Oriental Culture(OCG) - 2023 Q4 - Annual Report

PART I Item 1. Identity of Directors, Senior Management and Advisers This section is not applicable as per the report - The report states that this item is not applicable[14] Item 2. Offer Statistics and Expected Timetable This section is not applicable as per the report - The report states that this item is not applicable[14] Item 3. Key Information This section details the company's Cayman Islands holding structure, which operates in China through a Variable Interest Entity (VIE), highlighting associated risks and presenting selected condensed consolidated financial data - 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 carrying unique risks as Chinese authorities could disallow it, potentially rendering the company's securities worthless[14] - The company asserts that its VIE and subsidiaries in China have all required permissions (business licenses) and are not currently required to obtain approvals from the CSRC or CAC for their operations, but acknowledges significant uncertainty regarding future PRC regulations on overseas listings and data security[17] - As a holding company, cash flow from the PRC operating entities to the parent company is subject to PRC regulations, with dividends from the WFOE permissible only from accumulated after-tax profits and subject to a 10% withholding tax (potentially reducible to 5% under the Hong Kong-Mainland tax treaty), and as of the report date, no dividends or distributions have been made between the holding company, its subsidiaries, and the VIE[21][22][23] Selected Condensed Consolidated Balance Sheet as of December 31, 2023 (in USD) | Category | Amount (USD) | | :--- | :--- | | Total Current Assets | 37,893,285 | | Total Assets | 48,630,835 | | Total Current Liabilities | 3,081,186 | | Total Liabilities | 3,081,186 | | Total Shareholders' Equity | 45,549,649 | | Total Liabilities and Shareholders' Equity | 48,630,835 | Selected Condensed Consolidated Statement of Income for the Year Ended December 31, 2023 (in USD) | Category | Amount (USD) | | :--- | :--- | | Operating Revenues | 1,580,058 | | Gross Profit | 1,174,430 | | Income (Loss) from Operations | (4,335,408) | | Net Income (Loss) | (3,598,480) | Risk Factors This subsection comprehensively outlines material business, corporate structure, China-specific, and share-related risks, including the impact of frozen bank accounts and regulatory uncertainties - Business Risks: - The freezing of bank accounts of Jiangsu Yanggu's subsidiaries by the Nan County Public Safety Bureau, due to an investigation into major shareholders, has materially and negatively impacted business operations and financial results[47][60] - Corporate Structure Risks: - The company relies on contractual arrangements with its VIE, which may not be as effective as direct ownership - If the PRC government deems these arrangements non-compliant, the company could face severe penalties, including being forced to relinquish its interests in the VIE operations[48][124][129] - China-Specific Risks: - Uncertainties in the interpretation and enforcement of Chinese laws, including the New Overseas Listing Rules requiring CSRC filings, could negatively impact operations and the value of securities - The Holding Foreign Companies Accountable Act (HFCA Act) poses a delisting risk if the PCAOB is unable to inspect the company's auditor in the future, although the current auditor is US-based and inspectable[50][152][165] - Share-Related Risks: - The company's ordinary shares may be thinly traded, leading to liquidity issues for investors - As a foreign private issuer, the company is exempt from certain U.S. corporate governance and reporting requirements, offering less protection to shareholders - There is a risk of being classified as a Passive Foreign Investment Company (PFIC), which could have adverse U.S. federal income tax consequences for U.S. shareholders[54][243][260] Item 4. Information On The Company This section provides a detailed overview of Oriental Culture Holding LTD, covering its history, business as an online e-commerce provider for collectibles, its VIE-centric organizational structure, and property assets History and Development of the Company Oriental Culture Holding LTD, incorporated in the Cayman Islands in 2018, launched operations in 2018, completed its IPO in 2020, and executed a reverse stock split in 2023 - The company is a holding company incorporated in the Cayman Islands in 2018, conducting operations through subsidiaries and a VIE structure[274][275] - Completed its Initial Public Offering (IPO) in December 2020, raising net proceeds of approximately $17.3 million[281] - Executed a 1-for-5 reverse stock split (Share Consolidation) in October 2023 to regain compliance with Nasdaq's minimum bid price rule[284] Business Overview The company operates online e-commerce platforms for collectibles, artwork, and commodities through its Hong Kong subsidiaries, providing comprehensive trading and support services - The company provides online e-commerce platforms for trading collectibles, artwork, and commodities, with operations primarily conducted through its Hong Kong subsidiaries, International Exchange and HKDAEx[286] - Services offered to customers include investor education, real-time market information, customer support, and warehousing services, delivered through proprietary software and a call center[288][289] - The trading process involves Original Owners who list items, Offering Agents who assist with the listing, and Traders who buy and sell on the platform - The company has established detailed trading rules and a listing process[297][298][301] Organizational Structure The company uses a Cayman