Intelligent Living Application Group Inc 20-F for FY2024
Intelligent Living Application Group Inc. (ILAG)
About this 20-F
Intelligent Living Application Group Inc filed this 20-F on April 28, 2025, covering the fiscal year ended December 31, 2024 (FY2024).
Headline figures
Fiscal year ended December 31, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $7.51M
- up 16.5% from $6.44M a year earlier
- Net loss
- $3.69M
- compared with a net loss of $3.5M a year earlier
- Diluted EPS
- -$0.20
- compared with -$0.19 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
OR
For the fiscal year ended
OR
For the transition period from _________ to _________.
OR
Date of event requiring this shell company report:
Commission file number:
(Exact name of Registrant as Specified in its Charter)
(Jurisdiction of Incorporation or Organization)
(Address of Principal Executive Offices)
(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
As of December 31, 2024, there were ordinary shares issued and outstanding, par value US$ per share.
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
If this report is an annual or transition report,
indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934. Yes ☐
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant has
submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | Emerging growth company |
If an emerging growth company that prepares its financial
statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.
†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has
filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its
audit report.
If securities are registered pursuant to Section 12(b)
of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of
an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| ☒ |
☐ International Financial Reporting Standards as issued by the International Accounting Standards Board |
☐ Other |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow: Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐
No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐
TABLE OF CONTENTS
i
INTRODUCTION
In this annual report on Form 20-F, unless otherwise indicated, “we,” “us,” “our,” the “Company”, “Intelligent Living”, “Registrant” and “ILAG” refer to Intelligent Living Application Group Inc., a company organized in the Cayman Islands, its predecessor entities and its subsidiaries.
Unless indicated otherwise, references to:
| ● | “Bamberg” are to Bamberg (HK) Limited, which was incorporated under the laws of Hong Kong and is a wholly owned subsidiary of ILAG BVI; “China” or the “PRC” are to the People’s Republic of China； |
| ● | “EIT” are to PRC enterprise income tax; “Hing Fat” are to Hing Fat Industrial Limited, which was incorporated under the laws of Hong Kong and is a wholly owned subsidiary of ILAG BVI; |
| ● | “Hong Kong” are to Hong Kong Special Administrative Region of the People’s Republic of China； | |
| ● | “HK$” or “Hong Kong dollars” refers to the legal currency of Hong Kong； | |
| ● | “Intelligent Living,” “we,” “us,” “our company,” “ILAG,” and “our” are to Intelligent Living Application Group Inc., a Cayman Islands exempted company with limited liability, and its subsidiary and consolidated entity; | |
| ● | “ILAG BVI” are to Intelligent Living Application Group Limited, a holding company incorporated under the laws of the British Virgin Islands and a wholly owned subsidiary of Intelligent Living Application Group Inc.; |
| ● | “Kambo Hardware” are to Kambo Hardware Limited, which was incorporated under the laws of Hong Kong and is a wholly owned subsidiary of ILAG BVI; | |
| ● | “Kambo Locksets” are to Kambo Locksets Limited, which was incorporated under the laws of Hong Kong and is a wholly owned subsidiary of ILAG BVI |
| ● | “MOFCOM” are to the Ministry of Commerce of the PRC; |
| ● | “Ordinary Share(s)” are to our ordinary shares with a par value of US$0.0001 per share; |
| ● | “Preferred Share(s)” are to our preferred shares with a par value of US$0.0001 per share; |
| ● | “RMB” and “Renminbi” refer to the legal currency of China; |
| ● | “SAFE” are to the State Administration of Foreign Exchange; |
| ● | “US$,” “U.S. dollars,” “$” and “dollars” are to the legal currency of the United States; and |
| ● | Xingfa are to Dongguan Xingfa Hardware Products Co. Ltd., which was incorporated under the laws of China and is a wholly owned subsidiary of Hing Fat. |
Our business is primarily conducted in Hong Kong and China, an all of our revenues are received and denominated in HK$ and RMB. RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. This annual report contains translations of HK$ and RMB amounts into U.S. dollars at specified rates solely for the convenience of the reader. We make no representation that the Renminbi, HK$ or U.S. dollar amounts referred to in this report could have been or could be converted into U.S. dollars, HK$ or Renminbi, as the case may be, at any particular rate or at all.
We completed an initial public offering of our ordinary shares at an initial offering price of US$4.00 per share on July 15, 2022. Our ordinary shares, par value US$0.0001 per share, are traded on the Nasdaq Capital Market under the symbol “ILAG”.
ii
FORWARD-LOOKING STATEMENTS
This report contains “forward-looking statements” for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 that represent our beliefs, projections and predictions about future events. Known and unknown risks, uncertainties and other factors, including those listed under “Risk Factors,” may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. All statements other than statements of historical fact are “forward-looking statements,” including any projections of earnings, revenue or other financial items, any statements of the plans, strategies and objectives of management for future operations, any statements concerning proposed new projects or other developments, any statements regarding future economic conditions or performance, any statements of management’s beliefs, goals, strategies, intentions and objectives, and any statements of assumptions underlying any of the foregoing. Words such as “may”, “will”, “should”, “could”, “would”, “predicts”, “potential”, “continue”, “expects”, “anticipates”, “future”, “intends”, “plans”, “believes”, “estimates” and similar expressions, as well as statements in the future tense, identify forward-looking statements.
We have based these forward-looking statements largely on our current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include statements relating to:
| ● | our goals and strategies; |
| ● | our future business and technology development, financial conditions and results of operations fluctuations in interest rates; |
| ● | our expectations regarding demand for and market acceptance of our products and services; |
| ● | projections of revenue, earnings, capital structure and other financial items; |
| ● | competition in our industry; |
| ● | tariff, relevant government policies and regulations relating to our industry; and |
| ● | general economic and business conditions in the markets in which we operate. |
These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. Our actual results could be materially different from our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in “Risk Factors” and other sections in this report. You should thoroughly read this report and the documents that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements.
This report contains certain data and information that we obtained from various government and private publications. Statistical data in these publications also include projections based on a number of assumptions. Our industry may not grow at the rate projected by market data, or at all. Failure of this market to grow at the projected rate may have a material and adverse effect on our business and the market price of our ordinary shares. In addition, the rapidly changing nature of the lockset and hardware marketplace industry results in significant uncertainties for any projections or estimates relating to the growth prospects or future condition of our market. Furthermore, if any one or more of the assumptions underlying the market data are later found to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.
The forward-looking statements made in this report relate only to events or information as of the date on which the statements are made in this report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this report and the documents that we refer to in this report and any exhibits filed with this report completely and with the understanding that our actual future results may be materially different from what we expect.
iii
PART I
| ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
Not Applicable.
| ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE |
Not Applicable.
| ITEM 3. | KEY INFORMATION |
Our Holding Company Structure and Operations in Hong Kong and China
We are a Cayman Islands holding company without any operation and our operations are conducted by our wholly owned subsidiaries in Hong Kong and China and this structure involves unique risks to investors.
There are legal and operational risks associated with being based in and having all our operations in Hong Kong and China. The Chinese government recently took regulatory actions on certain U.S. listed Chinese companies and made statement that it will exert more oversight and control over offerings and listings by Chinese companies that are conducted overseas, such as those related to the use of variable interest entities and data security or anti-monopoly concerns. On July 6, 2021, the General Office of the Communist Party of China Central Committee and the General Office of the State Council jointly issued an announcement to crack down on illegal activities in the securities market and promote the high-quality development of the capital market, which, among other things, requires the relevant governmental authorities to strengthen cross-border oversight of law-enforcement and judicial cooperation, to enhance supervision over China-based companies listed overseas, and to establish and improve the system of extraterritorial application of the PRC securities laws. On December 28, 2021, Cybersecurity Review Measures were published by Cyberspace Administration of China or the CAC, National Development and Reform Commission, Ministry of Industry and Information Technology, Ministry of Public Security, Ministry of State Security, Ministry of Finance, Ministry of Commerce, People’s Bank of China, State Administration of Radio and Television, China Securities Regulatory Commission (“CSRC”), State Secrecy Administration and State Cryptography Administration and became effective on February 15, 2022, which provides that, Critical Information Infrastructure Operators (“CIIOs”) that purchase internet products and services and Online Platform Operators engaging in data processing activities that affect or may affect national security shall be subject to the cybersecurity review by the Cybersecurity Review Office. On July 7, 2022, CAC promulgated the Measures for the Security Assessment of Data Cross-border Transfer, effective on September 1, 2022, which requires the data processors to apply for data cross-border security assessment coordinated by the CAC under the following circumstances: (i) any data processor transfers important data to overseas; (ii) any critical information infrastructure operator or data processor who processes personal information of over 1 million people provides personal information to overseas; (iii) any data processor who provides personal information to overseas and has already provided personal information of more than 100,000 people or sensitive personal information of more than 10,000 people to overseas since January 1st of the previous year; and (iv) other circumstances under which the data cross-border transfer security assessment is required as prescribed by the CAC. On February 17, 2023, the CSRC released the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Enterprises (the “New Overseas Listing Rules”) with five interpretive guidelines, which took effect on March 31, 2023. The New Overseas Listing Rules require Chinese domestic enterprises to complete filings with relevant governmental authorities and report related information under certain circumstances, such as: a) an issuer making an application for initial public offering and listing in an overseas market; b) an issuer making an overseas securities offering after having been listed on an overseas market; c) a domestic company seeking an overseas direct or indirect listing of its assets through single or multiple acquisition(s), share swap, transfer of shares or other means. According to the Notice on Arrangements for Overseas Securities Offering and Listing by Domestic Enterprises, published by the CSRC on February 17, 2023, a company that (i) has already completed overseas listing or (ii) has already obtained the approval for the offering or listing from overseas securities regulators or exchanges but has not completed such offering or listing before effective date of the new rules and also completes the offering or listing before September 30, 2023 is considered as an existing listed company and is not required to make any filing until it conducts a new offering in the future. Furthermore, upon the occurrence of any of the material events specified below after an issuer has completed its offering and listed its securities on an overseas stock exchange, the issuer shall submit a report thereof to the CSRC within 3 business days after the occurrence and public disclosure of the event: (i) change of control; (ii) investigations or sanctions imposed by overseas securities regulatory agencies or other competent authorities; (iii) change of listing status or transfer of listing segment; or (iv) voluntary or mandatory delisting. The New Overseas Listing Rules provide that the determination as to whether a domestic company is indirectly offering and listing securities on an overseas market shall be made on a substance over form basis, and if the issuer meets the following conditions, the offering and listing shall be determined as an indirect overseas offering and listing by a Chinese domestic company: (i) any of the revenue, profit, total assets or net assets of the Chinese domestic entity is more than 50% of the related financials in the issuer’s audited consolidated financial statements for the most recent fiscal year; and (ii) the senior managers in charge of business operation and management of the issuer are mostly Chinese citizens or with regular domicile in China, the main locations of its business operations are in China or main business activities are conducted in China. The New Overseas Listing Rules also stipulate the legal consequences to the companies for breaches, including failure to fulfill filing obligations or filing documents having false statement or misleading information or material omissions, which may result in a fine ranging from RMB1 million to RMB10 million, and in cases of severe violations, the relevant responsible persons may also be barred from entering the securities market. On February 24, 2023, the CSRC, the Ministry of Finance, the National Administration of State Secretes Protection and the National Archives Administration released the Provisions on Strengthening the Confidentiality and Archives Administration Related to the Overseas Securities Offering and Listing by Domestic Companies, or the Confidentiality and Archives Administration Provisions, which took effect on March 31, 2023. PRC domestic enterprises seeking to offer securities and list in overseas markets, either directly or indirectly, shall establish and improve the system of confidentiality and archives work, and shall complete approval and filing procedures with competent authorities, if such PRC domestic enterprises or their overseas listing entities provide or publicly disclose documents or materials involving state secrets and work secrets of state organs to relevant securities companies, securities service institutions, overseas regulatory agencies and other entities and individuals. It further stipulates that (i) providing or publicly disclosing documents and materials which may adversely affect national security or public interests, and accounting records or photocopies thereof to relevant securities companies, securities service institutions, overseas regulatory agencies and other entities and individuals shall be subject to corresponding procedures in accordance with relevant laws and regulations; and (ii) any working papers formed in the territory of the PRC by securities companies and securities service agencies that provide domestic enterprises with securities services relating to overseas securities issuance and listing shall be stored in the territory of the PRC, the outbound transfer of which shall be subject to corresponding procedures in accordance with relevant laws and regulations. As of the date of this prospectus, these new laws and guidelines have not impacted the Company’s ability to conduct its business, accept foreign investments, or list and trade on a U.S. We are headquartered in Hong Kong and our major operational activities are carried out in Hong Kong, our main places of business are located in Hong Kong, and none of the senior managers in charge of operation and management of the Company is Chinese citizen or domiciled in China. Hong Kong is a special administrative region of the PRC and the basic policies of the PRC regarding Hong Kong are reflected in the Basic Law of the Hong Kong Special Administrative Region of the People’s Republic of China, or the Basic Law, providing Hong Kong with a high degree of autonomy and executive, legislative and independent judicial powers, including that of final adjudication under the principle of “one country, two systems”. Also, all the senior managers in charge of business operation and management of the Company and its manufacturing subsidiary in China are non- Chinese citizens and do not have regular domicile in China, the main location of the business operations or business activities of the Company are in Hong Kong instead of mainland China and our manufacturing subsidiary in China only supplies its products to its affiliates in Hong Kong and does not sell them in mainland China. And the proportion of any indicator of the operating income, total profit, total assets or net assets of the mainland subsidiary in the most recent accounting year to the relevant data of the issuer’s audited consolidated financial statements for the same period shall not exceed 50%. According to the advice by our Chinese legal counsel Guangdong Wesley Law Firm, we believe the Company would not be deemed as “Indirect Overseas Issuance and Listing” under the Trial Administrative Measures, the New Overseas Listing Rules by CSRC do not apply to the Company. The Company owns 100% equity interest of all its subsidiaries including the manufacturing subsidiary in China and does not have a VIE structure. Our subsidiary in China manufactures and sells locksets to its affiliate in Hong Kong and is not a cyberspace operator with personal information of more than 1 million users or activities that affect or may affect national security and it does not have documents and materials which may adversely affect national security or public interests. However, there are uncertainties in the interpretation and enforcement of these new laws and guidelines, which could materially and adversely impact our business and financial outlook, may impact our ability to accept foreign investments, offer our securities to investors or continue to list on a U.S. or other foreign exchange, and could impact our ability to conduct our business. If there is significant change to current political arrangements between mainland China and Hong Kong, companies operated in Hong Kong may face similar regulatory risks as mainland Chinese companies. Any change in foreign investment regulations, and other policies in China or related enforcement actions by China government could result in a material change in our operations and the value of our securities and could significantly limit or completely hinder our ability to offer our securities to investors or cause the value of our securities to significantly decline or be worthless. The Company’s auditor is headquartered in the U.S. and it is not subject to the determinations announced by the PCAOB on December 16, 2021, which determinations were vacated on December 15, 2022, and Holding Foreign Companies Accountable Act and related regulations currently do not affect the Company as the Company’s auditor is subject to PCAOB’s inspection on a regular basis.
| 1 |
Permissions Required from the PRC Authorities for Our Operations
Our wholly owned subsidiary Dongguan Xingfa Hardware Products Co. Ltd. (“Xingfa”) is incorporated and operating in mainland China. Xingfa has received all permission required to obtain from Chinese authorities to operate its current business in China or issue the ordinary shares of the Company to foreign investors, including Business license, Customs Registration Certificate, Bank Account Open Permit and Approval regarding Environmental Protection. Currently, the Chinese government may intervene or influence our operations in China or any securities offering at any time, which could result in a material change in our operations and our ordinary shares could decline in value or become worthless. Other than these permits, we are not required to obtain permit and approval from Chinese authorities to operate our business and to offer the securities being registered to foreign investors. We or our subsidiaries are not covered by permissions requirements from the China Securities Regulatory Commission (CSRC), Cyberspace Administration of China (CAC) or any other governmental agency that is required to approve our business and operations. We manufacture and sell lockset products and our products and services do not pose national security risks, based on the advice of our PRC counsel, we are not subject to the report requirement under Cybersecurity Review Measures published by Cyberspace Administration of China, National Development and Reform Commission, Ministry of Industry and Information Technology, Ministry of Public Security, Ministry of State Security, Ministry of Finance, Ministry of Commerce, People’s Bank of China, State Administration of Radio and Television, China Securities Regulatory Commission, State Secrecy Administration and State Cryptography Administration on December 28, 2021, which became effective on February 15, 2022.
As of the date of this report, we (1) are not required to obtain permissions from any PRC authorities to issue our ordinary shares to foreign investors, (2) are not subject to permission requirements from CSRC, CAC or any other entity that is required to approve of our operations in China, and (3) have not received or were denied such permissions by any PRC authorities. We are headquartered in Hong Kong with our chief executive officer, chief financial officer, chief operating officer and all members of the board of directors based in Hong Kong who are not Chinese citizens and most of our revenues and profits are generated by our subsidiaries in Hong Kong. Although we don’t believe we would be deemed as “Indirect Overseas Issuance and Listing” under the Trial Administrative Measures published by CSRC on February 17, 2023, this conclusion has not been confirmed by the CSRC., which may require us to file the offering related documents with CSRC and any failed filing for offering will subject us to fines and other penalties by CSRC. Also, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the “Opinions on Severely Cracking Down on Illegal Securities Activities According to Law,” or the Opinions, which were made available to the public on July 6, 2021. The Opinions emphasized the need to strengthen the administration over illegal securities activities, and the need to strengthen the supervision over overseas listings by Chinese companies. Given the current PRC regulatory environment, it is uncertain when and whether our PRC subsidiary, will be required to obtain permission from the PRC government in connection with our listing on U.S. exchanges in the future, and even when such permission is obtained, whether it will be denied or rescinded. If we or our subsidiaries do not receive or maintain such permissions or approvals, inadvertently conclude that such permissions or approvals are not required, or applicable laws, regulations, or interpretations change and we are required to obtain such permissions or approvals in the future, it could significantly limit or completely hinder our ability to offer or continue to offer our securities to investors and cause the value of our securities to significantly decline or become worthless.
| 2 |
Transfer of Cash To and From Our Subsidiaries
We mainly conduct our marketing and sales, research and development and design activities through our wholly owned subsidiaries in Hong Kong and manufacturing activities through our wholly owned subsidiary in China, Dongguan Xingfa Hardware Products Co., Limited. As a result, almost all of our sales revenues are received by our Hong Kong subsidiaries which make payment to Xingfa for the cost of products and reasonable markups. Transfers of funds among our Hong Kong subsidiaries or from our Hong Kong subsidiaries to the holding company are free of restrictions. Remittances of funds from our Hong Kong subsidiaries to Xingfa are subject to review and conversion of HK$ or US$ to Renminbi Yuan (“RMB”) through Xingfa’s bank in China, which represents the SAFE to monitor foreign exchange activities. Under the existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements with the banks. Currently, we don’t have any intentions to distribute earnings or settle amounts owed under our operating structure other than the agreements entered under normal business operation as discussed above.
