Lichen China Limited (Nasdaq: LICN) — FY2023 Form 20-F
Reporting period: Fiscal year ended December 31, 2023. This is an annual report, not a standalone Q4 report. The Cayman Islands holding company conducts substantially all operations in China through subsidiaries; financial statements are prepared under U.S. GAAP and reported in U.S. dollars.
Business context
The company provides financial and taxation consulting, education support, and software and maintenance services under the Lichen brand. Its principal revenue source is project-based financial and taxation consulting, which management describes as non-recurring. The company reported one operating segment and generated all revenue in China.
Financial performance and liquidity
Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Revenue | $39.76m | $33.81m | +17.6% |
| Gross profit / margin | $24.32m / 61.2% | $20.19m / 59.7% | Margin +1.4 pts |
| Operating income / margin | $12.26m / 30.8% | $10.65m / 31.5% | Income +15.1% |
| Net income / margin | $8.34m / 21.0% | $7.82m / 23.1% | Income +6.7% |
| Basic and diluted EPS | $0.32 | $0.35 | Down |
| Cash from operating activities | $0.56m | $10.77m | Down $10.21m |
| Cash and cash equivalents at year-end | $25.86m | $22.60m | +$3.26m |
Revenue by service in FY2023: financial and taxation solutions $31.77m (79.9% of revenue), education support $3.73m (9.4%), and software and maintenance $4.26m (10.7%). Financial and taxation revenue grew 20.9%; software revenue grew 36.5%; education support revenue fell 15.4% as the company shifted focus toward consulting.
Operating expenses rose 26.4% to $12.06m. Selling and marketing expense increased 48.0% to $3.12m, and general and administrative expense rose 20.2% to $8.94m. Other expense was $0.71m, versus other income of $0.03m in FY2022; the filing does not clearly explain the principal cause. Foreign currency translation reduced comprehensive income by $1.43m.
At December 31, 2023, total assets were $65.55m, including current assets of $40.13m. Current liabilities were $4.09m and total liabilities $4.13m; the company reported no material borrowings. Lease liabilities totaled $0.13m. Cash was $25.86m, while prepayments, deposits and other current assets rose to $9.73m from $1.00m, including deposits tied to software development and potential acquisitions. Cash from operations was sharply lower, mainly reflecting a $9.70m increase in prepayments and other current assets and settlement of related-party amounts.
Material changes, outlook and notable items
- FY2023 net income increased, but more slowly than revenue; net margin declined 2.2 percentage points. Cash generation from operations fell substantially despite higher reported earnings.
- Investing cash outflow was $9.87m, including property and equipment purchases, intangible asset purchases, and a $4.60m deposit for a Haicang property. The filing also reports substantial software developer deposits and an acquisition-related deposit; completion and refund terms should be monitored.
- The company completed a February 2023 IPO, receiving approximately $14.10m net proceeds. It says $10.27m had been used by the annual report date for internal investment, a potential-acquisition deposit, and general corporate purposes.
- No quantified financial guidance is provided. Management intends to retain earnings for operations, research and development, new products and capacity expansion; it does not expect cash dividends in the foreseeable future.
- Management identifies demand, pricing, competition, Chinese policy and regulation, foreign-exchange movements, and successful execution of expansion plans as factors affecting results. Project-based revenue may not recur; 2023 revenue concentration by customer was limited, but the five largest suppliers represented 89.5% of purchases.
- Cash-transfer and dividend capacity is subject to PRC rules, including statutory reserve appropriations and restrictions on conversion and remittance. The company reported $22.13m of cash held with financial institutions in China; those balances are not insured.
- Management concluded internal control over financial reporting and disclosure controls were ineffective at year-end, citing insufficient U.S. GAAP/SEC reporting expertise and a lack of a comprehensive accounting policies manual. Remediation is underway; the auditor did not attest to internal controls. The financial statement audit opinion was unqualified.
- The company changed auditors in February 2024 from TPS Thayer to Enrome LLP. The filing reports no disagreements or reportable events with the former auditor. It also disclosed issuance of 870,000 Class A shares to employees and a consultant on March 12, 2024.
Key risks and contingencies
Key risks include PRC regulatory uncertainty and possible future CSRC filing or cybersecurity requirements for overseas offerings; restrictions on moving funds out of China; RMB/USD translation exposure; potential Nasdaq/HFCAA delisting if PCAOB inspection requirements are not met; and CEO control through the dual-class structure. The CEO held 9.0m Class B shares with ten votes each and approximately 83% of voting power, according to the filing.
The company reports no material legal or administrative proceedings or significant commitments at year-end, and management does not expect ordinary-course claims to have a material adverse effect. It also discloses limited insurance coverage and possible exposure to employee-benefit contribution shortfalls. PRC subsidiaries had accrued a provision for potential benefit-plan make-up payments, late fees or fines, but the amount is not clearly stated in the filing text.
Important facts for investors to verify
- Reconcile the sharp fall in operating cash flow with the large increase in deposits and prepayments, including the software development and acquisition arrangements, their completion status and refundability.
- Confirm the planned use and remaining balance of IPO proceeds, and assess whether the property and software investments are generating returns.
- Track remediation of the disclosed material weaknesses and whether future filings show effective controls and adequate U.S. GAAP/SEC reporting resources.
- Review supplier concentration, related-party arrangements, and the related-party schools controlled by the CEO; related-party revenue was $0.48m in FY2023.
- Verify share-count changes and dilution: 17.5m Class A shares and 9.0m Class B shares were outstanding at year-end; the subsequent 870,000-share issuance is reported in March 2024.
- Monitor cash accessibility, PRC regulatory developments, exchange-rate effects, and auditor/PCAOB inspection status.