Biddance AI Systems, Inc. annual report, Q4 FY2023

Filing Overview

Source discrepancy: The provided filing is Hitek Global Inc.’s Form 20-F, not Biddance AI Systems, Inc. It reports the fiscal year ended December 31, 2023, rather than a standalone 2023 fourth quarter. Hitek Global is a Cayman Islands holding company whose operations are conducted in China through subsidiaries and a contractual variable interest entity (VIE). Its Class A ordinary shares trade on Nasdaq under “HKIT.”

The company provides IT consulting and solutions, hardware and software sales, and Anti-Counterfeiting Tax Control System tax devices and services in China. Financial statements are prepared under U.S. GAAP in U.S. dollars, while operations are primarily conducted in RMB.

Financial Highlights

Metric	2023	2022	Change
Revenue	$4.564 million	$6.429 million	Down 29.0%
Gross profit	$1.921 million	$3.537 million	Down 45.7%
Gross margin	42.1%	55.0%	Down 12.9 percentage points
Operating income	$101,061	$1.627 million	Down 93.8%
Net income	$1.048 million	$1.416 million	Down 26.0%
Comprehensive income	$717,525	$400,298	Up 79.3%
Net cash from operating activities	$(61,912)	$3.824 million	Shifted to cash outflow
Cash and cash equivalents	$9.312 million	$1.203 million	Up $8.108 million
Total assets	$35.428 million	$21.205 million	Up 67.1%
Total liabilities	$7.090 million	$7.679 million	Down 7.7%

Revenue Mix

Hardware revenue was $2.429 million, down 3.0%, and represented approximately 53% of revenue.
Software revenue was $758,816, down 64.2%, and represented approximately 17% of revenue.
Tax devices and services revenue was $1.376 million, down 23.7%, and represented approximately 30% of revenue.

Liquidity, Debt and Capital Resources

Working capital was $21.414 million at December 31, 2023, compared with $6.981 million in the prior year.
Current assets were $24.787 million versus current liabilities of $3.373 million.
Short-term investments were $8.837 million, and long-term investments were $1.000 million.
Total loan payables were $2.607 million, consisting of $493,159 current debt and $2.114 million non-current debt. Reported interest expense was $313,861.
Loan receivables totaled $7.835 million, including $5.213 million owed by Guangxi Beihengda Mining and $2.622 million owed by another third party.
The company completed an April 2023 IPO and over-allotment issuance of 3,404,685 ordinary shares, generating approximately $15.143 million in net cash proceeds.
Management believes existing cash and anticipated operating cash flow will satisfy working-capital and capital-expenditure needs for at least the next 12 months.

Material Changes Versus 2022

Revenue declined substantially, primarily because large customers reduced software procurement and had slow repayment cycles.
Software revenue fell sharply, causing a significant reduction in gross profit and gross margin.
Operating income nearly disappeared as the lower-margin revenue mix offset the reduction in operating expenses.
Other income increased to $1.493 million from $241,753, principally because of higher investment income, government subsidies and interest income. This materially cushioned the decline in operating earnings.
General and administrative expenses increased 23.6% to $1.820 million, reflecting higher professional fees, IPO-related costs and rent, partially offset by lower salaries.
Operating cash flow fell from a $3.824 million inflow to a $61,912 outflow, while investing cash outflow remained high at $6.947 million.
Cash increased primarily because of the IPO proceeds, despite substantial lending activity, investment purchases and software-development payments.
Customer concentration remained significant: one customer represented 18% of 2023 revenue, while two customers represented 95% of accounts receivable at year-end.