Intelligent Living Application Group Inc. (“ILAG”) is incorporated in Cayman Islands as a holding company with no actual operations and it currently conducts its business through its subsidiaries in Hong Kong and China. There has been no cash flows and transfers of other assets between the holding company and its subsidiaries, other than that as of December 31, 2022, Kimbo Locksets and Intelligent Living Application Group Limited (BVI), both wholly owned subsidiaries of ILAG have paid approximately $1,671,000 for expenses related to the public offering of ILAG as intercompany loans and not as the dividend payment or distribution. For the year ended December 31, 2024 and 2023, ILAG BVI paid approximately $285,000 and $972,000 for general and administration expenses as intercompany loans and not as the dividend payment or distribution. None of our subsidiaries has made any dividend payment or distribution to our holding company as of the date this report and they have no plans to make any distribution or dividend payment to the holding company in the near future. Neither the Company nor any of its subsidiaries has made any dividends or distributions to U.S. investors as of the date of this report.
At operational level, Xingfa has sold products with markups to Hing Fat, in the amount of approximately $7.18 million and $6.54 million for the year ended December 31, 2024 and 2023, respectively. Hing Fat has sold products with markups to Kambo Locksets in the amount of approximately $7.33 million and $6.31 million for the year ended December 31, 2024 and 2023, respectively. Hing Fat has made payment to Xingfa approximately $6.42 million and $6.45 million for the year ended December 31, 2024 and 2023, respectively. Kambo Locksets has made payment to Hing Fat for approximately $6.46 million and $5.47 million for the years ended December 31, 2024 and 2023, respectively.
All transfers of cash are related to the operations of the subsidiaries in the ordinary course of business. For our Hong Kong subsidiaries, our subsidiary in British Virgin Islands and the holding company (“Non-PRC Entities”), there is no restrictions on foreign exchange for such entities and they are able to transfer cash among these entities, across borders and to US investors. Also, there is no restrictions and limitations on the abilities of Non-PRC Entities to distribute earnings from their businesses, including from subsidiaries to the parent company or from the holding company to the U.S. investors as well as the abilities to settle amounts owed. However, PRC may impose greater restrictions on our Hong Kong subsidiaries’ abilities to transfer cash out of Hong Kong and to the holding company, which could adversely affect our business, financial condition and results of operations.
Regarding cash transfer to and from Xingfa, we are able to have such transfer through banks in China under current account items, such as profit distributions and trade and service-related foreign exchange transactions, which can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements with the banks. However, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. PRC laws and regulations allow an offshore holding company to provide funding to our wholly owned subsidiary in China only through loans or capital contributions, subject to the filing or approval of government authorities and limits on the amount of capital contributions and loans. Subject to satisfaction of applicable government registration and approval requirements, we may extend inter-company loans to our wholly owned subsidiary in China or make additional capital contributions to fund Xingfa’s capital expenditures or working capital. For an increase of its registered capital, Xingfa needs to file such change of registered capital with the MOFCOM or its local counterparts. If the holding company provides funding to Xingfa through loans, the total amount of such loans may not exceed the difference between the entity’s total investment as approved by the foreign investment authorities and its registered capital. Such loans must be registered with SAFE or its local branches. Under PRC law, Xingfa is also required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. And the company shall not distribute any profits until any losses from prior fiscal years have been offset.
| 3 |
Selected Financial Data
In the table below, we provide you with historical selected financial data for our company. The selected consolidated statements of operations data for the years ended December 31, 2024, 2023 and 2022 and the selected consolidated balance sheets data as of December 31, 2024 and 2023 have been derived from our audited consolidated financial statements (“CFS”), which are included in this annual report beginning on page F-1. Our historical results do not necessarily indicate results expected for any future periods. The selected consolidated financial data should be read in conjunction with, and are qualified in their entirety by reference to, our audited CFS and related notes and “Item 5. Operating and Financial Review and Prospects” below. Our audited CFS are prepared and presented in accordance with US GAAP.
| December 31, 2024 | December 31, 2023 | |||||||
| Current assets | $ | 8,815,426 | $ | 12,102,160 | ||||
| Total non-current assets | $ | 5,624,795 | $ | 6,181,698 | ||||
| Total assets | $ | 14,440,221 | $ | 18,283,858 | ||||
| Total current liabilities | $ | 1,420,108 | $ | 1,390,963 | ||||
| Total non-current liabilities | $ | 382,047 | $ | 490,502 | ||||
| For the years ended December 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Revenue | $ | 7,506,551 | $ | 6,443,357 | $ | 12,158,102 | ||||||
| Operating expenses | $ | 5,182,268 | $ | 4,527,090 | $ | 4,461,258 | ||||||
| Net loss | $ | (3,690,287 | ) | $ | (3,501,518 | ) | $ | (1,655,903 | ) | |||
| For the years ended December 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Net cash used in operating activities | $ | (3,042,081 | ) | $ | (3,163,187 | ) | $ | (4,170,876 | ) | |||
| Net cash used in investing activities | $ | (115,161 | ) | $ | (1,360,274 | ) | $ | (4,181,724 | ) | |||
| Net cash provided by (used in) financing activities | $ | (44,557 | ) | $ | (154,976 | ) | $ | 17,397,802 | ||||
| Net increase (decrease) in cash | $ | (3,202,819 | ) | $ | (4,681,921 | ) | $ | 9,034,522 | ||||
3.A. [Reserved]
3.B. Capitalization and Indebtedness
Not Applicable.
3.C. Reasons For The Offer And Use Of Proceeds
Not Applicable.
3.D. Risk Factors
An investment in our ordinary shares involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all other information contained in this annual report, including the matters discussed under the headings “Forward-Looking Statements” and “Operating and Financial Review and Prospects” before you decide to invest in our ordinary shares. We are a holding company with operations in Hong Kong and China and are subject to a legal and regulatory environment that in many respects differs from the United States. If any of the following risks, or any other risks and uncertainties that are not presently foreseeable to us, actually occur, our business, financial condition, results of operations, liquidity and our future growth prospects could be materially and adversely affected.
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Summary of Risk Factors
An investment in our ordinary shares involves significant risks. Below is a summary of material risks we face, organized under relevant headings. These risks are discussed more fully in Item 3. Key Information—D. Risk Factors.
Risks Related to Our Business
| ● | Tariffs, trade war and changes in U.S. trade policies have and could continue to significantly reduce the volume of exporting our products into the United States, which may materially reduce our profit margin and our sales in the United States. |
| ● | We may not be able to successfully introduce smart lock and security and internet of things (IoT) products that are in research and development. |
| ● | We incurred net losses for the year ended December 31, 2024 and the past two years and may not be able to generate sufficient operating cash flows and working capital to continue as a going concern over the next 12 months. Failure to manage our liquidity and cash flows may materially and adversely affect our financial condition and results of operations. As a result, we may need additional capital, and financing may not be available on terms acceptable to us, or at all. |
| ● | Fluctuations in the price, availability or quality of raw materials used in our products could cause manufacturing delays, adversely affecting our ability to provide goods to our customers or increase costs, any of which could decrease our sales or earnings. |
| ● | Xingfa may experience material disruptions to its manufacturing operations in China that could result in material delays, quality control issues, increased costs and loss of business opportunities, which may negatively impact our sales and financial results. |
| ● | We face risks related to health epidemics and other outbreaks, including the coronavirus (COVID-19), which has caused and may continue to cause business disruptions, resulting in a material adverse impact to our financial condition and results of operations. |
| ● | Environmental regulations impose substantial costs and limitations on our operations and violation of environmental regulations might subject us to fines, penalties or suspension of production which could have material negative impact on our financial results. |
| ● | We are obligated to develop and maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our Ordinary Shares. |
| ● | We do not have any business insurance coverage. |
Risks Related to Doing Business in China
| ● | Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and results of operations. |
| ● | Uncertainties and quick change in the interpretation and enforcement of Chinese laws and regulations with little advance notice could result in a material and negative impact on our business operation, decrease the value of our ordinary shares and limit the legal protections available to us. |
| ● | Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions. |
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| ● | Regulatory bodies of the United States may be limited in their ability to conduct investigations or inspections of our operations in China. |
| ● | The Holding Foreign Companies Accountable Act, or the HFCA Act, and the related regulations are evolving quickly. Further implementations and interpretations of or amendments to the HFCA Act or the related regulations, or a PCOAB’s determination of its lack of sufficient access to inspect our auditor, might pose regulatory risks to and impose restrictions on us because of our operations in mainland China. A potential consequence is that our ordinary shares may be delisted by the exchange. The delisting of our ordinary shares, or the threat of our ordinary shares being delisted, may materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct full inspections of our auditor deprives our investors of the benefits of such inspections. |
| ● | Substantial uncertainties exist with respect to the interpretation and implementation of the newly enacted PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance, business operations and financial results. |
| ● | Any change of regulations and rules by Chinese government, including the limitations on usage of power, additional environmental protection requirements, moving technology in and out of the PRC or restriction on cash transfer out of PRC, may intervene or influence our operations in China at any time and any additional control over offerings conducted overseas and/or foreign investment in issuers with Chinese operations could result in a material change in our business operations and/or the value of our ordinary shares and could significantly limit or completely hinder our ability to offer our ordinary shares to investors and cause the value of such securities to significantly decline or be worthless. |
Risks Related to Doing Business in Hong Kong
| ● | It will be difficult to acquire jurisdiction and enforce liabilities against us, our officers, directors and assets based in Hong Kong and China. |
| ● | The Hong Kong legal system embodies uncertainties which could negatively affect our listing on Nasdaq and limit the legal protections available to you and us. |
| ● | We cannot foresee the recently passed legislation of Basis Law Article 23 (Safeguarding National Security Ordinance) will create any legal impact on us, our business, our officers, our directors and assets based in Hong Kong and China. However, we cannot predict if our customers in the US may have special prospectus in doing business with us. |
Risks Related to Our Ordinary Shares
| ● | Our ordinary shares may be thinly traded and you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares. |
| ● | You may face difficulties in protecting your interests as a shareholder, as Cayman Islands law provides substantially less protection when compared to the laws of the United States and it may be difficult for a shareholder of ours to effect service of process or to enforce judgements obtained in the United States courts. |
In addition, please see “Risk Factors” below, and other information included in this report, for a discussion of these and other risks and uncertainties that we face.
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Risks Related to Our Business
Tariffs, trade war and changes in U.S. trade policies have and could continue to significantly reduce the volume of exporting our products into the United States, which may materially reduce our profit margin and our sales in the United States.
We sell most of our products to the United States. Since 2017, the U.S. and China have been engaged in a trade dispute that has involved a number of actions against China including the imposition of tariffs on Chinese imports. On February 1, 2025, President Trump issued executive orders imposing a 25% tariff on products imported from Canada and Mexico and a 10% tariff on products imported from China, effective February 4, 2025. An additional 10% increase in the China tariffs became effective March 4, 2025. On April 2, 2025, President Trump announced that the United States would impose a 10% tariff on all countries, effective on April 5, 2025, and individualized higher tariff rates on countries with which the United States has proportionately large trade deficits in goods, including, among others, a 34% additional tariff on goods imported from China that brings the total additional tariff rate levied on Chinese goods since 2025 to 54%. On April 4, 2025, the Chinese government announced that China would impose a 34% tariff on goods imported from the United States. President Trump responded by further imposing an additional 50% tariff on goods imported from China that brings the total additional tariff rate levied on Chinese goods since 2025 to 104%. On April 9, 2025, China retaliated against U.S. tariffs by imposing tariffs of 84% on goods from the United States. On April 9, 2025, President Trump suspended reciprocal tariffs imposed on trade surplus countries for 90 days with exception of China, which faces an additional 41% tariff increase that brings the total additional tariff rate levied on products from China since 2025 to 145% which has made export of our products to the United State impossible. On April 11, 2025, China retaliated against U.S. tariffs by imposing tariffs of 125% on goods from the United States.
As of the date of this annual report, there is still a high degree of uncertainty surrounding U.S. tariff policy, how it will be implemented, and how other countries will react to it. It also remains uncertain whether increased tariffs and trade tensions will create further disruptions and uncertainties to the international trade and lead to a downturn to the global economy.
The previous tariffs on products from Chinese have resulted in a material negative impact on our business and results of operations as we had to reduce our sales prices and profit margin to absorb some of the tariffs while still lost some orders, and these new tariffs or any additional actions will increase in the prices of our products and adversely affect the Company’s revenues and profitability or even make our export to United States impossible.
We continue to evaluate the impact of currently effective tariffs as well as other recent changes in foreign trade policy by the U.S. administration on our products. At this time, it is unknown how long U.S. tariffs on Chinese goods will remain in effect or whether additional tariffs will be imposed. Depending upon their duration and implementation, as well as our ability to mitigate their impact, these changes in foreign trade policy and any recently enacted, proposed and future tariffs on products from China, as well as general uncertainty in the tariff environment, will materially and negatively impact our business, results of operations and liquidity if the U.S. and China couldn’t reach a deal to reduce the tariffs from the current level.
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The growth of our business depends on our ability to accurately predict consumer trends and demand and successfully introduce new products and product line extensions and improve existing products.
Our growth depends, in part, on our ability to successfully introduce new products and product line extensions and improve and reposition our existing products to meet the requirements of property owners and builders. This, in turn, depends on our ability to predict and respond to evolving consumer trends, demands and preferences. The development and introduction of innovative new products and product line extensions involve considerable costs. In addition, it may be difficult to establish new supplier relationships and determine appropriate product selections when developing a new product or product line extension. Any new product or product line extension may not generate sufficient customer interest and sales to become a profitable product or to cover the costs of its development and promotion and may negatively affect our operating results and damage our reputation. If we are not able to anticipate, identify or develop and market products to respond to the changes in the requirements and preferences of property owners and builders, or if our new product introductions or repositioned products fail to gain consumer acceptance, we may not grow our business as anticipated, our sales may decline and our business, financial condition and results of operations may be materially adversely affected.
Our new smart lock and security and internet of things (IoT) products that we have researched and developed might not be successful and might not generate the revenues and net incomes that we expect.
We have invested our efforts, time and resources in the research and development of smart locks in the past couple years and the outcome is uncertain whether such development will be successful. We have picked certain smart lock designs for production and launch of our Competitive Smart Lock in March 2025. We will continue to invest in the smart locks and software, equipment and machineries to manufacture parts and assembly line to produce smart locks. In early 2023, we engaged a Hong Kong based technology company to conduct research and development (“R&D”) in a series of smart home products and devices as a part of our smart lock, security and IoT products development strategy. Having considered the availability of talents and cost-benefit efficiency, we will continue to incur costs to outsource information technology developer(s) to develop software application and support functions of new smart lock products. In additional, we will incur marketing costs to generate customer interest and sales of such products in enough volume to make it a profitable product. If we fail to design and develop appropriate functions for our smart locks to attract enough customers and establish commercial manufacturing capabilities or if our smart lock products can’t meet the local regulatory requirements where we sell such products, our financial condition and results of operations may be adversely affected. If we fail to obtain and maintain patent, trade secret and other intellectual property protection and regulatory exclusivity for our new smart locks or if we are unable to ensure that we do not infringe, misappropriate or otherwise violate the valid patent, trade secret or other intellectual property rights of third parties regarding smart locks on the market, our business, financial condition and results of operations may be materially adversely affected.
We may not be able to successfully implement our growth strategy on a timely basis or at all.
Our future success depends, in large part, on our ability to implement our growth strategy, including expanding distribution and improving placement of our products in the stores of our retail customers, attracting new consumers to our brands, introducing new products and product line extensions and expanding into new markets. Our ability to implement this growth strategy depends, among other things, on our ability to:
| ● | enter into distribution and other strategic arrangements with current and new retailers and other potential distributors of our products; |
| ● | continue to effectively compete in our distribution channels; |
| ● | increase our brand recognition by effectively implementing our marketing strategy and advertising initiatives; |
| ● | create and maintain brand loyalty; |
| ● | develop new products and product line extensions that appeal to consumers; |
| ● | maintain and, to the extent necessary, improve our high standards for product quality, safety and integrity; |
| ● | maintain sources for the required supply of quality raw materials and ingredients to meet our growing demand; and |
| ● | identify and successfully enter and market our products in new geographic areas and market segments. |
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We may not be able to successfully implement our growth strategy and may need to change our strategy from time to time. If we fail to implement our growth strategy or if we invest resources in a growth strategy that ultimately proves unsuccessful, our business, financial condition and results of operations may be materially adversely affected.
We incurred net losses for the year ended December 31, 2024 and the past two years and may not be able to generate sufficient operating cash flows and working capital to continue as a going concern over the next 12 months. Failure to manage our liquidity and cash flows may materially and adversely affect our financial condition and results of operations. As a result, we may need additional capital, and financing may not be available on terms acceptable to us, or at all.
We incurred net losses of $3.7 million, $3.5 million and $1.7 million for the years ended December 31, 2024, 2023 and 2022, respectively. As a result, we had negative cash flows from operating activities of approximately $3.0 million, $3.2million and approximately $4.1 million for the years ended December 31, 2024, 2023 and 2022. We can offer no assurance that we will operate profitably or that we will generate positive cash flows in the next twelve months, given our substantial expenses in relation to our revenue at this stage of our Company. Inability to collect our accounts receivable in a timely and sufficient manner, or the inability to offset our expenses with adequate revenue, may adversely affect our liquidity, financial condition and results of operations. Although we believe that our cash on hand and anticipated cash flows from operating activities will be sufficient to meet our anticipated working capital requirements and capital expenditures in the ordinary course of business for the next 12 months, we cannot assure you this will be the case.
If and when we are unable to generate sufficient cash flows from operations to meet our working capital requirements and various operating needs, we may need to raise additional funds for our operations and such funds may not be available on commercially acceptable terms, if at all. If we are unable to raise funds on acceptable terms, we may not be able to execute our business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated requirements. This may seriously harm our business, financial condition and results of operations. If we are unable to achieve or maintain profitability, the market price of our shares may significantly decrease. In the event that the Company requires additional funding to finance its operations, the Company’s major shareholders have indicated their intent and ability to provide such financial support, however, there is no assurance such funding will be available when the Company needs it in the future.
Any damage to our reputation or our brand may materially adversely affect our business, financial condition and results of operations.
