.
- Internal control over financial reporting and disclosure controls were assessed as ineffective at year-end 2019. Identified material weaknesses included insufficient U.S. GAAP expertise, inadequate oversight of financial-statement preparation, and deficient documentation supporting certain third-party advances and their collectibility.
- Other notable risks include customer and related-party concentration, slow collection and bad-debt exposure, dependence on secured short-term borrowing, potential dilution from convertible notes and warrants, PRC restrictions on fund transfers, and Nasdaq’s minimum-bid-price deficiency. A customer arbitration could result in an estimated loss of $0–$300,000.
Most important facts for investors to verify
- Subsequent cash collections on the approximately $12.5 million of net related-party receivables and the remaining receivables allowance.
- Current liquidity, operating cash flow and the status and repayment or extension of bank loans and convertible notes after the reporting date.
- Whether COVID-19 recovery, network growth and platform-service monetization translated into reported results, including progress toward the 300-city target.
- Progress remediating internal-control weaknesses and the effectiveness of financial reporting controls in later filings.
- Nasdaq listing compliance, potential share issuance from convertible securities and warrants, and the status or resolution of the customer arbitration.
- The continuing enforceability and regulatory acceptability of the iASPEC VIE arrangements, and the terms and approval of material related-party transactions.