Islands holding structure with BVI and Hong Kong subsidiaries, controlling its PRC operations through a Variable Interest Entity (VIE) via contractual agreements - The company utilizes a VIE structure for its PRC operations to comply with foreign investment restrictions - The WFOE, Nanjing Rongke, controls the VIE, Jiangsu Yanggu, through a series of contractual agreements[401][403] - Key VIE agreements include a Technical Consultation and Service Agreement (entitling the WFOE to 100% of the VIE's net income), an Equity Pledge Agreement, an Equity Option Agreement, and a Voting Rights Proxy Agreement, which collectively give the WFOE effective control[404][405][406] Property, Plants and Equipment The company's physical assets primarily consist of leased office spaces and a recently acquired office building in Nanjing, China, now serving as its main office - The company leases office space in Hong Kong and China for its operations[410] - In November 2021, VIE subsidiaries acquired an office building in Nanjing, China for approximately $9.2 million, which became the main China office in February 2024[410] Item 5. Operating And Financial Review And Prospects This section details the company's severe financial downturn in FY2023, with plummeting revenues and a net loss, attributed to an investigation into a related party and slow economic recovery Operating Results The company's FY2023 operating results show a severe decline in revenues and a swing to net loss, primarily due to an investigation into related parties and slow economic recovery Financial Performance Summary (FY2023 vs. FY2022) | Metric | FY 2023 (USD) | FY 2022 (USD) | Change (%) | | :--- | :--- | :--- | :--- | | Total Operating Revenues | 1,580,058 | 17,813,139 | (91.1)% | | Gross Profit | 1,174,430 | 16,816,680 | (93.0)% | | Income (Loss) from Operations | (4,335,408) | 2,589,351 | (267.4)% | | Net Income (Loss) | (3,598,480) | 3,235,686 | (211.2)% | | Basic & Diluted EPS | (0.84) | 0.77 | (210.6)% | Revenue Breakdown (FY2023 vs. FY2022) | Revenue Source | FY 2023 (USD) | FY 2022 (USD) | Change (%) | | :--- | :--- | :--- | :--- | | Listing services fees | 457,176 | 1,244,251 | (63.3)% | | Transaction fees | 806,794 | 13,643,958 | (94.1)% | | Marketing services fees | 166,444 | 2,749,224 | (93.9)% | | Other revenues | 149,644 | 175,706 | (14.8)% | | Total | 1,580,058 | 17,813,139 | (91.1)% | - The significant decrease in revenue and net income in 2023 was primarily due to the negative impact of an investigation into related parties and the slow recovery of the Chinese economy post-COVID-19[424] - Key operational metrics declined sharply in 2023: active traders fell by 75% to 35,000, total transactions dropped to 19 million from 96 million, and total transaction value decreased to $0.5 billion from $8.6 billion in 2022[427][428][429] Liquidity and Capital Resources As of December 31, 2023, the company maintained solid liquidity with $37.4 million in cash and short-term investments, despite operational challenges, and believes current working capital is sufficient - As of December 31, 2023, the company had approximately $37.4 million in cash and short-term investments, including $19.7 million that is restricted - Working capital was approximately $34.8 million[480] Summary of Cash Flows (in USD) | Cash Flow Activity | FY 2023 | FY 2022 | | :--- | :--- | :--- | | Operating Activities | 3,624,590 | (1,211,385) | | Investing Activities | (511,248) | 608,471 | | Financing Activities | 600,000 | 1,000,000 | - The company's ability to pay dividends depends on distributions from its PRC subsidiary, which are subject to PRC regulations on profit distribution and foreign exchange controls[483] Item 6. Directors, Senior Management and Employees This section introduces the company's leadership, compensation, equity plan, employee count, and major shareholders, noting the board's lack of gender diversity - The board is chaired by Mun Wah Wan, with Yi Shao as CEO and Xi Li as CFO - The board also includes three independent directors: Nelson Wong, Xiaobing Liu, and Jinren Chen[514][517][519] - In FY2023, aggregate cash compensation was approximately $82,811 for executive officers and $82,356 for non-executive directors[525] - The company adopted the 2021 Omnibus Equity Plan, authorizing up to 800,000 shares - In February 2024, 300,000 shares were granted to officers and employees, including 75,000 to the CEO, Yi Shao[532] - As of December 31, 2023, the company had 52 full-time employees, with 49 based in Mainland China and 3 in Hong Kong[551][552] - Major shareholders include Oriental Culture Investment Development LTD and Oriental Culture Investment Communication LTD, each beneficially owning a 10.7% stake of the ordinary shares[560][561][562] Item 7. Major Shareholders and Related Party Transactions This section details the company's significant transactions with related parties, including technology service fees, storage fees, rental expenses, and administrative service fees - The company generated $144,609 in technology service fee revenue from related parties in 2023[569][570] - Cost of revenues included $64,051 in storage fees paid to Zhongcang Warehouse Co., Ltd., an 18% subsidiary of the VIE[569] - The company paid approximately $147,000 in rent and $87,000 in administrative service fees to entities controlled by major shareholders and the Chairman, respectively[574][841] - As of year-end 2023, there was an outstanding receivable of $346,114 from Nanjing Jinwang, a related party, for funds held in a trust account[575][829] Item 8. Financial Information This section confirms no material legal proceedings, no current dividend payments, and no significant financial changes since the annual