UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 UNDER

THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of August 2020

 


 

Commission File Number: 001-38820

 


 

Futu Holdings Limited

 

11/F, Bangkok Bank Building

No. 18 Bonham Strand W, Sheung Wan

Hong Kong S.A.R., People’s Republic of China

+852 2523-3588

(Address of principal executive offices)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

 

Form 20-F     x          Form 40-F     o

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): o

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): o

 

 

 


 

Exhibit Index

 

Exhibit 99.1—Unaudited Interim Condensed Consolidated Financial Statements

 

2


 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

FUTU HOLDINGS LIMITED

 

 

 

 

 

 

 

 

 

By

:

/s/ Leaf Hua Li

 

Name

:

Leaf Hua Li

 

Title

:

Chairman of the Board of Directors and Chief Executive Officer

 

 

Date: August 17, 2020

 

3


Exhibit 99.1

 

FUTU HOLDINGS LIMITED

 

INDEX TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Contents

 

Page

Unaudited Interim Condensed Consolidated Financial Statements:

 

 

 

 

 

Unaudited Interim Condensed Consolidated Balance Sheets as of December 31, 2019 and June 30, 2020

 

F-2

 

 

 

Unaudited Interim Condensed Consolidated Statements of Comprehensive Income for the Six Months Ended June 30, 2019 and 2020

 

F-4

 

 

 

Unaudited Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2019 and 2020

 

F-5

 

 

 

Unaudited Interim Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2020

 

F-6

 

 

 

Notes to Unaudited Interim Condensed Consolidated Financial Statements

 

F-8

 

F-1


 

FUTU HOLDINGS LIMITED

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

 

(In thousands, except for share and per share data)

 

 

 

 

 

As of December 31

 

As of June 30

 

 

 

Note

 

2019

 

2020

 

2020

 

 

 

 

 

HK$

 

HK$

 

US$

 

ASSETS

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

362,574

 

788,113

 

101,691

 

Cash held on behalf of clients

 

 

 

14,540,863

 

31,111,501

 

4,014,335

 

Available-for-sale financial securities

 

 

 

93,773

 

12,043

 

1,554

 

Equity method investment

 

4

 

6,166

 

5,740

 

741

 

Loans and advances (net of allowance of nil and HK$3,248 thousand as of December 31, 2019 and June 30, 2020)

 

6

 

4,188,689

 

6,777,557

 

874,512

 

Receivables:

 

 

 

 

 

 

 

 

 

Clients

 

 

 

247,017

 

547,812

 

70,685

 

Brokers

 

 

 

1,226,348

 

2,826,107

 

364,654

 

Clearing organization

 

 

 

304,080

 

225,762

 

29,130

 

Fund management companies and fund distributors

 

 

 

 

238,445

 

30,767

 

Interest

 

 

 

16,892

 

23,598

 

3,045

 

Prepaid assets

 

 

 

12,470

 

10,610

 

1,369

 

Operating lease right-of-use assets

 

5

 

161,617

 

137,286

 

17,714

 

Other assets

 

9

 

239,435

 

256,981

 

33,158

 

Total assets

 

 

 

21,399,924

 

42,961,555

 

5,543,355

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

Amounts due to related parties

 

28(b)

 

33,628

 

16,150

 

2,084

 

Payables:

 

 

 

 

 

 

 

 

 

Clients

 

 

 

15,438,879

 

32,502,042

 

4,193,758

 

Brokers

 

 

 

1,484,243

 

4,618,505

 

595,928

 

Clearing organization

 

 

 

 

225,629

 

29,113

 

Fund management companies and fund distributors

 

 

 

26,381

 

27,463

 

3,544

 

Interest

 

 

 

519

 

103

 

13

 

Borrowings

 

10

 

1,467,586

 

1,607,485

 

207,415

 

Securities sold under agreements to repurchase

 

 

 

1,590

 

500,549

 

64,586

 

Operating lease liabilities

 

5

 

172,466

 

147,437

 

19,024

 

Accrued expenses and other liabilities

 

11

 

226,079

 

366,122

 

47,241

 

Total liabilities

 

 

 

18,851,371

 

40,011,485

 

5,162,706

 

 

Contingencies (Note 27)

 

F-2


 

FUTU HOLDINGS LIMITED

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

 

(In thousands, except for share and per share data)

 

 

 

 

 

As of December 31

 

As of June 30

 

 

 

Note

 

2019

 

2020

 

2020

 

 

 

 

 

HK$

 

HK$

 

US$

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Class A ordinary shares (US$0.00001 par value; 48,700,000,000 and 48,700,000,000 shares authorized as of December 31, 2019 and June 30, 2020, respectively; 459,090,941 and 459,655,397 shares issued and outstanding as of December 31, 2019 and June 30, 2020, respectively)

 

12

 

36

 

36

 

5

 

Class B ordinary shares (US$0.00001 par value; 800,000,000 and 800,000,000 shares authorized as of December 31, 2019 and June 30, 2020, respectively; 544,552,051 and 544,552,051 shares issued and outstanding as of December 31, 2019 and June 30, 2020, respectively)

 

12

 

42

 

42

 

5

 

Additional paid-in capital

 

 

 

2,536,182

 

2,550,653

 

329,112

 

Accumulated other comprehensive loss

 

 

 

(4,446

)

(8,742

)

(1,128

)

Retained earnings

 

 

 

16,739

 

408,081

 

52,655

 

Total shareholders’ equity

 

 

 

2,548,553

 

2,950,070

 

380,649

 

Total liabilities and shareholders’ equity

 

 

 

21,399,924

 

42,961,555

 

5,543,355

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

F-3


 

FUTU HOLDINGS LIMITED

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(In thousands, except for share and per share data)

 

 

 

 

 

For the Six Months ended June 30,

 

 

 

Note

 

2019

 

2020

 

2020

 

 

 

 

 

HK$

 

HK$

 

US$

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Brokerage commission and handling charge income

 

17

 

236,981

 

708,695

 

91,443

 

Interest income

 

18

 

221,741

 

352,333

 

45,462

 

Other income

 

19

 

37,581

 

117,178

 

15,120

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

 

496,303

 

1,178,206

 

152,025

 

Costs

 

 

 

 

 

 

 

 

 

Brokerage commission and handling charge expenses

 

20

 

(45,236

)

(127,174

)

(16,409

)

Interest expenses

 

21

 

(39,209

)

(73,315

)

(9,460

)

Processing and servicing costs

 

23

 

(40,630

)

(71,233

)

(9,191

)

Total costs

 

 

 

(125,075

)

(271,722

)

(35,060

)

Total gross profit

 

 

 

371,228

 

906,484

 

116,965

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

Research and development expenses

 

22

 

(117,137

)

(201,336

)

(25,979

)

Selling and marketing expenses

 

22

 

(74,217

)

(161,606

)

(20,852

)

General and administrative expenses

 

22

 

(66,438

)

(97,755

)

(12,613

)

Total operating expenses

 

 

 

(257,792

)

(460,697

)

(59,444

)

 

 

 

 

 

 

 

 

 

 

Others, net

 

 

 

(3,832

)

(8,362

)

(1,079

)

 

 

 

 

 

 

 

 

 

 

Income before income tax expenses

 

 

 

109,604

 

437,425

 

56,442

 

 

 

 

 

 

 

 

 

 

 

Income tax expenses

 

24

 

(8,263

)

(45,775

)

(5,906

)

Share of loss from equity method investments

 

 

 

(470

)

(308

)

(40

)

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

100,871

 

391,342

 

50,496

 

 

 

 

 

 

 

 

 

 

 

Preferred shares redemption value accretion

 

 

 

(12,309

)

 

 

Income allocation to participating preferred shareholders

 

 

 

(10,196

)

 

 

Net income attributable to ordinary shareholders of the Company

 

 

 

78,366

 

391,342

 

50,496

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

100,871

 

391,342

 

50,496

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

(4,523

)

(4,296

)

(554

)

Total comprehensive income

 

 

 

96,348

 

387,046

 

49,942

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to ordinary shareholders of the Company

 

15

 

 

 

 

 

 

 

Basic

 

 

 

0.11

 

0.39

 

0.05

 

Diluted

 

 

 

0.10

 

0.39

 

0.05

 

 

 

 

 

 

 

 

 

 

 

Net income per ADS

 

 

 

 

 

 

 

 

 

Basic

 

 

 

0.87

 

3.12

 

0.40

 

Diluted

 

 

 

0.76

 

3.09

 

0.40

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of ordinary shares used in computing net income per share

 

15

 

 

 

 

 

 

 

Basic

 

 

 

717,361,836

 

1,003,789,053

 

1,003,789,053

 

Diluted

 

 

 

827,313,154

 

1,013,357,569

 

1,013,357,569

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

F-4


 

FUTU HOLDINGS LIMITED

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

(In thousands, except for share and per share data)

 

 

 

 

 

Ordinary shares

 

Class A
ordinary shares

 

Class B
ordinary shares

 

Additional

 

Accumulated
other

 

(Accumulated

 

 

 

 

 

Note

 

Number of
Shares

 

Amount

 

Number of
Shares

 

Amount

 

Number of
Shares

 

Amount

 

paid in
capital

 

comprehensive
loss

 

deficit)/Retained
earnings

 

Total equity

 

 

 

 

 

 

 

HK$

 

 

 

HK$

 

 

 

HK$

 

HK$

 

HK$

 

HK$

 

HK$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of January 1, 2019

 

 

 

403,750,000

 

31

 

 

 

 

 

 

(1,299

)

(148,925

)

(150,193

)

Profit for the period

 

 

 

 

 

 

 

 

 

 

 

100,871

 

