Oriental Culture(US:OCG)2025-05-14 22:06PART I Key Information This section outlines the company's VIE structure in China, detailing legal and operational risks, regulatory impacts, and selected financial data Selected Condensed Consolidated Financial Schedule Condensed consolidated financial data for the holding company, subsidiaries, WFOE, and VIE for FY2024 are presented Condensed Consolidated Financial Highlights for FY 2024 | Financial Metric | Holding Company | HK Subsidiaries | WFOE (PRC) | VIE (PRC) | Consolidated Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Assets | $60,778,716 | $1,010,267 | $40,384,424 | $39,958,127 | $53,035,666 | | Total Liabilities | $10,869,404 | $2,202,299 | $1,570,397 | $2,125,559 | $3,126,354 | | Total Shareholders' Equity | $49,909,312 | $(1,192,032) | $38,814,027 | $37,832,568 | $49,909,312 | | Operating Revenues | $0 | $0 | $0 | $622,690 | $622,690 | | Net (Loss) Income | $(2,433,536) | $763,029 | $(610,708) | $(623,395) | $(2,433,536) | Condensed Consolidated Cash Flow for FY 2024 | Cash Flow Activity | Holding Company | HK Subsidiaries | WFOE (PRC) | VIE (PRC) | Consolidated Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating Activities | $(1,761,029) | $(25,502) | $(3,451,046) | $1,231,202 | $(4,006,375) | | Investing Activities | $(5,756,000) | $0 | $3,294,358 | $(52,363) | $(11,556,351) | | Financing Activities | $6,998,517 | $0 | $0 | $0 | $6,998,517 | Risk Factors Significant business, structural, and regulatory risks include VIE challenges, frozen bank accounts, and uncertain PRC laws - A major operational risk stems from the freezing of certain bank accounts of the VIE's subsidiaries by the Nan County Public Safety Bureau in China, materially impacting business operations, customer confidence, and financial results, with approximately $17.3 million in cash and short-term investments remaining frozen as of December 31, 2024606465 - The company's reliance on a VIE structure is a significant risk, as non-compliance with PRC foreign investment regulations could lead to severe penalties, including relinquishing interests in China operations and rendering securities worthless53111126 - The rapidly changing and uncertain interpretation of Chinese laws, particularly regarding overseas listings (New Overseas Listing Rules), cybersecurity, and data transfers, poses a material risk to the company's ability to operate, raise capital, and remain listed on a U.S. exchange26131132 - The company's ordinary shares may be thinly traded, leading to low liquidity and price volatility, and its status as a foreign private issuer offers potentially less protection to investors due to exemptions from certain SEC reporting and corporate governance requirements208222224 - The company is a Cayman Islands holding company, not a Chinese operating company, conducting business in China through contractual arrangements with a Variable Interest Entity (VIE), a structure with unique risks not fully tested in Chinese courts25 - Recent PRC regulations, including the New Overseas Listing Rules effective March 31, 2023, require filings with the CSRC for overseas offerings, which the company believes are subject to post-offering filing rather than prior approval26132 - The company's auditor, Wei, Wei & Co., LLP, is a U.S.-based firm subject to PCAOB inspection, therefore the Holding Foreign Companies Accountable Act (HFCA Act) does not currently affect the company28151 - As of the report date, no dividends or distributions have been made between the holding company, its subsidiaries, and the consolidated VIEs, or to investors, with the company intending to retain future earnings for business expansion3435 Information On The Company This section details the company's history, e-commerce business model for collectibles, and its corporate structure, including the VIE arrangement History and Development of the Company Key milestones include the 2020 IPO, a 2023 reverse stock split for Nasdaq compliance, and a 2024 private placement and subsidiary sale - The company completed its IPO on December 1, 2020, raising net proceeds of approximately $17.3 million243 - In October 2023, the company executed a 1-for-5 reverse stock split (Share Consolidation) to regain compliance with Nasdaq's minimum bid price requirement245 - On May 31, 2024, the company entered into a Securities Purchase Agreement for a private placement to sell 14,000,000 ordinary shares at $0.50 per share, for aggregate proceeds of $7.0 million, along with warrants to purchase an additional 14,000,000 shares246 - The company sold its subsidiary HKDAEx to an unrelated party for $1 in December 2024, after HKDAEx ceased operations on June 30, 2024240 Business Overview Operates an online e-commerce platform for collectibles, offering trading and support services in a competitive and complex regulatory environment - The company's primary business is facilitating the e-commerce trading of collectibles and artwork on its online platform, owned by its Hong Kong subsidiary253 - Services provided to customers include account opening, investor education, real-time market information, customer