We have long business relationships with our customers by maintaining high quality and quick service response. Maintaining our strong reputation with consumers and our suppliers is critical to our success. Our brands may suffer if our marketing plans or product initiatives are not successful. The importance of our brands may increase if competitors offer products with designs and functions similar to ours. Further, our brands may be negatively impacted due to real or perceived quality issues or if consumers perceive us as being untruthful in our marketing and advertising, even if such perceptions are not accurate. The failure to maintain high standards for product quality and integrity, including raw materials obtained from suppliers, or allegations of product quality issues, even if untrue or caused by our raw material suppliers, may reduce demand for our products or cause production and delivery disruptions. We maintain guidelines and procedures to ensure the quality and integrity of our products. However, we may be unable to detect or prevent product quality issues, particularly in instances of the attempts to cover up or obscure deviations from our guidelines and procedures. If any of our products become unfit for use or cause injury, we may have to engage in a product recall and/or be subject to liability. In addition, if our products have quality issues, we could incur significant expenses related to the replacement of our products. Damage to our reputation or our brands or loss of consumer confidence in our products for any of these or other reasons could result in decreased demand for our products and increased costs and our business, financial condition and results of operations may be materially adversely affected.
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To the extent our customers purchase products in excess of consumer demand in any period, our sales in a subsequent period may be adversely affected as our customers seek to reduce their inventory levels.
From time to time, our customers may purchase more products than they expect to sell during a particular time period. Our customers may grow their inventory in anticipation of, or during, our promotional events, which typically provide for reduced prices during a specified time or other customer incentives. Our customers may also grow inventory in anticipation of a price increase for our products, or otherwise over-order our products as a result of overestimating demand for our products. If a customer increases its inventory during a particular reporting period as a result of a promotional event, anticipated price increases or otherwise, then sales during the subsequent reporting period may be adversely impacted as our customers seek to reduce their inventory to customary levels. This effect may be particularly pronounced when the promotional event, price increase or other event occurs near the end or beginning of a reporting period or when there are changes in the timing of a promotional event, price increase or similar event, as compared to the prior year. To the extent our customers seek to reduce their usual or customary inventory levels or change their practices regarding purchases in excess of consumer demand, our net sales and results of operations may be materially adversely affected in that period.
We operate in a highly competitive industry and may lose market share or experience margin erosion if we are unable to compete effectively.
We compete on the basis of product quality, design and performance, brand awareness and loyalty, product variety, reputation, price and promotional efforts. We compete with a significant number of companies of varying sizes, including divisions or subsidiaries of larger companies who may have greater financial resources and larger customer bases than we have. As a result, these competitors may be able to identify and adapt to changes in consumer preferences more quickly than us due to their resources and scale. They may also be more successful in marketing and selling their products, better able to increase prices to reflect cost pressures and better able to increase their promotional activity, which may impact us and the entire lockset manufacturing industry. If these competitive pressures cause our products to lose market share or experience margin erosion, our business, financial conditions and results of operations may be materially adversely affected.
Fluctuations in the price, availability or quality of raw materials used in our products could cause manufacturing delays, adversely affect our ability to provide goods to our customers or increase costs, any of which could decrease our sales or earnings.
Our major raw material purchases include copper, iron, zinc alloy and packaging materials comprised of paper and plastic. We depend on outside suppliers for these raw materials and must obtain sufficient quantities of quality raw materials from these suppliers at acceptable prices and in a timely manner. We do not maintain fixed supply contracts with our suppliers. Unfavorable fluctuations in the price, quality or availability of required raw materials could negatively affect our ability to meet the demands of our customers. Our inability to meet customers’ demands could result in the loss of future sales.
The profitability of our products depends in part upon the margin between the cost to us of certain raw materials and our fabrication costs associated with converting such raw materials into assembled products, as compared to the selling price of our products. We intend to continue to base the selling prices of our products in part upon their associated raw material costs. However, we may not be able to pass all increases in raw material costs or increases in the costs associated with taking possession of raw materials through to our customers in the future. The inability to offset price increases of raw materials by sufficient product price increases could have a material adverse effect on our consolidated financial condition, results of operations and cash flows.
We do not engage in hedging transactions to protect against raw material fluctuations but attempt to mitigate the short-term risks of price swings by purchasing raw materials in advance based on production needs or reaching agreements with some of our suppliers to keep the cost of raw materials stable. We also attempt to lower consumption of raw materials by lowing waste rate and recycled materials without compromising product quality.
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Xingfa may experience material disruptions to its manufacturing operations in China that could result in material delays, quality control issues, increased costs and loss of business opportunities, which may negatively impact our sales and financial results.
We rely primarily upon our manufacturing facilities of Xingfa, which is located in Shatian Town, Dongguan City, Guangdong Province, China, to produce our products. While we seek to operate our facilities in compliance with applicable rules and regulations and take measures to minimize the risks of disruption at our facilities, a material disruption at our manufacturing facilities could prevent us from meeting customer demand, reduce our sales and negatively impact our financial results. Our manufacturing facilities, or any of our machines, could cease operations unexpectedly due to a number of events, including: prolonged power failures; equipment failures; disruptions in the transportation infrastructure including roads, bridges, railroad tracks; fires, floods, earthquakes, health epidemics, acts of war, or other catastrophes, which could also pose a risk to injury or damage to personnel, the property of others, which in turn could lead to considerable financial costs and may also have negative legal consequences. Our future growth strategy may include an expansion of our manufacturing capacity to meet increasing demand for our existing products. Any projects undertaken by us to increase such capacity may not be constructed on the anticipated timetable or within budget. We may also experience quality control issues as we implement these manufacturing upgrades and ramp up production. Any such material disruption may prevent us from shipping our products on a timely basis, reduce our sales and market share and negatively impact our financial results.
We face risks associated with managing operations in China, any of which could decrease our sales or earnings and could significantly limit or completely hinder our ability to offer our ordinary shares to investors and cause the value of such securities to significantly decline or be worthless.
All of our manufacturing operations currently are conducted in China. There are a number of risks inherent in doing business in China, including the following: unfavorable political or economic factors; fluctuations in foreign currency exchange rates; potentially adverse tax consequences; unexpected legal or regulatory changes; lack of sufficient protection for intellectual property rights; difficulties in recruiting and retaining personnel, and managing international operations; and less developed infrastructure. Furthermore, changes in the political, economic and social conditions in China from which these risks are derived could make it more difficult to provide products to our customers. Our inability to manage these risks successfully could adversely affect our business and manufacturing operations and could significantly limit or completely hinder our ability to offer our ordinary shares to investors and cause the value of such securities to significantly decline or be worthless.
We face risks related to health epidemics and other outbreaks, including the coronavirus (COVID-19), which has caused and may continue to cause business disruptions, resulting in a material, adverse impact to our financial condition and results of operations.
In recent years, there have been outbreaks of epidemics in various countries. The outbreak of COVID-19 spread throughout the world, especially in China, the United States and Europe. On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. The pandemic has resulted in quarantines, travel restrictions, and the temporary closure of office buildings and facilities in China and in the U.S. Our results of operations were materially adversely affected by the outbreak of COVID-19.
In 2022, there were outbreaks of the Omicron variant of the COVID-19 in Hong Kong where our headquarters are located and other cities in China, including Shenzhen, Shanghai, Guangzhou, Taiyuan, Changchun as well as Dongguan city where Xingfa is located, and travel restrictions, mandatory COVID-19 tests, quarantine requirements and/or temporary closure of office buildings and facilities were imposed by local governments. China eased the strict lockdown procedures in early December 2022, which led to surge in COVID infections in December 2022 and January 2023 and caused disruption our business operations as our migrant workers from other provinces in the manufacturing factory had to leave and go home early for the new year holidays and did not come back until March 2023. Although our operations have resumed to normal since March 2023, the government authorities may issue new orders of office closure, travel and transportation restrictions in China if there is any new variants or resurgence of the COVID-19, which will have material negative impact to our business and financial conditions.
In general, our business could be materially adversely affected by the effects of epidemics or pandemic, including, but not limited to, the COVID-19, avian influenza, severe acute respiratory syndrome (SARS), the influenza A virus, Ebola virus, or other outbreaks. In response to an epidemic or other outbreaks, government and other organizations may adopt regulations and policies that could lead to severe disruption to our daily operations, including temporary closure of our offices and other facilities. These severe conditions may cause us and/or our partners to make internal adjustments, including but not limited to, temporarily closing down businesses, limiting business hours, and setting restrictions on travel and/or visits with clients and partners for a prolonged period of time. Various impacts arising from a severe condition may cause business disruptions, resulting in a material, adverse impact to our financial condition and results of operations.
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We have a substantial customer concentration, with a limited number of customers accounting for a substantial portion of our revenues.
We derive a significant portion of our revenues from a few major customers that are located in the United States. For the years ended December 31, 2024 and 2023, three and four customers accounted for 86% and 88% of our revenues, respectively. In addition, our five largest customers in aggregate accounted for 95% and 92% of our revenues for the years ended December 31, 2024 and 2023, respectively. There are inherent risks whenever a large percentage of total revenues are concentrated with a limited number of customers. It is not possible for us to predict the future level of demand for our products that will be generated by these customers or the future demand for our products by these customers in the end-user marketplace. If any of these customers experience declining or delayed sales due to market, economic or competitive conditions, we could be pressured to reduce our prices or they could decrease the purchase quantity of our products, which could have an adverse effect on our margins and financial position, and could negatively affect our revenues and results of operations. If any of our three largest customers terminates the purchase of our products, such termination would materially negatively affect our revenues, results of operations and financial condition.
Our operating results may fluctuate significantly and may not fully reflect the underlying performance of our business.
Our operating results, including the levels of our net revenues, expenses, net (loss)/income and other key metrics, may vary significantly in the future due to a variety of factors, some of which are outside of our control, and period-to-period comparisons of our operating results may not be meaningful. Accordingly, the results for any one period are not necessarily an indication of future performance. Fluctuations in results may adversely affect the market price of our ordinary shares. Factors that may cause fluctuations in our financial results include:
| ● | our ability to attract new customers and retain existing customers; |
| ● | changes in our mix of products and introduction of new products; |
| ● | the amount and timing of operating expenses related to the maintenance and expansion of our business, operations and infrastructure; |
| ● | Increase the cost of raw materials and/or labor; |
| ● | our decision to manage order volume growth during the period; |
| ● | the impact of competitors or competitive products; |
| ● | increases in our costs and expenses that we may incur to grow and expand our operations and to remain competitive; |
| ● | changes in the legal or regulatory environment or proceedings, including enforcement by government regulators, fines, orders or consent decrees; |
| ● | increase of tariffs, general economic, industry and market conditions, including changes in Chinese, U.S. or global business or macroeconomic conditions; |
| ● | the timing of expenses related to the development or acquisition of technologies or businesses; and |
| ● | the additional costs related to being a public company. |
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Despite our marketing efforts, we may not be able to promote and maintain our brand in an effective and cost-efficient way and our business and results of operations may be harmed accordingly.
We believe that developing and maintaining awareness of our brand effectively is critical to attracting new and retaining existing customers. Successful promotion of our brand and our ability to attract quality customers depends largely on the effectiveness of our marketing efforts and the success of the channels we use to promote our products. Our efforts to promote our sales and to build our brand have caused us to incur selling and marketing expenses of approximately $1,103,000, $60,000 and $105,000 for the years ended December 31, 2024, 2023 and 2022, respectively. Our COO has taken a marketing trip recently to promote our products in the US for new and potential customers. It is likely that our future marketing efforts will require us to incur significant additional expenses. These efforts may not result in increased revenues in the immediate future or at all and, even if they do, any increases in revenues may not offset the expenses incurred. If we fail to successfully promote and maintain our brand while incurring substantial expenses, our results of operations and financial condition would be adversely affected, which may impair our ability to grow our business.
If we fail to manage our inventory effectively, our results of operations, financial condition and liquidity may be materially and adversely affected.
Our inventories are mostly raw materials, such as copper, iron, zinc alloy and packaging materials comprised of paper and plastic, which require us to manage our inventory effectively. We depend on our demand forecasts for various kinds of raw materials and pre-made products to make purchase decisions and to manage our inventory. Such demand, however, can change significantly between the time inventory is ordered and the date by which we hope to sell it. Demand may be affected by seasonality, the economy, new product launches, pricing and discounts, product defects, changes in customer spending patterns, changes in customer tastes and other factors, and our customers may not order products in the quantities that we expect. The acquisition of certain types of inventory may require significant lead time and prepayment.
Furthermore, as we plan to continue expanding our product offerings, we expect to include a wider variety of products and raw materials in our inventory, which will make it more challenging for us to manage our inventory and logistics effectively. We cannot guarantee that our inventory levels will be able to meet the demands of customers, which may adversely affect our sales. If we fail to manage our inventory effectively, we may be subject to a heightened risk of inventory obsolescence resulting in a decline in inventory value, and significant inventory write-downs or write-offs. Any of the above may materially and adversely affect our results of operations and financial condition. On the other hand, if we underestimate demand for our products, or if our suppliers fail to supply quality raw materials and pre-made products in a timely manner, we may experience inventory shortages, which might result in diminished brand loyalty and lost revenues, any of which could harm our business and reputation.
We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.
We regard our trademarks, domain names, know-how, proprietary technologies and similar intellectual property as critical to our success, and we rely on a combination of intellectual property laws and contractual arrangements, including confidentiality and non-compete agreements with our employees and others to protect our proprietary rights. Thus, we cannot assure you that any of our intellectual property rights would not be challenged, invalidated, circumvented or misappropriated, or such intellectual property will be sufficient to provide us with competitive advantages. In addition, because of the rapid pace of technological change, parts of our business rely on Internet of Things (IoT) technology, the network of physical objects that feature an IP address for internet connectivity, and the communication that occurs between these objects and other Internet-enabled devices and systems which will alert the users under pre-set conditions, developed or licensed by third parties, and we may not be able to obtain or continue to obtain licenses and technologies from these third parties on reasonable terms, or at all.
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It is often difficult to register, maintain and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation. Confidentiality, invention assignment and non-compete agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in China. Preventing any unauthorized use of our intellectual property is difficult and costly and the steps we take may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. To the extent that our employees or consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related know-how and inventions. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.
We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.
We cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks, patents, copyrights, know-how or other intellectual property rights held by third parties. We may be from time to time in the future be subject to legal proceedings and claims relating to the intellectual property rights of others. In addition, there may be third-party trademarks, patents, copyrights, know-how or other intellectual property rights that are infringed by our products, services or other aspects of our business without our awareness. Holders of such intellectual property rights may seek to enforce such intellectual property rights against us in China, Hong Kong, the United States or other jurisdictions. If any third-party infringement claims are brought against us, we may be forced to divert management’s time and other resources from our business and operations to defend against these claims, regardless of their merits.
Additionally, the application and interpretation of China’s intellectual property right laws and the procedures and standards for granting trademarks, patents, copyrights, know-how or other intellectual property rights in China are still evolving and are uncertain, and we cannot assure you that PRC courts or regulatory authorities would agree with our analysis. If we were found to have violated the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. As a result, our business and results of operations may be materially and adversely affected.
From time to time we may evaluate and potentially consummate strategic investments or acquisitions, which could require significant management attention, disrupt our business and adversely affect our financial results.
We may evaluate and consider strategic investments, combinations, acquisitions or alliances to further increase the value of our marketplace and better serve our customers. These transactions could be material to our financial condition and results of operations if consummated. If we are able to identify an appropriate business opportunity, we may not be able to successfully consummate the transaction and, even if we do consummate such a transaction, we may be unable to obtain the benefits or avoid the difficulties and risks of such transaction.
Strategic investments or acquisitions will involve risks commonly encountered in business relationships, including:
| ● | difficulties in assimilating and integrating the operations, personnel, systems, data, technologies, products and services of the acquired business; |
| ● | inability of the acquired technologies, products or businesses to achieve expected levels of revenue, profitability, productivity or other benefits; |
| ● | difficulties in retaining, training, motivating and integrating key personnel; |
| ● | diversion of management’s time and resources from our normal daily operations; |
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| ● | difficulties in successfully incorporating licensed or acquired technology and rights into our product offerings; |
| ● | difficulties in maintaining uniform standards, controls, procedures and policies within the combined organizations; |
| ● | difficulties in retaining relationships with customers, employees and suppliers of the acquired business; |
| ● | risks of entering markets in which we have limited or no prior experience; |
| ● | regulatory risks, including remaining in good standing with existing regulatory bodies or receiving any necessary pre-closing or post-closing approvals, as well as being subject to new regulators with oversight over an acquired business; |
| ● | assumption of contractual obligations that contain terms that are not beneficial to us, require us to license or waive intellectual property rights or increase our risk for liability; |
| ● | failure to successfully further develop the acquired technology; |
| ● | liability for activities of the acquired business before the acquisition, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities; |
| ● | potential disruptions to our ongoing businesses; and |
| ● | unexpected costs and unknown risks and liabilities associated with strategic investments or acquisitions. |
We may not make any investments or acquisitions, or any future investments or acquisitions may not be successful, may not benefit our business strategy, may not generate sufficient revenues to offset the associated acquisition costs or may not otherwise result in the intended benefits. In addition, we cannot assure you that any future investment in or acquisition of new businesses or technology will lead to the successful development of new or enhanced products or that any new or enhanced products, if developed, will achieve market acceptance or prove to be profitable.
Our business depends on the continued efforts of our senior management. If one or more of our key executives were unable or unwilling to continue in their present positions, our business may be severely disrupted.
Our business operations depend on the continued services of our senior management, particularly the executive officers named in this report. While we have the ability to provide different incentives to our management, we cannot assure you that we can continue to retain their services. If one or more of our key executives were unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, our future growth may be constrained, our business may be severely disrupted and our financial condition and results of operations may be materially and adversely affected, and we may incur additional expenses to recruit, train and retain qualified personnel. In addition, although we have entered into confidentiality and non-competition agreements with our management, there is no assurance that any member of our management team will not join our competitors or form a competing business. If any dispute arises between our current or former officers and us, we may have to incur substantial costs and expenses in order to enforce such agreements in China or we may be unable to enforce them at all.
The relative lack of public company experience of our management team may put us at a competitive disadvantage.
Our management team lacks public company experience, which could impair our ability to comply with legal and regulatory requirements such as those imposed by the Sarbanes-Oxley Act of 2002, (“Sarbanes-Oxley”). Our senior management does not have much experience managing a publicly traded company. Such responsibilities include complying with federal securities laws and making required disclosures on a timely basis. Our senior management may be unable to implement programs and policies in an effective and timely manner or that adequately respond to the increased legal, regulatory and reporting requirements associated with being a publicly traded company. Our failure to comply with all applicable requirements could lead to the imposition of fines and penalties, distract our management from attending to the management and growth of our business, result in a loss of investor confidence in our financial reports and have an adverse effect on our business and stock price.