100,871

 

Share-based compensation

 

14

 

 

 

 

 

 

 

7,595

 

 

 

7,595

 

Preferred shares redemption value accretion

 

 

 

 

 

 

 

 

 

(12,309

)

 

 

(12,309

)

Conversion and redesignation of preferred shares into ordinary shares

 

 

 

 

 

237,129,043

 

19

 

140,802,051

 

11

 

1,262,751

 

 

 

1,262,781

 

Issuance of ordinary shares upon Initial Public Offering (“IPO”)

 

 

 

 

 

115,666,666

 

9

 

 

 

1,259,308

 

 

 

1,259,317

 

Redesignation of ordinary shares into Class B ordinary shares

 

 

 

(403,750,000

)

(31

)

 

 

403,750,000

 

31

 

 

 

 

 

Foreign currency translation adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

(4,523

)

 

(4,523

)

Balance at June 30, 2019

 

 

 

 

 

352,795,709

 

28

 

544,552,051

 

42

 

2,517,345

 

(5,822

)

(48,054

)

2,463,539

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of January 1, 2020

 

 

 

 

 

459,090,941

 

36

 

544,552,051

 

42

 

2,536,182

 

(4,446

)

16,739

 

2,548,553

 

Profit for the period

 

 

 

 

 

 

 

 

 

 

 

391,342

 

391,342

 

Share-based compensation

 

14

 

 

 

 

 

 

 

12,065

 

 

 

12,065

 

Shares issued upon exercise of employee share options

 

 

 

 

 

564,456

 

 

 

 

2,406

 

 

 

2,406

 

Foreign currency translation adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

(4,296

)

 

(4,296

)

Balance at June 30, 2020

 

 

 

 

 

459,655,397

 

36

 

544,552,051

 

42

 

2,550,653

 

(8,742

)

408,081

 

2,950,070

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

F-5


 

FUTU HOLDINGS LIMITED

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(In thousands)

 

 

 

 

 

For the Six Months Ended June 30,

 

 

 

Note

 

2019

 

2020

 

2020

 

 

 

 

 

HK$

 

HK$

 

US$

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

Net income

 

 

 

100,871

 

391,342

 

50,496

 

Adjustments for:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

6,556

 

13,570

 

1,751

 

Expected credit loss expenses

 

 

 

 

3,248

 

419

 

Share of loss from equity method investments

 

 

 

470

 

308

 

40

 

Foreign exchange losses

 

 

 

2,631

 

4,153

 

536

 

Share-based compensation

 

14

 

7,595

 

12,065

 

1,557

 

Realized gain from available-for-sale financial securities

 

 

 

(376

)

(360

)

(46

)

Deferred income tax benefit

 

 

 

(2,518

)

 

 

Amortisation of right-of-use assets

 

 

 

6,098

 

24,804

 

3,200

 

 

 

 

 

 

 

 

 

 

 

Changes in operating assets:

 

 

 

 

 

 

 

 

 

Net increase in loans and advances

 

 

 

(685,570

)

(2,592,116

)

(334,462

)

Net increase in accounts receivable from clients and brokers

 

 

 

(181,454

)

(1,900,554

)

(245,230

)

Net decrease in accounts receivable from clearing organization

 

 

 

36,730

 

78,318

 

10,105

 

Net increase in accounts receivable from fund management companies and fund distributors

 

 

 

 

(238,445

)

(30,767

)

Net decrease/(increase) in interest receivable

 

 

 

11,639

 

(6,706

)

(865

)

Net decrease in prepaid assets

 

 

 

537

 

1,860

 

240

 

Net decrease in other assets

 

 

 

18,101

 

10,106

 

1,304

 

 

 

 

 

 

 

 

 

 

 

Changes in operating liabilities:

 

 

 

 

 

 

 

 

 

Net increase in amounts due to related parties

 

 

 

2,026

 

11,100

 

1,432

 

Net increase in accounts payable to clients and brokers

 

 

 

194,395

 

20,197,425

 

2,606,086

 

Net increase in accounts payable to clearing organization

 

 

 

 

225,629

 

29,113

 

Net increase in accounts payable to fund management companies and fund distributors

 

 

 

 

1,082

 

140

 

Net increase in payroll and welfare payable

 

 

 

861

 

61,704

 

7,962

 

Net increase/(decrease) in interest payable

 

 

 

1,931

 

(416

)

(54

)

Net decrease in operating lease liabilities

 

 

 

(4,634

)

(26,414

)

(3,408

)

Net increase in securities sold under agreements to repurchase

 

 

 

 

498,959

 

64,381

 

Net increase in other liabilities

 

 

 

8,730

 

78,069

 

10,073

 

Net cash (used in)/generated from operating activities

 

 

 

(475,381

)

16,848,731

 

2,174,003

 

 

F-6


 

FUTU HOLDINGS LIMITED

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

 

(In thousands)

 

 

 

 

 

For the Six Months Ended June 30,

 

 

 

Note

 

2019

 

2020

 

2020

 

 

 

 

 

HK$

 

HK$

 

US$

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

Proceeds from disposal of property and equipment and intangible assets

 

 

 

3

 

 

 

Purchase of property and equipment and intangible assets

 

 

 

(47,901

)

(31,523

)

(4,067

)

Purchase of available-for-sale financial securities

 

 

 

(87,300

)

(102,911

)

(13,279

)

Proceeds from disposal of available-for-sale financial securities

 

 

 

97,820

 

182,832

 

23,591

 

Realized gain received from available-for-sale financial securities

 

 

 

376

 

360

 

46

 

Acquisition of equity method investments

 

 

 

(6,709

)

 

 

Net cash (used in)/generated from investing activities

 

 

 

(43,711

)

48,758

 

6,291

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

Proceeds from borrowings

 

 

 

2,424,101

 

8,384,295

 

1,081,831

 

Repayment of borrowings

 

 

 

(3,181,807

)

(8,244,396

)

(1,063,779

)

Proceeds from initial public offering, net of issurance costs

 

 

 

1,259,317

 

 

 

Proceeds from exercise of share options

 

 

 

 

11,365

 

1,466

 

Net cash generated from financing activities

 

 

 

501,611

 

151,264

 

19,518

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

 

(13,827

)

(52,576

)

(6,784

)

 

 

 

 

 

 

 

 

 

 

Net (decrease)/increase in cash, cash equivalents and restricted cash

 

 

 

(31,308

)

16,996,177

 

2,193,028

 

Cash, cash equivalents and restricted cash at beginning of the period

 

 

 

11,987,104

 

14,903,437

 

1,922,998

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and restricted cash at end of the period

 

 

 

11,955,796

 

31,899,614

 

4,116,026

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and restricted cash

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

496,761

 

788,113

 

101,691

 

Cash held on behalf of clients

 

 

 

11,459,035

 

31,111,501

 

4,014,335

 

Cash, cash equivalents and restricted cash at end of the period

 

 

 

11,955,796

 

31,899,614

 

4,116,026

 

 

 

 

 

 

 

 

 

 

 

Non-cash financing activities

 

 

 

 

 

 

 

 

 

Accretion to preferred shares redemption value

 

 

 

12,309

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure

 

 

 

 

 

 

 

 

 

Interest paid

 

 

 

(37,278

)

(74,772

)

(9,648

)

Income tax paid

 

 

 

 

(10,843

)

(1,399

)

Cash paid for amounts include in operating lease liabilities

 

 

 

(6,876

)

(28,865

)

(3,724

)

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

F-7


 

FUTU HOLDINGS LIMITED

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.                            ORGANIZATION AND PRINCIPAL ACTIVITIES

 

Principal activities

 

Futu Holdings Limited (the “Company”) is an investment holding company incorporated in the Cayman Islands with limited liability and conducts its business mainly through its subsidiaries, variable interest entity (“VIE”) and subsidiary of the VIE (collectively referred to as the “Group”). The Group principally engages in online financial services including securities and derivative trades brokerage, margin financing and fund distribution services based on independently developed software and websites like “Futu NiuNiu” mobile app. The Group also provides financial information and online community services, etc. The Company completed its IPO on March 8, 2019 on the Nasdaq Global Market. Each American Depositary Shares (“ADSs”) of the Company represents eight Class A ordinary shares.

 

As of June 30, 2020, the Company’s principal subsidiaries, consolidated VIE and subsidiary of VIE are as follows:

 

Subsidiaries

 

Date of Incorporation/
Establishment/

 

Place of
Incorporation/
Establishment

 

Percentage of
Direct or Indirect
Economic Interest

 

Principal Activities

Futu Securities International (Hong Kong) Limited (“Futu Securities” or the “Operating Company”)

 

April 17, 2012

 

Hong Kong

 

100

%

Financial services

Futu Securities (Hong Kong) Limited

 

May 2, 2014

 

Hong Kong

 

100

%

Investment holding

Futu Network Technology Limited

 

May 17, 2015

 

Hong Kong

 

100

%

Research and development and technology services

Futu Network Technology (Shenzhen) Co., Ltd.

 

October 14, 2015

 

Shenzhen, PRC

 

100

%

Research and development and technology services

Shen Si Network Technology (Beijing) Co., Ltd. (“Shen Si”)

 

September 15, 2014

 

Beijing, PRC

 

100

%

No substantial business

Futu Inc.

 

December 17, 2015

 

Delaware, USA

 

100

%

Financial services

 

 

 

 

 

 

 

 

 

VIE

 

 

 

 

 

 

 

 

Shenzhen Futu Network Technology Co., Ltd.(1) (“Shenzhen Futu”)

 

December 18, 2007

 

Shenzhen, PRC

 

100

%

Research and development and technology services

 

 

 

 

 

 

 

 

 

Subsidiary of the VIE

 

 

 

 

 

 

 

 

Beijing Futu Network Technology Co., Ltd.