statements - The company is not currently involved in any material legal or administrative proceedings[576] - The company has not paid dividends and has no plans to pay any in the near future, intending to retain earnings for business operations and expansion[577] Item 9. The Offer and Listing This section provides details about the company's ordinary shares, which have been traded on the NASDAQ Capital Market under 'OCG' since December 15, 2020 - The company's ordinary shares are listed on the NASDAQ Capital Market under the symbol "OCG", with trading having commenced on December 15, 2020[580] Item 10. Additional Information This section provides supplementary corporate and legal information, including memorandum and articles of association, exchange controls, and detailed taxation summaries for shareholders - The company is a Cayman Islands exempted company, and its affairs are governed by its memorandum and articles of association and the Cayman Islands Companies Act[580] - Holders of ordinary shares are entitled to one vote per share - Dividends can be declared by the board out of profits or the share premium account, provided the company remains solvent[584][585] - The PRC government imposes controls on the convertibility of RMB and the remittance of currency out of China, which may limit the ability to transfer funds from the PRC subsidiary[603] - The company discusses potential U.S. federal income tax consequences for U.S. Holders, including the risk of being classified as a Passive Foreign Investment Company (PFIC)[614][621] Item 11. Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's exposure to liquidity, inflation, interest rate, and foreign currency risks, primarily due to RMB-denominated operations - The company is exposed to liquidity risk, inflation risk, interest rate risk, and foreign currency translation risk due to its operations being denominated in RMB[637][638][640] Item 12. Description of Securities Other Than Equity Securities This section is not applicable as per the report - The report states that this item is not applicable[641] PART II Item 13. Defaults, Dividend Arrearages and Delinquencies This section is not applicable as per the report - The report states that this item is not applicable[643] Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds This section details the use of approximately $2.9 million from the company's $17.3 million December 2020 IPO proceeds for IT infrastructure and software upgrades - The company received net proceeds of approximately $17.3 million from its December 2020 IPO[643] - As of December 31, 2023, approximately $2.9 million of the IPO proceeds have been used for upgrading IT infrastructure and software[644] Item 15. Controls and Procedures Management concluded that the company's disclosure controls were ineffective as of December 31, 2023, due to a material weakness in accounting personnel knowledge of U.S. GAAP and SEC reporting - Management concluded that as of December 31, 2023, the company's disclosure controls and procedures were not effective[645] - A material weakness was identified related to a lack of in-house accounting personnel with appropriate knowledge of U.S. GAAP and SEC reporting requirements[650] - Remediation plans include using external accountants, recruiting more qualified financial personnel, and implementing continuous training[651] Item 16. Corporate Governance and Other Disclosures This section covers governance topics including the audit committee financial expert, code of ethics, principal accountant fees, foreign private issuer exemptions, and cybersecurity risk management - The Board of Directors has designated independent director Mr. Nelson Wong as the audit committee financial expert[655] Principal Accountant Fees (Wei Wei & Co., LLP) | Fee Category | FY 2023 (USD) | FY 2022 (USD) | | :--- | :--- | :--- | | Audit fees | 250,000 | 184,000 | | All other fees | - | 60,000 | | TOTAL | 250,000 | 244,000 | - As a foreign private issuer, the company follows its home country (Cayman Islands) practices for certain corporate governance matters, exempting it from specific Nasdaq listing rules[663] - The company has established a cybersecurity risk management process overseen by the Board of Directors and managed by an internal IT manager - No material cybersecurity incidents have been reported[665] PART III Item 17. Financial Statements The company has elected to provide financial statements pursuant to Item 18 - The company provides its financial statements under Item 18[667] Item 18. Financial Statements This section contains the company's consolidated financial statements for FY2021-2023, audited by Wei, Wei & Co., LLP, detailing financial position, operations, cash flows, and significant accounting policies - The consolidated financial statements were audited by Wei, Wei & Co., LLP, which issued an unqualified opinion[679] - The notes to the financial statements detail the company's VIE structure, confirming that the WFOE is the primary beneficiary of Jiangsu Yanggu and its subsidiaries, leading to their consolidation[708] - Revenue is disaggregated into four main categories: listing service fees, transaction fees, marketing service fees, and other revenues - Transaction fees were the largest component in 2022 but saw a dramatic decline in 2023[756] - The company's PRC subsidiaries, Kashi Longrui and Kashi Dongfang, had a 5-year tax exemption that expired on December 31, 2022, which will impact future profitability[816] Item 19. Exhibits This section lists the exhibits filed as part of the annual report - Key exhibits filed with the report include the company's formation documents, VIE contractual agreements, and Sarbanes-Oxley certifications[669]