Jiuzi Holdings, Inc. — FY2021 Form 20-F
Reporting period: Fiscal year ended October 31, 2021, compared with FY2020. This is an annual report, not a standalone fourth-quarter filing; Q4 results are not separately provided. Financial figures are in U.S. dollars unless noted.
Business context
Jiuzi franchises and operates Jiuzi-branded retail stores selling mostly battery-electric vehicles in China’s smaller cities. Its primary revenue source is initial franchise fees; it also sells vehicles and may earn royalties equal to 10% of franchisees’ net income. The Cayman Islands parent conducts its China business principally through a variable interest entity (VIE) controlled by contractual arrangements, rather than direct ownership.
Key financial metrics
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $9.54 million | $8.21 million |
| Gross profit / margin | $4.63 million / 48.5% | $6.02 million / 73.3% |
| Operating income | $1.32 million | $4.37 million |
| Net income | $778,037 | $3.42 million |
| Operating cash flow | $(4.81) million | $515,297 |
| Investing cash flow | $(1.49) million | $(26,288) |
| Financing cash flow | $12.85 million | $(164,056) |
| Cash and cash equivalents at year-end | $7.37 million | $764,492 |
| Total assets / liabilities / equity | $28.15 million / $5.82 million / $22.33 million | $11.90 million / $3.69 million / $8.22 million |
FY2021 revenue grew 16.2%, but gross profit fell 23.1% and net income fell 77.3%. Gross margin contracted 24.8 percentage points. Selling, general and administrative expenses doubled to $3.31 million, which management attributed largely to higher salaries, travel, conferences, advertising, executive insurance and office costs after the IPO.
Franchise initial fees were $8.09 million, about 85% of revenue, versus $7.81 million in FY2020. Vehicle sales rose 262% to $1.44 million, but vehicle gross margin fell to 3.0% from 8.1%; management said supplier prices rose while the company held prices down to support expansion. No franchise royalty revenue was recorded.
Current assets were $22.22 million against current liabilities of $4.02 million. However, $13.81 million of current and non-current assets comprised net loans to related franchisees; these loans are unsecured and generally due within 18 months. Total liabilities included $700,580 of operating lease liabilities and $1.26 million of deferred government grants. The filing reports no material payment defaults.
Changes, outlook and risks
- Cash generation and funding: Operating cash flow swung from positive $515,297 to negative $4.81 million, with increased lending to franchisees and other working-capital movements contributing to the outflow. Financing cash flow included $12.81 million of stock proceeds. The company completed a May 2021 IPO at $5 per share, reporting $26 million gross proceeds and approximately $22 million net proceeds.
- Growth plans: Management planned an online-offline platform, with customer and vehicle management functions under development, targeting service to all franchise stores by end-2022 at an estimated cost of about $2 million. It also described continued franchise expansion and cost reduction. No specific financial earnings guidance was provided.
- Franchise economics: Management said some franchisees might become profitable by end-2022 and generate royalties, but gave no assurance. Revenue depends heavily on franchise fees, and franchise relationships and several supplier arrangements are not supported by long-term binding commitments.
- COVID-19: Management reported that the pandemic had been effectively controlled in China and did not expect it to continue into 2022, while acknowledging that renewed disruption could harm operations and franchisees.
- Material control weakness: Management concluded disclosure controls and internal control over financial reporting were ineffective as of October 31, 2021, citing insufficient accounting and finance personnel with U.S. GAAP experience. It planned to hire qualified staff. The auditor did not express an opinion on internal control effectiveness.
- Structural and regulatory exposure: The company depends on VIE contracts to control substantially all operating activity; PRC authorities or courts could challenge enforceability. Risks also include currency and capital-transfer restrictions, evolving overseas-listing and cybersecurity rules, and uncertainty over future PRC approvals.
- Related-party and concentration risks: Related-party franchise revenue represented about 81% of total revenue. Related-party franchise loans were $13.81 million net of discounts and credit-loss allowances, and the filing also reports $367,549 due from company officers and an affiliate representative. Two PRC-resident beneficial owners had not completed Circular 37 registration.
- Subsequent financing: On December 3, 2021, the company issued a convertible debenture with principal of up to $2.5 million, a 12-month maturity and a conversion price tied to market VWAP, subject to a $1 floor. A 5% fee and $15,000 structuring fee were payable; specified price-trigger events could require monthly repayments with a 10% redemption premium.
Important facts for investors to verify
- Reconcile the filing’s differing store counts: 31 operating franchise stores in one business overview, 52 in another passage, and 87 franchise agreements at October 31, 2021.
- Reconcile IPO proceeds: the filing reports $26 million gross and approximately $22 million net proceeds, while the cash-flow statement reports $12.81 million of stock proceeds. Confirm the accounting and cash movements underlying these figures.
- Assess collectability, repayment schedules and credit-loss assumptions for the $13.81 million net franchisee loan portfolio, including its related-party nature and unsecured status.
- Review related-party revenue, officer advances and franchisee relationships, and confirm appropriate approval, disclosure and collection controls.
- Track remediation of the material weakness in financial reporting controls and whether subsequent filings establish that it has been addressed.
- Monitor franchisee profitability, store openings and closures, fee collections, vehicle-sales margins, and whether royalties begin contributing revenue.
- Evaluate VIE enforceability and applicable PRC regulatory developments, along with dilution, repayment and pricing provisions of the December 2021 convertible debenture.