TIAN RUIXIANG(TIRX) - 2023 Q4 - Annual Report

Introduction Company Structure and Operations The company operates in the PRC through a VIE structure, controlling its Chinese operating entity (TRX ZJ) contractually, exposing investors to unique risks - The Company is a Cayman Islands holding company, not a Chinese operating company, and conducts its business through a VIE structure in the PRC[6] - Control over the VIE (TRX ZJ) is established through contractual VIE Agreements, enabling the consolidation of financial results under U.S. GAAP. However, these agreements have not been tested in a Chinese court[6] - Investors own equity in the Cayman Islands holding company, not in the PRC-based VIE, exposing them to risks associated with the VIE structure[6] - The company's business is conducted in Renminbi (RMB), while its consolidated financial statements are presented in United States dollars, creating exposure to currency exchange rate fluctuations[8] Forward-Looking Information Forward-Looking Statements Disclosure This section details forward-looking statements on future performance and strategies, subject to various risks and uncertainties, with no obligation to update - The report includes forward-looking statements concerning future financial results, growth strategies, and economic conditions[11] - Key areas covered by forward-looking statements include revenue projections, growth execution, competition, the future of the Chinese insurance industry, and the stability of the VIE structure[11] - The company warns that these statements involve risks and uncertainties, and actual results may differ materially. It does not commit to updating forward-looking statements unless required by law[12][15] PART I Key Information This section details the company's Cayman Islands holding structure and reliance on a VIE for PRC operations, highlighting associated legal, regulatory, and financial risks - The company operates as a Cayman Islands holding company controlling its PRC operations through a VIE structure, which involves unique risks as investors do not own equity in the Chinese operating entity[16][17] - The company is subject to risks from recent PRC regulatory actions, including those related to cybersecurity and overseas listings, although it states these have not impacted its operations as of the report date[19] - Cash transfers between the holding company, subsidiaries, and the VIE are detailed, noting that PRC government controls on currency conversion could restrict the ability to fund operations outside of China or pay dividends[21][22] - The company's auditor, RBSM LLP, is a U.S.-based firm regularly inspected by the PCAOB, and is not currently affected by the Holding Foreign Companies Accountable Act. However, future inspection issues could lead to delisting[20] Selected Condensed Consolidating Financial Schedule This section presents condensed consolidating financial schedules for the Cayman parent, subsidiaries, and VIE for FY2021-2023, showing most financial activity within the PRC VIE structure Condensed Consolidating Balance Sheet as of October 31, 2023 (in $) | Entity | Total Assets | Total Liabilities | Total Equity | | :--- | :--- | :--- | :--- | | TRX (Cayman Islands) | 34,289,999 | 1,873,093 | 32,416,906 | | Subsidiary (Hong Kong) | 14,268,263 | 7,501,149 | 6,767,114 | | WFOE (PRC) | (842,405) | 492,358 | (1,334,763) | | VIE and Subsidiaries (PRC) | 27,663,627 | 290,935 | 27,372,692 | | Consolidated Total | 35,479,774 | 3,062,868 | 32,416,906 | Condensed Consolidating Statement of Operations for the Year Ended October 31, 2023 (in $) | Entity | Revenues | Loss from operations | Net (Loss) Income | | :--- | :--- | :--- | :--- | | TRX (Cayman Islands) | — | (2,773,070) | (2,453,982) | | Subsidiary (Hong Kong) | — | — | 319,088 | | WFOE (PRC) | — | (40,605) | 284,399 | | VIE and Subsidiaries (PRC) | 1,244,247 | (202,651) | — | | Consolidated Total | 1,244,247 | (3,016,326) | (2,453,982) | Condensed Consolidating Statement of Cash Flows for the Year Ended October 31, 2023 (in $) | Entity | Net cash from operating | Net cash from investing | Net cash from financing | | :--- | :--- | :--- | :--- | | TRX (Cayman Islands) | — | — | — | | Subsidiary (Hong Kong) | 300,000 | (300,591) | — | | WFOE (PRC) | (14,464) | 