Blue Hat(BHAT) - 2022 Q4 - Annual Report

PART I ITEM 3. KEY INFORMATION This section presents selected financial data for the fiscal years 2020, 2021, and 2022, showing a significant decline in revenue and a shift from net income to substantial net losses, alongside a comprehensive list of risk factors. Selected Consolidated Financial Data (2020-2022) | Financial Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Revenues | $7,376,009 | $15,155,074 | $24,599,923 | | Gross Profit | $3,998,349 | $6,482,924 | $13,420,020 | | Income (Loss) from Operations | ($7,999,806) | ($60,957,583) | $10,204,409 | | Net Income (Loss) | ($9,405,082) | ($60,054,620) | $8,281,017 | | Basic EPS from cont. operation ($) | (1.23) | (11.60) | 2.09 | Selected Consolidated Cash Flow Data (2020-2022) | Cash Flow Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash (used in)/from operating activities | ($1,598,493) | ($22,284,750) | $5,052,415 | | Net cash used in investing activities | $6,336 | ($4,498,355) | ($10,761,890) | | Net cash generated from financing activities | $2,530,674 | $7,574,848 | $2,493,110 | | Cash and cash equivalents at end of period | $76,535 | $135,562 | $15,752,704 | - The company identifies significant business risks, including its limited operating history, high market competition, dependence on its distribution network, and business seasonality[13] - A key structural risk is the company's dependence on Contractual Arrangements with its Variable Interest Entities (VIEs), Blue Hat Fujian and Fujian Roar Game, to conduct business in China, which may not be as effective as direct ownership and is subject to scrutiny by PRC authorities[13][15][28] - The company faces substantial risks related to operating in China, including changes in economic, political, and legal systems, greater oversight by the Cyberspace Administration of China (CAC) over data security, and potential delisting from U.S. exchanges under the Holding Foreign Companies Accountable Act (HFCAA) if the PCAOB cannot inspect its auditor[15][51][76] - The company has identified three material weaknesses in its internal control over financial reporting as of December 31, 2022: (i) insufficient personnel with U.S. GAAP knowledge, (ii) ineffective oversight by governance, and (iii) inadequate design of internal controls over financial statement preparation[86][295] ITEM 4. INFORMATION ON THE COMPANY This section details the company's history, corporate structure, and business operations, including its focus on AR interactive entertainment, recent expansion into IDC and commodity trading, and the extensive PRC legal and regulatory framework governing its activities. - The company operates its core business in China through two Variable Interest Entities (VIEs), Fujian Blue Hat Interactive Entertainment Technology Ltd. and Fujian Roar Game Technology Co., Ltd., which are controlled via a series of contractual arrangements rather than direct ownership due to PRC restrictions on foreign investment[101][105] - The company's primary business is the production, development, and operation of augmented reality (AR) interactive entertainment, including games, toys, and educational materials, with recent expansion into the Internet Data Center (IDC) business and commodity trading[111][123] - As of April 27, 2023, the company's intellectual property portfolio included 224 authorized patents, 14 PCT international patent applications, 794 artistic copyrights, 94 registered trademarks, and 134 software copyrights[111][127] - The company's corporate structure is a multi-layered holding structure: Blue Hat Interactive Entertainment Technology (Cayman Islands) owns Blue Hat BVI, which owns Blue Hat HK, which in turn owns the WFOE (Xiamen Duwei Consulting), and the WFOE controls the VIEs (Fujian Blue Hat and Fujian Roar Game) through contractual arrangements[100][101][175] ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section provides management's discussion and analysis of the company's financial performance, highlighting a 51.3% decrease in revenue in FY2022, a shift to significant net losses, and details on liquidity, capital resources, and contractual obligations. Revenue Breakdown by Category (FY2022 vs. FY2021) | Revenue Category | FY 2022 | FY 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Interactive toys - animation series | $9,061 | $657,619 | ($648,558) | (98.62)% | | Interactive toys - game series | $155,559 | $8,723,480 | ($8,567,921) | (98.22)% | | Mobile games | $5,181,410 | $4,165,456 | $1,015,954 | 24.39% | | Information service | $884,329 | $1,608,519 | ($724,190) | (45.02)% | | Commodity Trading | $1,145,650 | $0 | $1,145,650 | N/A | | Total revenues | $7,376,009 | $15,155,074 | ($7,779,065) | (51.33)% | - Total revenues decreased by 51.33% in FY2022, mainly due to the significant negative impact of COVID-19 on the interactive toy business, which saw a combined revenue drop of over $9.2 million, while a new commodity trading business was introduced in Q4 2022, generating $1.15 million in revenue[184][194][197] - Operating expenses decreased significantly to $12.00 million in FY2022 from $67.44 million in FY2021, primarily due to a $25.66 million decrease in G&A expenses, an $8.71 million decrease in R&D expenses, and a reduction in impairment loss from $18.44 million to $33,397[201] - The company's liquidity is under pressure, with a working capital of $4.12 million and cash equivalents of only $76,535 as of December 31, 2022, having generated a net loss of $9.41 million in FY2022[213] Contractual Obligations as of December 31, 2022 | Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Loan obligations | $1,261,944 | $1,261,944 | $0 | $0 | $0 | | Operating lease obligations | $42,302 | $11,261 | $31,041 | $0 | $0 | | Convertible notes payable | $1,393,499 | $0 | $1,393,499 | $0 | $0 | | Long-term loans - related party | $914,771 | $0 | $0 | $914,771 | $0 | | Total | $3,777,459 | $1,438,148 | $1,424,540 | $914,771 | $0 | ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section provides