Lucas GC(LGCL) - 2024 Q4 - Annual Report

PART I Item 1. Identity of Directors, Senior Management and Advisers This section is not applicable - The report states that this item is not applicable[21] Item 2. Offer Statistics and Expected Timetable This section is not applicable - The report states that this item is not applicable[22] Item 3. Key Information This section provides an overview of Lucas GC Limited, a Cayman Islands holding company operating in China's human capital management sector, detailing key risks and selected financial data - The company is a Cayman Islands holding company, not a Chinese operating company, with operations mainly conducted by its subsidiaries in mainland China[25] - The company identifies itself as the largest technology-driven online agent-centric human capital management service provider in China based on active users and 2021 net revenues, utilizing AI, data analytics, and blockchain[23] - The company's auditor, Enrome LLP, is headquartered in Singapore and is subject to PCAOB inspection, therefore the company does not expect to be identified as a Commission-Identified Issuer under the HFCA Act[31] - The company has completed the required filings with the CSRC for its initial public offering in accordance with the Overseas Listing Trial Measures effective March 31, 2023[28] Selected Financial Data This subsection presents selected consolidated financial data for fiscal years 2022-2024, including income, balance sheet, and cash flow figures, prepared under U.S. GAAP Selected Consolidated Statements of Income and Comprehensive Income Data (in thousands, except US$) | | 2022 (RMB) | 2023 (RMB) | 2024 (RMB) | 2024 (US$) | | :--- | :--- | :--- | :--- | :--- | | Net revenues | 766,571 | 1,473,958 | 1,063,409 | 145,686 | | Gross profit | 215,198 | 418,552 | 357,402 | 48,963 | | Operating profit | 31,623 | 67,716 | 28,011 | 3,837 | | Net income | 36,411 | 78,181 | 40,085 | 5,492 | Selected Consolidated Balance Sheet Data (in thousands, except US$) | | As of Dec 31, 2023 (RMB) | As of Dec 31, 2024 (RMB) | As of Dec 31, 2024 (US$) | | :--- | :--- | :--- | :--- | | Total current assets | 231,336 | 263,427 | 36,088 | | Total liabilities | 95,230 | 137,674 | 18,861 | | Total shareholders' equity | 196,592 | 265,578 | 36,384 | Selected Consolidated Cash Flows Data (in thousands, except US$) | | 2022 (RMB) | 2023 (RMB) | 2024 (RMB) | 2024 (US$) | | :--- | :--- | :--- | :--- | :--- | | Net cash (used in)/provided by operating activities | (15,120) | (36,408) | 20,186 | 2,767 | | Net cash provided by /(used in) investing activities | 16,819 | (12,097) | (79,948) | (10,953) | | Net cash provided by financing activities | 3,418 | 29,422 | 60,746 | 8,322 | Risk Factors This subsection outlines numerous risks and uncertainties, categorized into business, China-specific, and share-related factors, including operational history, competition, and regulatory challenges - Business & Industry Risks: The company has a limited operating history with its current PaaS model, depends heavily on attracting and retaining users and corporate customers for its recruitment and outsourcing services, and faces significant competition, with a history of negative operating cash flows and reliance on a limited number of customers for a significant portion of its revenue[38][39] - China-Related Risks: The company faces uncertainties with the PRC legal system, significant government oversight and potential intervention, and risks related to cybersecurity and data protection laws, along with risks associated with the classification of its platform users as independent contractors and potential difficulties in enforcing foreign judgments in China[42] - Share-Related Risks: The company's ordinary shares are subject to price volatility and potential delisting from Nasdaq if it fails to meet continued listing requirements, and as a "controlled company" and a "foreign private issuer," it is exempt from certain corporate governance and reporting requirements, which may offer less protection to investors, with no expectation of dividend payments in the foreseeable future[43][44] - The company received a notification from Nasdaq on January 15, 2025, for non-compliance with the minimum bid price requirement of US$1.00 per share, with a 180-day compliance period until July 15, 2025, to regain compliance[223] Item 4. Information on the Company This section details the company's history, corporate structure, and business operations, describing its evolution into a technology-driven PaaS provider for human capital management - The company completed its initial public offering and listed on the Nasdaq Capital Market under the symbol "LGCL" in March 2024, raising