Linkage Global Inc(LGCB) - 2023 Q4 - Annual Report

PART I Key Information The company is a Cayman holding company with PRC operations, facing significant legal, regulatory, and currency control risks - Linkage Cayman is a holding company with no operations of its own, conducting its business through Operating Entities in Japan, Hong Kong, and mainland China[27] - The company acknowledges significant risks associated with its PRC and Hong Kong operations, including vague PRC laws, potential cybersecurity reviews, and uncertainties regarding the CSRC's Overseas Listing Trial Measures[28][30][31] - As a holding company, its ability to pay dividends depends on receiving funds from its subsidiaries, a process subject to PRC government controls on currency conversion[35][36][39] - The company's PRC subsidiaries have obtained the necessary business licenses from the State Administration for Market Regulation (SAMR), and its Hong Kong subsidiaries hold valid business registration certificates[43][45] Risk Factors The company faces business, market, and jurisdictional risks, especially from PRC regulations and potential delisting under the HFCA Act - Business and Industry Risks: The company operates in a highly competitive market, faces risks from system interruptions, cybersecurity threats, and reliance on related-party transactions[55][60][101] - Share and Market Risks: The CEO and certain shareholders control a majority of voting power, making the company a "controlled company," and material weaknesses in internal financial controls have been identified[57][117][119] - Hong Kong Risks: Operations in Hong Kong are subject to political risks, the Hong Kong National Security Law, and evolving data security and antimonopoly laws[57][146][149] - Mainland China Risks: Significant risks stem from the PRC government's oversight, evolving regulations on data security (CAC) and overseas listings (CSRC), and the HFCA Act delisting risk[58][165][180] Information on the Company The company is a cross-border e-commerce provider with sales and services segments, focusing on Southeast Asian expansion - The company operates through a holding structure, with Linkage Global Inc. (Cayman Islands) as the ultimate parent of operating entities in Japan, Hong Kong, and mainland China[229][234] - The business model comprises two main segments: cross-border sales (83.14% of FY2023 revenue) and integrated e-commerce services (16.86% of FY2023 revenue)[239][240][266] - A key growth strategy is expansion into the Southeast Asian market, becoming a TikTok Shop partner for Malaysia and a top-tier TikTok guild in Thailand[254][260] - The company is heavily reliant on its relationship with Google for its digital marketing services, which contributed 11.32% of total revenue in FY2023[69][244][266] History and Development of the Company The company was incorporated in the Cayman Islands in 2022 and completed a reorganization in 2023 to establish its current holding structure - Linkage Global Inc. was incorporated in the Cayman Islands on March 24, 2022, and serves as the ultimate holding company[229] - The company undertook a reorganization, completed on February 17, 2023, to consolidate its operating entities under the Cayman Islands holding company structure[231][232][793] Business Overview The company operates two business lines, cross-border sales and integrated e-commerce services, with a strategy to expand private labels and SEA presence Revenue by Business Segment (Fiscal Years 2021-2023) | Revenue Stream | 2023 (USD) | 2022 (USD) | 2021 (USD) | | :--- | :--- | :--- | :--- | | Cross-border Sales | 11,340,769 | 17,907,407 | 12,417,033 | | Integrated E-commerce Services | 2,147,129 | 4,120,896 | 3,049,829 | | - Digital marketing services | 1,527,247 | 3,945,353 | 3,046,565 | | - Others (Training/Software) | 619,882 | 175,543 | 3,264 | | Total Revenues | 13,487,898 | 22,028,303 | 15,466,862 | - The company's growth strategy includes expanding its customer and merchant base into Southeast Asia, leveraging its new status as a TikTok Shop partner[254][260] - The company is developing its private label smart electronics, with 205 SKUs as of September 30, 2023, using an "original-entrusted-manufacture" model[272][273][275] - The company is