 

April 4, 2014

 

Beijing, PRC

 

100

%

No substantial business

 


Note:

 

(1)                       Mr. Leaf Hua Li and Ms. Lei Li are beneficiary owners of the Company and held 85% and 15% equity interest in Shenzhen Futu, respectively. Mr. Leaf Hua Li is the founder, chairman and chief executive officer of the Company, and Ms. Lei Li is Mr. Leaf Hua Li’s spouse.

 

F-8


 

FUTU HOLDINGS LIMITED

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                            SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation

 

The accompanying unaudited interim condensed consolidated financial statements of the Group have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes normally included in the annual financial statements prepared in accordance with U.S. GAAP. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted consistent with Article 10 of Regulation S-X. In the opinion of management, the Group’s unaudited interim condensed consolidated financial statements and accompanying notes include all adjustments (consisting of normal recurring adjustments) considered necessary for the fair statement of the Group’s financial position as of December 31, 2019 and June 30, 2020, and results of operations and cash flows for the six months ended June 30, 2019 and 2020. Interim results of operations are not necessarily indicative of the results for the full year or for any future period. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2019, and related notes included in the Group’s audited consolidated financial statements. The financial information as of December 31, 2019 presented in the unaudited interim condensed consolidated financial statements is derived from the audited consolidated financial statements as of December 31, 2019.

 

Significant accounting policies followed by the Group in the preparation of the accompanying unaudited interim condensed consolidated financial statements are summarized below.

 

Basis of Consolidation

 

The unaudited interim condensed consolidated financial statements include the financial statements of the Company, its subsidiaries, the VIEs and subsidiary of the VIEs for which the Company or its subsidiary is the primary beneficiary.

 

A subsidiary is an entity in which the Company, directly or indirectly, controls more than one half of the voting power; or has the power to appoint or remove the majority of the members of the board of directors; or to cast a majority of votes at the meeting of directors; or has the power to govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders.

 

A consolidated VIE is an entity in which the Company, or its subsidiary, through contractual arrangements, has the power to direct the activities that most significantly impact the entity’s economic performance, bears the risks of and enjoys the rewards normally associated with ownership of the entity, and therefore the Company or its subsidiary is the primary beneficiary of the entity.

 

All transactions and balances among the Company, its subsidiaries, the VIEs and subsidiary of the VIEs have been eliminated upon consolidation.

 

F-9


 

FUTU HOLDINGS LIMITED

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                            SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

VIE Companies

 

1)                           Contractual Agreements with VIEs

 

The following is a summary of the contractual agreements (collectively, “Contractual Agreements”) between the Company’s PRC subsidiary, Shen Si, and the VIEs, Shenzhen Futu and Hainan Futu Information Services Co., Ltd. (“Hainan Futu”). Through the Contractual Agreements, the VIEs are effectively controlled by the Company.

 

Shareholders’ Voting Rights Proxy Agreements.   Pursuant to the Shareholders’ Voting Rights Proxy Agreements, each shareholder of Shenzhen Futu and Hainan Futu irrevocably authorized Shen Si or any person(s) designated by Shen Si to exercise such shareholder’s rights in Shenzhen Futu and Hainan Futu, including without limitation, the power to participate in and vote at shareholder’s meetings, the power to nominate and appoint the directors, senior management, and other shareholders’ voting right permitted by the Articles of Association of Shenzhen Futu and Hainan Futu. The shareholders’ voting rights proxy agreements remain irrevocable and continuously valid from the date of execution until the expiration of the business term of Shen Si and can be renewed upon request by Shen Si.

 

Business Operation Agreements.   Pursuant to the Business Operation Agreements, Shenzhen Futu and Hainan Futu, and their shareholders undertake that without Shen Si’s prior written consent, Shenzhen Futu and Hainan Futu shall not enter into any transactions that may have a material effect on Shenzhen Futu’s and Hainan Futu’s assets, business, personnel, obligations, rights or business operations. Shenzhen Futu and Hainan Futu, and their shareholders shall elect directors nominated by Shen Si and such directors shall nominate officers designated by Shen Si. The business operation agreements will remain effective until the end of Shen Si’s business term, which will be extended if Shen Si’s business term is extended or as required by Shen Si.

 

Equity Interest Pledge Agreements.   Pursuant to the Equity Interest Pledge Agreements, each shareholder of Shenzhen Futu and Hainan Futu agrees that, during the term of the Equity Interest Pledge Agreements, he or she will not dispose of the pledged equity interests or create or allow any encumbrance on the pledged equity interests without the prior written consent of Shen Si. The Equity Interest Pledge Agreements remain effective until the latter of the full payment of all secured debt under the equity interest pledge agreements and Shenzhen Futu, Hainan Futu and their shareholders discharge all their obligations under the contractual arrangements.

 

Exclusive Technology Consulting and Services Agreement.   Under the Exclusive Technology Consulting and Services Agreements between Shen Si and the VIEs, Shenzhen Futu and Hainan Futu, Shen Si has the exclusive right to provide Shenzhen Futu and Hainan Futu with technology consulting and services related to, among other things, technology research and development, technology application and implementation, maintenance of software and hardware. Without Shen Si’s written consent, Shenzhen Futu and Hainan Futu shall not accept any technology consulting and services covered by these agreements from any third party. Shenzhen Futu and Hainan Futu. agree to pay a service fee at an amount equivalent to all of its net profit to Shen Si. Unless otherwise terminated in accordance with the terms of these agreements or otherwise agreed with Shen Si, these agreements will remain effective until the expiration of Shen Si’s business term, and will be renewed if Shen Si’s business term is extended.

 

F-10


 

FUTU HOLDINGS LIMITED

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                            SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

VIE Companies (Continued)

 

1)                           Contractual Agreements with VIEs (Continued)

 

Exclusive Option Agreements. Pursuant to the Exclusive Option Agreement, each shareholder of Shenzhen Futu and Hainan Futu has irrevocably granted Shen Si an exclusive option, to the extent permitted by PRC laws, to purchase, or have its designated person or persons to purchase, at its discretion, all or part of the shareholder’s equity interests in Shenzhen Futu and Hainan Futu. Unless PRC laws and/or regulations require valuation of the equity interests, the purchase price shall be RMB1.00 or the lowest price permitted by the applicable PRC laws, whoever is higher. Each shareholder of Shenzhen Futu and Hainan Futu undertakes that, without the prior written consent of Shen Si, he or she will not, among other things, (i) create any pledge or encumbrance on his or her equity interests in Shenzhen Futu and Hainan Futu, (ii) transfer or otherwise dispose of his or her equity interests in Shenzhen Futu and Hainan Futu, (iii) change Shenzhen Futu’s and Hainan Futu’s registered capital, (iv) amend Shenzhen Futu’s and Hainan Futu’s articles of association, (v) liquidate or dissolve Shenzhen Futu and Hainan Futu, or (vi) distribute dividends to the shareholders of Shenshen Futu and Hainan Futu. In addition, Shenzhen Futu and Hainan Futu undertake that, without the prior written consent of Shen Si, they will not, among other things, dispose of Shenzhen Futu’s and Hainan Futu’s material assets, provide any loans to any third parties, enter into any material contract with a value of more than RMB500,000, or create any pledge or encumbrance on any of their assets, or transfer or otherwise dispose of their material assets. Unless otherwise terminated by Shen Si, these agreements will remain effective until the expiration of Shen Si’s business term, and will be renewed if Shen Si’s business term is extended.

 

2)                           Risks in relation to the VIE structure

 

The following table sets forth the assets, liabilities, results of operations and changes in cash and cash equivalents of the VIEs and their subsidiary taken as a whole, which were included in the Group’s unaudited interim condensed consolidated financial statements with intercompany balances and transactions eliminated between the VIEs and their subsidiary:

 

 

 

As of December 31,

 

As of June 30,

 

 

 

2019

 

2020

 

 

 

(HK$ in thousands)

 

 

 

 

 

 

 

Total assets

 

68,480

 

122,632

 

Total liabilities

 

73,271

 

122,310

 

 

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

2020

 

 

 

(HK$ in thousands)

 

 

 

 

 

 

 

Total operating revenue

 

18,689

 

50,298

 

Net (loss)/income

 

(193

)

6,777

 

 

F-11


 

FUTU HOLDINGS LIMITED

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                            SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

VIE Companies (Continued)

 

2)                           Risks in relation to the VIE structure (Continued)

 

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

2020

 

 

 

(HK$ in thousands)

 

 

 

 

 

 

 

Net cash used in operating activities

 

(931

)

(567

)

Net decrease in cash and cash equivalents

 

(931

)

(567

)

Cash and cash equivalents at beginning of the period

 

1,750

 

1,481

 

Cash and cash equivalents at end of the period

 

819

 

914

 

 

Under the Contractual Agreements with the VIEs, the Company has the power to direct activities of the VIEs and VIEs’ subsidiary, and can have assets transferred out of the VIEs and VIEs’ subsidiary. Therefore, the Company considers itself the ultimate primary beneficiary of the VIEs and there is no asset of the VIEs that can only be used to settle obligations of the VIEs and VIEs’ subsidiary, except for registered capital of the VIEs and their subsidiary amounting to RMB10 million as of December 31, 2019 and June 30, 2020, respectively. Since the VIEs are incorporated as limited liability companies under the PRC Company Law, creditors of the VIEs do not have recourse to the general credit of the Company. There is currently no contractual arrangement that would require the Company to provide additional financial support to the VIEs. However, as the Company is conducting certain businesses through its VIEs and VIEs’ subsidiary, the Company may provide such support on a discretionary basis in the future, which could expose the Company to a loss.