approximately US$4.0 million in net proceeds[249] - The company operates two proprietary platforms, Star Career and Columbus, which had approximately 780,320 active registered users as of December 31, 2024, a 22% increase from the previous year[252][46] - The company holds a significant intellectual property portfolio, including 10 U.S. patents, 9 Chinese patents, 68 registered trademarks, and 75 registered copyrights, primarily in AI, data analytics, and blockchain[274][284] - The company's corporate structure is a holding company in the Cayman Islands with operating subsidiaries primarily in the PRC, and it does not use a Variable Interest Entity (VIE) structure[354] Business Overview The company positions itself as China's largest technology-driven, online agent-centric human capital management PaaS provider, leveraging AI, data analytics, and blockchain across recruitment, outsourcing, and other services Revenue by Service Line (in millions RMB) | Service Line | 2022 | 2023 | 2024 | | :--- | :--- | :--- | :--- | | Recruitment Services | 413.0 | 659.0 | 216.1 | | Outsourcing Services | 301.9 | 714.0 | 785.1 | | Other Services | 51.6 | 101.0 | 62.2 | | Total Net Revenues | 766.6 | 1,474.0 | 1,063.4 | - The revenue mix has shifted significantly, with outsourcing services growing from 39.4% of total revenue in 2022 to 73.8% in 2024, while recruitment services decreased from 53.9% to 20.3% over the same period[50][51] - The company's technology is central to its operations, utilizing AI for personalized recommendations, data analytics for insights, and blockchain for secure credential management and referral tracking[274][282] - The company faces competition from online agent-centric service providers, online HR service providers, traditional staffing companies, and traditional workforce solutions providers[284][286] Regulations This subsection details the complex regulatory landscape in China governing the company's operations, including foreign investment, talent intermediary services, cybersecurity, data protection, and new CSRC filing requirements for overseas listings - The company's human resource services are not on the Negative List for foreign investment, but it must comply with licensing requirements, such as the Human Resource Service License, which it has obtained[297][305][309] - The company is subject to strict PRC laws on cybersecurity and data protection, including the Cybersecurity Review Measures, and as of the report date, the company believes it is not subject to a cybersecurity review as it does not hold personal information of more than one million users and has not been designated a "critical information infrastructure operator"[314][87] - Under the CSRC's Trial Measures effective March 31, 2023, the company is required to file with the CSRC for overseas listings and follow-on offerings, and has completed the filing for its IPO[348][164] - PRC regulations impose controls on foreign currency exchange and dividend distribution, where dividends can only be paid out of accumulated profits after setting aside statutory reserves, and remittance of funds is subject to SAFE procedures[325][337] Item 5. Operating and Financial Review and Prospects This section provides management's discussion and analysis of the company's financial condition and results of operations for fiscal years 2022-2024, covering revenue, expenses, liquidity, and critical accounting policies Operating Results The company's operating results show significant fluctuations, with net revenues growing in 2023 but decreasing in 2024 due to a strategic shift, while gross profit margin improved Consolidated Results of Operations (FY2023 vs. FY2024, in thousands RMB) | | 2023 | 2024 | Variance (%) | | :--- | :--- | :--- | :--- | | Total revenues | 1,473,958 | 1,063,409 | (27.9)% | | Gross profit | 418,552 | 357,402 | (14.6)% | | Operating profit | 67,716 | 28,011 | (58.6)% | | Net income | 78,181 | 40,085 | (48.7)% | - The decrease in 2024 revenue was primarily due to a RMB 443.0 million (67.2%) decline in recruitment services, attributed to a market downturn and a strategic shift away from lower-margin business, partially offset by a RMB 71.1 million (10.0%) increase in outsourcing services revenue[382][383] - Research and development expenses increased by 7.0% in 2024 to RMB 168.6 million, reflecting continued investment in AI technologies like GPT and the company's proprietary platforms, Star Career and Columbus[393] - The company's strategic shift from revenue scale to value optimization is reflected in the gross profit margin improvement from 28.4% in 2023 to 33.6% in 2024[391] Liquidity and Capital Resources This section details the company's liquidity