investing in R&D for its Linkage ERP System and Honeybee software, with R&D expenses totaling $0.58 million in FY2023[320][321] Operating and Financial Review and Prospects The company experienced a significant revenue decline and a net loss in FY2023, though its liquidity was improved by a post-year-end IPO Financial Performance Summary (Fiscal Years 2021-2023) | Metric | 2023 (USD) | 2022 (USD) | 2021 (USD) | | :--- | :--- | :--- | :--- | | Revenues | 12,733,339 | 22,028,303 | 15,466,862 | | Gross Profit | 1,860,855 | 3,704,501 | 2,537,282 | | Operating (Loss)/Profit | (570,948) | 1,409,728 | 881,003 | | Net (Loss)/Income | (652,728) | 1,066,375 | 751,666 | | EPS (Basic & Diluted) | (0.03) | 0.05 | 0.04 | - Total revenues for FY2023 decreased by $9.29 million (42.17%) year-over-year, primarily due to a drop in cross-border sales and integrated e-commerce services[462] - The decrease in cross-border sales was attributed to severe COVID outbreaks in Japan and China and the depreciation of the Japanese yen[463] - Net cash used in operating activities was $3.88 million in FY2023, a reversal from the $1.17 million net cash provided in FY2022[488][489][490] - The company completed its IPO in December 2023, raising net proceeds of approximately $5.4 million, which is expected to support future operations[485][923] Directors, Senior Management and Employees The company is a "controlled company" due to a concerted actor agreement, with a board of five directors and established governance committees - The board consists of five directors, including CEO Zhihua Wu and three independent directors: H. David Sherman, Dong Chen, and Lin Yang[525][540] - The company is a "controlled company" as CEO Zhihua Wu and parties to a Concerted Actor Agreement collectively hold 66.51% of the voting power[537][538] - Total compensation for executive officers and directors for the fiscal year ended September 30, 2023, was $114,465[539] - The board has established an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee, each composed entirely of independent directors[545][546][548][549] Major Shareholders and Related Party Transactions A controlling interest is held by a group led by the CEO, and the company has engaged in significant related party transactions - CEO Zhihua Wu, through a Concerted Actor Agreement, controls the voting rights of a group that collectively owns 66.51% of the company's voting power[561][537] Related Party Transactions (Expenses paid on behalf of the Group) | Fiscal Year Ended Sep 30 | Amount (USD) | | :--- | :--- | | 2023 | 1,728,398 | | 2022 | 1,424,460 | | 2021 | 451,602 | Amounts Due to Related Parties | As of Sep 30 | Amount (USD) | | :--- | :--- | | 2023 | 1,413,604 | | 2022 | 1,273,832 | | 2021 | 466,442 | Financial Information The company does not anticipate paying dividends, as earnings will be retained for growth and are subject to PRC currency and profit distribution controls - The company has not paid any dividends and does not plan to in the foreseeable future, intending to retain earnings for business growth[569] - Dividend payments from PRC subsidiaries are restricted until a statutory reserve reaches 50% of registered capital[572] - The PRC government imposes controls on currency conversion, and dividend remittances over $50,000 are subject to review[573] - Dividends paid by the PRC subsidiary to its Hong Kong holding company may be subject to a PRC withholding tax of up to 10%[574][575] The Offer and Listing The company's shares began trading on the Nasdaq Capital Market under the ticker "LGCB" in December 2023 - The company's Ordinary Shares commenced trading on the Nasdaq Capital Market on December 19, 2023, under the symbol "LGCB"[577][578] Additional Information This section details the company's Cayman Islands governance, tax regimes in operating jurisdictions, and potential U.S. PFIC classification risk - The company's corporate affairs are governed by its amended and restated memorandum and articles of association and the laws of the Cayman Islands[582] - Significant differences exist between Cayman Islands and U.S. (Delaware) corporate law regarding director duties and shareholder rights[640][641] - The company is subject to taxation in Japan (approx. 