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We lease our facilities from third parties and there is no assurance that we will be able to renew our leased facilities on favorable terms, or at all.
We currently lease all of the properties we use to operate our business. Our headquarters are located in Hong Kong comprising office premises of approximately 300 m2. Our production facilities are located in Dongguan, Guangdong Province of China, where Xingfa leases a total floor area of approximately 17,560 m2. The lease terms on these premises expire on February 28, 2026. In October 2022, Xingfa acquired an electroplating production line which is on a 2,033 m2 floor area premise in an environmental protection industrial park in Dongguan, which is specially approved for infrastructures such as electroplating and other high pollution productions. The lease term on this premise expires on October 31, 2026. If we are unable to renew these leases on favorable terms, or at all, we would be required to find new leased space, which space may be more expensive to lease than our current facilities. Also, the lease may be terminated early due to unexpected change of land usage by the local government.
Moreover, the lessor of Xingfa has not provided us with a real estate ownership certificate for the manufacturing facility. Under the relevant PRC laws and regulations, if the lessor is unable to obtain certificate of title, such lease contract may be recognized as void and as a result, Xingfa may be required to vacate the relevant properties. Although the lessor agreed to compensate Xingfa’s loss or provide Xingfa with other properties for its current business operation, we might not be able to recover all the losses and our business might be negatively impacted.
Competition for employees is intense, and we may not be able to attract and retain the qualified and skilled employees needed to support our business.
We believe our success depends on the efforts and talent of our employees, including engineering, risk management, information technology, financial and marketing personnel. Our future success depends on our continued ability to attract, develop, motivate and retain qualified and skilled employees. Competition for highly skilled marketing, engineering, information technology, risk management and financial personnel is extremely intense. We may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary structure. Some of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment.
In addition, we invest significant time and expenses in training our employees, which increases their value to competitors who may seek to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements, and the quality of our products could diminish, resulting in a material adverse effect to our business.
Increases in labor costs in the PRC may adversely affect our business and results of operations.
The economy in China has experienced increases in inflation and labor costs in recent years. As a result, average wages in the PRC are expected to continue to increase. In addition, Xingfa is required by PRC laws and regulations to pay various statutory employee benefits, including pension, housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. The relevant government agencies may examine whether an employer has made adequate payments to the statutory employee benefits, and those employers who fail to make adequate payments may be subject to late payment fees, fines and/or other penalties. We expect that our labor costs, including wages and employee benefits, will continue to increase. Unless we are able to control our labor costs or pass on these increased labor costs to our customers or end users by increasing the prices of our products, our financial condition and results of operations may be adversely affected.
If we cannot maintain our corporate culture as we grow, we could lose the innovation, collaboration and focus that contribute to our business.
We believe that a critical component of our success is our corporate culture, which we believe fosters innovation, encourages teamwork and cultivates creativity. As we develop the infrastructure of a public company and continue to grow, we may find it difficult to maintain these valuable aspects of our corporate culture. Any failure to preserve our culture could negatively impact our future success, including our ability to attract and retain employees, encourage innovation and teamwork and effectively focus on and pursue our corporate objectives.
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Environmental regulations impose substantial costs and limitations on our operations and violation of environmental regulations might subject us to fines, penalties or suspension of production which could have material negative impact on our financial results.
Xingfa uses a variety of chemicals and produce significant emissions and powder dust in our lockset manufacturing operations. The stamping and casting machines in the manufacturing facility create high decibel noise. As such, Xingfa is subject to various national and local environmental laws, occupational safety and health (“OSH”) laws and regulations in China concerning issues such as air emissions, wastewater discharge, and solid waste management and disposal. These laws and regulations can restrict or limit our operations and expose us to liability and penalties for non-compliance. For example, in April 2018, Xingfa was ordered by Dongguan Environmental Protection Bureau to pay a fine of RMB100,000 (approximately $14,000) for failure to meet the air emission requirement, which Xingfa has paid and corrected the non-compliance emission. While we believe that Xingfa’s facilities are in material compliance with all applicable environmental and OSH laws and regulations, the risks of substantial unanticipated costs and liabilities related to compliance with these laws and regulations are an inherent part of our business. It is possible that future conditions may develop, arise or be discovered that create new environmental compliance or remediation liabilities and costs. While we believe that we can comply with existing environmental legislation and regulatory requirements and that the costs of compliance have been included within budgeted cost estimates, compliance may prove to be more limiting and costly than anticipated. If Xingfa fails to comply with the environmental regulations, it could face fines, penalties and our production facility-y(-ies) operations might be suspended until we comply, which could have material negative impact on our operation and financial results.
In addition to our core production facility, we acquire an electroplating production line. It is a result of polluted water drainage requirements are more stringent. This pushes cost of electroplating increase. As a result, we acquired a licensed production line. However, we may expose to sudden change in environmental regulations to require additional remediation costs for the electroplating production line, which would have material negative impact to our operation and financial results.
We are obligated to develop and maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our Ordinary Shares.
We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting (“ICFR”) for the year ending December 31, 2023, the first year beginning after our IPO. This assessment needs to include disclosure of any material weaknesses identified by our management in our ICFR and, after we cease to be an “emerging growth company,” a statement that our independent registered public accounting firm has issued an opinion on our ICFR.
We are in the early stages of the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our ICFR, we will be unable to assert that our internal controls are effective.
If we are unable to assert that our ICFR is effective, or if, when required, our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our Ordinary Shares to decline, and we may be subject to investigation or sanctions by the SEC.
To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff.
At such time that our independent registered public accounting firm is required to formally attest to the effectiveness of our ICFR, it may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may not enable us to avoid a material weakness in the future.
We do not have any business insurance coverage.
Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies in more developed economies. Currently, we and our subsidiaries do not have any business liability or disruption insurance to cover our operations. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured business disruptions may result in our incurring substantial costs and the diversion of resources, which could have an adverse effect on our results of operations and financial condition.
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Risks Related to Doing Business in China.
Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and results of operations.
All of our manufacturing operations are located in China. Accordingly, our business, prospects, financial condition and results of operations may be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic growth in China as a whole.
The Chinese economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies and change of enforcement practice of such rules and policies can change quickly with little advance notice. The Chinese government also exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.
While the Chinese economy has experienced significant growth over the past four decades, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. Since the outbreak of COVID-19, China’s economic growth has slowed down significantly, and the recovery has been slow. Any prolonged slowdown in the Chinese economy may reduce the demand for our products and materially and adversely affect our business and results of operations.
Uncertainties and quick change in the interpretation and enforcement of Chinese laws and regulations with little advance notice could result in a material and negative impact our business operation, decrease the value of our ordinary shares and limit the legal protections available to us.
The PRC legal system is based on written statutes, and prior court decisions have limited value as precedents. Since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties. The enforcement of laws and that rules and regulations in China can change quickly with little advance notice and the risk that the Chinese government may intervene or influence our operations at any time, or may exert more control over offerings conducted overseas and/or foreign investment in China- based issuers, could result in a material change in our operations and/or the value of our ordinary shares.
We cannot rule out the possibility that the PRC government will institute a licensing regime or pre-approval requirement covering our industry at some point in the future. If such a licensing regime or approval requirement were introduced, we cannot assure you that we would be able to obtain any newly required license in a timely manner, or at all, which could materially and adversely affect our business and impede our ability to continue our operations.
From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, could materially and adversely affect our business and impede our ability to continue our operations.
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We rely on dividends and other distributions on equity paid by our subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.
We are a holding company, and we rely on dividends and other distributions on equity paid by our subsidiaries for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. If any of our subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us.
Under PRC laws and regulations, our PRC subsidiary, as a wholly foreign-owned enterprise in China, may pay dividends only out of its respective accumulated after-tax profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise in China is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund certain statutory reserve funds, until the aggregate amount of such funds reaches 50% of its registered capital.
Any limitation on the ability of our PRC subsidiary to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.
PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of offering to make loans to or make additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
Under PRC laws and regulations, we are permitted to utilize the proceeds from offerings to fund our PRC subsidiary by making loans to or additional capital contributions to our PRC subsidiary, subject to applicable government registration and approval requirements.
Any loans to our PRC subsidiary, which are treated as foreign-invested enterprises under PRC laws, are subject to PRC regulations and foreign exchange loan registrations. For example, loans by us to our PRC subsidiary to finance its activities cannot exceed statutory limits and must be registered with the local counterpart of the State Administration of Foreign Exchange, or SAFE. The statutory limit for the total amount of foreign debts of a foreign-invested company is the difference between the amount of total investment as approved by China’s Ministry of Commerce (“MOFCOM”) or its local counterpart and the amount of registered capital of such foreign-invested company.
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We may also decide to finance our PRC subsidiary by means of capital contributions. These capital contributions must be filed with the MOFCOM or its local counterpart. In addition, SAFE issued a circular in September 2008, SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency registered capital into RMB by restricting how the converted RMB may be used. SAFE Circular 142 provides that the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable government authority and unless otherwise provided by law, may not be used for equity investments within the PRC. Although on July 4, 2014, SAFE issued the Circular of the SAFE on Relevant Issues Concerning the Pilot Reform in Certain Areas of the Administrative Method of the Conversion of Foreign Exchange Funds by Foreign-invested Enterprises, or SAFE Circular 36, which launched a pilot reform of the administration of the settlement of the foreign exchange capitals of foreign-invested enterprises in certain designated areas from August 4, 2014 and some of the restrictions under SAFE Circular 142 will not apply to the settlement of the foreign exchange capitals of the foreign-invested enterprises established within the designate areas and such enterprises mainly engaging in investment are allowed to use its RMB capital converted from foreign exchange capitals to make equity investment, our PRC subsidiary is not established within the designated areas. On March 30, 2015, SAFE promulgated Circular 19, to expand the reform nationwide. Circular 19 came into force and replaced both Circular 142 and Circular 36 on June 1, 2015. Circular 19 allows foreign-invested enterprises to make equity investments by using RMB funds converted from foreign exchange capital. However, Circular 19 continues to prohibit foreign-invested enterprises from, among other things, using RMB fund converted from its foreign exchange capitals for expenditure beyond its business scope, providing entrusted loans or repaying loans between non-financial enterprises. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of a foreign-invested company. The use of such RMB capital may not be altered without SAFE’s approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations of these Circulars could result in severe monetary or other penalties. These circulars may significantly limit our ability to use RMB converted from the net proceeds of any offering to fund the establishment of new entities in China by our PRC subsidiary, to invest in or acquire any other PRC companies through our PRC subsidiary, or to establish variable interest entities in the PRC.
According to current laws and regulations, the capital subscribed by all shareholders shall be fully paid within five years from the date of establishment of the company in accordance with the provisions of the company’s articles of association. For companies registered and established before June 30, 2024, if the remaining subscribed capital period of a limited liability company exceeds 5 years from July 1, 2027, the remaining subscribed capital period shall be adjusted to within 5 years before June 31, 2027. If we are unable to complete the capital payment within the prescribed time, we may face penalties from administrative authorities, including fines and revocation of business licenses.
In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans to our PRC subsidiary or future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we expect to receive from any offering to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
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PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiary’s ability to increase its registered capital or distribute profits to us or otherwise expose us or our PRC resident beneficial owners to liability and penalties under PRC law.
SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions. SAFE Circular 37 was issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75. SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February 2015, which took effect on June 1, 2015. This notice has amended SAFE Circular 37 requiring PRC residents or entities to register with qualified banks rather than SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing.
If our shareholders who are PRC residents or entities do not complete their registration as required, our PRC subsidiary may be prohibited from distributing its profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to contribute additional capital to our PRC subsidiary. Moreover, failure to comply with the SAFE registration described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
Currently, to our knowledge, all our 5% or more shareholders are not PRC citizens or residents, however, we cannot assure you whether our other shareholders or beneficial owners will include the PRC residents or entities in the future and whether they will comply with, and make or obtain any applicable registrations or approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to comply with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiary, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiary’s ability to make distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.
Fluctuations in exchange rates could have a material adverse effect on our results of operations and the value of your investment.
Substantially all of our manufacturing and expenditures are denominated in RMB, whereas our reporting currency is the U.S. dollar. As a result, fluctuations in the exchange rate between the U.S. dollar and RMB will affect the relative purchasing power in RMB terms of our U.S. dollar assets and the proceeds from any offering. Our reporting currency is the U.S. dollar while the functional currency for our PRC subsidiary is RMB. Gains and losses from the remeasurement of assets and liabilities that are receivable or payable in RMB are included in our consolidated statements of operations. The remeasurement has caused the U.S. dollar value of our results of operations to vary with exchange rate fluctuations, and the U.S. dollar value of our results of operations will continue to vary with exchange rate fluctuations. A fluctuation in the value of RMB relative to the U.S. dollar could reduce our profits from operations and the translated value of our net assets when reported in U.S. dollars in our financial statements. This could have a negative impact on our business, financial condition or results of operations as reported in U.S. dollars. If we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. In addition, fluctuations in currencies relative to the periods in which the earnings are generated may make it more difficult to perform period-to-period comparisons of our reported results of operations.
There remains international pressure on the PRC government to adopt a flexible currency policy. Any significant appreciation or depreciation of the RMB may materially and adversely affect our revenues, earnings and financial position, and the value of, and any dividends payable on, our ordinary shares in U.S. dollars. For example, to the extent that we need to convert U.S. dollars we receive from our IPO into RMB to pay our operating expenses, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, a depreciation of the RMB against the U.S. dollar may reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the market price of our ordinary shares.
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Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.
Governmental control of currency conversion may limit our ability to utilize our net revenues effectively and affect the value of your investment.
The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. Under our current corporate structure, our company in the Cayman Islands may rely on dividend payments from our PRC subsidiary to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. Therefore, our PRC subsidiary is able to pay dividends in foreign currencies to us without prior approval from SAFE, subject to the condition that the remittance of such dividends outside of the PRC complies with certain procedures under PRC foreign exchange regulation, such as the overseas investment registrations by the beneficial owners of our Company who are PRC residents. But approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders.
Failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.
Xingfa is required under PRC laws and regulations to participate in various government sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of its employees up to a maximum amount specified by the local government from time to time at locations where Xingfa operate its businesses. The requirement of employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations. As of the date of this report, we believe that Xingfa has made employee benefit payments in material aspects. If Xingfa fails to make adequate payments in the future, it may be required by the social security premium collection agency to make or supplement contributions within a stipulated period, and shall be subject to a late payment fine computed from the due date at 0.05% per day; where payment is not made within the stipulated period, the relevant administrative authorities shall impose a fine ranging from one to three times the amount in arrears. If Xingfa is subject to fines in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected.
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Non-compliance with labor-related laws and regulations of the PRC may have an adverse impact on our financial condition and results of operation.
Xingfa has been subject to stricter regulatory requirements in entering into labor contracts with its employees and paying various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of its employees. Pursuant to the PRC Labor Contract Law, or the Labor Contract Law, that became effective in January 2008 and was amended in December 2012 and became effective on July 1, 2013, and its implementing rules that became effective in September 2008, employers are subject to stricter requirements in terms of signing labor contracts, minimum wages, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts. In the event that Xingfa decides to terminate some of its employees or otherwise change its employment or labor practices, the Labor Contract Law and its implementation rules may limit our ability to effect those changes in a desirable or cost-effective manner, which could adversely affect our business and results of operations. We believe Xingfa’s current practice complies with the Labor Contract Law and its amendments. However, the relevant governmental authorities may take a different view and impose fines on us.
As the interpretation and implementation of labor-related laws and regulations are still evolving, our employment practices could violate labor-related laws and regulations in China, which may subject us to labor disputes or government investigations. If Xingfa is deemed to have violated relevant labor laws and regulations, Xingfa could be required to provide additional compensation to its employees and our business, financial condition and results of operations could be materially and adversely affected.
Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.
In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, replacing earlier rules promulgated in March 2007. Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiary of such overseas listed company, and complete certain other procedures. In addition, an overseas entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who have resided in the PRC for a continuous period of not less than one year and who have been granted options or other awards are subject to these regulations. Failure to complete the SAFE registrations may subject them to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiary and limit our PRC subsidiary’s ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law. See “Regulations— Regulations of People’s Republic of China —Employee Stock Incentive Plan.”
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If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.
Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with a “de facto management body” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control over and overall management of the business, productions, personnel, accounts and properties of an enterprise. In April 2009, the State Administration of Taxation issued a circular, known as Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners like us, the criteria set forth in the circular may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of all offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.
We believe none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. See “Taxation—People’s Republic of China Taxation.” However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” As some of our management members are based in or frequently travel to China, it remains unclear how the tax residency rule will apply to our case. If the PRC tax authorities determine that we or any of our subsidiaries outside of China is a PRC resident enterprise for PRC enterprise income tax purposes, then we or such subsidiary could be subject to PRC tax at a rate of 25% on its world-wide income, which could materially reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations. Furthermore, if the PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, gains realized on the sale or other disposition of our ordinary shares may be subject to PRC tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case, subject to the provisions of any applicable tax treaty), if such gains are deemed to be from PRC sources. It is unclear whether non-PRC shareholders of our Company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in our ordinary shares.
Regulatory bodies of the United States may be limited in their ability to conduct investigations or inspections of our operations in China.
From time to time, the Company may receive requests from certain US agencies to investigate or inspect the Company’s operations, or to otherwise provide information. While the Company will be compliant with these requests from these regulators, there is no guarantee that such requests will be honored by those entities who provide services to us or with whom we associate, especially as those entities are located in China. Furthermore, an on-site inspection of our facilities in China by any of these regulators may be limited or entirely prohibited. Such inspections, though permitted by the Company and its affiliates, are subject to the unpredictability of the Chinese enforcers, and may therefore be impossible to facilitate. According to Article 177 of the PRC Securities Law which became effective in March 2020, the securities regulatory authority of the State Council may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region, to implement cross-border supervision and administration and no overseas securities regulator is allowed to directly conduct an investigation or evidence collection activities within the territory of the PRC. Accordingly, without the consent of the competent PRC securities regulators and relevant authorities, no organization or individual may provide the documents and materials relating to securities business activities to overseas parties.