information on the company's leadership and workforce, including director and executive officer compensation, board structure, and significant share ownership by management and principal shareholders. - As of December 31, 2022, the company had 27 full-time employees, all located in China[241] Director and Executive Officer Compensation (FY2022) | Name | Position | Total Compensation (Cash) | | :--- | :--- | :--- | | Xiaodong Chen | CEO and Director | $98,738 | | Caifan He | CFO and Director | $69,635 | | Qinyi Fu | Independent Director | $10,000 | | Jun Ouyang | Independent Director | $10,000 | | Huibin Shen | Independent Director | $10,000 | | Can Su | Independent Director | $10,000 | - The company's officers, directors, and principal shareholders collectively control a significant portion of the company, with CEO Xiaodong Chen beneficially owning 13.23% of outstanding shares and all directors and executive officers as a group owning 14.25% as of December 31, 2022[85][245] ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section details transactions with related parties, primarily focusing on loans from the CEO, Xiaodong Chen, to the company and his role as a guarantor for certain company loans. - As of December 31, 2022, the company had an outstanding loan payable to its CEO, Xiaodong Chen, amounting to $935,878, with the loans being unsecured, interest-free, and $914,771 due on January 31, 2026[246] ITEM 8. FINANCIAL INFORMATION This section confirms the inclusion of audited consolidated financial statements in Item 18, states the absence of material legal proceedings, and clarifies the company's dividend policy. - The company has never declared or paid a dividend and intends to retain all future earnings to fund business development and expansion[250] - The company is not currently a party to any legal proceedings that would have a material adverse effect on its business or financial position[249] ITEM 10. ADDITIONAL INFORMATION This section provides details on the company's share capital, memorandum and articles of association, and material tax considerations, including its status as a Cayman Islands exempted company and its expected non-PFIC classification. - The company is an exempted company incorporated in the Cayman Islands, and its corporate affairs are governed by Cayman Islands law, which provides different shareholder rights compared to U.S. jurisdictions[252][264] - Based on current and expected income and assets, the company does not presently expect to be classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes for the current taxable year or the foreseeable future[97][272] ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company is exposed to several market risks, including interest rate, credit, liquidity, and significant foreign exchange risk due to its RMB-denominated operations and U.S. dollar reporting currency. - The company faces significant foreign exchange risk as almost all of its consolidated revenues, costs, and assets are denominated in RMB, while its reporting currency is the U.S. dollar, meaning fluctuations in the RMB/USD exchange rate can affect its reported financial results[288] PART II ITEM 15. CONTROLS AND PROCEDURES This section addresses the company's internal controls, concluding that disclosure controls and procedures were not effective as of December 31, 2022, due to identified material weaknesses, which the company is actively remediating. - Management concluded that the company's disclosure controls and procedures were not effective as of December 31, 2022, due to identified material weaknesses[293] - Three material weaknesses in internal control over financial reporting were identified as of December 31, 2022: 1. Insufficient personnel with U.S. GAAP accounting knowledge 2. Ineffective oversight of financial reporting and internal control by governance 3. Inadequate design of internal control over the preparation of financial statements[295] Corporate Governance and Accountant Services This section covers various governance topics, including the identification of the audit committee financial expert, adoption of a Code of Business Conduct and Ethics, disclosure of principal accountant fees, and adherence to home country corporate governance practices. Principal Accountant Fees (Audit Alliance LLP) | Fee Category | FY 2022 | FY 2021 | | :--- | :--- | :--- | | Audit fees | $160,000 | $160,000 | | Audit-related fees | $0 | $0 | | Tax fees | $0 | $0 | | All Other Fees | $0 | $0 | | Total | $160,000 | $160,000 | - The company follows its home country (Cayman Islands) practice in lieu of Nasdaq rules regarding annual shareholder meetings and certain shareholder approval requirements for securities issuances, which may afford less protection to shareholders[303][304] PART III FINANCIAL STATEMENTS This section contains the company's audited consolidated financial statements for fiscal years 2020-2022, prepared under U.S. GAAP, including the independent auditor's report with a "Going Concern Uncertainty" paragraph due to recurring losses and negative operating cash flow. - The independent auditor's report includes a 'Going Concern Uncertainty' paragraph due to the company suffering recurring losses from operations (approx. $9.41 million in 2022) and negative operating cash flow (approx. $1.60 million in 2022), which raise substantial doubt about its ability to continue as a going concern[317] Consolidated Balance Sheet Summary | Metric | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $21,532,070 | $21,704,144 | | Total Assets | $34,276,858 | $36,511,577 | | Total Current Liabilities | $17,408,208 | $18,281,724 | | Total Liabilities | $19,747,519 | $18,861,371 | | Total Equity | $14,529,339 | $17,650,206 | - As of December 31, 2022, the company had significant accounts receivable of $13.5 million (net) and other receivables of $4.7 million (net)[320] - For the year ended December 31, 2022, two customers accounted for 30.1% and 16.98% of the Company's total revenues, indicating significant customer concentration risk[437]