Oriental Culture Holding LTD — FY2020 Form 20-F
Reporting period: Fiscal year ended December 31, 2020; filed April 30, 2021. This is an annual report, not a standalone fourth-quarter filing, and it does not provide separate Q4 results. Financial statements are audited and prepared under U.S. GAAP. The company operates online collectibles, artwork and selected-commodities trading platforms, with related marketing, storage and technology services in China and Hong Kong.
Financial performance
| Metric (US$ unless stated) | 2020 | 2019 | Change |
|---|---|---|---|
| Operating revenue | $17.44 million | $13.45 million | +29.7% |
| Gross profit | $14.80 million | $12.12 million | +22.1% |
| Gross margin | 84.9% | 90.1% | Down 5.2 percentage points |
| Operating expenses | $13.15 million | $3.14 million | +318.7% |
| Operating income | $1.65 million | $8.98 million | −81.7% |
| Net income | $2.05 million | $9.09 million | −77.5% |
| Net margin | 11.7% | 67.6% | Down 55.9 percentage points |
| Basic and diluted EPS | $0.13 | $0.64 | −79.6% |
- Revenue mix: Listing fees were $8.41 million, transaction fees $7.08 million, marketing fees $1.37 million and other revenue $0.59 million. Listing-fee growth reflected higher product listing values and a rise in product types listed from 115 to 303. Marketing fees fell 80%, which management attributed chiefly to COVID-related delays in appraisal, listing and marketing activity.
- Expense and margin drivers: Selling and marketing expense rose to $6.00 million from $0.68 million, including higher referral commissions and advertising. General and administrative expense rose to $7.15 million from $2.47 million, including IT investment, consulting, U.S. expansion planning and public-company costs. Cost of revenue nearly doubled, partly due to higher warehouse fees. Related-party storage costs were $1.73 million and related-party advertising expense was $1.76 million.
- Cash flow: Operating cash flow was $8.10 million, versus $9.56 million in 2019. Investing cash outflow was $11.77 million, including a real-estate deposit and short-term investment activity. Financing cash inflow was $18.04 million, primarily IPO proceeds. Year-end cash and cash equivalents were $24.04 million, versus $9.18 million.
- Balance sheet and liquidity: Current assets were $39.03 million; current liabilities and total liabilities were $7.54 million; total assets were $41.11 million and shareholders’ equity was $33.57 million. Working capital was approximately $31.5 million, with no long-term debt reported. Management said existing working capital was sufficient for the next 12 months. The filing reports $600,000 of IPO proceeds held in escrow for potential offering claims.
- Other operating measures: Approximately 77,000 traders participated in 2020 versus 91,000 in 2019, and transactions were approximately 48 million versus 56 million. Transaction value increased to approximately $4.6 billion from $1.5 billion. Transaction fees included approximately $2.6 million from customer reward-point trading, compared with $0.3 million in 2019.
Material changes and unusual items
- COVID-19 disrupted offices, warehousing, appraisals, logistics and marketing in the first half of 2020; management said revenue and net income recovered from July as activity resumed. The company wrote off $117,432 of accounts receivable during 2020.
- The company completed its IPO in December 2020, selling 5,124,400 shares at $4.00 per share and receiving approximately $17.3 million in net proceeds. It reported using approximately $1.3 million by year-end to upgrade platform IT infrastructure, software and systems.
- A proposed purchase of office and warehouse property for approximately $29.6 million required a change-of-use permit. The company terminated the agreement in March 2021 after the seller indicated the permit might not be obtained; the full approximately $13.3 million deposit was subsequently refunded, with no termination fee or penalty.
- Related-party transactions are significant in certain expense categories. The filing says related-party providers accounted for 65.7% of cost of revenue and 29.4% of selling and marketing expense in 2020; related-party revenue was 1.2% of total revenue.
- Cash-flow figures are inconsistent in the filing: the audited cash-flow statement and selected financial data report 2020 financing cash flow of $18.04 million, while one MD&A passage states $18.6 million. The audited statement reports $18.04 million.
Outlook, risks and controls
- Management expected marketing-services revenue to increase in 2021 as activity recovered and promotional work expanded, but provided no quantified earnings or revenue guidance. It expected general and administrative costs to continue rising and said 2021 results remained uncertain, particularly given possible COVID-19 resurgence.
- Key risks include the company’s limited operating history and volatile collectibles market; dependence on trading activity; competition; storage, theft and system-security risks; and the fact that the company reports having no business liability or disruption insurance.
- The China operations rely on contractual VIE arrangements rather than direct ownership. The filing highlights uncertainty over PRC regulation, foreign-investment restrictions, licenses and trading-platform rules, and the enforceability of those contracts. It also describes risks involving data protection, currency conversion and moving funds out of China.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2020 because in-house accounting personnel lacked capacity to prepare SEC-compliant financial statements and disclosures. The company hired external accountants and planned to recruit qualified personnel and provide training; remediation was not assured. The auditor issued an unqualified opinion on the financial statements, but did not audit internal control effectiveness.
- There was no income-tax provision in either year. The filing attributes this to tax-loss allowances and preferential tax treatment for certain Xinjiang subsidiaries, described as a five-year exemption; the filing estimates 2020 tax savings of approximately $2.43 million. Expiration or loss of preferential treatment could reduce profitability.
- The company reported no material legal proceedings and no material off-balance-sheet arrangements. It does not expect to pay cash dividends in the foreseeable future.
Important facts for investors to verify
- Reconcile the financing cash-flow discrepancy and confirm the composition and availability of year-end cash, including funds in the trading-platform trust account and IPO escrow.
- Assess how much 2020 transaction-fee revenue depended on reward-point trading, and whether that activity is repeatable and appropriately reflected in revenue.
- Review related-party storage and advertising arrangements, pricing, approval procedures and outstanding payables.
- Track remediation of the disclosed material weakness and any subsequent auditor or management findings on internal controls.
- Confirm receipt of the full property deposit refund and monitor the outcome of the company’s planned facilities and expansion investments.
- Evaluate the legal and regulatory status of the VIE structure and the company’s trading model, as well as the duration and eligibility of the tax exemptions.