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The Holding Foreign Companies Accountable Act, or the HFCA Act, and the related regulations are evolving quickly. Further implementations and interpretations of or amendments to the HFCA Act or the related regulations, or a PCOAB’s determination of its lack of sufficient access to inspect our auditor, might pose regulatory risks to and impose restrictions on us because of our operations in mainland China. A potential consequence is that our ordinary shares may be delisted by the exchange. The delisting of our ordinary shares, or the threat of our ordinary shares being delisted, may materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct full inspections of our auditor deprives our investors of the benefits of such inspections
The Holding Foreign Companies Accountable Act, or the HFCA Act, was enacted on December 18, 2020. In accordance with the HFCA Act, trading in securities of any registrant on a national securities exchange or in the over-the-counter trading market in the United States may be prohibited if the PCAOB determines it cannot inspect or fully investigate the registrant’s auditor for three consecutive years beginning in 2021, and, as a result, an exchange may determine to delist the securities of such registrant. On June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which, would amend the HFCA Act and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three, thus reducing the time period before our securities may be prohibited from trading or delisted if our auditor is unable to meet the PCAOB inspection requirement. On December 29, 2022, a legislation entitled “Consolidated Appropriations Act, 2023” (the “Consolidated Appropriations Act”), was signed into law by President Biden. The Consolidated Appropriations Act contained, among other things, an identical provision to Accelerating Holding Foreign Companies Accountable Act, which reduces the number of consecutive non-inspection years required for triggering the prohibitions under the HFCA Act from three years to two.
On November 5, 2021, the SEC adopted the PCAOB rule to implement HFCA Act, which provides a framework for the PCAOB to determine whether it is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction.
On December 2, 2021, SEC adopted amendments to finalize rules implementing the submission and disclosure requirements in the HFCA Act. The rules apply to registrants the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB is unable to inspect or investigate (the “Commission-Identified Issuers”). A Commission-Identified Issuer will be required to comply with the submission and disclosure requirements in the annual report for each year in which it was identified. If a registrant is identified as a Commission-Identified Issuer based on its annual report for the fiscal year ended December 31, 2021, the registrant will be required to comply with the submission or disclosure requirements in its annual report filing covering the fiscal year ended December 31, 2022.
On December 16, 2021, the PCAOB issued its determinations (the “Determination”) that they are unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China and in Hong Kong. The Determination includes lists of public accounting firms headquartered in mainland China and Hong Kong that the PCAOB is unable to inspect or investigate completely.
On August 26, 2022, the PCAOB signed a Statement of Protocol with the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China governing inspections and investigations of audit firms based in China and Hong Kong. On December 15, 2022, the PCAOB determined that the PCAOB was able to secure complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong and voted to vacate its previous determinations to the contrary. However, should PRC authorities obstruct or otherwise fail to facilitate the PCAOB’s access in the future, the PCAOB will consider the need to issue a new determination.
The enactment of the HFCA Act and related regulations and any additional actions, proceedings, or new rules resulting from these efforts to increase U.S. regulatory access to audit information could cause investors uncertainty for affected issuers and the market price of our ordinary shares could be adversely affected, and we could be delisted if our auditor is unable to meet the PCAOB inspection requirement.
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The lack of access to PCAOB inspections prevents the PCAOB from fully evaluating audits and quality control procedures of the auditors based in China and Hong Kong. As a result, investors may be deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China and Hong Kong makes it more difficult to evaluate the effectiveness of these accounting firm’s audit procedures and quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections.
Our auditor, Wei, Wei & Co., LLP, an independent registered public accounting firm that is headquartered in the United States, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts inspections to assess its compliance with the applicable professional standards. Our auditor has been inspected by the PCAOB on a regular basis with the last inspection in 2022 and it is not included in the PCAOB Determinations. However, we cannot assure you whether Nasdaq or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach, or experience as it relates to our audit. If it is later determined that the PCAOB is unable to inspect or investigate completely our auditor because of a position taken by an authority in a foreign jurisdiction or any other reasons, the lack of inspection could cause the trading in our securities to be prohibited under the Holding Foreign Companies Accountable Act, and as a result Nasdaq may delist our securities. If our securities are unable to be listed on another securities exchange, such a delisting would substantially impair your ability to sell or purchase our securities when you wish to do so, and the risk and uncertainty associated with a potential delisting would have a negative impact on the price of our ordinary shares. Further, new laws and regulations or changes in laws and regulations in both the United States and China could affect our ability to list our ordinary shares on Nasdaq, which could materially impair the market for and market price for our securities.
Enhanced scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.
The PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of certain taxable assets, including, in particular, equity interests in a PRC resident enterprise, by a non-resident enterprise by promulgating and implementing SAT Circular 59 and Circular 698, which became effective in January 2008, and Circular 698 was abolished and void as of December 1, 2017.
Under Circular 698, where a non-resident enterprise conducts an “indirect transfer” by transferring the equity interests of a PRC “resident enterprise” indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise, being the transferor, may be subject to PRC enterprise income tax, if the indirect transfer is considered to be an abusive use of company structure without reasonable commercial purposes. As a result, gains derived from such indirect transfer may be subject to PRC tax at a rate of up to 10%. Circular 698 also provides that, where a non-PRC resident enterprise transfers its equity interests in a PRC resident enterprise to its related parties at a price lower than the fair market value, the relevant tax authority has the power to make a reasonable adjustment to the taxable income of the transaction.
In February 2015, the SAT issued Circular 7 to replace the rules relating to indirect transfers in Circular 698. Circular 7 has introduced a new tax regime that is significantly different from that under Circular 698. Circular 7 extends its tax jurisdiction to not only indirect transfers set forth under Circular 698 but also transactions involving transfer of other taxable assets, through the offshore transfer of a foreign intermediate holding company. In addition, Circular 7 provides clearer criteria than Circular 698 on how to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. Circular 7 also brings challenges to both the foreign transferor and transferee (or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an “indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity which directly owned the taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise.
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We face uncertainties on the reporting and consequences on future private equity financing transactions, share exchange or other transactions involving the transfer of shares in our Company by investors that are non-PRC resident enterprises. The PRC tax authorities may pursue such non-resident enterprises with respect to a filing or the transferees with respect to withholding obligation and request our PRC subsidiary to assist in the filing. As a result, we and non-resident enterprises in such transactions may become at risk of being subject to filing obligations or being taxed, under Circular 59 and Circular 7, and may be required to expend valuable resources to comply with Circular 59 and Circular 7 or to establish that we and our non-resident enterprises should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.
The PRC tax authorities have the discretion under SAT Circular 59, and Circular 7 to make adjustments to the taxable capital gains based on the difference between the fair value of the taxable assets transferred and the cost of investment. Although we currently have no specific plans to pursue any acquisitions in China or elsewhere in the world, we may pursue acquisitions in the future that may involve complex corporate structures. If we are considered a non-resident enterprise under the PRC Enterprise Income Tax Law and if the PRC tax authorities make adjustments to the taxable income of the transactions under SAT Circular 59 and Circular 7, our income tax costs associated with such potential acquisitions will be increased, which may have an adverse effect on our financial condition and results of operations.
Substantial uncertainties exist with respect to the interpretation and implementation of the newly enacted PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance, business operations and financial results.
On March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which came into effect on January 1, 2020 and replaced the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. However, since it is relatively new, uncertainties still exist in relation to its interpretation and implementation and how it may impact the viability of our current corporate governance and business operations in China and financial results of the Company.
Any change of regulations and rules by Chinese government including the limitations on usage of power, additional environmental protection requirements, moving technology in and out of the PRC or restriction on cash transfer out of PRC may intervene or influence our operations in China at any time and any additional control over offerings conducted overseas and/or foreign investment in issuers with Chinese operations could result in a material change in our business operations and/or the value of our ordinary shares and could also significantly limit or completely hinder our ability to offer our ordinary shares to investors and cause the value of such securities to significantly decline or be worthless.
Our manufacturing facility and operation in China may be intervened or influenced by the new regulations and policies by Chinese government. For example, between July 2 and July 6, 2021, Cyberspace Administration of China, or the CAC, announced cybersecurity investigations of the business operations of certain U.S.-listed Chinese companies. On July 6, 2021, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued “The Opinions on Severely Cracking Down on Illegal Securities Activities According to Law”, or “the Opinions”. The Opinions emphasized the needs to strengthen the administration over illegal securities activities and the supervision over overseas listings by Chinese companies. According to the Opinions, Measures, including promoting the construction of relevant regulatory systems, will be taken to control the risks and manage the incidents from overseas listed Chinese companies.
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On February 17, 2023, the CSRC released the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Enterprises (the “New Overseas Listing Rules”) with five interpretive guidelines, which took effect on March 31, 2023. The New Overseas Listing Rules require Chinese domestic enterprises to complete filings with relevant governmental authorities and report related information under certain circumstances, such as: a) an issuer making an application for IPO and listing in an overseas market; b) an issuer making a subsequent overseas securities offering after having been listed on an overseas market; c) a domestic company seeking an overseas direct or indirect listing of its assets through single or multiple acquisition(s), share swap, transfer of shares or other means. The new rules provide that the determination as to whether a domestic company is indirectly offering and listing securities on an overseas market shall be made on a substance over form basis, and if the issuer meets the following conditions, the offering and listing shall be determined as an indirect overseas offering and listing by a Chinese domestic company: (i) any of the revenue, profit, total assets or net assets of the Chinese domestic entity is more than 50% of the related financials in the issuer’s audited CFS for the most recent fiscal year; and (ii) the senior managers in charge of business operation and management of the issuer are mostly Chinese citizens or with regular domicile in China, the main locations of its business operations are in China or main business activities are conducted in China. Although we are headquartered in Hong Kong with all our executive officers and directors based in Hong Kong who are not Chinese citizens and most of our revenues and profits are generated by our subsidiaries in Hong Kong, it is not certain whether we might be determined by CSRC as a Chinese entity under New Overseas Listing Rules which will require us to file the offering related documents with CSRC.
On December 28, 2021, Cybersecurity Review Measures published by Cyberspace Administration of China or the CAC, National Development and Reform Commission, Ministry of Industry and Information Technology, Ministry of Public Security, Ministry of State Security, Ministry of Finance, Ministry of Commerce, People’s Bank of China, State Administration of Radio and Television, China Securities Regulatory Commission, State Secrecy Administration and State Cryptography Administration, effective on February 15, 2022, which provides that, Critical Information Infrastructure Operators (“CIIOs”) and Online Platform Operators engaging in data processing activities that affect or may affect national security shall be subject to the cybersecurity review by the Cybersecurity Review Office. In addition, CIIOs and Online Platform Operators that possess personal data of at least one (1) million users must apply for a review by the Cybersecurity Review Office, if they plan to conduct listings in foreign countries. Although we are not an CIIO or an Online Platform Operator as defined in the Review Measures, it is not certain whether any future regulations will impose restrictions on the business that we are currently engaging in China, which is manufacturing lockset. As of the date of this report, we have not received any notice from any authorities identifying us as a CIIO, Online Platform Operator or requiring us to undertake a cybersecurity review by the CAC.
On July 23, 2021, General Office of the State Council promulgated “Opinions on Further Reducing Students’ Homework Burden and After-school Tutoring Burden at the Stage of Compulsory Education”, pursuant to which the institutions that offer tutoring of school curriculum shall be registered as non-profit organizations and are not allowed to make profits and raise capital. The new regulation also disallows foreign investment in these institutions through acquisitions, franchise or contractual agreements. Although we only manufacture lockset products in China and do not engage in CIIO, Online Platform Operator or any education or tutoring related business, our stock price may be negatively affected by these new regulations as they have materially negatively affected stock prices of the U.S listed Chinese companies which are the CIIOs, Online Platform Operators or in the tutoring business. Any additional restriction, scrutiny or negative publicity of the U.S.-listed Chinese companies could cause the U.S. investors less interested in our ordinary shares, or completely hinder our ability to offer our ordinary shares to investors and cause the value of such securities to significantly decline or be worthless.
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Furthermore, the PRC government authorities may adopt new rules and regulations and impose additional limitations or restrictions on us based on the industry that we operate in, for example, the “dual control of energy consumption” policy to control the total power consumption and efficiency which has caused disruptions to Xingfa’s production schedule in 2021, or more stringent environmental protection requirements for air emissions, wastewater treatment and solid waste management and disposal which could restrict or limit our operations and expose us to liability and penalties for non-compliance. The new rules or regulations may also impose additional restrictions on us for moving technology in and out of the PRC or restriction on our cash transfer out of PRC from current accounts. Such new rules or actions taken by the PRC government authorities may intervene or influence our operations at any time, which may adversely affect our operations and significantly limit or hinder our ability to offer or continue to offer securities to you and reduce the value of our securities.
Uncertainties regarding the enforcement of laws and the fact that rules and regulations in China can change quickly with little advance notice, along with the risk that the Chinese government may intervene or influence our operations at any time, or may exert more control over offerings conducted overseas and/or foreign investment in China-based issuers could result in a material change in our operations, financial performance and/or the value of our ordinary shares or impair our ability to raise money.
If we become subject to additional scrutiny, criticism and negative publicity involving U.S.-listed China-based companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, securities offering and our reputation and could result in a loss of your investment in our ordinary shares, especially if such matter cannot be addressed and resolved favorably.
Recently, U.S. public companies that have substantial operations in China have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in some cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S.-listed China-based companies has decreased in value and, in some cases, has become virtually worthless. Some of these companies have been subject to shareholder lawsuits and SEC enforcement actions and have conducted internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on us, our business and securities offering. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company. This situation may be a major distraction to our management. If such allegations are not proven to be groundless, our business operations will be severely hindered and your investment in our ordinary shares could be rendered worthless.
Risks Related to Doing Business in Hong Kong.
The Hong Kong legal system embodies uncertainties which could negatively affect our listing on Nasdaq and limit the legal protections available to you and us.
As one of the conditions for the handover of the sovereignty of Hong Kong to China, China had to accept some conditions such as Hong Kong’s Basic Law before its return. The Basic Law ensured Hong Kong will retain its own currency (the Hong Kong Dollar), legal system, parliamentary system and people’s rights and freedom for fifty years from 1997. This agreement has given Hong Kong the freedom to function in a high degree of autonomy. The Special Administrative Region of Hong Kong is responsible for its own domestic affairs including, but not limited to, the judiciary and courts of last resort, immigration and customs, public finance, currencies and extradition. Hong Kong continues using the English common law system.
However, if the PRC reneges on its agreement to allow Hong Kong to function autonomously, this could potentially impact Hong Kong’s common law legal system and may in turn bring about uncertainty in, for example, listing our ordinary shares on Nasdaq Stock Exchange.
This also could materially and adversely affect our business and operation. Additionally, intellectual property rights and confidentiality protections in Hong Kong may not be as effective as in the United States or other countries. Accordingly, we cannot predict the effect of future developments in the Hong Kong legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us, including our ability to enforce our agreements with our customers.
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Any social unrest in Hong Kong may affect our business and financial results.
Hong Kong is a special administrative region of the PRC with its own government. Hong Kong enjoys a high degree of autonomy from the PRC under the principle of “one country, two systems.” However, there can be no assurance that our financial condition and results of operations will not be adversely affected as a consequence of the exercise of PRC sovereignty over Hong Kong. In particular, in 2019 and 2020, there has been a series of large demonstrations in Hong Kong that has adversely affected the business volume and operations of local businesses, airports and public transportation systems. On July 14, 2020, the President of U.S. signed an executive order to end the special status enjoyed by Hong Kong under the United States-Hong Kong Policy Act of 1992. Hong Kong’s position and reputation as an international financial and trade center may be further damaged, and our business may be materially and adversely affected.
We may be affected by the recently effect by the Basic Law Article 23: Safeguarding National Security Ordinance
On March 23, 2024, the Basic Law Article 23: Safeguarding National Security Ordinance took effect. We have accessed the content and believe our business operations in Hong Kong will not be adversely affected by this new law. However, our customers in U.S. and investors may have different point of view on the impact of this new law which could in turn adversely affect our business operations and financial results.
We may be affected by the currency peg system in Hong Kong.
Since 1983, Hong Kong dollars have been pegged to the US dollars at the rate of approximately HK$7.80 to US$1.00. We cannot assure you that this policy will not change in the future. If the pegging system collapses and Hong Kong dollars suffer devaluation, the Hong Kong dollar cost of our expenditures denominated in foreign currency may increase. This would in turn adversely affect the operations and profitability of our business.
It will be difficult to acquire jurisdiction and enforce liabilities against us, our officers, directors and assets based in Hong Kong and China.
Almost all of our assets are located in Hong Kong and China and our officers and directors currently reside outside of the United States and most of them are in Hong Kong. There are currently no treaties or other arrangements providing for reciprocal enforcement of foreign judgments between Hong Kong and the United States. In a common law action for enforcement of a foreign judgment in Hong Kong, the enforcement is subject to various conditions, including but not limited to, that the foreign judgment is a final judgment conclusive upon the merits of the claim, the judgment is for a liquidated amount in a civil matter and not in respect of taxes, fines, penalties, or similar charges, the proceedings in which the judgment was obtained were not contrary to natural justice, and the enforcement of the judgment is not contrary to public policy of Hong Kong. China does not have any treaties or other form of reciprocity with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it may be difficult or not possible for United States investors to enforce their legal rights, to effect service of process upon us, our directors or officers or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties of us, our directors and officers under federal securities laws.
Risks Related to Our Ordinary Shares
Risks Relating to Our Shares
We may fail to meet continued listing requirements on the NASDAQ Capital Market
On January 23, 2025, the Company received a letter from the Nasdaq Stock Market (“Nasdaq”) notifying the Company that, because the closing bid price for the Company’s ordinary shares listed on Nasdaq was below $1.00 for 30 consecutive trading days, the Company no longer meets the minimum bid price requirement for continued listing on Nasdaq under Nasdaq Marketplace Rule 5550(a)(2), which requires a minimum bid price of $1.00 per share (the “Minimum Bid Price Requirement”). In accordance with Nasdaq Marketplace Rule 5810(c)(3)(A), the Company has a period of 180 calendar days from the date of notification, until July 22, 2025 (the “Compliance Period”), to regain compliance with the Minimum Bid Price Requirement. If at any time before the expiration of the Compliance Period the bid price of the Company’s ordinary shares closes at least $1.00 per share for a minimum of 10 consecutive business days, Nasdaq will provide written confirmation of compliance. If the Company does not regain compliance by the end of the Compliance Period, the Company may be eligible for an additional 180 calendar day period to regain compliance. To qualify, the Company will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the bid price requirement, and will need to provide written notice of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary. If the Company meets these requirements, Nasdaq will inform the Company that it has been granted an additional 180 calendar days. However, if it appears to Nasdaq that the Company will not be able to cure the deficiency, or if the Company is otherwise not eligible, Nasdaq will provide notice that the Company’s securities will be subject to delisting.
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Our ordinary shares may be thinly traded and you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares.