support, and warehousing256258 - The art e-commerce market is highly competitive, with over 10 active platforms operating in China as of December 31, 2024296 - The company's operations are subject to extensive regulations in both the PRC and Hong Kong, including PRC rules on trading platforms (Decision No.38, Opinion No.37) and Hong Kong's Personal Data (Privacy) Ordinance (PDPO)159363 Organizational Structure The company uses a VIE structure, with its WFOE controlling the PRC VIE via contractual agreements to consolidate financial results - The company uses a VIE structure because it expects its PRC entity, Jiangsu Yanggu, may engage in business activities (like marketing surveys) that are on the PRC's 'Negative List' for foreign investment380710 - The VIE agreements grant the WFOE the right to receive 100% of the VIE's net income as service fees and obligate it to absorb 100% of the VIE's losses382711 - The VIE's shareholders have pledged all their equity to the WFOE and granted the WFOE an exclusive option to purchase their equity at the lowest price permitted by PRC law383385713714 Operating and Financial Review and Prospects Fiscal year 2024 saw a 60.6% revenue decline and a $2.4 million net loss, primarily due to an investigation and frozen accounts, though liquidity is supported by a $7.0 million private placement Operating Results Operating revenues declined 60.6% to $0.6 million in 2024 due to an investigation and frozen accounts, but net loss narrowed to $2.4 million from reduced expenses - The investigation and charges against former major shareholders, along with the freezing of VIE subsidiary bank accounts, have materially and negatively impacted business operations and revenue396400402 Key Operational Metrics (2022-2024) | Metric | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Active Traders | ~19,000 | ~35,000 | ~142,000 | | Number of Transactions | ~7 million | ~19 million | ~96 million | | Transaction Value | ~$0.1 billion | ~$0.5 billion | ~$8.6 billion | Comparison of Operations for Years Ended Dec 31 | Metric | 2024 | 2023 | Change (%) | | :--- | :--- | :--- | :--- | | Total Operating Revenues | $622,690 | $1,580,058 | (60.6)% | | Gross Profit | $440,509 | $1,174,430 | (62.5)% | | Operating Expenses | $(3,637,707) | $(5,509,838) | (34.0)% | | Net Loss | $(2,433,536) | $(3,598,480) | (32.4)% | | Basic & Diluted EPS | $(0.18) | $(0.84) | (78.2)% | Liquidity and Capital Resources The company held $39.6 million in cash and investments (including $17.3 million restricted) as of December 2024, with a $7.0 million private placement supporting liquidity despite negative operating cash flow - The company secured $7.0 million in a private placement on May 31, 2024, selling 14,000,000 ordinary shares at $0.50 per share453 Summary of Cash Flows (Years Ended Dec 31) | Cash Flow Activity | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Net Cash from Operating Activities | $(4,006,375) | $3,624,590 | $(1,211,385) | | Net Cash from Investing Activities | $(11,556,351) | $(511,248) | $608,471 | | Net Cash from Financing Activities | $6,998,517 | $600,000 | $1,000,000 | - As of December 31, 2024, the company held approximately $32.6 million in cash and cash equivalents, though PRC regulations restrict the ability of PRC subsidiaries to transfer funds out of China455456 Directors, Senior Management and Employees This section details the company's 7-member board, executive compensation, equity plan, and a decrease in full-time employees to 33 in 2024 - The board of directors consists of 7 members, with Kit Ming (Michael) Lo serving as Chairman and Yi Shao as CEO485 - For the fiscal year ended December 31, 2024, the company paid approximately $194,744 in cash to its executive officers and $127,097 to its non-executive directors499 - The company has a 2021 Omnibus Equity Plan authorizing up to 800,000 shares, with 300,000 shares granted in February 2024 and an additional 500,000 shares granted to officers and employees in April 2025508509 - The total number of full-time employees decreased from 52 as of December 31, 2023, to 33 as of December 31, 2024529 Major Shareholders and Related Party Transactions This section outlines major shareholders and details related-party transactions, primarily with entities affiliated with Mr. Huajun Gao and Mr. Aimin Kong - The company's primary related party transactions involve its VIE arrangements and other operational agreements with entities controlled by or affiliated with shareholders Mr. Huajun Gao and Mr. Aimin Kong, such as Nanjing Culture and Kashi Jinwang541545547 Related Party Transactions Summary (FY 2024 vs FY 2023) | Transaction Type | 2024 | 2023 | | :--- | :--- | :--- | | Net Revenues - Related Parties | $54,633 | $144,609 | | Cost of Revenues - Related Party | $21,075 | $64,051 | | General & Admin Expenses - Related Parties | $104,391 | $234,289 | Financial Information The company's consolidated financial statements are included, with no material legal proceedings or plans for near-term dividend payments - The company is not currently involved in any material legal or administrative proceedings551 - The