position, cash flow activities, and capital expenditures, noting positive operating cash flow in 2024 and restrictions on fund transfers from PRC subsidiaries Cash and Cash Equivalents (in millions) | As of | RMB | US$ | | :--- | :--- | :--- | | Dec 31, 2023 | 30.1 | N/A | | Dec 31, 2024 | 30.4 | 4.2 | Cash Flow Summary (in millions RMB) | | 2022 | 2023 | 2024 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | (15.1) | (36.4) | 20.2 | | Net cash from investing activities | 16.8 | (12.1) | (79.9) | | Net cash from financing activities | 3.4 | 29.4 | 60.7 | - Capital expenditures increased significantly to RMB 44.7 million in 2024 from RMB 12.1 million in 2023, primarily for software and equipment to support its platform-based operations[439] - The company is a holding company and relies on dividends from its PRC subsidiaries, however, PRC laws restrict these subsidiaries from transferring a portion of their net assets (RMB 98.4 million as of Dec 31, 2024) to the parent company[443][855] Critical Accounting Policies and Estimates This subsection outlines key accounting policies and estimates, including revenue recognition, allowance for credit losses, useful lives of software, and valuation allowance for deferred tax assets, which significantly impact financial statements - Revenue is recognized based on a five-step model under ASC 606, with revenue from flexible employment recognized over time, while revenue from permanent employment and outsourcing services recognized at a point in time upon completion of the performance obligation[463][467][469][473] - The company adopted ASU 2016-13 (Credit Losses) on January 1, 2023, recognizing an allowance for credit losses of RMB 11.5 million in 2023 and a reversal of credit losses of RMB 3.6 million in 2024[461][462] - The company considers itself the principal in its service arrangements, recognizing revenue on a gross basis, based on its control over the services, discretion in pricing, and bearing of credit risk[477] - Deferred tax assets are assessed for a valuation allowance, with the company having a valuation allowance of RMB 10.2 million against its deferred tax assets as of December 31, 2024, up from RMB 3.0 million in 2023[478][479] Item 6. Directors, Senior Management and Employees This section provides information on the company's leadership, compensation, board structure, and workforce, including details on the 2024 Equity Incentive Plan and employee breakdown - The company paid an aggregate of approximately RMB 1.3 million (US$0.2 million) in cash and benefits to its directors and executive officers for the year ended December 31, 2024[499] - A 2024 Equity Incentive Plan was adopted in November 2024, authorizing a maximum of 11,800,000 ordinary shares for awards, with no awards granted under this plan as of the report date[506][507][511] - The board consists of five directors, with three independent directors (Jeremy Wegerer, Stanley Ho, Michael Carter) who comprise the entirety of the Audit, Compensation, and Nominating and Corporate Governance committees[512][514][515] Employee Breakdown by Function (as of Dec 31, 2024) | Function | Number of Employees | % of Total | | :--- | :--- | :--- | | Research and Development | 106 | 33.2% | | Sales and Marketing | 68 | 21.3% | | Operations | 126 | 39.5% | | General Administration | 19 | 6.0% | | Total | 319 | 100.0% | Item 7. Major Shareholders and Related Party Transactions This section discloses major shareholders, including controlling shareholder Howard Lee, and details significant related party transactions, primarily involving services with Beagledata and expenses paid by Mr. Lee Major Shareholder Ownership | Shareholder | Beneficial Ownership (%) | | :--- | :--- | | HTL Lucky Holding Limited (Howard Lee) | 61.1% | | 51job, Inc. | 18.2% | | MLT Holding Limited | 7.1% | - The company is a "controlled company" under Nasdaq rules due to Mr. Howard Lee's majority voting power[243] - Significant related party transactions in 2024 included providing RMB 3.9 million in recruitment services to Beagledata, with amounts due to related parties totaling RMB 3.7 million as of December 31, 2024, including RMB 2.3 million to Mr. Howard Lee for expenses paid on behalf of the company[531][533][534] Item 8. Financial Information This section confirms the inclusion of consolidated financial statements, discusses the absence of material legal proceedings, and outlines the company's dividend policy, which currently plans no future payments - The company has not declared or paid any dividends since its inception and has no present plan to do so in the foreseeable future[540] - The company's ability to pay dividends is dependent on receiving funds from its PRC