Our ordinary shares may be “thinly-traded,” meaning that the number of persons interested in purchasing our ordinary shares at or near bid prices at any given time may be relatively small or non-existent. This situation may be attributable to a number of factors, including the fact that we are relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and might be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. A broad or active public trading market for our ordinary shares may not develop or be sustained.
The market price for our ordinary shares may be volatile.
The market price for our ordinary shares may be volatile and subject to wide fluctuations due to factors such as:
| ● | the perception of U.S. investors and regulators of U.S. listed Chinese companies; |
| ● | actual or anticipated fluctuations in our operating results; |
| ● | changes in financial estimates by securities research analysts; |
| ● | negative publicity, studies or reports; |
| ● | conditions in the international lockset, hardware and real estate markets; |
| ● | our capability to catch up with the technology innovations in the industry; |
| ● | changes in the economic performance or market valuations of other lockset and hardware companies; |
| ● | announcements by us or our competitors of acquisitions, strategic partnerships, joint ventures or capital commitments; |
| ● | addition or departure of key personnel; |
| ● | fluctuations of exchange rates among RMB, HK dollar and the U.S. dollar; and |
| ● | Tariffs, trade war, general economic, health or political conditions in Hong Kong, China and worldwide. |
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In addition, the securities market has from time-to-time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our ordinary shares.
Volatility in our ordinary shares price may subject us to securities litigation.
The market for our ordinary shares may have, when compared to seasoned issuers, significant price volatility and we expect that our share price may continue to be more volatile than that of a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.
In order to raise sufficient funds to enhance operations, we may have to issue additional securities at prices which may result in substantial dilution to our shareholders.
If we raise additional funds through the sale of equity or convertible debt, our current shareholders’ percentage ownership will be reduced. In addition, these transactions may dilute the value of ordinary shares outstanding. We may have to issue securities that may have rights, preferences and privileges senior to our ordinary shares. We cannot provide assurance that we will be able to raise additional funds on terms acceptable to us, if at all. If future financing is not available or is not available on acceptable terms, we may not be able to fund our future needs, which would have a material adverse effect on our business plans, prospects, results of operations and financial condition.
We are not likely to pay cash dividends in the foreseeable future.
We currently intend to retain any future earnings for use in the operation and expansion of our business. Accordingly, we do not expect to pay any cash dividends in the foreseeable future but will review this policy as circumstances dictate. Should we determine to pay dividends in the future, our ability to do so will depend upon the receipt of dividends or other payments from our subsidiaries. Our subsidiaries may, from time to time, be subject to restrictions on their ability to make distributions to us, including restrictions on the conversion of RMB into US dollars or other hard currency and other regulatory restrictions.
You may face difficulties in protecting your interests as a shareholder, as Cayman Islands law provides substantially less protection when compared to the laws of the United States and it may be difficult for a shareholder of ours to effect service of process or to enforce judgements obtained in the United States courts.
Our corporate affairs are governed by our amended and restated memorandum and articles of association and by the Cayman Islands Companies Act (As Revised) (“Companies Act”) and common law of the Cayman Islands. The rights of shareholders to take legal action against our directors and us, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law. Decisions of the Privy Council (which is the final court of appeal for British Overseas Territories such as the Cayman Islands) are binding on a court in the Cayman Islands. Decisions of the English courts, and particularly the Supreme Court of the United Kingdom and the Court of Appeal are generally of persuasive authority but are not binding on the courts of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws as compared to the United States, and provide significantly less protection to investors. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action before the United States federal courts. The Cayman Islands courts are also unlikely to impose liabilities against us in original actions brought in the Cayman Islands, based on certain civil liability provisions of United States securities laws.
Currently, all of our operations are conducted outside the United States, and substantially all of our assets are located outside the United States. All of our directors and officers are nationals or residents of jurisdictions other than the United States and a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.
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As a result of all of the above, our shareholders may have more difficulty in protecting their interests through actions against us or our officers, directors or major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.
We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to United States domestic public companies.
We are a foreign private issuer within the meaning of the rules under the Exchange Act. As such, we are exempt from certain provisions applicable to United States domestic public companies. For example:
| ● | we are not required to provide as many Exchange Act reports, or as frequently, as a domestic public company; |
| ● | for interim reporting, we are permitted to comply solely with our home country requirements, which are less rigorous than the rules that apply to domestic public companies; |
| ● | we are not required to provide the same level of disclosure on certain issues, such as executive compensation; |
| ● | we are exempt from provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information; |
| ● | we are not required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; and |
| ● | we are not required to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction. |
We are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we will file reports on Form 6-K as a foreign private issuer. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.
We are an “emerging growth company” within the meaning of the Securities Act, and if we take advantage of certain exemptions from disclosure requirements available to emerging growth companies, this could make it more difficult to compare our performance with other public companies.
We are an “emerging growth company” within the meaning of the Securities Act, as modified by the JOBS Act. Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
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As an “emerging growth company” under applicable law, we will be subject to reduced disclosure requirements. Such reduced disclosure may make our ordinary shares less attractive to investors.
For as long as we remain an “emerging growth company”, as defined in the JOBS Act, we will elect to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies”, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. Because of these lessened regulatory requirements, our shareholders would be left without information or rights available to shareholders of more mature companies. If some investors find our ordinary shares less attractive as a result, there may be a less active trading market for our ordinary shares and our share price may be more volatile.
Because we are a foreign private issuer and are exempt from certain NASDAQ corporate governance standards applicable to U.S. issuers, you may have less protection than you would have if we were a domestic issuer.
The Nasdaq Listing Rules require listed companies to have, among other things, a majority of its board members be independent. As a foreign private issuer, however, we are permitted to follow home country practice in lieu of the above requirements. On June 23, 2023, the Company has notified Nasdaq that it will follow its home country practice in lieu of the provisions under Rule 5620(a), Rule 5635(a), Rule 5635(c) and Rule 5635(d) of the NASDAQ Stock Market Marketplace Rules (the “Rules”) by relying on the exemption provided for foreign private issuers under Marketplace Rule 5615(a)(3). Rule 5620(a) requires that the Company to hold an annual meeting of shareholders no later than one year after the end of the Company’s fiscal year-end; Rule 5635(a) of the Rules requires shareholder approval for the issuance of securities in connection with the acquisition of the stock or assets of another company; Rule 5635(c) of the Rules requires shareholder approval prior to the issuance of securities when a stock option or purchase plan is to be established or materially amended or other equity compensation arrangement made or materially amended, pursuant to which stock may be acquired by officers, directors, employees; and Rule 5635(d) of the Rules requires shareholder approval prior to an issuance of securities, other than in a public offering, equal to 20% or more of the voting power outstanding at a price less than the lower of: (i) the Nasdaq Official Closing Price (as reflected on Nasdaq.com) immediately preceding the signing of the binding agreement; or (ii) the average Nasdaq Official Closing Price of the common stock (as reflected on Nasdaq.com) for the five trading days immediately preceding the signing of the binding agreement. The corporate governance practice in our home country, the Cayman Islands, does not require the Company to follow or comply with the requirements of Rule 5620(a), Rule 5635(a), Rule 5635(c) and Rule 5635(d). We will comply with other corporate governance requirements of the Nasdaq Listing Rules. However, we may consider following home country practice in lieu of additional requirements under the Nasdaq Listing Rules with respect to certain corporate governance standards in the future which may afford less protection to investors.
We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”
As a public company, we incur legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and NASDAQ Capital Market, impose various requirements on the corporate governance practices of public companies. We are an “emerging growth company,” as defined in the JOBS Act and will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of our initial public offering, (b) in which we have total annual gross revenue of at least $1.235 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our Ordinary Shares that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 in the assessment of the emerging growth company’s internal control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies.
Compliance with these rules and regulations increases our legal and financial compliance costs and makes some corporate activities more time-consuming and costly. After we are no longer an “emerging growth company,” or until five years following the completion of our initial public offering, whichever is earlier, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 and the other rules and regulations of the SEC. For example, as a public company, we have increased the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures to become a public company. We have incurred additional costs in obtaining director and officer liability insurance. In addition, we incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our BOD or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.
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Mr. Bong Lau, our Chairman and CEO will have substantial influence over our Company and their interests may not be aligned with the interests of our other shareholders.
Mr. Bong Lau, our Chief Executive Officer and chairman of the Board beneficially own 70% of the voting power of our total issued and outstanding shares. As a result of their significant shareholding, Mr. Bong Lau, has, substantial influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. He may take actions that are not in the best interests of us or our other shareholders. This concentration of voting power may discourage, delay or prevent a change in control of our Company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the market price of our ordinary shares. These actions may be taken even if they are opposed by our other shareholders.
Our dual-class share structure with different voting rights will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Ordinary Shares may view as beneficial.
We have adopted a dual-class share structure such that our shares consist of Ordinary Shares and Preferred Shares. In respect of matters requiring the votes of shareholders, each Ordinary Share is entitled to one vote and each Series A Preferred Share is entitled to 20 votes. The Series A Preferred Shares may be converted into Ordinary Shares by its holder. We have authorized 50,000,000 Preferred Shares and our Chairman and Chief Executive Officer Mr. Bong Lau, beneficially owns all of the 2,000,000 issued and outstanding Series A Preferred Shares. As a result of this dual-class share structure, the holder of our Series A Preferred Shares will have concentrated control over the outcome of matters put to a vote of shareholders and have significant influence over our business, including decisions regarding mergers, consolidations, liquidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. The holder of Series A Preferred Shares may take actions that are not in the best interest of us or our other shareholders. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could have the effect of depriving our other shareholders of the opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of the Ordinary Share. This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Ordinary Shares may view as beneficial.
We are a “controlled company” within the meaning of the NASDAQ Stock Market Rules and, as a result, may rely on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies.
Because more than 50% of the voting power for the election of our directors are controlled by Mr. Bong Lau, our Chief Executive Officer and Chairman of the board of directors, we are a “controlled company” as defined under Rule 5615(c)(1) of the Nasdaq Listing Rules. As a “controlled company”, we qualify for, exemptions from several of Nasdaq’s corporate governance requirements, including:
| ● | an exemption from the rule that a majority of our board of directors must be independent directors; an exemption from the rule that the compensation of our chief executive officer must be determined or recommended solely by independent directors; and | |
| ● | an exemption from the rule that our director nominees must be selected or recommended solely by independent directors. |
We currently do not intend to rely on the corporate governance exemptions available to “controlled companies”, however, we may choose to rely on such exemptions in the future. Accordingly, to the extent that we may choose to rely on one or more of these exemptions, our shareholders would not be afforded the same protections generally as shareholders of other Nasdaq-listed companies as long as Mr. Bong Lau controls more than 50% of the voting power of our Company and our board determines to rely upon one or more of such exemptions.
Cayman Islands economic substance requirements may have an effect on our business and operations.
Pursuant to the International Tax Cooperation (Economic Substance) Act, 2018 of the Cayman Islands, or the ES Act, that came into force on January 1, 2019, a “relevant entity” is required to satisfy the economic substance test set out in the ES Act. A “relevant entity” includes an exempted company incorporated in the Cayman Islands as is our Company. Based on the current interpretation of the ES Act, we believe that our Company, Intelligent Living Applicant Group Inc., is a pure equity holding company since it only holds equity participation in other entities and only earns dividends and capital gains. Accordingly, for so long as our Company, Intelligent Living Applicant Group Inc., is a “pure equity holding company”, it is only subject to the minimum substance requirements, which require us to (i) comply with all applicable filing requirements under the Companies Act; and (ii) has adequate human resources and adequate premises in the Cayman Islands for holding and managing equity participations in other entities. However, there can be no assurance that we will not be subject to more requirements under the ES Law. Uncertainties over the interpretation and implementation of the ES Act may have an adverse impact on our business and operations.
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| ITEM 4. | INFORMATION ON THE COMPANY |
A. History and Development of the Company
For 40 years, we have manufactured and sold high quality mechanical locksets to customers mainly in the United States and Canada, and we continue to diversify and refine our product offerings to meet our customers’ needs. The predecessor of Hing Fat commenced our business of selling door locksets in 1981. In 1983, we started a small manufacturing workshop in China to produce door locksets with imported materials to fulfill for our customer orders, which becomes our current manufacturing subsidiary, Xingfa. Our mission was “dedicated to manufacture high quality lockset products at affordable prices.”
Since 2000, we have offered our products with the American National Standards Institute (ANSI) Grade 2 and Grade 3 standards, which are developed by Builders Hardware Manufacturing Association (BHMA) for ANSI. Our focus is producing mechanical locksets, including locksets for outdoor uses, such as main entrances and gates, and indoor uses, to promote sustainable growth in our business and competitiveness in the market. To continue driving growth, we have designed our products to go beyond a basic lockset for security purposes; we offer a wide range of ODM door locksets to various customer segments from “Premium Series” to “Economy-oriented Series” with classic to contemporary looks, functions and colors. Currently, our products are sold mainly in the USA, and some in Canada, Macau and China.
We sell our products mainly to the US and Canada (“North America”) through one of our Hong Kong registered subsidiaries Kambo Locksets. Another Hong Kong registered subsidiary, Kambo Hardware, targets and distributes locksets and related hardware to countries other than the North America market and serves our customers in the Asian countries including Thailand and Australia.
In 1993, as the laws and regulations for processing with imported materials entity had changed in China, we established our wholly foreign owned entity (WFOE) subsidiary, Dongguan Xingfa Hardware Products Limited (“Xingfa”) located in Shatian County, Dongguan City, Guangdong Province of PRC. Xingfa is equipped with various types of machines such as die casting machines, furnace, polishing machines and other machines for metal processing in a 17,560 m2 manufacturing facility. In light of excess production capacity due to current economic conditions, Xingfa subleased one plant building of approximately 4,300 m2 to reduce our operating costs.
| ● | We restructured our corporate organization in 2009 and incorporated Hing Fat Industrial Limited under Hong Kong law (“Hing Fat”), as the holding company of Xingfa to manage the door lockset manufacturing activities of Xingfa and to conduct research and development. | |
| ● | On March 26, 2014, Kambo Locksets Limited (“Kambo Locksets”) was incorporated under Hong Kong law. Kambo Locksets is a trading company focusing on marketing and sales of our products in North America market and became our subsidiary as a result of reorganization. | |
| ● | On February 25, 2015, Kambo Hardware Limited (“Kambo Hardware”) was incorporated under Hong Kong law. Its primary business is to sell our products to markets outside of the North America. | |
| ● | Bamberg (HK) Limited (“Bamberg”) was incorporated on June 24, 2016 under Hong Kong law. Through Bamberg, we started marketing our products under our own brand “Bamberg” to establish and focus on internet sales channels, such as Amazon.com. | |
| ● | On July 17, 2019, the Company issued 500,000,000 ordinary shares to its shareholders. On August 14, 2019, these shareholders surrendered an aggregate of 499,990,000 ordinary shares to the Company at no consideration. The transaction is considered as a recapitalization prior to the Company’s initial public offering. | |
| ● | A reorganization of the Company’s legal entity structure was completed in April 2020. The reorganization involved the incorporation of ILAG in July 2019 and execution of the Share Exchange Agreement between ILAG and ILA BVI in April 2020 (the “Share Exchange Agreement”) whereby ILAG took control of ILA BVI and its wholly owned subsidiaries by acquiring all the outstanding shares of ILA BVI with ordinary shares of ILAG. Pursuant to the Share Exchange Agreement, ILAG and ILA BVI exchanged 2,550,000 shares of ILA BVI for 12,990,000 ordinary shares of ILAG. This transaction was treated as a recapitalization of the Company and the financial statements give retroactive effect to this transaction. |
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| ● | On July 16, 2021, the BOD and Shareholders of the Company approved the Amended and Restated Memorandum and Articles of Association of the Company and our authorized share capital currently is $50,000 divided into 500,000,000 shares, comprising of (i) 450,000,000 ordinary shares, par value of $0.0001 each; and (ii) 50,000,000 preferred shares, par value of $0.0001 each. | |
| ● | On July 17, 2019, Intelligent Living Application Group Inc. was established as a holding company and it is a Cayman Islands exempted company limited by shares and were incorporated as an offshore holding company for listing purposes and for further expansion flexibility. Intelligent Living Application Group Inc. owns 100% of the equity interest in Intelligent Living Application Group Limited, which was incorporated on March 19, 2014 under the laws of British Virgin Islands (“BVI”). | |
| ● | Through Intelligent Living Application Group Limited in BVI, we own 100% of the equity interest in Hing Fat, Kambo Locksets, Kambo Hardware and Bamberg, and through Hing Fat, we own 100% of the equity interest in Xingfa. |
The Company has subsidiaries in countries and jurisdictions including PRC and Hong Kong. Details of the subsidiaries and VIE of the Company are set out below:
| Name of Entity | Date of Incorporation | Place of Incorporation | % of Ownership | Principal Activities | ||||
| Intelligent Living Application Group Inc. | July 2019 | Cayman Islands | 100 | Holding company | ||||
| Intelligent Living Application Group Limited | March 2014 | BVI | 100 | Intermediate holding company | ||||
| Kambo Locksets Limited | March 2014 | Hong Kong | 100 | Trading company | ||||
| Kambo Hardware Limited | February 2015 | Hong Kong | 100 | Trading company | ||||
| Bamberg (HK) Limited | June 2016 | Hong Kong | 100 | Sales of self branded products | ||||
| Hing Fat Industrial Limited | March 2009 | Hong Kong | 100 | Holding Company | ||||
| Dongguan Xingfa Hardware Products Co. Ltd. | August 1993 | PRC | 100 | Manufacturing |
On July 15, 2022, the Company closed its IPO of 5,060,000 ordinary shares, par value $0.0001 per share, at $4.00 per share. The gross proceeds from the IPO were $20.24 million, before deducting underwriting discounts and other related expenses. The ordinary shares of the Company began trading on The Nasdaq Capital Market on July 13, 2022 under the ticker symbol “ILAG.”
On October 12, 2022 (the “Effective Date”), Hing Fat Industrial Limited and Dongguan Xingfa Hardware Products Co., Ltd. (“Buyer”) entered into an Asset Purchase Agreement (the “Agreement”) with Hu Xiongjie, a citizen of Singapore (the “Seller”), pursuant to which the Seller agreed to sell to the Buyer an electroplating production line, including but not limited to equipment, machinery, tanks, fixtures, flowlines, improvements and mixed property located in Dongguan City, Guangdong, China (the “Asset”) for $4,500,000 in cash. The Seller’s clientele details, books, accounting records and liabilities are excluded from this transaction. Pursuant to the Agreement, Buyer shall pay a refundable deposit of $2,000,000 on Effective Date and Buyer shall check operational conditions and access the value of the Asset at current market rate within ten (10) days of the Effective Date, and if Buyer accepts the Purchase Price, an intermediate payment of $1,000,000 shall be then paid. Upon closing, Buyer shall pay Seller an additional amount of $1,000,000. A residual of $500,000 shall be held by the Buyer for one (1) year from closing date as quality guarantee for possible tax liabilities, defects or required repair(s) of the Asset. The balance of Purchase Price shall be paid after deduction of costs of repairment related to unidentified defects or problems with the Asset at transfer date. As of the date of this report, the Buyer has paid all $4,500,000 to the Seller.