company has no plan to declare or pay dividends in the near future and intends to retain earnings for business operations and expansion552 Additional Information Details the company's Cayman Islands corporate governance, share capital, shareholder rights, and material tax consequences for investors across various jurisdictions - The company is a Cayman Islands exempted company, and its corporate affairs are governed by its memorandum and articles of association and the Companies Act of the Cayman Islands562 - As of May 9, 2025, the authorized share capital is $50,000 divided into 180,000,000 ordinary shares ($0.00025 par value) and 100,000,000 preferred shares ($0.00005 par value), with 20,733,927 ordinary shares outstanding and no preferred shares issued563 - The company does not believe it was a Passive Foreign Investment Company (PFIC) for the taxable year ended December 31, 2024, but notes that PFIC status is a factual determination made annually and depends on the composition of its assets and income229 Quantitative and Qualitative Disclosures About Market Risk The company faces liquidity, inflation, interest rate, and significant foreign currency risks, particularly due to RMB-denominated operations without hedging - The company's primary market risks are liquidity, inflation, interest rate, and foreign currency translation risk635636637638 - Foreign currency risk is significant as operating transactions are mainly in RMB, which is not freely convertible, and the company does not currently use hedging instruments to manage this risk638 PART II Material Modifications to the Rights of Security Holders and Use of Proceeds This section details the use of approximately $4.4 million from the $17.3 million IPO proceeds for IT upgrades, with no material change in intended use - The company's IPO in December 2020 raised net proceeds of approximately $17.3 million645 - From the IPO date to December 31, 2024, approximately $4.4 million of the proceeds were used for upgrading IT infrastructure, software, and platform systems646 Controls and Procedures Management concluded disclosure controls were ineffective as of December 31, 2024, due to a material weakness in accounting personnel expertise, with remediation plans underway - Management concluded that as of December 31, 2024, the company's disclosure controls and procedures and its internal control over financial reporting were not effective647648 - A material weakness was identified related to the lack of in-house accounting personnel with appropriate knowledge of U.S. GAAP and SEC reporting requirements651 - Remediation plans include using experienced external accountants, recruiting more qualified financial personnel, and implementing regular U.S. GAAP and SEC training652 Corporate Governance and Other Matters This section covers corporate governance, including the audit committee financial expert, code of ethics, accountant fees, foreign private issuer status, and cybersecurity risk management - The board has determined that Mr. Nelson Wong is an audit committee financial expert657 Principal Accountant Fees (Wei Wei & Co., LLP) | Fee Type | 2024 | 2023 | | :--- | :--- | :--- | | Audit Fees | $230,000 | $250,000 | | Total Fees | $230,000 | $250,000 | - As a foreign private issuer, the company follows its home country (Cayman Islands) practices in lieu of certain Nasdaq corporate governance rules, such as those related to shareholder approval for certain securities issuances666 - The company has established a cybersecurity management policy and process, with oversight responsibility resting with the Board of Directors, and no material cybersecurity incidents have affected the company to date670 PART III Financial Statements This section presents the company's audited consolidated financial statements for 2022-2024, prepared under U.S. GAAP, with an unqualified auditor's opinion Consolidated Balance Sheet Highlights (As of Dec 31) | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $17,068,272 | $17,684,018 | | Restricted cash and equivalents | $6,475,274 | $14,740,676 | | Total Assets | $53,035,666 | $48,630,835 | | Total Liabilities | $3,126,354 | $3,081,186 | | Total Shareholders' Equity | $49,909,312 | $45,549,649 | Consolidated Statement of Operations Highlights (Years Ended Dec 31) | Metric | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Total Operating Revenues | $622,690 | $1,580,058 | $17,813,139 | | Gross Profit | $440,509 | $1,174,430 | $16,816,680 | | (Loss) Income from Operations | $(3,197,198) | $(4,335,408) | $2,589,351 | | Net (Loss) Income | $(2,433,536) | $(3,598,480) | $3,235,686 | - The notes to the financial statements detail the company's VIE structure, confirming that Jiangsu Yanggu and its subsidiaries are consolidated as VIEs because the WFOE has effective control and absorbs all risks and rewards804 - A significant contingency relates to the frozen bank accounts of the VIE's subsidiaries, totaling approximately $14.7 million as of December 31, 2024, which had not been released as of the report date despite related charges against former shareholders being withdrawn in May 2025874877879