 

In the opinion of the Company’s management, the contractual arrangements among its subsidiary, the VIEs and their respective Nominee Shareholders are in compliance with current PRC laws and are legally binding and enforceable. However, uncertainties in the interpretation and enforcement of the PRC laws, regulations and policies could limit the Company’s ability to enforce these contractual arrangements. As a result, the Company may be unable to consolidate the VIEs and VIEs’ subsidiary in the unaudited interim condensed consolidated financial statements.

 

On March 15, 2019, the Foreign Investment Law was formally passed by the thirteenth National People’s Congress and it was taken effect on January 1, 2020. The Foreign Investment Law replaces the Law on Sino-Foreign Equity Joint Ventures, the Law on Sino-Foreign Cooperative Joint Ventures and the Law on Foreign-Capital Enterprises to become the legal foundation for foreign investment in the PRC.

 

The Foreign Investment Law stipulates certain forms of foreign investment. However, the Foreign Investment Law does not explicitly stipulate contractual arrangements such as those we rely on as a form of foreign investment. Notwithstanding the above, the Foreign Investment Law stipulates that foreign investment includes “foreign investors investing through any other methods under laws, administrative regulations or provisions prescribed by the State Council.” Future laws, administrative regulations or provisions prescribed by the State Council may possibly regard Contractual Arrangements as a form of foreign investment. In the event that the State Council in the future promulgates laws and regulations that deem investments made by foreign investors through contractual arrangements as “foreign investment”, the Group’s ability to use the contractual arrangements with its VIEs and the Group’s  ability to conduct business through the VIEs could be severely limited.

 

F-12


 

FUTU HOLDINGS LIMITED

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                            SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

VIE Companies (Continued)

 

2)                           Risks in relation to the VIE structure (Continued)

 

The Company’s ability to control the VIEs also depends on the power of attorney Shen Si has to vote on all matters requiring shareholders’ approvals in the VIEs. As noted above, the Company believes these power of attorney are legally binding and enforceable but may not be as effective as direct equity ownership. In addition, if the Group’s corporate structure or the contractual arrangements with the VIEs were found to be in violation of any existing PRC laws and regulations, the PRC regulatory authorities could, within their respective jurisdictions:

 

·                                revoke the Group’s business and operating licenses;

 

·                                require the Group to discontinue or restrict its operations;

 

·                                restrict the Group’s right to collect revenues;

 

·                                block the Group’s websites;

 

·                                require the Group to restructure its operations, re-apply for the necessary licenses or relocate the Group’s businesses, staff and assets;

 

·                                impose additional conditions or requirements with which the Group may not be able to comply; or

 

·                                take other regulatory or enforcement actions against the Group that could be harmful to the Group’s business.

 

The imposition of any of these restrictions or actions may result in a material adverse effect on the Group’s ability to conduct its business. In addition, if the imposition of any of these restrictions causes the Group to lose the right to direct the activities of the VIEs or the right to receive their economic benefits, the Group would no longer be able to consolidate the financial statements of the VIEs. In the opinion of management, the likelihood of losing the benefits in respect of the Group’s current ownership structure or the contractual arrangements with its VIEs is remote.

 

Use of Estimates

 

The preparation of the unaudited interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, related disclosures of contingent assets and liabilities at the balance sheet date, and the reported revenue, cost and expenses during the reported period in the unaudited interim condensed consolidated financial statements and accompanying notes. Significant accounting estimates reflected in the Group’s unaudited interim condensed consolidated financial statements mainly include, but are not limited to, assessment of whether the Group acts as a principal or an agent in different revenue streams, the determination of estimated selling prices of multiple element revenue contracts, the estimation of selling and marketing expense from incentive program, the valuation and recognition of share-based compensation arrangements, depreciable lives of property and equipment, useful life of intangible assets, assessment for impairment of loans and advances, provision of income tax and valuation allowance for deferred tax asset. Actual results could differ from those estimates.

 

F-13


 

FUTU HOLDINGS LIMITED

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                            SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Comprehensive Income and Foreign Currency Translation

 

The Group’s operating results are reported in the unaudited interim condensed consolidated statements of comprehensive income pursuant to FASB ASC Topic 220, “Comprehensive Income”. Comprehensive income consists of two components: net income and other comprehensive income (“OCI”). The Group’s OCI is comprised of gains and losses resulting from translating foreign currency financial statements of entities, of which functional currency is other than Hong Kong dollar which is the presentational currency of the Group, net of related income taxes, where applicable. Such subsidiaries’ assets and liabilities are translated into Hong Kong dollars at period-end exchange rates, and revenues and expenses are translated at average exchange rates prevailing during the period. Adjustments that result from translating amounts from a subsidiary’s functional currency to the Hong Kong dollar (as described above) are reported net of tax, where applicable, in accumulated OCI in the unaudited interim condensed consolidated balance sheets.

 

Convenience Translation

 

Translations of balances in the unaudited interim condensed consolidated balance sheets, unaudited interim condensed consolidated statements of comprehensive income and unaudited interim condensed consolidated statements of cash flows from HK$ into US$ as of and for the six months ended June 30, 2020 are solely for the convenience of the readers and were calculated at the rate of US$1.00=HK$7.7501, representing the noon buying rate set forth in the H.10 statistical release of the U.S. Federal Reserve Board on June 30, 2020. No representation is made that the HK$ amounts could have been, or could be, converted, realized or settled into US$ at that rate on June 30, 2020, or at any other rate.

 

Current Expected Credit Losses

 

Prior to January 1, 2020, the Group applied incurred loss methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred.

 

On January 1, 2020, the Group adopted FASB ASC Topic 326 — “Financial Instruments — Credit Losses” (“ASC Topic 326”) which replaces the incurred loss methodology with the current expected credit loss (“CECL”) methodology. The new guidance applies to financial assets measured at amortized cost, held-to-maturity debt securities and off-balance sheet credit exposures. For on-balance sheet assets, an allowance must be recognized at the origination or purchase of in-scope assets and represents the expected credit losses over the contractual life of those assets. Expected credit losses on off-balance sheet credit exposures must be estimated over the contractual period the Group is exposed to credit risk as a result of a present obligation to extend credit. The Group concluded there is no liability associated with off-balance sheet credit exposures for all periods presented.

 

The Group adopted ASC Topic 326 using the modified retrospective approach for all in-scope assets. The adoption of ASC Topic 326 has no impact on the Group’s retained earnings as of January 1, 2020. Loans and advances are collateralized by client securities and the collateral is required to be maintained at specified minimum levels at all times. The Group monitors margin levels and requires clients to provide additional collateral, or reduce margin positions, to meet minimum collateral requirements if the fair value of the collateral changes. The Group applies the practical expedient based on collateral maintenance provisions in estimating an allowance for credit losses for the loans and advances. In accordance with the practical expedient, when the Group reasonably expects that borrowers (or counterparties, as applicable) will replenish the collateral as required, there is no expectation of credit losses when the collateral’s fair value is greater than the amortized cost of the financial asset. If the amortized cost exceeds the fair value of collateral, then credit losses are estimated only on the unsecured portion. For the six months ended June 30, 2020, expected credit loss expenses of HK$3,248 thousand resulting from the assessment of credit losses for the loans and advances under ASC Topic 326 at period-end is recognized in “Others, net” in the unaudited interim condensed consolidated statements of comprehensive income.

 

F-14


 

FUTU HOLDINGS LIMITED

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                            SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Current Expected Credit Losses(Continued)

 

An allowance for credit losses on other financial receivables, including receivables from clients, brokers, clearing organization and fund management companies and fund distributors, is estimated based on the aging of these financial receivables. Since most of the financial receivables are short-term in nature, the allowance for credit losses for other financial receivables were immaterial for all periods presented.

 

Cash and Cash Equivalents

 

Cash and cash equivalents represent cash on hand, demand deposits and time deposits placed with banks or other financial institutions, which are unrestricted to withdrawal or use, and which have original maturities of three months or less.

 

Cash Held on Behalf of Clients

 

The Group has classified the clients’ deposits as cash held on behalf of clients under the assets section in the unaudited interim condensed consolidated balance sheets and recognized the corresponding accounts payables to the respective clients under the liabilities section.

 

Available-for-Sale Financial Securities

 

Available-for-sale financial securities include debt securities and are measured at fair value. Investments classified as available-for-sale debt securities are reported at fair value with unrealized gains or losses, if any, recorded in accumulated other comprehensive income in the unaudited interim condensed consolidated statements of changes in shareholders’ equity. Debt securities in this category are wealth management products with expected return rate or variable interest rate indexed to investment horizon. These wealth management products are issued by a commercial bank in China and the Group can redeem the units held upon request.

 

Available-for-sale debt securities are impaired if their fair value is below their amortized cost basis. Impairment shall be assessed at the individual security level. An entity shall not combine separate contracts for purposes of determining whether an available-for-sale debt security is impaired or can contractually be prepaid or otherwise settled in such a way that the entity would not recover substantially all of its cost. The Group analyzes the impairment of its available-for-sale debt securities by considering factors including, but not limited to, its ability and intent to hold the individual security, and whether a decline in fair value of the Group’s available-for-sale debt securities is due to any credit related factors. If the Group determines that an impairment of an available-for-sale debt security is due to any credit related factors, losses related to a credit impairment will be recorded as an allowance for credit losses with an offsetting entry to net income, and the portion of losses related to a non-credit factors will be recorded in OCI. If the Group determines that an impairment of the available-for-sale debt security is not related to any credit related factors, no allowance or credit loss expense is recorded, and the non-credit impairment loss will be recorded in OCI. As of December 31, 2019 and June 30, 2020, the fair value of the Group’s available-for-sale debt securities is equal to their amortized cost amounting to HK$93,773 thousand and HK$12,043 thousand, respectively, the Group did not identify any sign for its available-for-sale debt securities to impair.

