UP Fintech Holding Limited — FY2022 Form 20-F Summary
Business context and reporting period
UP Fintech is a Cayman Islands holding company operating an integrated digital brokerage and fintech platform under the Tiger Brokers brand. Services include global securities brokerage, margin financing, securities lending, IPO distribution, ESOP administration, asset management and wealth management. Operations are conducted primarily through subsidiaries in New Zealand, Singapore, the United States, Hong Kong and Australia, plus China-based variable interest entities, or VIEs. The filing covers the fiscal year ended December 31, 2022, with comparative financial statements for 2020 and 2021 prepared under U.S. GAAP in U.S. dollars.
Fourth-quarter 2022 operating data included 2.008 million customer accounts, 781,500 customers with deposits, 563,700 trading customers, US$14.0 billion of total account balances and US$68.5 billion of trading volume. The company self-cleared more than 80% of U.S. cash-equity trades by the end of the quarter.
Financial performance and key metrics
| Metric | FY2021 | FY2022 | Change |
|---|---|---|---|
| Total revenue | US$264.5 million | US$225.4 million | Down 14.8% |
| Net revenue after interest expense | US$246.1 million | US$206.7 million | Down 16.0% |
| Commissions | US$147.2 million | US$108.1 million | Down 26.5% |
| Financing service fees | US$9.3 million | US$7.9 million | Down 14.7% |
| Interest income | US$70.3 million | US$85.2 million | Up 21.1% |
| Other revenue | US$37.7 million | US$24.2 million | Down 35.8% |
| Operating costs and expenses | US$228.5 million | US$205.0 million | Down 10.3% |
| Income before tax | US$19.1 million | US$2.0 million | Down 89.3% |
| Net income attributable to UP Fintech shareholders | US$14.7 million | Net loss of US$2.2 million | Turned to loss |
| Adjusted net income | US$24.5 million | US$12.6 million | Down 48.5% |
Reported net loss was US$2.3 million, or approximately negative 1.0% of revenue. Income before tax represented approximately 0.9% of revenue, compared with 7.2% in 2021. Net revenue represented 91.7% of total revenue. The average commission rate declined from 0.0364% of trading volume in 2021 to 0.0335% in 2022.
- Trading volume declined from US$404.3 billion to US$323.2 billion, reflecting weaker market activity and macroeconomic conditions.
- Interest income increased primarily because of higher interest rates and higher interest income on bank deposits; margin-financing interest income increased to US$36.8 million from US$29.0 million.
- Daily average margin-financing balances fell 70.0% to US$404.8 million, while daily average securities-lending balances fell 27.1% to US$75.5 million.
- Employee compensation and benefits rose 16.7% to US$101.7 million, and research and development expense increased to US$60.1 million.
- Execution and clearing expense fell 49.9% to US$15.6 million due largely to increased self-clearing. Marketing and branding expense declined 44.1% to US$33.1 million.
- Share-based compensation was US$14.2 million. Adjusted net income excludes share-based compensation, impairment losses on equity investments and fair-value changes in convertible bonds.
Cash flow, liquidity, debt and capital
- Net cash provided by operating activities was US$258.1 million, down from US$413.2 million in 2021. The filing attributes the substantial operating cash flow partly to a US$486.9 million increase in payables to customers, so operating cash flow was materially affected by brokerage customer-balance movements rather than net income alone.
- Net cash used in investing activities was US$3.6 million, including US$4.9 million of purchases of property, equipment and intangible assets.
- Net cash provided by financing activities was US$4.7 million, primarily from proceeds related to redeemable non-controlling interests.
- Cash and cash equivalents were US$277.7 million at December 31, 2022, compared with US$269.1 million at December 31, 2021. Cash segregated for regulatory purposes was US$1.678 billion, and total cash, cash equivalents and restricted cash was approximately US$1.956 billion.
- Total assets were US$3.797 billion; total liabilities were US$3.346 billion; and total shareholders’ equity was US$447.0 million.
- Convertible bonds totaled US$154.3 million at year-end, consisting of 1% notes maturing in 2026. The filing does not identify material bank debt beyond these convertible bonds and ordinary-course brokerage funding obligations.
- Payables to customers increased to US$3.0 billion from US$2.5 billion, while receivables from customers declined to US$644.7 million from US$664.7 million.
- All disclosed broker-dealer subsidiaries met applicable minimum capital requirements. Aggregate reported excess net capital was US$243.7 million at December 31, 2022.
- Management stated that existing cash and expected operating cash flows should meet anticipated working-capital and material cash requirements for at least the next 12 months. No dividends were declared or paid in 2022.
Material changes, outlook and unusual items
Management attributed the 2022 deterioration primarily to lower trading activity, weaker IPO and currency-exchange businesses, and a challenging macroeconomic environment. The strategy remains focused on international expansion, customer growth and retention, broader brokerage and wealth-management products, ESOP services, IPO distribution and continued investment in technology and self-clearing. The filing provides no specific revenue, earnings or margin guidance.
- The CSRC issued a December 30, 2022 notice asserting that the company conducted cross-border securities business for mainland Chinese investors without approval. The company was required to stop incremental mainland business, including new customer solicitation and account openings, while allowing existing customers to continue trading subject to restrictions on incremental funds. The company was cooperating with regulators; potential further actions and their financial impact remained uncertain.
- The company’s VIEs generated approximately 1.5% of consolidated revenue in 2022 but remain important to China-based technology and support functions. The VIE arrangements are contractual rather than equity ownership and have not been tested in a Chinese court.
- The company was placed on the SEC’s Commission-Identified Issuers list in May 2022 based on prior PCAOB inspection restrictions. The PCAOB vacated its adverse determination in December 2022, and the company did not expect a 2022 HFCAA identification, but future inspection access remains uncertain.
- Tiger Brokers (NZ) Limited agreed to a NZ$900,000 penalty in connection with historical AML/CFT control weaknesses. Proceedings were filed in December 2022, the hearing occurred on March 23, 2023, and the filing states that no formal judgment had been issued as of the financial-statement issuance date. The company recorded a provision.
- The company recognized a US$472,605 impairment loss on an available-for-sale investment and continued to carry significant deferred tax assets. Deferred tax assets were US$27.1 million before a US$11.3 million valuation allowance.
- Foreign-currency translation losses of US$8.1 million and unrealized losses on available-for-sale securities contributed to a total comprehensive loss of US$11.2 million.
- Customer data leakage complaints, cybersecurity, regulatory compliance, margin lending, liquidity, interest-rate, foreign-exchange and dependence on clearing partners remain significant risk areas. Interactive Brokers executed and cleared 24.3% of total net revenue-related trading activity in 2022, down from 57.4% in 2021 based on the filing’s concentration disclosure.
Most important facts for investors to verify
- Progress and final regulatory consequences of the CSRC 1230 Notice, including the effect on mainland Chinese customers, account growth and revenue.
- Whether PCAOB inspection access remains satisfactory and whether future HFCAA or Nasdaq trading restrictions could arise.
- The sustainability of operating cash flow given the large influence of customer payables, segregated cash and other brokerage-balance movements.
- Liquidity and repayment or conversion terms for the US$154.3 million of convertible bonds due in 2026.
- Whether lower trading volumes and commission rates are offset by higher interest income, self-clearing efficiencies and growth in international markets.
- The adequacy of regulatory capital and customer-asset segregation during continued growth in consolidated accounts and margin activity.
- The status and ultimate cost of the New Zealand AML/CFT proceedings and any other regulatory or litigation contingencies.
- The enforceability and continued regulatory acceptability of the VIE structure, cash-transfer arrangements and related-party service agreements.