36.8%), Hong Kong (8.25%/16.5%), and the PRC (25%), but not in the Cayman Islands[670][672][681][685] - There is a risk that the company could be classified as a Passive Foreign Investment Company (PFIC), which would result in adverse U.S. federal income tax consequences for U.S. Holders[703][705][710] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are foreign exchange exposure from JPY and RMB and credit risk from accounts receivable - The company's primary market risk is foreign exchange risk, as its operations are in JPY and RMB, but financial statements are reported in USD[722][723] - The company does not currently use derivative financial instruments to hedge its foreign exchange risk exposure[724] - Credit risk is concentrated in accounts receivable, and the company conducts credit evaluations of customers to minimize collection risk[725] - Inflation in Japan and the PRC has not materially affected the company's results of operations in recent years[726] PART II Material Modifications to the Rights of Security Holders and Use of Proceeds The company raised approximately $5.4 million in net proceeds from its December 2023 IPO, which are being used for strategic initiatives - The company completed its IPO on December 21, 2023, selling 1,500,000 ordinary shares at $4.00 per share[735] IPO Proceeds Summary | Item | Amount (USD) | | :--- | :--- | | Gross Proceeds | 6,000,000 | | Offering Expenses | 1,304,330 | | Net Proceeds | 5,400,000 | - As of March 31, 2024, proceeds have been used for supply chain development ($0.71M), R&D ($0.2M), and Southeast Asia market development (~$0.2M)[737] Controls and Procedures Management identified material weaknesses in internal financial controls, including insufficient staffing and formal policies, and is implementing remediation - Management concluded that as of September 30, 2023, there were material weaknesses in the company's internal control over financial reporting[739] - The identified weaknesses are a lack of formal internal control policies and insufficient accounting staff with appropriate U.S. GAAP and SEC reporting knowledge[119][739] - Remediation efforts include hiring qualified accounting personnel and organizing regular training on U.S. GAAP and SEC requirements[740][741][742] - As an emerging growth company, this annual report does not include a management report on internal control or an attestation report from its auditor[745][746] Corporate Governance As a foreign private issuer, the company follows Cayman Islands governance practices but currently complies with Nasdaq's independent director majority rule - The company is a foreign private issuer and is permitted to follow Cayman Islands corporate governance practices in lieu of certain Nasdaq rules[755] - A key difference is that Cayman Islands law does not require a majority of the board to be independent, unlike Nasdaq rules; however, the company currently complies with this requirement[756] PART III Financial Statements The audited financial statements for FY2023 show a net loss of $0.65 million and highlight significant customer and supplier concentration risks Consolidated Balance Sheet Summary (As of Sep 30, 2023 vs 2022) | Account | 2023 (USD) | 2022 (USD) | | :--- | :--- | :--- | | Total Assets | 10,633,513 | 9,079,231 | | Cash and cash equivalents | 1,107,480 | 3,686,391 | | Accounts receivable, net | 2,011,047 | 2,164,213 | | Total Liabilities | 7,136,600 | 6,344,678 | | Long-term debts | 1,996,326 | 2,653,764 | | Total Shareholders' Equity | 3,496,913 | 2,734,553 | Consolidated Statement of Operations Summary (FY 2023 vs 2022) | Account | 2023 (USD) | 2022 (USD) | | :--- | :--- | :--- | | Revenues | 12,733,339 | 22,028,303 | | Gross Profit | 1,860,855 | 3,704,501 | | Net (Loss)/Income | (652,728) | 1,066,375 | - The company has two reportable segments: EXTEND (Japan) and Other Subsidiaries (Hong Kong and PRC), which generated $8.75 million and $3.98 million in revenue respectively in FY2023[866] - Significant concentration risk exists, with two customers accounting for 22.68% of total revenue and three suppliers accounting for 45.58% of total purchases in FY2023[916][918] - Subsequent to the fiscal year-end, the company completed its IPO in December 2023, raising net proceeds of approximately $5.4 million[923]