 

F-15


 

FUTU HOLDINGS LIMITED

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                            SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Equity method investment

 

In accordance with ASC 323 Investment—Equity Method and Joint Ventures, the Company accounts for an equity investment over which it has significant influence but does not own a majority of the equity interest or otherwise controls and the investments are either common stock or in substance common stock using the equity method. The Company’s share of the investee’s profit and loss is recognized in the unaudited interim condensed consolidated statements of comprehensive income of the period.

 

In January 2019, the Company invested in Zhixiang Technology (Shenzhen) Co., Ltd, a professional stock incentive plan service company. The Company acquired 20% ordinary equity interest with a total consideration of HK$6,709 thousand. The Company exercises significant influence in Zhixiang Technology (Shenzhen) Co., Ltd and therefore accounts for this as a long-term investment using equity method.

 

Loans and advances

 

Loans and advances include margin loans and IPO loans extended to clients and other advances, collateralized by securities and are carried at the amortized cost, net of an allowance for doubtful accounts.

 

IPO loans for subscription of new shares are normally settled within one week from the drawdown date. Once IPO stocks are allotted, the Operating Company requires clients to repay the IPO loans. Force liquidation action would be taken if the clients fail to settle their shortfall after the IPO allotment result is announced. The outstanding IPO loan balances as of December 31, 2019 and June 30, 2020 were nil and HK$519,991 thousand, respectively. The allowance for doubtful accounts for clients and related activity was immaterial for the period presented.

 

Other advances consist of bridge loans to enterprises which pledged unlisted or listed shares they hold as collateral. The allowance for doubtful accounts for clients and related activity was immaterial for the period presented.

 

Loans and advances are initially recorded net of directly attributable transaction costs and are measured at subsequent reporting dates at amortized cost. Finance charges, premiums payable on settlement or redemption and direct costs are accounted for on an accrual basis to the surplus or deficit using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.

 

F-16


 

FUTU HOLDINGS LIMITED

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                            SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Trading Receivables from and Payables to Clients

 

Trading receivables from and payables to clients include amounts due on brokerage transactions on a trade-date basis.

 

Receivables from and Payables to Brokers, Clearing Organization and Fund Management Companies and Fund Distributors

 

Receivables from and payables to brokers, clearing organization and fund management companies and fund distributors include receivables and payables from unsettled trades on a trade-date basis, including amounts receivable for securities, derivatives or funds trades not delivered by the Operating Company to the purchaser by the settlement date and cash deposits, and amounts payable for securities, derivatives or funds trades not received by the Operating Company from a seller by the settlement date.

 

Clearing settlement fund deposited in the clearing organization for the clearing purpose is recognized in receivables from clearing organization.

 

The Operating Company borrowed margin loans from executing brokers in the United States, with the benchmark interest rate plus premium differentiated depending on the amount borrowed, and immediately lent to margin financing clients. Margin loans borrowed is recognized in the payables to brokers.

 

Receivables from and payables to fund management companies and fund distributors are currently presented as separate line items on the face of the balance sheet as the management believes that the fund distribution services has become one of the Company’s major businesses. Comparatives have also been reclassified from other assets and accrued expenses and other liabilities for comparability.

 

Interest Receivable and Payable

 

Interest receivable is calculated based on the contractual interest rate of bank deposit, loans and advances on an accrual basis, and is recorded as interest income as earned.

 

Interest payable is calculated based on the contractual interest rates of borrowings on an accrual basis.

 

F-17


 

FUTU HOLDINGS LIMITED

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                            SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Securities Borrowed and Securities Loaned

 

Securities borrowed and securities loaned are recorded at the amount of the cash collateral advanced or received. Securities borrowed transactions require the Operating Company to provide counterparties with collateral, which may be in the form of cash, or other securities. With respect to securities loaned, the Operating Company receives collateral, which may be in the form of cash or other securities in an amount generally in excess of the fair value of the securities loaned. The Operating Company monitors the market value of securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded as permitted contractually.

 

Receivables and payables related to securities borrowed and securities loaned are included at receivables from and payables to brokers or clients in the unaudited interim condensed consolidated balance sheets. Securities lending fees received and securities borrowing fees paid by the Operating Company are included in interest income and interest expense, respectively, in the unaudited interim condensed consolidated statements of comprehensive income.

 

Securities Sold Under Agreements to Repurchase

 

Transactions involving sales of securities under agreements to repurchase (repurchase agreements) are treated as collateralized financing transactions. Under repurchase agreements, the Operating Company receives cash from counterparties and provides securities as collateral. These agreements are carried at amounts at which the securities will subsequently be repurchased, plus accrued interest, and the interest expense incurred by the Operating Company is recorded as interest expenses on the unaudited interim condensed consolidated statements of comprehensive income.

 

Leases

 

The Group reviews all relevant contracts to determine if the contract contains a lease at its inception date. A contract contains a lease if the contract conveys to the Group the right to control the use of an underlying asset for a period of time in exchange for consideration. If the Group determines that a contract contains a lease, it recognizes, in the unaudited interim condensed consolidated balance sheets, a lease liability and a corresponding right-of-use asset on the commencement date of the lease. The lease liability is initially measured at the present value of the future lease payments over the lease term using the rate implicit in the lease or, if not readily determinable, the Group’s secured incremental borrowing rate. An operating lease right-of-use asset is initially measured at the value of the lease liability minus any lease incentives and initial direct costs incurred plus any prepaid rent.

 

Each lease liability is measured using the Group’s secured incremental borrowing rate, which is based on an internally developed yield curve using interest rates of debt issued with a similar risk profile as the Group and a duration similar to the lease term. The Group’s leases have remaining terms of one to three years, and some of which include options to terminate the lease upon notice. The Group considers these options when determining the lease term used to calculate the right-of-use asset and the lease liability when the Group is reasonably certain it will exercise such option.

 

F-18


 

FUTU HOLDINGS LIMITED

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                            SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Leases (Continued)

 

The Group’s operating leases contain both lease components and non-lease components. Non-lease components are distinct elements of a contract that are not related to securing the use of the underlying assets, such as common area maintenance and other management costs. The Company elected to measure the lease liability by combining the lease and non-lease components as a single lease component. As such, the Company includes the fixed payments and any payments that depend on a rate or index that relate to the lease and non-lease components in the measurement of the lease liability. Some of the non-lease components are variable in nature and not based on an index or rate, and as a result, are not included in the measurement of the operating lease right-of-use assets or operating lease liability.

 

Operating lease expense is recognized on a straight-line basis over the lease term and is included in rental and other related expenses in the Group’s unaudited interim condensed consolidated statements of comprehensive income.

 

All of the Group’s leases are classified as operating leases and primarily consist of real estate leases for corporate offices, data centers, and other facilities. As of June 30, 2020, the weighted-average remaining lease term on these leases is approximately three years and the weighted-average discount rate used to measure the lease liabilities is approximately 4.75%. For the six months ended June 30, 2020, right-of-use assets obtained under operating leases was HK$1,385 thousand. The Group’s lease agreements do not contain any residual value guarantees, restrictions or covenants.

 

Refundable Deposit

 

Refundable deposit is included in other assets in the unaudited interim condensed consolidated balance sheets. As a clearing member firm of HKEx, the Group is also exposed to clearing member credit risk. HKEx requires member firms to deposit cash to a clearing fund. If a clearing member defaults in its obligations to the clearing organization in an amount larger than its own margin and clearing fund deposits, the shortfall is absorbed pro rata from the deposits of the other clearing members. HKEx has the authority to assess their members for additional funds if the clearing fund is depleted. A large clearing member default could result in a substantial cost if the Group is required to pay such assessments.

 

Property and Equipment, net

 

Property and equipment, which are included in other assets in the unaudited interim condensed consolidated balance sheets are stated at historical cost less accumulated depreciation and impairment, if any. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Residual rate is determined based on the economic value of the property and equipment at the end of the estimated useful lives as a percentage of the original cost.

 

Category

 

Estimated useful lives

 

Residual rate

 

 

 

 

 

 

 

Computers equipment

 

3 - 5 years

 

5

%

Furniture and fixtures

 

3 - 5 years

 

5

%

Office equipment

 

3 - 5 years

 

5

%

Vehicle

 

5 years

 

5

%

Office building

 

30 years

 

5

%

 

Expenditures for maintenance and repairs are expensed as incurred.

 

F-19


 

FUTU HOLDINGS LIMITED

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                            SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Intangible Assets

 

Intangible assets which are included in other assets in the unaudited interim condensed consolidated balance sheets mainly consist of computer software and golf membership. Identifiable intangible assets are carried at acquisition cost less accumulated amortization and impairment loss, if any. Finite-lived intangible assets are tested for impairment if impairment indicators arise. Amortization of finite-lived intangible assets is computed using the straight-line method over their estimated useful lives, which are as follows:

 

Category

 

Estimated useful lives

 

Computer software

 

5 years

 

Golf membership

 

10 years

 

 

Infinite-lived intangible assets mainly consist of the trading right and license. The Operating Company had hold a futures trading right as a clearing member firm of Hong Kong Exchanges and Clearing Limited (“HKEx”) in order to trade futures through the trading facilities of the Stock Exchange, and has recognized it as intangible assets. The Operating Company obtained an insurance broker license through auquiring a member of the HongKong Professional Insurance Brokers Association. The future trading right and insurance broker licence have an indefinite useful life and are carried at cost less accumulated impairment losses. The Group will not amortize the future trading right and insurance broker license until its useful life is determined to be finite.