14,019 | — | | VIE and Subsidiaries (PRC) | 708,485 | (692,717) | — | | Consolidated Total | 994,021 | (992,717) | — | Risk Factors This section outlines principal risks, including business competition, VIE structure enforceability, PRC government intervention, and share-related market volatility and dual-class structure - Business Risks: The company has a limited operating history, faces intense competition, and its revenue is dependent on commission rates set by insurance companies, which can decrease[41] - Corporate Structure Risks: The VIE structure is a primary risk, as the agreements may not be enforceable under PRC law. If the government deems the structure non-compliant, the company could face severe penalties, and shares could become worthless[44][86] - China-Related Risks: The PRC government exerts substantial influence and may intervene in operations at any time. Changes in laws regarding foreign investment, data security (CAC), and overseas listings (CSRC) create significant uncertainty[47][121][173] - Market & Share Risks: The company is an emerging growth company and a foreign private issuer, exempting it from certain U.S. disclosure and governance standards. The dual-class share structure concentrates voting power with a single controlling shareholder[54][55][103] - The company has identified material weaknesses in its internal control over financial reporting, including a lack of personnel with U.S. GAAP knowledge and a lack of formal disclosure controls[116][118] Information on the Company This section provides a comprehensive overview of TIAN RUIXIANG Holdings Ltd, detailing its history, insurance brokerage operations in China via a VIE, and regulatory environment - The company operates as an insurance brokerage in China through its VIE, TRX ZJ, distributing property & casualty and other insurance products from over 30 insurance company partners[217][218] - The company's online platform, Needbao, was unsuccessful due to the impact of COVID-19, leading to an impairment loss of $123,646 in fiscal year 2022[71][234] - The company's corporate structure relies on a series of VIE agreements (Exclusive Business Cooperation, Equity Pledge, Exclusive Option to Purchase, and Proxy Agreement) to control its PRC operating entity, TRX ZJ[318] - The insurance industry in the PRC is highly regulated, with the National Financial Regulatory Administration (NFRA) replacing the CBIRC in 2023 as the primary supervisory body[261][272] History and Development of the Company This section traces the company's corporate history, from the VIE entity's formation in 2010 to the Cayman Islands holding company's establishment and its Nasdaq IPO in January 2021 - The VIE entity, TRX ZJ, was formed in 2010. The current management team's involvement began in May 2016[210] - The Cayman Islands holding company, TRX, was established on March 5, 2019, followed by the creation of its Hong Kong subsidiary and PRC WFOE[211] - The company's Class A Ordinary Shares commenced trading on the Nasdaq Capital Market under the symbol "TIRX" on January 27, 2021[212] Business Overview The company operates as an insurance broker in China via its VIE, distributing various insurance products, with FY2023 revenue decreasing by 8.0% to $1.24 million Revenue by Insurance Product Commissions (FY2021-FY2023) | Product Category | 2023 Commissions ($) | 2022 Commissions ($) | 2021 Commissions ($) | | :--- | :--- | :--- | :--- | | Property & Casualty | | | | | Automobile Insurance | 6,103 | 134,718 | 434,793 | | Commercial Property Ins. | 151,013 | 382,180 | 213,204 | | Liability Insurance | 975,460 | 363,899 | 1,588,818 | | Accidental Insurance | 20,361 | 255,218 | 356,156 | | Other Insurance | | | | | Life Insurance | 576 | 20,489 | 70,336 | | Health Insurance | 49,712 | 25,524 | 3,747 | | Miscellaneous Insurance | 41,022 | 142,627 | 8,557 | | Total Commissions | $1,244,247 | $1,324,655 | $2,675,611 | - In FY2023, revenue concentration was high, with the top three insurance partners accounting for 32.1%, 28.0%, and 10.5% of total revenues, respectively[219][244] - The company discontinued its institutional risk management services in November 2022 due to diminished demand[217][233] - The company's distribution network includes 155 sales professionals and seven