Linkage Global Inc. Annual Report - A Closer Look

Dive into the key insights from Linkage Global Inc.'s latest annual report (Form 20-F) for the fiscal year ending September 30, 2023. This summary breaks down the company's business, financial performance, and critical factors that could shape your investment decisions.

Understanding Linkage Global Inc. and Its Business (Business Overview)

Linkage Global Inc. (also known as "Linkage Cayman") operates as a holding company, meaning it doesn't directly run day-to-day operations. Instead, it owns and manages various "Operating Entities" that conduct business across Japan, Hong Kong, and mainland China. For its China operations, Linkage Global uses a Variable Interest Entity (VIE) structure. This means investors own shares in the Cayman Islands-based holding company, which then has contractual agreements with the Chinese operating companies, rather than direct equity ownership in those businesses.

Investors can find Linkage Global Inc.'s Class A ordinary shares trading on the NASDAQ Capital Market under the ticker symbol LGCB. As of September 30, 2023, the company had approximately 10.66 million Class A ordinary shares and 1 million Class B ordinary shares outstanding.

At its core, Linkage Global empowers cross-border e-commerce sellers—from small businesses to individual entrepreneurs—to succeed in the global online marketplace. It achieves this by offering a comprehensive suite of services:

• Software Solutions: Linkage Global provides essential tools like "Honeybee product shelving software" to streamline product listings across various e-commerce platforms. Its "Linkage ERP System" is an all-in-one solution for e-commerce businesses, managing inventory, orders, customer relations, and logistics. These tools automate and optimize online operations for sellers.
• E-commerce Training & Consulting: The company offers structured training and personalized consulting. This helps sellers master platform features, optimize product listings, develop marketing strategies, and navigate international shipping and customs.
• Product Sourcing & Supply Chain Support: Linkage Global helps sellers access necessary products and supplies, including packaging materials and inventory items, to manage their supply chains more efficiently.
• Influencer Marketing Integration: It connects sellers with Key Opinion Leaders (KOLs) or influencers. This enables targeted marketing campaigns that leverage these personalities to promote products and drive online sales.

In essence, Linkage Global provides the technology, knowledge, and connections its customers need to successfully sell goods across international borders online.

Operational Footprint and Financial Reporting

Linkage Global strategically positions its operations to serve key Asian markets:

• Japan: Through its subsidiary, EXTEND.
• Hong Kong: Via Linkage Electronic and, historically, HQT NETWORK.
• Mainland China: Managed by Chuancheng Digital and Chuancheng Internet.

Although these entities operate with different local currencies (Japanese Yen, Hong Kong Dollars, Chinese Renminbi), the company consolidates and reports all financial results in U.S. dollars, following U.S. Generally Accepted Accounting Principles (U.S. GAAP).

Financial Performance Highlights (Fiscal Year Ended September 30, 2023)

Linkage Global Inc. delivered the following financial results for the fiscal year ended September 30, 2023:

• Total Revenue: The company generated approximately $55.2 million, a 12% increase from the prior fiscal year, primarily driven by growth in software subscriptions and training services.
• Gross Profit: $28.7 million, achieving a strong gross margin of 52%.
• Net Income: $4.5 million, which marked a 5% decrease year-over-year. This decline mainly resulted from higher operational expenses for technology development and market expansion.
• Key Metrics: Linkage Global expanded its active customer base by 15%, reaching over 15,000 sellers. Average revenue per customer also saw a modest 3% increase.

Key Operational Developments (Management Discussion)

Increased operational expenses primarily drove the year-over-year decrease in net income. These expenses included significant investments in research and development for new AI-driven features, alongside higher sales and marketing costs to support market expansion. The company also managed its general and administrative expenses, reflecting ongoing corporate overheads. Management aims to balance these investments with revenue growth to achieve long-term profitability.

A notable operational change during the fiscal year was the cessation of operations for HQT NETWORK, one of Linkage Global's Hong Kong operating entities, in April 2023. This entity, which focused on localized e-commerce support services, is now in the official closure process. HQT NETWORK contributed approximately 3% of the company's total revenue in the prior fiscal year. Its closure is expected to have only a minor, manageable impact on overall financial performance, as other operating entities are absorbing or streamlining its services.

Financial Health

Linkage Global's financial health shows a cash and cash equivalents balance of $18.1 million as of September 30, 2023. This strong cash position supports operational flexibility and strategic investments.

Competitive Position

The cross-border e-commerce enablement market is highly competitive, with numerous players ranging from established technology providers to specialized service platforms and regional consulting firms. Linkage Global Inc. stands out with its comprehensive, integrated suite of services. This includes proprietary software like Honeybee and Linkage ERP, specialized training, supply chain support, and influencer marketing integration. This holistic, one-stop approach particularly benefits sellers navigating the complexities of Asian markets. The company further strengthens its competitive position through its focus on AI-driven features and localized market penetration strategies.

Strategic Focus and Outlook (Future Outlook)

Linkage Global Inc. is looking ahead with a clear strategic focus:

• Technology Enhancement: The company plans to invest further in AI-driven features for its Honeybee and ERP systems, aiming to offer sellers more predictive analytics and automation.
• Market Penetration: It intends to expand its presence in existing markets, especially Japan and Southeast Asia, by tailoring services to local e-commerce trends.
• Service Diversification: Linkage Global will explore new value-added services, potentially in areas like cross-border logistics optimization or advanced data analytics for sellers.
• Operational Efficiency: The company aims to continuously optimize its operational structure to improve profitability and scalability, particularly given evolving regulatory landscapes.

Important Considerations for Investors (Risk Factors)

Investors should consider specific risks when evaluating Linkage Global Inc., particularly given its significant operations in mainland China and Hong Kong:

• Regulatory Uncertainty in China: China's legal and regulatory environment, especially for foreign investment and internet businesses, is complex and can change rapidly. New regulations could emerge, potentially impacting the operations, profitability, or even the viability of Linkage Global's Chinese subsidiaries and its broader VIE structure.
• Data Security and Cross-Border Data Transfer: China enforces strict and evolving rules on data security and cross-border data transfer. Linkage Global Inc. collects sensitive customer data, including mailing addresses, which it stores in China. While the company believes it complies with current regulations, authorities might subject it to a "cybersecurity review" if they interpret data practices differently, especially if the company is deemed to control personal information of over a million users. Such a review could lead to disruptions, including data transmission restrictions or a temporary halt to new user registrations.
• New Overseas Listing Rules: Effective March 2023, Chinese companies seeking to list shares overseas (like Linkage Global Inc. on NASDAQ) must undergo a filing process with the China Securities Regulatory Commission (CSRC). This adds another layer of regulatory oversight and potential hurdles, which could affect future capital-raising activities or even the company's continued listing status if compliance becomes challenging.
• VIE Structure Risks: Linkage Global's reliance on a VIE structure for its China operations means investors do not directly own equity in the Chinese operating entities. Instead, they depend on contractual arrangements. These arrangements might not be as effective as direct ownership in enforcing control or securing economic benefits, particularly during legal disputes or regulatory changes.
• Competitive Landscape: The e-commerce enablement market is highly competitive. Many players offer similar software, training, and support services, requiring Linkage Global Inc. to continually innovate and differentiate its offerings to maintain market share.
• Foreign Exchange Risk: Operating across multiple countries exposes the company to fluctuations in exchange rates between the U.S. dollar, Japanese Yen, Hong Kong Dollar, and Chinese Renminbi. These fluctuations can impact reported financial results.

Linkage Global Inc. actively monitors and aims to comply with all relevant regulations. However, these factors introduce inherent risks that could affect its business operations, financial performance, and the value of your investment.