 

Fair Value Measurements

 

Accounting guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

 

Accounting guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Accounting guidance establishes three levels of inputs that may be used to measure fair value:

 

Level 1 - Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.

 

Level 2 - Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques.

 

Level 3 - Valuation techniques in which more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect the Group’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

F-20


 

FUTU HOLDINGS LIMITED

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                            SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Fair Value Measurements (Continued)

 

When available, the Group uses quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, the Group will measure fair value using valuation techniques that use, when possible, current market-based or independently sourced market parameters, such as interest rates and currency rates.

 

The carrying amount of cash and cash equivalents, cash held on behalf of clients, receivables from and payables to clients, brokers, clearing organization and fund management companies and fund distributors, accrued interest receivable, accrued interest payable, amounts due to related parties, other financial assets and liabilities approximates fair value because of their short-term nature. Loans and advances, borrowings, securities sold under agreements to repurchase and operating lease liabilities are carried at amortized cost. The carrying amount of loans and advances, borrowings and operating lease liabilities approximate their respective fair value as the interest rates applied reflect the current quoted market yield for comparable financial instruments. Available-for-sale financial securities are measured at fair value.

 

The Group’s non-financial assets, such as operating lease right-of-use assets, equity method investment, property and equipment and intangible assets, would be measured at fair value only if they were determined to be impaired.

 

Revenue Recognition

 

1)                           Brokerage commission and handling charge income

 

Brokerage commission income earned for executing and/or clearing transactions are accrued on a trade-date basis.

 

Handling charge income arise from the services such as settlement services, subscription and dividend collection handling services, etc., are accrued on a trade-date basis.

 

2)                           Interest Income

 

The Group earns interest income primarily in connection with its margin financing and securities lending services, IPO financing, bridge loan and deposits with banks, which are recorded on an accrual basis and are included in interest income in the unaudited interim condensed consolidated statements of comprehensive income. Interest income is recognized as it accrued using the effective interest method.

 

3)                           Other income

 

Other income consists of enterprise public relations service charge income provided to corporate clients, underwriting fee income, IPO subscription service charge income, currency exchange service income from clients, income from market data service, client referral income from brokers and funds distribution service income from fund management companies, employee share option plan (“ESOP”) management service income, etc.

 

Enterprise public relations service charge income is charged to corporate clients by providing platform to post their detailed stock information and latest news in Futu NiuNiu app, as well as providing a lively, interactive community among their potential investors to exchange investment views, share trading experience and socialize with each other. Unearned enterprise public relations service income of which the Group had received the consideration is recorded as contract liabilities (deferred revenue).

 

F-21


 

FUTU HOLDINGS LIMITED

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                            SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Revenue Recognition (Continued)

 

3)                           Other income (Continued)

 

IPO subscription service charge income is derived from provision of new share subscription services in relation to IPOs in the Hong Kong capital market.

 

Underwriting fee income is generated from investment banking business primarily by providing equity sub-underwriting to corporate issuers.

 

Funds distribution service income is charged to fund management companies for providing fund products distribution service to Futu’s individual clients. The Operating Company, as an intermediary would receive subscription fees from fund management companies as agreed in the service contracts.

 

Market information and data income are the amounts charged to Futu NiuNiu app users for market data service.

 

Currency exchange service income are the amounts charged to the Group’s paying clients for providing currency exchange service.

 

Client referral income from brokers is derived from referring clients to China A-share licensed brokers by embedding on the Group’s website or online platform a link which can lead clients to the account opening interface of these brokers.

 

ESOP management service income is derived from establishing and administrating the platforms for corporate clients’ ESOP. This includes all workflow and administration surrounding ESOP fulfillment, including employee communications, records management, data protection, users and administrators education, and other upgrading and customizing services on the ESOP platforms as agreed.

 

For enterprise public relations service charge income, funds distribution service income, market information and data income, client referral income from brokers and ESOP management service income, the service revenues are recognized ratably over the term of the service contracts.

 

For IPO subscription service charge income, underwriting fee income and currency exchange service income, the Group recognizes the revenues upon the time when the services are rendered to customers.

 

F-22


 

FUTU HOLDINGS LIMITED

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                            SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Incentives

 

The Group offers a self-managed client loyalty program points, which can be used in mobile app and website to redeem a variety of concessions or service, such as commission-deduction coupon, Level 2 A shares securities market data card and etc. Clients have a variety of ways to obtain the points. The major accounting policy for the points program is described as follows:

 

1)                           Sales contracts related scenarios

 

The sales contracts related scenarios include client entering into the first Hong Kong brokerage transaction, first US brokerage transaction, IPO stock brokerage transactions, and currency exchange services. The Group concludes the points offered linked to the purchase transaction of these scenarios is a material right and accordingly a separate performance obligation according to ASC 606, and should be taken into consideration when allocating the transaction price of the sales. The Group determines the value of each point based on fair value of the concessions and services that can be redeemed with points. The Group also estimates the probability of the points redemption when performing the allocation. Since there is no lapse requirement of the points and no historical of forfeitures observed, coupled with the fact that most services can be redeemed without requiring a significant amount of points comparing with the amount of points provided to users, the Group believes it is reasonable to assume all points will be redeemed and no forfeiture is estimated currently. The Group will apply and update the estimated redeem rate and the estimated value of each point at each reporting period. The amount allocated to the points as separate performance obligation is recorded as contract liabilities (deferred revenue) and revenue should be recognized when future concessions or services are transferred.

 

For the six months ended June 30, 2019 and 2020, the revenue portion allocated to the points as separate performance obligation were HK$463 thousand and HK$669 thousand, respectively, which is recorded as contract liabilities (deferred revenue). For the six months ended June 30, 2019 and 2020, the total points recorded as a reduction of revenue were HK$67 thousand and HK$215 thousand, respectively. As of December 31, 2019 and June 30, 2020 contract liabilities recorded related to unredeemed points were HK$2,126 thousand and HK$1,411 thousand, respectively.

 

2)                           Other scenarios

 

Clients or the users of the mobile application can also obtain points through other ways such as log-ins to the mobile application, opening a trade account and inviting friends, etc. The Group believes these points are to encourage user engagement and generate market awareness. As a result, the Group accounts for such points as selling and marketing expenses with a corresponding liability recorded under accrued expenses and other liabilities of its unaudited interim condensed consolidated balance sheets upon the points offering. The Group estimates liabilities under the client loyalty program based on cost of the concessions or services that can be redeemed, and its estimate of full redemption. At the time of redemption, the Group records a reduction of accrued expenses and other liabilities.

 

For the six months ended June 30, 2019 and 2020, the total redeemed points recorded as selling and marketing expenses were HK$253 thousand and HK$1,931 thousand, respectively. As of December 31, 2019 and June 30, 2020, liabilities recorded related to unredeemed points in other scenarios were HK$3,518 thousand and HK$4,843 thousand, respectively.

 

F-23


 

FUTU HOLDINGS LIMITED

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                            SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Brokerage Commission and Handling Charge Expenses

 

Commission expenses for executing and/or clearing transactions are accrued on a trade-date basis. The commission expenses are charged by executing brokers for securities and derivative trades in the United States stock and derivative markets as the Operating Company makes securities and derivative trades with these brokers as principal.

 

Handling and settlement fee is charged by HKEx or executing brokers for clearing and settlement services, are accrued on a trade-date basis.

 

IPO subscription service charge expenses are charged by commercial banks in connection with new share subscription services in relation to IPOs in the Hong Kong capital market.

 

Interest Expenses

 

Interest Expenses primarily consists of interest expenses of borrowings from banks, other licensed financial institutions and other parties paid to fund the Operating Company’s margin financing business and IPO financing business.

 

Processing and Servicing Costs

 

Processing and servicing costs consists of market information and data fee, data transmission fee, cloud service fee, system cost, and SMS service fee, etc. The nature of market information and data fee mainly represents for information and data fee paid to stock exchanges like HKEx, NASDAQ, and New York stock exchange, etc. Data transmission fee is the fee of data transmission among cloud server and data centers located in Shenzhen, PRC and Hong Kong, etc. Cloud service fee and SMS service fee mainly represent the data storage and computing service and the SMS channel service fee. The nature of system cost mainly represents for the fee to access and use the systems paid to software providers.

 

Research and Development Expenses

 

Research and development expenses consist of expenses related to developing transaction platform and website like Futu NiuNiu app and other products, including payroll and welfare, rental expenses and other related expenses for personnel engaged in research and development activities. All research and development costs have been expensed as incurred as the costs qualifying for capitalization have been insignificant.

 

Selling and Marketing Expenses

 

Selling and marketing expenses consist primarily of advertising and promotion costs, payroll, rental and related expenses for personnel engaged in marketing and business development activities. Advertising and promotion costs are expensed as incurred and are included within selling and marketing expenses in the unaudited interim condensed consolidated statements of comprehensive income.

 

General and Administrative Expenses

 

General and administrative expenses consist of payroll, rental, and related expenses for employees involved in general corporate functions, including finance, legal and human resources; costs associated with use of facilities and equipment, such as depreciation expenses, rental and other general corporate related expenses.

 

F-24


 

FUTU HOLDINGS LIMITED

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                            SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Others, net

 

Others, net, mainly consist of non-operating income and expenses, foreign currency gains or losses, expected credit loss expenses for all periods presented. Non-operating expenses mainly consist of accrued social security underpayment surcharge.