subsidiaries, which is restricted by PRC laws requiring statutory reserves and government approvals for currency conversion and remittance[541] - The company is not currently a party to any material legal or administrative proceedings[537] Item 9. The Offer and Listing This section provides details about the listing of the company's ordinary shares on the Nasdaq Capital Market since March 5, 2024 - The company's ordinary shares are listed on the Nasdaq Capital Market under the trading symbol "LGCL" as of March 5, 2024[545] Item 10. Additional Information This section provides detailed corporate and legal information, including the company's memorandum and articles of association, material contracts, exchange controls, and a comprehensive overview of taxation in various jurisdictions - The company is an exempted company under the laws of the Cayman Islands, and its corporate governance is subject to Cayman Islands law, which differs from U.S. corporate law in areas such as shareholder suits, director's fiduciary duties, and mergers[549][574] - Regarding U.S. federal income tax, the company does not believe it was a Passive Foreign Investment Company (PFIC) for the 2024 taxable year but notes that its PFIC status is a factual determination made annually and is subject to change[235][627] - PRC taxation subjects the company's Chinese subsidiaries to a 25% standard EIT rate, with a preferential 15% rate for entities qualifying as High and New Technology Enterprises (HNTEs), and dividends paid from PRC subsidiaries to the Hong Kong holding company may be subject to a 5% or 10% withholding tax[611][615] Item 11. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to various market risks, primarily credit risk from accounts receivable, liquidity risk in meeting financial commitments, and foreign exchange risk from currency fluctuations - Credit Risk: Managed by placing cash with high-credit-rating financial institutions and applying credit approval and monitoring procedures for accounts receivable[646][647] - Liquidity Risk: Managed through financial position analysis and monitoring, with the company potentially seeking short-term funding from financial institutions if needed[648] - Foreign Exchange Risk: The company is exposed to currency risk as its reporting currency is RMB, but it engages in capital transactions in other currencies like the US dollar, recognizing a foreign currency exchange gain of RMB 482,443 in 2024[649] Item 12. Description of Securities Other Than Equity Securities This section is not applicable - The report states that this item, concerning debt securities, warrants, and other non-equity securities, is not applicable[650][651][652] PART II Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds This section states no material modifications to security holder rights and details the allocation of approximately US$4.0 million net proceeds from the March 2024 initial public offering - There have been no material modifications to the rights of security holders[655] - The net proceeds of approximately US$4.0 million from the March 2024 IPO were used for: - US$2.0 million for technology infrastructure and R&D - US$1.0 million for marketing and geographic expansion - US$0.7 million for new product and service offerings - US$0.3 million for general corporate purposes[657][659] Item 15. Controls and Procedures This section addresses the company's internal controls, noting a material weakness in financial reporting due to insufficient U.S. GAAP expertise and outlining remediation measures - Management concluded that disclosure controls and procedures were not effective as of December 31, 2024[660] - A material weakness was identified: a lack of accounting staff and resources with appropriate knowledge of U.S. GAAP and SEC reporting and compliance requirements[665] - Remediation measures being implemented include recruiting qualified accounting personnel and organizing regular training on U.S. GAAP and SEC reporting[666] - As an emerging growth company, the company is exempt from the auditor attestation report on internal control over financial reporting[667][668] Item 16. Corporate Governance and Other Disclosures This section covers governance topics, including the audit committee, code of ethics, principal accountant fees, a share repurchase program, and the implementation of a cybersecurity risk management policy - The company dismissed Marcum Asia CPAs LLP and engaged Enrome LLP as its independent registered public accounting firm, effective August 28, 2024, with the change not due to any disagreements on accounting principles or practices[678] - In August 2024, the board authorized a share repurchase program of up to US$6 million, and