On February 6, 2025, the Board of Directors (the “Board”) of the Company, pursuant to the Articles of Association of the Company, designated 2,000,000 Preferred Shares of the Company as series A preferred shares of the Company, par value US$0.0001 each (“Series A Preferred Shares” or the “Subject Shares”), with the following terms:
I. Voting Right: At any general meeting, (i) on a show of hands every holder of the Subject Shares present in person (or being a corporation, is present by a duly authorized representative), or by proxy shall have twenty (20) votes for every fully paid Subject Share, and (ii) on a poll every holder of the Subject Shares present in person or by proxy or, in the case of a holder being a corporation, by its duly authorized representative shall have twenty (20) votes for every fully paid Subject Share; and
II. each Series A Preferred Share is convertible into one (1) ordinary share of the Company, par value $0.0001 (“Ordinary Share”) at any time at the option of the holder thereof. The right to convert shall be exercisable by the holder of the Series A Preferred Share delivering a written notice to the Company that such holder elects to convert a specified number of Series A Preferred Share into Ordinary Shares. In no event shall Ordinary Shares be convertible into Series A Preferred Shares; and
III. upon any sale, transfer, assignment or disposition of any Series A Preferred Share by such shareholder of the Company to any person who is not an affiliate of such shareholder, or upon a change of control of any Series A Preferred Share to any person who is not an affiliate of the registered shareholder of such share, as determined by the Board, such Series A Preferred Share shall be automatically and immediately converted into one Ordinary Share (the “Automatic Conversion”). For the avoidance of doubt, (i) a sale, transfer, assignment or disposition shall be effective upon the Company’s registration of such sale, transfer, assignment or disposition in the register of members of the Company; and (ii) the creation of any pledge, charge, encumbrance or other third party right of whatever description on any Series A Preferred Share to secure a holder’s contractual or legal obligations shall not be deemed as a sale, transfer, assignment or disposition unless and until any such pledge, charge, encumbrance or other third party right is enforced and results in the third party holding legal title to the relevant Series A Preferred Shares, in which case all the relevant Series A Preferred Shares shall be automatically converted into the same number of Ordinary Shares; and
IV. other than the Automatic Conversion, any conversion of Series A Preferred Shares into Ordinary Shares by a holder thereof (the “Conversion Shareholder”) shall be effected by means of the repurchase of each relevant Series A Preferred Share for cancellation and allotting and issuance of an Ordinary Share, credited as fully paid (the “Ordinary Conversion”). Both the Automatic Conversion and the Ordinary Conversion shall become effective forthwith upon the Register of Members being updated; and
V. all other rights of the Subject Shares will be the same as the Ordinary Shares and any other Preferred Shares.
On February 19, 2025 (the “Grant Date”), the Compensation Committee (“Committee”) of the Board of Directors (the “Board”) of the Company granted stock awards of ordinary shares of the Company, par value $0.0001 (the “Ordinary Shares”), pursuant to the Company’s 2022 Omnibus Equity Plan, to certain officers and employees of the Company and its subsidiaries (the “Grantees”), including: 400,000 Ordinary Shares to Wynn Hui, Chief Technical Officer and a director of the Company, 400,000 Ordinary Shares to Bun Lau, Chief Operating Officer and a director of the Company, 400,000 Ordinary Shares to Errol Hui, Vice President of Engineering of the Company, 100,000 Ordinary Shares to Frederick Wong, Chief Financial Officer of the Company, 80,000 Ordinary Shares to Wei Zhong, Vice President of Finance of the Company as well as 40,000 Ordinary Shares to each of the independent directors of the Company, namely Monique Ho, Chun Fai (Kenneth) Liu, Carina Chui and Henry Yeung. On the Grant Date, the Committee and the Board also granted 2,000,000 Series A Preferred Shares, par value US$0.0001 to Mr. Bong Lau, the Chief Executive Officer and Chairman of the Board and each Series A Preferred Share is entitled to twenty (20) votes (collectively, the “Grants”). The Grants vested immediately on the Grant Date and each of the grantees also entered into an Unrestricted Stock Award Agreement with the Company on February 19, 2025.
Our principal executive offices are located at Unit 2, 5/F, Block A, Profit Industrial Building, 1-15 Kwai Fung Crescent, Kwai Chung, New Territories, Hong Kong. Our telephone number at this address is +852 2481 7938. Our registered office in the Cayman Islands is located at Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman, KY1-1111. Our agent for service of process in the United States is Cogency, located at 122 East 42nd Street, 18th Floor, New York, NY 10168, United States. Investors should contact us for any inquiries through the address and telephone number (852) 2481-7938 of our principal executive offices.
The SEC maintains a web site at www.sec.gov that contains reports and other information regarding issuers that file electronically with the SEC using its EDGAR system.
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See “Item 5. Operating and Financial Review and Prospects — B. Liquidity and Capital Resources — Capital Expenditures” for a discussion of our capital expenditures.
B. Business Overview
Our mission is to make life safer and smarter by designing and producing affordable, high-quality locksets and smart security systems.
Headquartered in Hong Kong, we manufacture and sell high quality mechanical locksets to customers mainly in the United States (US) and Canada and have continued to diversify and refine our product offerings in the past 40 years to meet our customers’ needs. We believe Xingfa is one of the pioneers of mechanical lockset manufacturing in China. Since inception, to cope with our development and increase customer satisfaction in quality, we keep investing in self-designed automated product lines, new craftsmanship and developing new products including smart locks. In order to obtain the confidence of our customers, Xingfa has obtained the ISO9001quality assurance certificate.
Starting in 2000, we offer products that comply with the American National Standards Institute (ANSI) Grade 2 and Grade 3 standards that are developed by the Builders Hardware Manufacturing Association (BHMA) for ANSI. Our focus in producing mechanical locksets - including locksets for outdoors (such as main entrances and gates) and indoors - has resulted in sustainable growth in our business and raised our competitiveness. To maintain our growth, our products are beyond a simple lockset for security purposes, we offer a wide range of Original Design Manufacturer (“ODM”) door locksets to various customer segments from “Premium Series” to “Economy-oriented Series” with classic to contemporary looks, functions and colors.
To meet increasing consumer needs for smart locks and smart home products, Hing Fat has been researching and developing smart locks in the past couple years. Most of our research and development on smart locks have been done internally by our technician and engineers, except that Hing Fat hired outside services for approximately $25,000 in 2017. Because of tariff war and outbreak of COVID-19, we did not further progress on the software for our smart locks until early 2023. Since then, we have reinitiated the process to develop devices and software applications for our smart locks. On March 6, 2025, the Company announced the launch of its Competitive Smart Lock and the first batch of new smart locks has been shipped to the United States and will be available in its online store at Amazon.com soon.
Currently, approximately 99% of our revenues are from products sold to the US market, and the remaining products are sold to Canadian market. We build our distribution network by working together with our large and small business partners in different geographic areas to sell our products. More information about geographical penetration of our revenues can be found in “Segment reporting in Note 3 of Notes to the Consolidated Financial Statements”.
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Our Products
We produce various ODM indoor and outdoor locksets mainly for importers, builders and the construction market in the USA. Since 2016, we market our self-branded products, Bamberg, in South-east Asia. In addition, we are selling our self-branded products through reputable online shops.
| ● | Locksets functions |
Mechanical locksets are mechanical devices which secure an opening by keeping a door closed until a release mechanism is activated. It can be a lever, knob, key, thumb-turn or button. Mechanical locksets are very common on exterior/interior doors in residential and multi-family applications. There are several types of mechanical locksets, and the most common functions for mechanical locksets are as follows:
| ● | Deadbolts – are used for front doors and doors which may require an additional security from a deadbolt, combined in a lockset with one of the functions above. It can be locked by a thumb-turn from the inside or by a key from the outside. |
| ● | Entry locksets – are used for bedrooms, front doors, and back doors. It can be locked by a thumb-turn from the inside or by a key from the outside. |
| ● | Privacy locksets – are used for restrooms or dressing rooms. It can be locked from the inside with a thumb turn for privacy, and it can be unlocked from the outside using a tool, a screwdriver for example, rather than a key. |
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| ● | Passage locksets – are used where doors do not need to lock. There is no key and no lock function. |
| ● | Storeroom locks – are used for storerooms. It should always be locked from the outside and a key is used to open the door. When the key is removed, the door is locked from the outside again. There is no lock/unlock the door from the inside. |
Our Customized Keying Options
One of our value propositions is the ability to customize the keys for our door locksets based on specific customer requests. Below is a summary of our various professional custom-made keying options applicable to our products:
| ● | Types of Keying Options |
The term “keying” refers to the way keys will be used to operate the cylinders that are installed in the door locksets. Keys can be assigned to different groups that will and will not open the cylinders. Keying determines which keys work at each opening. A cylinder will contain a certain number of pins generally ranging from 5 pins or more. The pins vary in height. This variation in height and the cuts on the key can generate different keying combinations. It can provide access to the cylinder to lock or unlock the locksets.
| ● | Keyed Different (KD) |
Each cylinder is keyed different. It means that each lock is operated by a unique key. A key used at one door cannot be used to open other doors.
| ● | Keyed Alike (KA) |
Each cylinder is keyed alike. It means that every lock can be opened by the same key. This is useful in an area where a limited number of keys is required, such as a residential unit area with storage closets or common rooms that only need one key combination.
| ● | Master Keyed (MK) |
Each cylinder has its own individual key which cannot open other locksets in the system and all locksets in the system can be opened by one master key. A master keyed system is useful where someone requires a higher level of access authority, such as the building owner.
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| ● | Construction Keyed (CK) |
A construction key is needed when contractors need entry to a building during construction. When new homes are under construction, a contractor will provide a general key to carpenters, painters, and other contractors. This allows easy access to several homes without requiring different keys, and prevents duplication and later entry into the homes once a homeowner moves in. Once construction is complete, the owner’s keys will block further access by the contractors. The following diagram shows how it works.
Smart Lock
We launched our Smart Lock in March 2025 and the first batch of new smart locks has been shipped to the United States and will be available in its online store at Amazon.com soon. The innovative features and benefits of the new smart lock include:
| ● | Advanced Security: Encryption and multiple authentication methods ensure robust protection. | |
| ● | Convenience: Remote access and seamless integration with smartphones. | |
| ● | Aesthetic Appeal: Sleek design that complements various home décors. |
Our Suppliers
In past years, our primary raw materials are brass, iron and zinc alloy. We started to use stainless steel to partially substitute brass from the second half of 2021. And we managed to replace substantial usage of brass with stainless steel since 2023. Raw materials by weight of our locksets basing on bill of materials and actual weighting, approximately 58% are iron, 30% are zinc alloy, 1% are brass and 11% are stainless steel for the year ended December 31, 2024 while approximately 50% are iron, 38% are zinc alloy, 1% are brass and 11% are stainless steel for for 2023. We don’t have long term purchase contracts with our suppliers but only purchase via orders. For procurement purpose, management will get master quote from at least two suppliers for every three (3) months. Management will bargain purchase price by taking into account price trends of brass, iron, zinc alloy, and stainless-steel commodity and quantity volume discount. Xingfa has purchased approximately 5 tonnes brass, 525 tonnes iron, 276 tonnes zinc alloy and 100 tonnes stainless steel for the year ended December 31, 2024, while approximately 11 tonnes brass, 490 tonnes iron, 373 tonnes zinc alloy and 103 tonnes stainless steel for the year ended December 31, 2023.
Xingfa purchased iron from three Chinese suppliers in Guangdong province in year 2024.
Xingfa purchased zinc alloy from two suppliers. One supplier ships zinc alloy from Shanghai and Dongguan while one Hong Kong supplier ships them from Shenzhen in 2024.
Xingfa purchased brass from various subsidiaries of one supplier in Dongguan and Shanghai in 2024.
Xingfa purchased stainless steel from two suppliers in Guangdong province in 2024.
We have business relationships with our iron, zinc alloy and brass suppliers for over 5 years. Some of them are public companies or subsidiaries of public companies listed on Shanghai, Shenzhen or Hong Kong Stock Exchanges and the supplies and availabilities of our raw materials have never been an issued for us in the past. Also, all of our primary raw materials are general commercial commodities. For 2024, total global production of: (i) brass is approximately 23 million tonnes; (ii) iron is approximately 2.5 billion tonnes and (iii) zinc alloy is approximately 12.5 million tonnes; (iii) stainless steel is approximately 60 million tonnes. There are numbers of suppliers in China of our raw materials. Therefore, even our existing suppliers may be temporarily short in inventory, we can place purchase order to other suppliers without difficulty and price premium.
Intellectual Property
We regard our trademarks, domain names, know-how, proprietary technologies and similar intellectual property as critical to our success, and we rely on trademark and trade secret law and confidentiality and invention assignment with our employees and others to protect our proprietary rights.
We mostly rely on our know-how for production processes. Currently, Bamberg (HK) Limited has one registered trademark for Bamberg in the U.S. and one registered trademark for Bamberg in Hong Kong, which are utilized for our self-branded products, and the Company has one trademark of ILAG in Hong Kong as our group holding company logo for our general company image and marketing purpose. In addition, we and our subsidiaries have three registered domain names in Hong Kong, namely i-l-a-g.com, kambo.com.hk and bamberggroup.com.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our intellectual properties. Monitoring unauthorized use of our intellectual properties is difficult and costly, and we cannot be certain that the steps we have taken will prevent misappropriation of our intellectual properties. From time to time, we may have to resort to litigation to enforce our intellectual property rights, which could result in substantial costs and diversion of our resources.
In addition, third parties may initiate litigation against us alleging infringement of their proprietary rights or declaring their non-infringement of our intellectual property rights. In the event of a successful claim of infringement and our failure or inability to develop non-infringing technology or license the infringed or similar technology on a timely basis, our business could be harmed. Moreover, even if we are able to license the infringed or similar technology, license fees could be substantial and may adversely affect our results of operations.
See “Risk Factors—Risks Related to Our Business—We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.” and “—We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.”
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Competition
We face competition from worldwide brands such as Kwiksets, Schlage, and other domestic manufacturers in Hong Kong and China. The Company positions its products as affordable high-quality mechanical Grade 2 and Grade 3 locksets. In Asia, there are only a few manufacturers in China and South-east Asia that are capable of competing with us on such products.
Mechanical lockset companies have been consolidating in the last decade (see table: Competitive Landscaping, below). Sizable multinational companies keep expanding by acquiring or merging with other lockset companies. Currently, the major player in the world is ASSA Abloy AB (ASSA B: STO), a Swedish conglomerate that sells cover products and services ranging from locks, doors, gates and entrance automation, which owns brands such as Abloy, Yale Mul-T-Lock and Medeco. Other well-known brands including Kwikset by the Hardware and Home Improvement (HHI), division of ASSA ABLOY (STO: AAY.ST), Schlage by Allegion PLC (NYSE: ALLE), Defiant by Home Depot (NYSE: HD), and Delaney Hardware in Cumming, USA. The PRC market is fragmented because various international lockset standards are all applicable in China. Thus, various brands of locksets all compete in PRC which makes the Chinese lockset market highly competitive.
We mostly compete with manufacturing subsidiaries and factories of those worldwide brands on product quality as well as the manufacturers in China on price. The key for our sustainability is to maintain high quality, fine craftsmanship and procurement at affordable prices. In additional, high capital expense for building a new locket manufacturing facility and our longtime created reputation set up barriers of entry by new players.
Our Competitive Strengths
We have four decades of experience in mechanical lockset manufacturing. This gave us the ability to design our own automated production lines to meet our customers’ needs effectively and efficiently. Xingfa is few of manufacturers who is able to finish complicated stamping and casting with few machineries by optimizing production progresses. We are currently offering 108 basic designs of various locksets in our product catalogue (see “Our Products” for sample images) and we also have many other designs stored in the library of engineering department of Hing Fat, all of which enable us to provide our customers with products of many varieties with different functions, outlooks and colors. We have accumulated extensive design and production know-hows of our lock core in the past thirty years. Our experience and expertise in the design of mechanical locksets helps us expand our product lines and quickly respond to the changes of market trends and demands of our customers.
To comply with stringent requirements of U.S. standards, Xingfa has obtained ISO9000 certificate, and its manufacturing facility has been reviewed and audited by U.S. customers from time to time for compliance of social responsibility about labor welfare and safety, environmental protection and other requirements from such customers. To serve our customers better, Xingfa has equipped with professional keying machineries which is a very niche service being provided by lockset manufacturers in China and Asia Pacific region. In Asia, we only have a few peer competitors in China and South-east Asia due to high capital expense requirement for the manufacturing facility and professional know-hows of the products and industry.
We have launched research in smart locks functions, communication protocols, available designs and suppliers of electronic parts in the market as a part of our R & D process of smart lock products. Our in-depth knowledge in lockset mechanics makes it easier for us to enter into smart locks market by incorporating relevant electronic parts into our locksets after we develop the software system. We launched our first smart lock product in March 2025. In additional, our long relationship with our customers makes it quicker for us to introduce new products including future smart locks to the market.
With our years of operational history, Xingfa has built a loyal and experienced work force and manufacturing management, which can drive manufacturing facility expansion without additional talent. Along with long-term relationships with reputable customers and recent access to e-commerce channels, we believe we are able to attract customers with our new products.
Regulations
Regulations of People’s Republic of China
This section sets forth a summary of the most significant rules and regulations that affect our business activities in China through our wholly owned subsidiary Xingfa.
