ICZOOM(US:IZM)2024-10-25 20:00Part I Key Information This section outlines principal risks related to business, corporate structure, China operations, and securities, including concentrated founder voting power Risks Related to Our Business and Industry The company's business is highly dependent on Chinese electronics SMEs, facing risks from intense competition, operational challenges, and a material weakness in internal control over financial reporting - The company's revenue heavily relies on Chinese SMEs in consumer electronics, IoT, automotive, and industrial control sectors, making it vulnerable to industry downturns2042 - The company faces intense competition from offline suppliers, authorized distributors, and other B2B e-commerce platforms with superior resources5271 - A material weakness in internal control over financial reporting was identified due to insufficient dedicated U.S. GAAP accounting resources105106 Accounts Receivable Balance (Net) | Fiscal Year End | Accounts Receivable (USD) | |:---:|:---:| | June 30, 2024 | $28,297,491 | | June 30, 2023 | $76,690,246 | | June 30, 2022 | $76,020,296 | Risks Related to Our Corporate Structure The company faces residual risks from its terminated VIE structure, as PRC authorities could retroactively penalize non-compliance, despite current operations not being on the foreign investment 'negative list' - The company terminated its VIE structure in December 2021, with its B2B platform now operated by ICZOOM HK, a Hong Kong subsidiary not requiring a PRC ICP license128325 - PRC authorities could retroactively penalize the company for prior VIE structure use if deemed non-compliant, potentially causing a material adverse operational impact130131 Risks Related to Doing Business in China Operating in China exposes the company to significant risks from government intervention, legal uncertainties, currency controls, evolving cybersecurity laws, and new CSRC filing requirements for overseas listings - The PRC government exerts substantial influence over business operations, creating regulatory uncertainty through potential intervention143 - New PRC regulations require CSRC filing for future overseas securities offerings, with non-compliance potentially leading to fines and penalties157158 - Fund transfers from PRC subsidiaries are subject to government controls on currency conversion and remittance, potentially restricting cash movement out of China98217 - The company is subject to evolving PRC data security and cybersecurity laws, including Cybersecurity Review Measures, with management's interpretation of applicability subject to PRC authorities150328 Risks Related to Our Offerings and the Ordinary Shares The dual-class share structure concentrates significant voting power with founders, limiting Class A shareholder influence, while the company's status as a foreign private issuer and emerging growth company allows less stringent disclosure, with potential PFIC classification risks - The dual-class share structure grants 10 votes per Class B share versus 1 vote per Class A share, with founders controlling approximately 83.98% of total voting power268298367 - The company's status as an 'emerging growth company' and 'foreign private issuer' allows exemptions from certain U.S. disclosure and corporate governance requirements299292 - The company's auditor, Audit Alliance LLP, is subject to PCAOB inspection, but potential PRC regulatory changes could restrict access to audit work papers, impacting U.S. listing status under the HFCA Act291330 Information on The Company ICZOOM Group Inc., a Cayman Islands holding company, operates a B2B e-commerce platform for electronic components in China and Hong Kong, focusing on SMEs, having terminated its VIE structure and completed its NASDAQ IPO in March 2023 History and Development of the Company ICZOOM Group Inc., a Cayman Islands entity, completed its NASDAQ IPO in March 2023, raising $6 million, after terminating its VIE structure in December 2021, and remains a 'controlled company' due to its dual-class share structure - The company completed its IPO on March 17, 2023, issuing 1,500,000 Class A Ordinary Shares at $4.00 per share, raising gross proceeds of $6 million308374 - The company terminated its VIE structure in December 2021, with its B2B online platform now operated by ICZOOM HK, a Hong Kong subsidiary not requiring a PRC ICP license311325 - The company is a 'controlled company' with its CEO and COO collectively holding 83.98% of total voting power due to the dual-class share structure367 Business Overview The company operates a B2B e-commerce platform for electronic components, serving Chinese SMEs with product sales and service fees, enhancing market efficiency through real-time pricing and SaaS solutions, and holding AEO status for faster customs clearance - The company's e-commerce platform business model provides anonymous product offerings, real-time pricing, and integrated SaaS solutions to electronics industry SMEs379396 Customer and Supplier Counts | Fiscal Year Ended | Total Customers | Total Suppliers | |:---|:---:|:---:| | June 30, 2024 | 805 | 821 | | June 30, 2023 | 813 | 836 | | June 