as of December 2024, the company had repurchased 96,243 ordinary shares for a total of US$117,312.53[676][677] Principal Accountant Fees (in thousands) | Firm | 2023 (RMB) | 2024 (RMB) | 2024 (US$) | | :--- | :--- | :--- | :--- | | Marcum Asia CPAs LLP | 3,406 | 2,704 | 370 | | Enrome LLP | - | 1,825 | 250 | - The company has implemented a cybersecurity risk management policy, with oversight delegated to the audit committee of the Board of Directors[687][688] PART III Item 18. Financial Statements This section indicates the company's election to provide full audited consolidated financial statements and all related notes as required under Item 18 - The company has elected to provide full financial statements as required under Item 18 of Form 20-F[695][696] Item 19. Exhibits This section lists all exhibits filed as part of the annual report, including corporate governance documents, agreements, and various certifications - Key exhibits filed with the report include the 2024 Equity Incentive Plan, Code of Business Conduct and Ethics, and the Executive Compensation Clawback Policy[697] Consolidated Financial Statements Report of Independent Registered Public Accounting Firm This section contains unqualified audit opinions from Enrome LLP for 2024 and Marcum Asia CPAs LLP for 2022-2023, confirming fair presentation of financial statements under U.S. GAAP - Enrome LLP audited the financial statements for the fiscal year ended December 31, 2024[704] - Marcum Asia CPAs LLP audited the financial statements for the fiscal years ended December 31, 2022 and 2023[710] Consolidated Financial Statements This section presents the core audited financial statements, including Consolidated Balance Sheets, Statements of Income, Changes in Shareholders' Equity, and Cash Flows for fiscal years 2022-2024 Consolidated Balance Sheet Highlights (in thousands RMB) | | Dec 31, 2023 | Dec 31, 2024 | | :--- | :--- | :--- | | Total Assets | 291,822 | 403,252 | | Total Liabilities | 95,230 | 137,674 | | Total Shareholders' Equity | 196,592 | 265,578 | Consolidated Income Statement Highlights (in thousands RMB) | | 2022 | 2023 | 2024 | | :--- | :--- | :--- | :--- | | Total revenues | 766,571 | 1,473,958 | 1,063,409 | | Gross profit | 215,198 | 418,552 | 357,402 | | Net income | 36,411 | 78,181 | 40,085 | Notes to Consolidated Financial Statements This section provides detailed explanations and supplemental information for the financial statements, covering accounting policies, fair value measurements, account breakdowns, related party transactions, and taxation Note 2: Summary of Significant Accounting Policies This note details the basis of presentation and key accounting policies, including revenue recognition, lease accounting, income taxes, and credit losses, all prepared under U.S. GAAP - The company recognizes revenue on a gross basis, acting as the principal in its service arrangements, controlling the services, having pricing discretion, and bearing credit risk[777] - The company adopted lease accounting standard ASC 842 on January 1, 2022, resulting in the recognition of right-of-use assets and lease liabilities for its office leases[793] - The company has one operating segment, as the CEO, identified as the Chief Operating Decision Maker (CODM), reviews consolidated results to allocate resources and assess performance[807] Note 13: Taxation This note details the company's tax obligations across jurisdictions, including preferential rates for HNTEs in PRC, the R&D super-deduction, and net operating loss carryforwards - Key PRC subsidiaries, Lucas China and Luogaoshi, are certified as High and New Technology Enterprises (HNTEs) and are entitled to a reduced income tax rate of 15%[859] - The company benefits from a "Super Deduction" for qualified R&D expenses, which significantly reduces its effective tax rate, with the R&D super-deduction reducing expected tax by RMB 20.1 million in 2024[860][862] - The company had net operating loss carryforwards of approximately RMB 160.5 million in the PRC and RMB 10.4 million in Hong Kong as of December 31, 2024[864] Note 17: Concentration of Credit Risk This note highlights the company's concentration of credit risk, primarily from accounts receivable with a small number of customers and significant supplier concentration for purchases and payables - In 2024, Customer A accounted for 11% of total revenues and 35% of net accounts receivable[877] - As of December 31, 2024, two customers (A and C) represented a combined 59% of the Group's total net accounts receivable[877] - Significant supplier concentration exists, with four suppliers (I, J, K, L) accounting for 64% of the total advance to suppliers as of year-end 2024[879]