branch offices in major Chinese cities as of June 1, 2024[235] Organizational Structure The company's organizational structure centers on a VIE model, where the Cayman Islands parent controls PRC operations through contractual agreements with its WFOE and the VIE (TRX ZJ) - The company controls its PRC operating entity, TRX ZJ, through a series of VIE agreements entered into on May 20, 2019[318] - Exclusive Business Cooperation and Service Agreement: WFOE provides exclusive technical and management services to TRX ZJ in exchange for service fees equal to TRX ZJ's net income[323] - Equity Interest Pledge Agreement: The shareholder of TRX ZJ has pledged all its equity interests to WFOE to guarantee the performance of the service agreement[325] - Share Disposal and Exclusive Option to Purchase Agreement: WFOE holds an exclusive option to purchase all or part of the equity interests in TRX ZJ for a nominal price, subject to PRC law[328] - Proxy Agreement: The shareholder of TRX ZJ has irrevocably granted all shareholder rights, including voting rights, to WFOE[330] Operating and Financial Review and Prospects This section provides management's discussion and analysis of financial condition and operations for FY2021-2023, showing revenue decreased to $1.24 million in FY2023, while net loss improved to $2.45 million Consolidated Results of Operations Summary (FY2021-FY2023) | Metric | FY 2023 ($) | FY 2022 ($) | FY 2021 ($) | | :--- | :--- | :--- | :--- | | Revenues | 1,244,247 | 1,351,909 | 2,790,617 | | Loss from Operations | (3,016,326) | (5,068,914) | (2,253,804) | | Net Loss | (2,453,982) | (4,684,189) | (1,944,577) | | Comprehensive Loss | (2,515,116) | (8,401,667) | (1,730,454) | - FY2023 revenue decreased by 8.0% YoY due to lower commissions from automobile, commercial property, and accidental insurance, partially offset by a significant increase in liability insurance commissions[365] - General and administrative expenses decreased by 60.9% in FY2023, primarily due to a $2.23 million reduction in compensation and benefits, including lower stock-based compensation[370][372] - As of October 31, 2023, the company had approximately $695,000 in cash and restricted cash and $26.8 million in short-term investments, which management believes is sufficient to meet cash requirements for the next twelve months[408][425][426] Directors, Senior Management and Employees This section details the company's leadership, compensation, board practices, and employee structure, including executive compensation and the dual-class share structure - Sheng Xu has served as the CEO and Chairman of the board since April 2024[434] FY2023 Named Executive Officer Compensation | Name and Principal Position | Salary (US$) | Total (US$) | | :--- | :--- | :--- | | Zhe Wang (former CEO, Chairman) | 150,000 | 150,000 | | Mingxiu Luan (CFO) | 80,000 | 80,000 | - The company has two share incentive plans: the 2021 Plan (200,000 Class A shares authorized) and the 2023 Plan (1,000,000 Class A shares authorized)[445][449] - As of June 1, 2024, the company had 8 employees and 152 contractual sales agents[464] - Unitrust Holdings Limited holds all 50,000 Class B Ordinary Shares, representing 33.43% of the total voting power due to the 18-to-1 voting ratio of Class B to Class A shares[468][470] Major Shareholders and Related Party Transactions This section details major shareholders and related party transactions, including VIE contractual arrangements, working capital borrowings, and balances due to/from related parties - The company's operations are controlled through VIE contractual arrangements with TRX ZJ, which is a related party transaction[471] - In FY2023, the company borrowed $9,535 from and repaid $9,818 to related parties for working capital needs. These borrowings are non-interest bearing and unsecured[473] Due to Related Parties (as of Oct 31, 2023) | Related Party | Amount Due ($) | | :--- | :--- | | Baohai Xu (Manager) | 321,385 | | Zhe Wang (Former CEO) | 120,985 | | Sheng Xu (CEO) | 110,362 | | Mufang Gao (Mother of former CEO) | 310,771 | | Feng'e Feng (Mother of CEO) | 186,571 | | Mingxiu Luan (CFO) | 123,436 | | Total | $1,173,510 | Financial Information This section confirms appended consolidated financial statements, states no material legal