 

Foreign Currency Gains and Losses

 

Foreign currency transactions denominated in currencies other than the functional currency are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are remeasured at the applicable rates of exchange in effect at that date. Foreign currency gain or loss resulting from the settlement of such transactions and from remeasurement at period-end is recognized in “Others, net” in the unaudited interim condensed consolidated statements of comprehensive income.

 

Share-Based Compensation

 

The Company follows ASC 718 to determine whether a share option should be classified and accounted for as a liability award or equity award. All share-based awards to employees and directors classified as equity awards, such as stock options, are measured at the grant date based on the fair value of the awards. Share-based compensation, net of estimated forfeitures, is recognized as expenses on a straight-line method over the requisite service period, which is the vesting period. Options granted generally vest over four or five years.

 

The modification of the terms or conditions of the existing shared-based award is treated as an exchange of the original award for a new award. The incremental compensation expenses are equal to the excess of the fair value of the modified award immediately after the modification over the fair value of the original award immediately before the modification. For stock options already vested as of the modification date, the Group immediately recognized the incremental value as compensation expenses. For stock options still unvested as of the modification date, the incremental compensation expenses are recognized over the remaining service period of these stock options.

 

The Company utilizes the binomial option pricing model to estimate the fair value of stock options granted, with the assistance of an independent valuation firm.

 

Forfeitures are estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates. The Group uses historical data to estimate pre-vesting options and records share-based compensation expenses only for those awards that are expected to vest. See Note 14 for further discussion on share-based compensation.

 

F-25


 

FUTU HOLDINGS LIMITED

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                            SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Taxation

 

1)                           Income tax

 

Current income taxes are provided on the basis of net income for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income tax purposes, in accordance with the regulations of the relevant tax jurisdictions. Deferred income taxes are accounted for using an asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purpose. The effect on deferred taxes of a change in tax rates is recognized in the unaudited interim condensed consolidated statements of comprehensive income in the period of change. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of the deferred tax assets will not be realized.

 

2)                           Uncertain tax positions

 

The Group did not recognize any interest and penalties associated with uncertain tax positions for the six months ended June 30, 2019 and 2020. As of December 31, 2019 and June 30, 2020, the Group did not have any significant unrecognized uncertain tax positions.

 

Net income per share

 

Basic net income per share is computed by dividing net income attributable to ordinary shareholder, considering the accretion of redemption feature and cumulative dividend related to the Company’s redeemable convertible preferred shares, and undistributed earnings allocated to redeemable convertible preferred shares by the weighted average number of ordinary shares outstanding during the period using the two-class method. Under the two-class method, net income is allocated between ordinary shares and other participating securities based on their participating rights. Net loss is not allocated to other participating securities if based on their contractual terms they are not obligated to share the losses.

 

Diluted net income per share is calculated by dividing net income attributable to ordinary shareholder, as adjusted for the effect of dilutive ordinary equivalent shares, if any, by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the period. Ordinary equivalent shares consist of ordinary shares issuable upon the conversion of the redeemable convertible preferred shares, using the if-converted method, and shares issuable upon the exercise of share options using the treasury stock method. Ordinary equivalent shares are not included in the denominator of the diluted net income per share calculation when inclusion of such share would be anti-dilutive.

 

F-26


 

FUTU HOLDINGS LIMITED

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                            SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Segment Reporting

 

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-makers has been identified as the Chief Executive Officer who allocates resources to and assesses the performance of the operating segments of an entity. The Group’s reporting segments are decided based on its operating segments while taking full consideration of various factors such as products and services, geographic location and regulatory environment related to administration of the management. Operating segments meeting the same qualifications are allocated as one reporting segment, providing independent disclosures.

 

The Group engages primarily in online brokerage services and margin financing services. The Group does not distinguish between markets or segments for the purpose of internal reports. The Group does not distinguish revenues, costs and expenses between segments in its internal reporting, and reports costs and expenses by nature as a whole. Hence, the Group has only one reportable segment.

 

Significant Risks and Uncertainties

 

1)                           Currency risk

 

Currency risk arises from the possibility that fluctuations in foreign exchange rates will impact the financial instruments. The Operating Company is not exposed to significant transactional foreign currency risk since almost all of its transactions, assets and liability are denominated in Hong Kong dollars and U.S. dollars and Hong Kong dollars are pegged against U.S. dollars. The impact of foreign currency fluctuations in the Group’s earnings is included in “others, net” in the unaudited interim condensed consolidated statements of comprehensive income. At the same time, the Group is exposed to translational foreign currency risk since some of the Group’s major subsidiaries have RMB as their functional currency. Therefore, RMB depreciation against Hong Kong dollars could have a material adverse impact on the foreign currency translation adjustment in the unaudited interim condensed consolidated statements of comprehensive income.

 

As of December 31, 2019 and June 30, 2020, the Group had RMB-denominated cash of HK$46.7 million (US$6.0 million) and HK$72.6 million (US$9.4 million) respectively. We estimate that a 10% depreciation of Renminbi against the U.S. dollar based on the foreign exchange rate on December 31, 2019 and June 30, 2020 would result in a decrease of US$0.6 million and US$0.9 million, respectively, in the Group’s total assets as of December 31, 2019 and June 30, 2020, and a 10% appreciation of Renminbi against the U.S. dollar based on the foreign exchange rate on December 31, 2019 and June 30, 2020 would result in an increase of US$0.6 million and US$0.9 million, respectively, in the Group’s total assets as of December 31, 2019 and June 30, 2020.

 

F-27


 

FUTU HOLDINGS LIMITED

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                            SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Significant Risks and Uncertainties (Continued)

 

2)                           Credit risk

 

Cash held on behalf of clients are segregated and deposited in financial institutions as required by Securities and Futures Ordinance. These financial institutions are of sound credit ratings, therefore management believes that there is no significant credit risk related to cash held on behalf of clients.

 

The Group’s securities and derivative trades activities are transacted on either a cash or margin basis. The Group’s credit risk is limited in that substantially all of the contracts entered into are settled directly at securities and derivatives clearing organization. In margin transactions, the Group extends credit to the client, subject to various regulatory and internal margin requirements, collateralized by cash and securities in the client’s account. IPO loans are exposed to credit risk from clients who fails to repay the loans upon IPO stock allotment. The Group monitors the clients’ collateral level and has the right to dispose the newly allotted stocks once the stocks first start trading. Bridge loans to enterprise pledged by shares are exposed to credit risk from counterparties who fail to repay the loans, the Group monitors on the collateral level of bridge loans in real time, and has the right to dispose of the pledged shares once the collateral level falls under the minimal level required to get the loans repaid.

 

Liabilities to other brokers and dealers related to unsettled transactions are recorded at the amount for which the securities were purchased, and are paid upon receipt of the securities from other brokers or dealers.

 

In connection with its clearing activities, the Group is obligated to settle transactions with brokers and other financial institutions even if its clients fail to meet their obligations to the Group. Clients are required to complete their transactions by the settlement date, generally two business days after the trade date. If clients do not fulfill their contractual obligations, the Group may incur losses. The Group has established procedures to reduce this risk by generally requiring that clients deposit sufficient cash and/or securities into their account prior to placing an order.

 

For cash management purposes, the Group enters into short-term securities sold under agreements to repurchase transactions (“repos”) in addition to securities borrowing and lending arrangements, all of which may result in credit exposure in the event the counterparty to a transaction is unable to fulfill its contractual obligations. Repos are collateralized by securities with a market value in excess of the obligation under the contract. Similarly, securities lending agreements are collateralized by deposits of cash or securities. The Group attempts to minimize credit risk associated with these activities by monitoring collateral values on a daily basis and requiring additional collateral to be deposited with or returned to the Group as permitted under contractual provisions.

 

Concentrations of Credit Risk

 

The Group’s exposure to credit risk associated with its brokerage and other activities is measured on an individual counterparty basis, as well as by groups of counterparties that share similar attributes. There was no revenue from clients which individually represented greater than 10% of the total revenues for the six months ended June 30, 2019 and 2020, respectively. Concentrations of credit risk can be affected by changes in political, industry, or economic factors. To reduce the potential for risk concentration, credit limits are established and exposure is monitored in light of changing counterparty and market conditions. As of December 31, 2019 and June 30, 2020, the Group did not have any material concentrations of credit risk outside the ordinary course of business.

 

F-28


 

FUTU HOLDINGS LIMITED

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                            SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Significant Risks and Uncertainties (Continued)

 

3)                           Interest rate risk

 

Fluctuations in market interest rates may negatively affect the Group’s financial condition and results of operations. The Group are exposed to floating interest rate risk on cash deposit and floating rate borrowings. We use net interest simulation modeling techniques to evaluate the effect that changes in interest rates might have on pre-tax income. The model includes all interest-sensitive assets and liabilities. The simulations involve assumptions that are inherently uncertain and, as a result, cannot precisely predict the impact that changes in interest rates will have on pre-tax income. Actual results may differ from simulated results due to differences in timing and frequency of rate changes, changes in market conditions and changes in management strategy that lead to changes in the mix of interest-sensitive assets and liabilities.

 

The simulations assume that the asset and liability structure of the unaudited interim condensed consolidated balance sheets would not be changed as a result of a simulated change in interest rates. The results of the simulations based on the Group’s financial position as of June 30, 2020 indicate that a gradual 1% (100 basis points) increase in interest rates over a 12-month period would result in approximately HK$68.4 million (US$ 8.8 million) net income and a gradual 1% (100 basis points) decrease in interest rates over a 12-month period would result in approximately HK$68.4 million (US$ 8.8 million) net loss, depending largely on the extent and timing of possible changes in floating rates.