30, 2022 | 1,051 | 1,012 | Revenue Breakdown by Source (FY2024) | Revenue Source | Percentage of Total Revenue | |:---|:---:| | Sales of electronic components | 98.5% | | Service commission fee | 1.5% | - The company holds 20 registered trademarks and 69 registered software copyrights, crucial for its e-commerce platform operations453 Operating and Financial Review and Prospects For FY2024, revenue decreased by 17.0% to $177.9 million due to reduced demand, resulting in a net loss of $2.3 million from lower revenue, decreased gross profit, and increased operating expenses, with liquidity managed through cash, bank loans, and related-party financing Key Financial Performance (Fiscal Years 2024 vs. 2023) | Metric | FY 2024 | FY 2023 | Change (%) | |:---|:---:|:---:|:---:| | Total Revenue | $177,933,890 | $214,405,226 | (17.0%) | | Gross Profit | $4,950,361 | $5,292,611 | (6.5%) | | Operating Expenses | $6,294,192 | $4,417,579 | 42.5% | | Net (Loss)/Income | ($2,272,297) | $1,751,170 | (230.0%) | - The 17.0% decrease in FY2024 revenue was largely attributed to reduced customer demand due to high inventory levels carried over from the previous fiscal year599 - Operating expenses increased significantly, driven by higher stock-based compensation, increased senior management salaries, and higher professional fees post-IPO617620 Results of Operations In FY2024, total revenue decreased to $177.9 million, with semiconductor sales down 34.5% and equipment sales up 135.5%, leading to a 6.5% decrease in gross profit and a net loss of $2.3 million, primarily due to a foreign exchange loss and increased operating expenses Revenue by Product Category (USD) | Product Category | FY 2024 | FY 2023 | |:---|:---:|:---:| | Semiconductor Products | $124,138,137 | $189,388,293 | | Equipment, Tools & Others | $51,182,758 | $21,734,862 | | Total Product Sales | $175,320,895 | $211,123,155 | - Selling expenses increased by 17.7% to $2.3 million in FY2024, primarily due to a significant rise in stock-based compensation for the sales team617 - General and administrative expenses rose by 62.9% to $3.95 million in FY2024, driven by increased senior management salaries, stock-based compensation, and professional service fees post-IPO620 - The company experienced a foreign exchange loss of $258,649 in FY2024, a sharp reversal from a gain of $1,788,870 in FY2023, significantly contributing to the net loss624 Liquidity and Capital Resources As of June 30, 2024, the company had $5.5 million in cash and $14.5 million in working capital, with liquidity supported by $2.1 million net cash from operations, bank borrowings, and related-party loans, and $10.2 million in outstanding short-term bank loans Key Balance Sheet Items (as of June 30) | Item | 2024 (USD) | 2023 (USD) | |:---|:---:|:---:| | Cash and Restricted Cash | $5,484,960 | $6,413,367 | | Accounts Receivable | $28,297,491 | $76,690,246 | | Accounts Payable | $5,263,945 | $51,127,328 | | Short-term Bank Loans | $10,238,369 | $14,022,523 | Cash Flow Summary (Fiscal Year Ended June 30) | Cash Flow | 2024 (USD) | 2023 (USD) | |:---|:---:|:---:| | Net Cash from Operating Activities | $2,082,250 | ($3,751,832) | | Net Cash used in Investing Activities | ($155,448) | ($144,227) | | Net Cash (used in)/from Financing Activities | ($2,246,032) | $8,749,216 | | Net (decrease) increase in cash | ($928,407) | $3,461,344 | - As of September 15, 2024, the company collected 79.8% of its June 30, 2024 accounts receivable and settled 90.5% of its accounts payable633637 Directors, Senior Management and Employees The company is led by co-founders Lei Xia (CEO) and Duanrong Liu (COO), with a five-member Board including three independent directors, and had 96 full-time employees as of the report date, with executive compensation detailed and 6,250,000 Class A Ordinary Shares reserved under its 2015 Equity Incentive Plan - The Board of Directors consists of 5 members: Lei Xia (Chairman), Duanrong Liu, and three independent directors: Wei Xia, Qi (Jeff) He, and Tianshi (Stanley) Yang681710 Executive Compensation (FY 2024) | Name/Position | Salary (USD) | |:---|:---:| | Lei Xia / CEO | $180,000 | | Duanrong Liu / COO | $133,325 | | Qiang He / CFO (resigned May 2024) | $157,541 | - The company has a 2015 Equity Incentive Plan with 6,250,000 Class A Ordinary Shares reserved, with 1,373,962 options issued and none outstanding as of the report date700702 - As of the report date, the company had 96 full-time employees, including 14 in R&D, 21 in sales and marketing, and 35 in technical and customer services464729 Major Shareholders and Related Party Transactions Founders Lei Xia (CEO) and Duanrong Liu (COO) are major shareholders, controlling approximately 82.89% of total voting power, making ICZOOM a 'controlled company,' with related party transactions primarily involving non-interest-bearing loans and personal guarantees for bank loans Beneficial Ownership and Voting Power | Name | Class A Shares | Class B Shares | Total Voting Power* | |:---|:---:|:---:|:---:| | Lei Xia (CEO) | 250,000 | 1,969,500 | 42.63% | | Duanrong Liu (COO) | 250,000 | 1,860,000 | 40.26% | | All execs & directors (5) | 