proceedings, and outlines the dividend policy of retaining earnings for expansion - The company is not currently involved in any material legal or administrative proceedings[481] - The company has no present plan to pay cash dividends and intends to retain future earnings for business operations and expansion[482] - As a holding company, its ability to pay dividends depends on receiving funds from its PRC subsidiary, which is subject to PRC regulations on profit distribution and currency exchange[482] The Offer and Listing This section details the trading of the company's Class A Ordinary Shares on the Nasdaq Capital Market under the ticker symbol "TIRX" since January 27, 2021 - The company's Class A Ordinary Shares are listed on the Nasdaq Capital Market under the symbol "TIRX"[485][486] - The listing has been active since January 27, 2021[485] Additional Information This section provides further details on corporate governance, including the dual-class share structure, a material acquisition contract, and taxation considerations in the Cayman Islands, PRC, and U.S - The company has a dual-class share structure: Class A Ordinary Shares have one vote per share, while Class B Ordinary Shares have 18 votes per share[489] - In February 2024, the company's Hong Kong subsidiary entered into an agreement to acquire Peak Consulting Services Limited, a licensed insurance brokerage in Hong Kong, for $1.5 million paid in Class A Ordinary Shares[514] - The Cayman Islands levies no corporate or income taxes. PRC taxation includes a potential 10% withholding tax on dividends paid from the PRC subsidiary[517][519] - There is a risk that the company could be classified as a PRC "resident enterprise," which would subject its global income to PRC taxes and could result in PRC withholding tax on dividends paid to non-PRC shareholders[520][523] - For U.S. investors, the company does not expect to be a Passive Foreign Investment Company (PFIC), but this is a factual determination made annually and is subject to change[536] Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks including interest rate, credit, liquidity, and significant foreign exchange risk due to RMB-denominated revenues and U.S. dollar reporting - The company's primary market risks include interest rate risk, credit risk, liquidity risk, and foreign exchange risk[544][545][546][547] - Foreign exchange risk is significant because revenues and expenses are denominated in RMB, while financial statements are reported in U.S. dollars. A depreciating RMB would negatively impact reported results[547] - The company has not entered into any hedging transactions to mitigate its exposure to foreign exchange risk[547] Description of Securities Other Than Equity Securities This section indicates the company has no debt securities, warrants, rights, or other securities to describe under this item - The company reports no debt securities, warrants, rights, or other securities under this item[547][548] PART II Defaults, Dividend Arrearages and Delinquencies The company reports no defaults, dividend arrearages, or delinquencies during the reporting period - The company has no defaults, dividend arrearages, or delinquencies to report[548] Material Modifications to the Rights of Security Holders and Use of Proceeds This section reports no material modifications to security holder rights and details the use of proceeds from the January 2021 IPO and June 2021 follow-on offerings - There have been no material modifications to the rights of security holders[548] - The company raised net proceeds of approximately $10.01 million from its IPO in January 2021 and has used $2.33 million for general operating purposes[549] - An additional $22.2 million in net proceeds was raised from follow-on offerings in June 2021, which remains unspent as of the report date[550] Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of October 31, 2023, due to material weaknesses in internal control over financial reporting, with remediation efforts underway - Management concluded that as of October 31, 2023, the company's disclosure controls and procedures were not effective[552] - Material weaknesses in internal control were identified, including: (1) a lack of accounting personnel with knowledge of U.S. GAAP and SEC