Guidance, Outlook and Unusual Items

Management expects to expand tax-control-system investigation services for SMEs and increase software and hardware orders from major customers in 2024. No quantitative revenue or earnings guidance was provided.
Management expects tax-device and related service revenue to remain under pressure because of electronic invoicing, free tax-control devices for new taxpayers and government-regulated pricing.
The company plans to focus on higher-margin SME services while pursuing additional hardware and software sales to large customers and expanding system-integration and online-platform services.
Consulting fees owed by the VIE to the WFOE totaled $10.847 million at December 31, 2023. The filing states that these fees had not been paid since 2018 and were planned to be paid in 2024.
In 2023, the company advanced approximately $9.8 million in short-term loans to a third party; approximately $7.3 million of principal was repaid before year-end. These loans were secured by pledged assets.
The company extended a RMB30 million loan receivable and a corresponding RMB15 million loan payable for one year, to January 21, 2025.
The company’s disclosure controls and internal control over financial reporting were not effective at December 31, 2023. Material weaknesses relate to limited U.S. GAAP and SEC-reporting expertise and insufficient supervision and monitoring of financial-statement preparation.
The auditor issued an unqualified opinion on the financial statements but did not provide an opinion on internal control effectiveness because the company is a non-accelerated filer.
In February 2024, shareholders reclassified 8.192 million shares held by the chairman and CEO into Class B shares carrying 15 votes each, while the remaining 6.200 million shares became Class A shares carrying one vote each. The chairman and CEO control approximately 95.2% of voting power.
No dividends were declared, and management does not anticipate paying dividends in the foreseeable future.

Principal Risks and Contingencies

VIE structure: The company does not own the Chinese operating entity and relies on contractual arrangements that have not been tested in court. PRC authorities could challenge the arrangements, restrict operations or require restructuring.
PRC regulatory risk: Evolving rules concerning overseas listings, foreign investment, cybersecurity, data security and cross-border transfers could affect operations, financing or the Nasdaq listing.
Liquidity transfer risk: Cash generated by the VIE may not be freely transferred to the offshore holding company because of PRC foreign-exchange controls, taxes, statutory reserves and contractual restrictions.
Customer and collection risk: Extended credit terms and substantial receivables from a small number of customers could lead to delayed collections or bad debts.
Loan-credit risk: The company has material third-party loan receivables secured by mining rights or other pledged assets; collateral values may be insufficient in a default.
Business-model risk: ACTCS pricing is regulated, while electronic invoicing and free tax-control devices may reduce recurring service revenue.
Foreign-exchange risk: Most revenue, costs and assets are denominated in RMB, creating translation exposure. The company reported a $330,116 foreign-currency translation loss in 2023 and has no hedging transactions.
Listing and governance risk: The dual-class structure, concentrated insider control, small public float and Nasdaq discretion may reduce minority-shareholder protections and liquidity.
Internal-control risk: The disclosed material weaknesses increase the risk that financial reporting errors may not be prevented or detected on a timely basis.
The filing states that the company was not aware of any material litigation or administrative proceedings as of the report date and disclosed no material commitments or contingencies beyond those described.

Investor Verification Checklist

Confirm that the filing belongs to Hitek Global Inc. rather than Biddance AI Systems, Inc., and verify the intended issuer and reporting period.
Reconcile the significant decline in software revenue, gross margin and operating income with customer orders, contract acceptance and accounts receivable collections.
Verify the collectability, maturity dates, collateral and related-party involvement of the $7.835 million loan receivables.
Track payment of the $10.847 million in unpaid VIE consulting fees and assess whether the proposed 2024 settlement creates tax, liquidity or transfer-pricing consequences.
Review the remediation and testing of the two material weaknesses in internal control over financial reporting.
Assess the effect of electronic invoicing, free tax-control devices and regulated ACTCS pricing on recurring revenue and margins.
Confirm the use and remaining availability of IPO proceeds, particularly given the company’s large investment and lending activity relative to operating cash flow.
Evaluate customer concentration, extended payment terms and the fact that two customers represented 95% of year-end accounts receivable.
Review the enforceability and continuing regulatory status of the VIE arrangements and the company’s compliance with PRC overseas-listing and cybersecurity requirements.
Consider the implications of 95.2% voting control by the chairman and CEO, the absence of dividends and the company’s limited public float.