502,500 | 3,829,500 | 82.89% | - As of June 30, 2024, the company had a balance of $474,544 due to related parties, primarily non-interest bearing, on-demand loans from shareholders for working capital739 - The company's controlling shareholders have provided personal guarantees and pledged personal property to secure short-term bank loans741 Additional Information This section details the dual-class share capital structure concentrating founder control, outlines tax considerations across Cayman Islands, Hong Kong, and PRC jurisdictions, and discusses the risk of PRC resident enterprise classification and U.S. federal income tax implications for U.S. holders, including PFIC risks - The company's authorized share capital includes Class A Ordinary Shares (1 vote per share) and Class B Ordinary Shares (10 votes per share), with Class B shares convertible to Class A on a one-to-one basis749750 - The company is subject to Hong Kong profits tax (up to 16.5%) and PRC Enterprise Income Tax (25%), but not income or capital gains tax in the Cayman Islands780782789 - PRC tax authorities could classify the Cayman Islands holding company as a PRC resident enterprise, subjecting its global income to a 25% PRC tax and potential withholding tax on dividends to foreign shareholders782785 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include concentration of credit risk, interest rate risk, and significant foreign currency risk from RMB-denominated transactions - Credit risk is concentrated in cash held at PRC and Hong Kong banks and unsecured accounts receivable from PRC customers823 - Foreign currency risk is significant as most transactions, assets, and liabilities are RMB-denominated, subject to exchange rate volatility and non-convertibility against the U.S. dollar825826 Part II Material Modifications to the Rights of Security Holders and Use of Proceeds This section details the allocation of net proceeds from the March 2023 IPO for sales and marketing, R&D, logistics, warehousing, and general working capital - The net proceeds from the IPO were allocated as follows: approximately $0.87 million for sales and marketing, $0.87 million for R&D, $0.44 million for logistics and warehousing, and $2.19 million for working capital830 Controls and Procedures As of June 30, 2024, management concluded that disclosure controls and procedures were ineffective due to a material weakness in internal control over financial reporting, specifically a lack of dedicated U.S. GAAP accounting resources - Management identified a material weakness in internal control over financial reporting as of June 30, 2024832 - The identified weakness is the lack of dedicated resources for finance/accounting functions and U.S. GAAP compliant financial statement preparation832835 Corporate Governance This section covers corporate governance matters including the audit committee financial expert, code of ethics, change in certifying accountant to Audit Alliance LLP, reliance on home country governance as a foreign private issuer, and cybersecurity risk management processes - On April 3, 2023, the company dismissed Friedman LLP and appointed Audit Alliance LLP as its independent registered public accounting firm845 Principal Accountant Fees (USD) | Fee Type | FY 2024 | FY 2023 | |:---|:---:|:---:| | Audit Fees | $200,000 | $330,000 | | Audit-Related Fees | $141,500 | $0 | | Total Fees | $341,500 | $330,000 | - The company has established processes for managing cybersecurity threats, overseen by its IT Engineering Department and Board of Directors, with no material incidents reported for FY2024855856 Financial Statements Consolidated Financial Statements The audited consolidated financial statements for FY2024, 2023, and 2022, presented under U.S. GAAP, show total assets of $40.0 million, total liabilities of $24.6 million, and a net loss of $2.3 million in FY2024, reflecting the VIE structure termination and detailed notes on accounting policies Consolidated Balance Sheet Data (as of June 30) | Account | 2024 (USD) | 2023 (USD) | |:---|:---:|:---:| | Total Assets | $39,975,042 | $88,175,838 | | Total Current Assets | $39,132,067 | $86,887,613 | | Total Liabilities | $24,594,328 | $72,631,642 | | Total Current Liabilities | $24,594,328 | $72,256,586 | | Total Shareholders' Equity | $15,380,714 | $15,544,196 | Consolidated Statement of Operations Data (Year Ended June 30) | Account | 2024 (USD) | 2023 (USD) | 2022 (USD) | |:---|:---:|:---:|:---:| | Total Revenue | $177,933,890 | $214,405,226 | $290,376,371 | | Gross Profit | $4,950,361 | $5,292,611 | $7,814,464 | | (Loss)/Income from Operations | ($1,343,831) | $875,032 | $3,371,255 | | Net (Loss)/Income | ($2,272,297) | $1,751,170 | $2,569,810 | | (Loss)/Earnings Per Share (Basic) | ($0.22) | $0.19 | $0.29 | Consolidated Statement of Cash Flows (Year Ended June 30) | Account | 2024 (USD) | 2023 (USD) | |:---|:---:|:---:| | Net cash from operating activities | $2,082,250 | ($3,751,832) | | Net cash used in investing activities | ($155,448) | ($144,227) | | Net cash (used in)/from financing activities | ($2,246,032) | $8,749,216 | | Net (decrease) increase in cash | ($928,407) | $3,461,344 |