reporting requirements; (2) a lack of formal disclosure controls and procedures; and (3) a lack of a comprehensive accounting policies and procedures manual[556] - Significant deficiencies identified include a lack of formal internal controls over financial closing and a lack of a formal risk assessment process[556] - The company is undertaking remedial measures, including preparing an accounting manual and establishing formal control and risk assessment processes[557] Other Information This section covers governance and compliance, including the audit committee financial expert, code of ethics, principal accountant fees, foreign private issuer corporate governance, and cybersecurity risk management - The board has designated Jingyu Li as the audit committee financial expert[561] Principal Accountant Fees (RBSM LLP) | Service | FY 2023 (US$) | FY 2022 (US$) | | :--- | :--- | :--- | | Audit Fees | 365,000 | 365,000 | | Audit-Related Fees | — | — | | Tax Fees | — | — | | Other fees | — | — | | Total | 365,000 | 365,000 | - As a foreign private issuer, the company follows Cayman Islands corporate governance practices, which do not require shareholder approval for certain equity issuances that would be required for U.S. domestic companies under Nasdaq rules[568] - The company has implemented a cybersecurity risk management process and reports no material cybersecurity incidents to date[572] PART III Financial Statements This section contains the audited consolidated financial statements for FY2021-2023, prepared under U.S. GAAP, including balance sheets, statements of operations, and cash flows, with an unqualified auditor's opinion Consolidated Balance Sheets The consolidated balance sheets show total assets of $35.48 million in 2023, dominated by short-term investments, with total liabilities increasing to $3.06 million and total equity slightly decreasing Consolidated Balance Sheet Highlights (in U.S. Dollars) | Account | As of Oct 31, 2023 | As of Oct 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | 27,618,624 | 34,858,624 | | Total Assets | 35,479,774 | 35,030,828 | | Total Current Liabilities | 3,062,868 | 1,494,088 | | Total Liabilities | 3,062,868 | 1,548,806 | | Total Equity | 32,416,906 | 33,482,022 | Consolidated Statements of Operations and Comprehensive Loss For FY2023, total revenues were $1.24 million, with a net loss of $2.45 million, representing a significant improvement from the prior year's $4.68 million loss Consolidated Operations Highlights (in U.S. Dollars) | Metric | FY 2023 | FY 2022 | FY 2021 | | :--- | :--- | :--- | :--- | | Total Revenues | 1,244,247 | 1,351,909 | 2,790,617 | | Loss from Operations | (3,016,326) | (5,068,914) | (2,253,804) | | Net Loss | (2,453,982) | (4,684,189) | (1,944,577) | | Net Loss Per Share | (3.87) | (9.03) | (5.65) | Consolidated Statements of Cash Flows For FY2023, net cash provided by operating activities was $994,304, a significant turnaround from the prior year's usage, with net cash used in investing activities at $992,717 Consolidated Cash Flow Highlights (in U.S. Dollars) | Cash Flow Activity | FY 2023 | FY 2022 | FY 2021 | | :--- | :--- | :--- | :--- | | Net Cash from Operating Activities | 994,304 | (198,760) | (1,363,938) | | Net Cash from Investing Activities | (992,717) | (28,897,466) | (7,503,411) | | Net Cash from Financing Activities | (283) | — | 32,642,481 | | Net Change in Cash | (167) | (30,148,399) | 23,920,146 | Notes to Consolidated Financial Statements The notes detail accounting policies, including VIE consolidation and revenue recognition, along with explanations of VIE agreements, related party transactions, income taxes, and equity structure - The financial statements are prepared under U.S. GAAP and consolidate the VIE (TRX ZJ) as the company is deemed its primary beneficiary[600][611] - Revenue from insurance brokerage services is recognized at the point in time when an insurance policy becomes effective and the premium is collected[649] - As of October 31, 2023, the company had a $7.8 million note receivable with a third party, bearing a 2.0% annual interest rate and maturing in October 2025[690] - In FY2023, three insurance carriers accounted for 32%, 28%, and 10% of total revenue, indicating significant customer concentration[756][757]