 

Recent Accounting Pronouncements

 

In June 2016, FASB amended guidance related to impairment of financial instruments as part of ASU 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is effective on January 1, 2020. The guidance replaces the incurred loss impairment methodology with an expected credit loss model for which a group is required to recognize an allowance based on its estimate of expected credit loss. In November 2018, FASB issued ASU No, 2018-19, Codification Improvements to Topic 326, further clarified the scope of the guidance in the amendments in ASU 2016-13. In May 2019, FASB issued ASU No.2019-05, Financial instrument—Credit Losses(Topic 326), Targeted Transition Relief, which provides an irrevocably fair value option to elect for eligible instruments. In November 2019, FASB issued ASU 2019-11 Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which clarified and improved various aspects of ASU 2016-13. The Group adopted ASU 2016-13, and the adoption had no material impact on the Group’s unaudited interim condensed consolidated financial statements as the Group applied the practical expedient relating to financial assets subject to collacteral maintenance provisions.

 

F-29


 

FUTU HOLDINGS LIMITED

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                            SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Recent Accounting Pronouncements (Continued)

 

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this standard will remove, modify and add certain disclosures under ASC Topic 820, Fair Value Measurement, with the objective of improving disclosure effectiveness. ASU 2018-13 is effective for the Group’s fiscal year beginning January 1, 2020, with early adoption permitted.  The update eliminates the requirement to disclose: (a) the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (b) an entity’s policy for timing of transfers between levels; (c) and an entity’s valuation processes for Level 3 fair value measurements. The Group adopted ASU 2018-13 on Janaury 1, 2020, and the adoption had no material impact on the unaudited interim condensed consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. Under the ASU, entities should account for costs associated with implementing a cloud computing arrangement that is considered a service contract in the same way as accounting for implementation costs incurred to develop or obtain software for internal use using the guidance in ASU 350-40. The amendment address when costs should be capitalized rather than expensed, the item to use when amortizing capitalized costs, and how to evaluate the unamortized portion of these capitalized implementation costs for impairment. The ASU also includes guidance on how to present implementation costs in the financial statements and creates additional disclosure requirements. ASU 2018-15 is effective for the Group’s fiscal year beginning January 1, 2020, with early adoption permitted. The Group adopted ASU 2018-15 on Janaury 1, 2020, and the adoption had no material impact on the unaudited interim condensed consolidated financial statements.

 

In December 2019, FASB issued ASU 2019-12, Income taxes (Topic 740)—Simplifying the accounting for income taxes, which simplifys the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, Income Taxes. The ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Group is currently evaluating the impact of this new guidance on the consolidated financial statements.

 

F-30


 

FUTU HOLDINGS LIMITED

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.                            FINANCIAL ASSETS AND FINANCIAL LIABILITIES

 

Financial Assets and Liabilities Measured at Fair Value

 

The following tables set forth, by level within the fair value hierarchy (see Note 2), financial assets measured at fair value as of June 30, 2020 and December 31, 2019. As required by ASC Topic 820, financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the respective fair value measurement.

 

 

 

Financial Assets At Fair Value as of 
June 30, 2020

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(HK$ in thousands)

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale financial securities

 

 

12,043

 

 

12,043

 

 

 

 

Financial Assets At Fair Value as of 
December 31, 2019

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(HK$ in thousands)

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale financial securities

 

 

93,773

 

 

93,773

 

 

Financial Assets and Liabilities Not Measured at Fair Value

 

The following tables represent the carrying value, fair value, and fair value hierarchy category of certain financial assets and liabilities that are not recorded at fair value in the Group’s unaudited interim condensed consolidated balance sheets. The following table excludes all non-financial assets and liabilities:

 

 

 

As of June 30, 2020

 

 

 

Carrying
Value

 

Fair
Value

 

Level 1

 

Level 2

 

Level 3

 

 

 

(HK$ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets, not measured at fair value

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

788,113

 

788,113

 

788,113

 

 

 

Cash held on behalf of clients

 

31,111,501

 

31,111,501

 

31,111,501

 

 

 

Loans and advances

 

6,777,557

 

6,777,557

 

 

6,777,557

 

 

Receivables:

 

 

 

 

 

 

 

 

 

 

 

Clients

 

547,812

 

547,812

 

 

547,812

 

 

Brokers

 

2,826,107

 

2,826,107

 

 

2,826,107

 

 

Clearing organization

 

225,762

 

225,762

 

 

225,762

 

 

Fund management companies and fund distributors

 

238,445

 

238,445

 

 

238,445

 

 

Interest

 

23,598

 

23,598

 

 

23,598

 

 

Other financial assets

 

131,605

 

131,605

 

 

131,605

 

 

Total financial assets, not measured at fair value

 

42,670,500

 

42,670,500

 

31,899,614

 

10,770,886

 

 

 

F-31


 

FUTU HOLDINGS LIMITED

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.                            FINANCIAL ASSETS AND FINANCIAL LIABILITIES  (Continued)

 

Financial Assets and Liabilities Not Measured at Fair Value (Continued)

 

 

 

As of June 30, 2020

 

 

 

Carrying
Value

 

Fair
Value

 

Level 1

 

Level 2

 

Level 3

 

 

 

(HK$ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities, not measured at fair value

 

 

 

 

 

 

 

 

 

 

 

Amounts due to related parties

 

16,150

 

16,150

 

 

16,150

 

 

Payables:

 

 

 

 

 

 

 

 

 

 

 

Clients

 

32,502,042

 

32,502,042

 

 

32,502,042

 

 

Brokers

 

4,618,505

 

4,618,505

 

 

4,618,505

 

 

Clearing Organization

 

225,629

 

225,629

 

 

225,629

 

 

Fund management companies and fund distributors

 

27,463

 

27,463

 

 

27,463

 

 

Interest

 

103

 

103

 

 

103

 

 

Borrowings

 

1,607,485

 

1,607,485

 

 

1,607,485

 

 

Securities sold under agreements to repurchase

 

500,549

 

500,549

 

 

500,549

 

 

Operating lease liabilities

 

147,437

 

147,437

 

 

147,437

 

 

Other financial liabilities

 

14,857

 

14,857

 

 

14,857

 

 

Total financial liabilities, not measured at fair value

 

39,660,220

 

39,660,220

 

 

39,660,220

 

 

 

 

 

As of December 31, 2019

 

 

 

Carrying
Value

 

Fair
Value

 

Level 1

 

Level 2

 

Level 3

 

 

 

(HK$ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets, not measured at fair value

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

362,574

 

362,574

 

362,574

 

 

 

Cash held on behalf of clients

 

14,540,863

 

14,540,863

 

14,540,863

 

 

 

Loans and advances

 

4,188,689

 

4,188,689

 

 

4,188,689

 

 

Receivables:

 

 

 

 

 

 

 

 

 

 

 

Clients

 

247,017

 

247,017

 

 

247,017

 

 

Brokers

 

1,226,348

 

1,226,348

 

 

1,226,348

 

 

Clearing organization

 

304,080

 

304,080

 

 

304,080

 

 

Interest

 

16,892

 

16,892

 

 

16,892

 

 

Other financial assets

 

64,184

 

64,184

 

 

64,184

 

 

Total financial assets, not measured at fair value

 

20,950,647

 

20,950,647

 

14,903,437

 

6,047,210

 

 

 

F-32


 

FUTU HOLDINGS LIMITED

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.                            FINANCIAL ASSETS AND FINANCIAL LIABILITIES (Continued)

 

Financial Assets and Liabilities Not Measured at Fair Value (Continued)

 

 

 

As of December 31, 2019

 

 

Carrying
Value

 

Fair
Value

 

Level 1

 

Level 2

 

Level 3

 

 

 

(HK$ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities, not measured at fair value

 

 

 

 

 

 

 

 

 

 

 

Amounts due to related parties

 

33,628

 

33,628

 

 

33,628

 

 

Payables:

 

 

 

 

 

 

 

 

 

 

 

Clients

 

15,438,879

 

15,438,879

 

 

15,438,879

 

 

Brokers

 

1,484,243

 

1,484,243

 

 

1,484,243

 

 

Fund management companies and fund distributors

 

26,381

 

26,381

 

 

26,381

 

 

Interest

 

519

 

519

 

 

519

 

 

Borrowings

 

1,467,586

 

1,467,586

 

 

1,467,586

 

 

Securities sold under agreements to repurchase

 

1,590

 

1,590

 

 

1,590

 

 

Operating lease liabilities

 

172,466

 

172,466

 

 

172,466

 

 

Other financial liabilities

 

5,612

 

5,612

 

 

5,612

 

 

Total financial liabilities, not measured at fair value

 

18,630,904

 

18,630,904

 

 

18,630,904

 

 

 

Netting of Financial Assets and Financial Liabilities

 

In the tables below, the amounts of financial instruments that are not offset in the unaudited interim condensed consolidated balance sheets, but could be netted against cash or financial instruments with specific counterparties under master netting agreements, according to the terms of the agreements, including clearing organization, are presented to provide financial statement readers with the Group’s net payable or receivable with counterparties for these financial instruments, as of June 30, 2020 and December 31, 2019.

 

 

 

Effects of offsetting on the balance sheet

 

Related amounts not offset

 

As of June 30, 2020

 

Gross
amount

 

Gross
amounts
set off in
the balance
sheet

 

Net amounts
presented in
the balance
sheet

 

Amounts
subject to
master
netting

arrangements

 

Financial 
instrument
collateral

 

Net
amount

 

 

 

HK$ in thousands

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts due from clearing organization

 

4,786,374

 

(4,560,612

)

225,762

 

 

 

225,762