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Regulations Relating to Foreign Investment
Negative List of Industries for Foreign Investment
Investment activities in the PRC by foreign investors were principally governed by the Guidance Catalogue of Industries for Foreign Investment, or the Guidance Catalog, which was promulgated and is amended from time to time by the Ministry of Commerce, or MOFCOM, and the National Development and Reform Commission, or NDRC. The Guidance Catalog lays out the basic framework for foreign investment in China, classifying businesses into three categories with regard to foreign investment: “encouraged,” “restricted” and “prohibited.” Industries not listed in the catalog are generally deemed as falling into a fourth category “permitted” unless specifically restricted by other PRC laws. The NDRC and the MOFCOM promulgated the Special Administrative Measures (Negative List) for Foreign Investment Access (2021 Edition) (the “2021 National Negative List”) and the Special Administrative Measures (Negative List) for Foreign Investment Access in Pilot Free Trade Zones (2021 Edition) (the “2021 FTZ Negative List”) (collectively the “2021 Negative Lists”) on December 27, 2021, which took effect on January 1, 2022. Industries listed on the 2021 Negative Lists are divided into two categories: restricted and prohibited. Industries not listed on the 2021 Negative Lists are generally deemed as constituting a third “permitted” category. The establishment of wholly foreign-owned enterprises is generally allowed in permitted industries. Some restricted industries are limited to equity or contractual joint ventures, while in some cases, Chinese partners are required to hold the majority interests in such joint ventures. In addition, projects falling under the restricted category are subject to higher-level government approvals. Foreign investors are not allowed to invest in industries in the prohibited category. Industries not listed in the Negative List are generally open to foreign investment unless specifically restricted by other PRC regulations. Any domestic enterprise engaging in businesses prohibited by the 2021 Negative Lists that lists, issues securities and trades shares overseas must obtain pre-approval consent from relevant competent regulator; overseas investors must not engage in the operation and management of the enterprise, and the percentage of foreign shareholding is subject to the relevant provisions in the administrative measures for domestic securities investments by foreign investors.
To comply with PRC laws and regulations, we rely on equity investment with our WFOE subsidiary to operate our business in China. See “Risk Factors—Risks Related to Our Corporate Structure—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of securities offering to make loans to or make additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”
Foreign Investment Law
On March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which became effective on January 1, 2020 and replace three existing laws on foreign investments in China, namely, the PRC Equity Joint Venture Law, the PRC Cooperative Joint Venture Law and the Wholly Foreign-owned Enterprise Law, together with their implementation rules and ancillary regulations. Furthermore, the Implementing Regulations of the Foreign Investment Law of the PRC, or the Implementing Regulations of FIL, was promulgated on December 26, 2019 and became effective on January 1, 2020. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic invested enterprises in China. The Foreign Investment Law establishes the basic framework for the access to, and the promotion, protection and administration of foreign investments in view of investment protection and fair competition.
According to the Foreign Investment Law and the Implement the Implementing Regulations of FIL, “foreign investment” refers to investment activities directly or indirectly conducted by one or more natural persons, business entities, or otherwise organizations of a foreign country (collectively referred to as “foreign investor”) within China, and the investment activities include the following situations: (i) a foreign investor, individually or collectively with other investors, establishes a foreign-invested enterprise within China; (ii) a foreign investor acquires stock shares, equity shares, shares in assets, or other like rights and interests of an enterprise within China; (iii) a foreign investor, individually or collectively with other investors, invests in a new project within China; and (iv) investments in other means as provided by laws, administrative regulations, or the State Council.
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The NDRC and the MOFCOM promulgated the Special Administrative Measures (Negative List) for Foreign Investment Access (2021 Edition) (the “2021 National Negative List”) and the Special Administrative Measures (Negative List) for Foreign Investment Access in Pilot Free Trade Zones (2021 Edition) (the “2021 FTZ Negative List”) (collectively the “2021 Negative Lists”) on December 27, 2021, which took effect on January 1, 2022. Compared to the last Special Administrative Measures for Market Access of Foreign Investment (Negative List) promulgated by the NDRC and the MOFCOM in June 2020, the 2021 Negative Lists cuts down the number of items restricted or prohibited to foreign investors from 33 to 31, widening access to more industries and fields. However, the 2021 Negative Lists prescribe that any domestic enterprise engaging in businesses prohibited by the Negative Lists that lists, issues securities and trades shares overseas must obtain pre-approval consent from relevant competent regulator; overseas investors must not engage in the operation and management of the enterprise, and the percentage of foreign shareholding is subject to the relevant provisions in the administrative measures for domestic securities investments by foreign investors. The Foreign Investment Law provides that foreign invested entities operating in foreign restricted or prohibited industries will require market entry clearance and other approvals from relevant PRC governmental authorities. The current industry entry clearance requirements governing investment activities in the PRC by foreign investors are set out in 2021 Negative Lists.
Furthermore, the Foreign Investment Law provides that foreign invested enterprises established according to the existing laws regulating foreign investment may maintain their structure and corporate governance within five years after the implementing of the Foreign Investment Law.
In addition, the Foreign Investment Law also provides several protective rules and principles for foreign investors and their investments in the PRC, including, among other things, that local governments shall abide by their commitments to the foreign investors; foreign-invested enterprises are allowed to issue stocks and corporate bonds; except for special circumstances, in which case statutory procedures shall be followed and fair and reasonable compensation shall be made in a timely manner, expropriation or requisition of the investment of foreign investors is prohibited; mandatory technology transfer is prohibited; and the capital contributions, profits, capital gains, proceeds out of asset disposal, licensing fees of intellectual property rights, indemnity or compensation legally obtained, or proceeds received upon settlement by foreign investors within China, may be freely remitted inward and outward in RMB or a foreign currency. Also, foreign investors or the foreign investment enterprise should be subject to legal liabilities for failing to report investment information in accordance with the requirements.
Regulations on Intellectual Property Rights
The PRC has adopted comprehensive legislation governing intellectual property rights, including copyrights, patents, trademarks and domain names.
Copyright. Copyright in the PRC, including copyrighted software, is principally protected under the Copyright Law of the PRC promulgated in February 2010 which took effect in April 2010 (the “Copyright Law”) which has been amended by SCNPC on November 11, 2020 and became effective on June 1, 2021, and related rules and regulations. Under the Copyright Law, the term of protection for copyrighted software of legal persons is 50 years and ends on December 31 of the 50th year from the date of first publishing of the software.
Patent. The Patent Law of the PRC promulgated in December 2008, which became effective in October 2009 and recently has been amended by SCNPC on October 17, 2020 and became effective on June 1, 2021, provides for patentable inventions, utility models and designs. An invention or utility model for which patents may be granted shall have novelty, creativity and practical applicability. The State Intellectual Property Office under the State Council is responsible for examining and approving patent applications. The protection period is 20 years for inventions and 10 years for utility models and designs, all of which commence from the date of application of patent rights under current Patent Law of the PRC. The protection period has been slightly amended in recent amendment which became effective on June 1, 2021. The terms of protection for invention and utility patents will still be 20 years and 10 years, respectively, in general. The term of protection for a design patent will be extended from 10 years to 15 years. In addition, for invention patents, in case it is only granted after 4 years or more from its filing date or 3 years or more after a request for substantive examination date, the applicant can request for an extension of protection term for any unreasonable delay.
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Trademark. The Trademark Law of the PRC promulgated in August 2013 which took effect in May 2014 (the “Trademark Law”) and it was last amended on April 23, 2019 and the amendments became effective on November 11, 2019. Its implementation rules protect registered trademarks. The Trademark Office of National Intellectual Property Administration, PRC, formerly the PRC Trademark Office of the State Administration of Market Regulation is responsible for the registration and administration of trademarks throughout the PRC. The Trademark Law has adopted a “first-to-file” principle with respect to trademark registration. The validity period of registered trademarks is 10 years from the date of approval of trademark application, and may be renewed for another 10 years provided relevant application procedures have been completed within 12 months before the end of the validity period.
Domain Name. Domain names are protected under the Administrative Measures for the Internet Domain Names of the PRC promulgated by the Ministry of Industry and Information Technology of the PRC effective on December 20, 2004 and the Administrative Measures for Internet Domain Names promulgated by Ministry of Industry and Information Technology (“MIIT”), effective on November 1, 2017 (the “Domain Name Measures”). MIIT is the major regulatory body responsible for the administration of the PRC internet domain names. The Domain Names Measures has adopted a “first-to-file” principle with respect to the registration of domain names.
Regulations on Environmental Protection and Work Safety
Regulations on Environmental Protection
Pursuant to the Environmental Protection Law of the PRC promulgated by the Standing Committee of the National People’s Congress (“SCNPC”) on December 26, 1989, amended on April 24, 2014 and effective on January 1, 2015, any entity which discharges or will discharge pollutants during the course of its operations or other activities must implement effective environmental protection safeguards and procedures to control and properly treat waste gas, waste water, waste residue, dust, malodorous gases, radioactive substances, noise vibrations, electromagnetic radiation and other hazards produced during such activities. The preparation of relevant development and utilization plans and the construction of the projects having impact on environment shall be subject to environmental impact assessment in accordance with the law. Furthermore, the enterprises and business operators on which the management system for the pollutants discharge permit and registration is implemented shall discharge pollutants according to their respective pollutants discharge permits or registrations and shall not discharge pollutants without obtaining a pollutants discharge permit or registration.
Environmental protection authorities impose various administrative penalties on persons or enterprises in violation of the Environmental Protection Law. Such penalties include warnings, fines, orders to rectify within the prescribed period, orders to cease construction, orders to restrict or suspend production, orders to make recovery, orders to disclose relevant information or make an announcement, imposition of administrative action against relevant responsible persons, and orders to shut down enterprises. Any person or entity that pollutes the environment resulting in damage could also be held liable under the Civil Code of PRC. In addition, environmental organizations may also bring lawsuits against any entity that discharges pollutants detrimental to the public welfare. In addition, on May 28, 2020, National People’s Congress promulgated the Civil Code of PRC, which took effective on January 1, 2021, to replace the PRC Inheritance Law, Adoption Law, PRC Contract Law, the General Principles of the Civil Law of the PRC, the PRC Marriage Law, the PRC Guarantee Law, the PRC Property Law and the PRC Tort Liability Law. Seven parts are introduced in the Civil Code of PRC, including General Part, Right in Rem, Contracts, Personality Rights, Marriage and Family, Inheritance, Tort Liability.
The Law of the PRC on the Prevention and Control of Occupational Diseases, or the Occupational Diseases Prevention Law, promulgated by the SCNPC on October 27, 2001, became effective on May 1, 2002, and latest amended on December 29, 2018 is applicable to activities for the prevention and control of diseases contracted by the workers due to their exposure in the course of work to dust, radioactive substances and other toxic and harmful substances. Pursuant to the Occupational Diseases Prevention Law, the employer shall strictly abide by the national occupational health standards and implement the measures for occupational disease prevention and control in accordance with laws and regulations. Violation of the Occupational Diseases Prevention Law may result in the imposition of fines and penalties, the suspension of operation, an order to cease operation, and/or criminal liability in severe cases.
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Regulations on Work Safety
Under relevant construction safety laws and regulations, including the Work Safety Law of the PRC which was promulgated by the SCNPC on June 29, 2002, amended on August 27, 2009, August 31, 2014 and June 10, 2021, and effective as of September 1, 2021, production and operating business entities must establish objectives and measures for work safety and improve the working environment and conditions for workers in a planned and systematic way. A work safety protection scheme must also be set up to implement the work safety job responsibility system. In addition, production and operating business entities must arrange work safety training and provide their employees with protective equipment that meets the national standards or industrial standards. Automobile and components manufacturers are subject to the aforementioned environment protection and work safety requirements.
Regulations Relating to Labor Protection
Labor Contract Law
The PRC Labor Contract Law, or the Labor Contract Law, which became effective on January 1, 2008 and was amended on December 28, 2012 and became effected on July 1, 2013, is primarily aimed at regulating rights and obligations of employer and employee relationships, including the establishment, performance and termination of labor contracts. Pursuant to the Labor Contract Law, labor contracts shall be concluded in writing if labor relationships are to be or have been established between employers and the employees. Employers are prohibited from forcing employees to work above certain time limits, and employers shall pay employees for overtime work in accordance to national regulations. In addition, employee wages shall be no lower than local standards on minimum wages and must be paid to employees in a timely manner.
Interim Provisions on Labor Dispatch
Pursuant to the Interim Provisions on Labor Dispatch, or the Labor Dispatch Provisions, promulgated by the Ministry of Human Resources and Social Security on January 24, 2014, which became effective on March 1, 2014, dispatched workers are entitled to equal pay with full-time employees for equal work. Employers are allowed to use dispatched workers for temporary, auxiliary or substitutive positions, and the number of dispatched workers may not exceed 10% of the total number of employees.
Social Insurance and Housing Fund
Pursuant to the Social Insurance Law of the PRC implemented on July 1, 2011, amended on December 29, 2018 and became effective on the same day, employers are required to provide their employees in the PRC with welfare benefits covering pension insurance, unemployment insurance, maternity insurance, labor injury insurance and medical insurance. These payments are made to local administrative authorities. Any employer that fails to make social insurance contributions may be ordered to rectify the non-compliance and pay the required contributions within a prescribed time limit and be subject to a late fee. If the employer still fails to rectify the failure to make the relevant contributions within the prescribed time, it may be subject to a fine ranging from one to three times the amount overdue. In accordance with the Regulations on the Management of Housing Fund which was promulgated by the State Council in 1999 and last amended on March 24, 2019 and became effective on the same day, employers must register at the designated administrative centers and open bank accounts for depositing employees’ housing funds. Employers and employees are also required to pay and deposit housing funds, which shall be the product of employees’ average monthly salaries of the previous year multiplied by the contribution rate of the housing provident fund of the employer. Where, in violation of the provisions of these Regulations, an employer is overdue in the contribution of, or underpays, the housing provident fund, the housing provident fund management center shall order it to make the contribution within a prescribed time limit; where the contribution has not been made after the expiration of the time limit, an application may be made to a people’s court for compulsory enforcement.
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Employee Stock Incentive Plan
Pursuant to the Notice of Issues Related to the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Listed Company, or Circular 7, which was issued by the SAFE on February 15, 2012, employees, directors, supervisors, and other senior management who participate in any stock incentive plan of a publicly-listed overseas company and who are PRC citizens or non-PRC citizens residing in China for a continuous period of no less than one year, subject to a few exceptions, are required to register with SAFE through a qualified domestic agent, which may be a PRC subsidiary of such overseas listed company, and complete certain other procedures. In addition, the SAT has issued certain circulars concerning employee stock options and restricted shares. Under these circulars, employees working in the PRC who exercise stock options or are granted restricted shares will be subject to PRC individual income tax. The PRC subsidiaries of an overseas listed company are required to file documents related to employee stock options and restricted shares with relevant tax authorities and to withhold individual income taxes of employees who exercise their stock option or purchase restricted shares. If the employees fail to pay or the PRC subsidiaries fail to withhold income tax in accordance with relevant laws and regulations, the PRC subsidiaries may face sanctions imposed by the tax authorities or other PRC governmental authorities.
Regulations Relating to Taxes
Income Tax
The PRC Enterprise Income Tax Law, or the EIT Law, imposes a uniform enterprise income tax rate of 25% on all PRC resident enterprises, including foreign-invested enterprises, unless they qualify for certain exceptions. The enterprise income tax is calculated based on the PRC resident enterprise’s global income as determined under PRC tax laws and accounting standards. If a non-resident enterprise sets up an organization or establishment in the PRC, it will be subject to enterprise income tax for the income derived from such organization or establishment in the PRC and for the income derived from outside the PRC but with an actual connection with such organization or establishment in the PRC. The EIT Law and its implementation rules permit certain “high and new technology enterprises strongly supported by the state” that independently own core intellectual property and meet statutory criteria, to enjoy a reduced 15% enterprise income tax rate. In January 2016, the SAT, the Ministry of Science and Technology and the MOF jointly issued the Administrative Rules for the Certification of High and New Technology Enterprises specifying the criteria and procedures for the certification of High and New Technology Enterprises.
On April 22, 2009, the SAT issued the Circular of the State Administration of Taxation on Issues Relating to Identification of PRC-Controlled Overseas Registered Enterprises as Resident Enterprises in Accordance With the De Facto Standards of Organizational Management, or the SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the SAT’s general position on how the “de facto management body” text should be applied in determining the tax resident status of all offshore enterprises. According to the SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC. Further to SAT Circular 82, on July 27, 2011, the SAT issued the Announcement of the State Administration of Taxation on Printing and Distributing the Administrative Measures for Income Tax on PRC-controlled Resident Enterprises Incorporated Overseas (Trial Implementation), or the SAT Bulletin 45, which took effect in September 2011, to provide more guidance on the implementation of SAT Circular 82. SAT Bulletin 45 provides for procedures and administration details for determination of resident status and administration on post-determination matters.
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Value-added Tax
The Provisional Regulations of the PRC on Value-added Tax, the VAT Regulation, were promulgated by the State Council on December 13, 1993 and came into effect on January 1, 1994 which were subsequently amended from time to time. The Detailed Rules for the Implementation of the Provisional Regulations of the PRC on Value-added Tax (Revised in 2011) was promulgated by the MOF on December 25, 1993 and subsequently amended on December 15, 2008 and October 28, 2011, or collectively, the VAT Law. On November 19, 2017, the State Council promulgated the Decisions on Abolishing the Provisional Regulations of the PRC on Business Tax and Amending the Provisional Regulations of the PRC on Value-added Tax, or the Order 691. On April 4, 2018, MOF and SAT jointly promulgated the Circular on Adjustment of Value-Added Tax Rates, or Circular 32. According to the VAT Law, the Order 691 and the Circular 32, all enterprises and individuals engaged in the sale of goods, the provision of processing, repair and replacement services, sales of services, intangible assets, real property and the importation of goods within the territory of the PRC are the taxpayers of VAT. The VAT tax rates generally applicable are simplified as 16%, 10%, 6% and 0%, and the VAT tax rate applicable to the small-scale taxpayers is 3%. Furthermore, according to the Announcement on Relevant Policies for Deepening Value-added Tax Reform jointly promulgated by the Ministry of Finance, the State Administration of Taxation and the General Administration of Customs, which became effective on April 1, 2019, the taxable goods previously subject to VAT rates of 16% and 10% respectively become subject to lower VAT rates of 13% and 9% respectively starting from April 1, 2019.
Dividend Withholding Tax
The EIT Law provides that since January 1, 2008, an income tax rate of 10% will normally be applicable to dividends declared to non-PRC resident investors which do not have an establishment or place of business in the PRC, or which have such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends are derived from sources within the PRC.
Pursuant to the Arrangement Between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Incomes, or the Double Tax Avoidance Arrangement, and other applicable PRC laws, if a Hong Kong resident enterprise is determined by the competent PRC tax authority to have satisfied the relevant conditions and requirements under such Double Tax Avoidance Arrangement and other applicable laws, the 10% withholding tax on the dividends the Hong Kong resident enterprise receives from a PRC resident enterprise may be reduced to 5%. However, based on the Circular on Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax Treaties, or the SAT Circular 81, issued on February 20, 2009 by the SAT, if the relevant PRC tax authorities determine, in their discretions, that a company benefits from such reduced income tax rate due to a structure or arrangement that is primarily tax-driven, such PRC tax authorities may adjust the preferential tax treatment. According to the Circular on Several Questions regarding the “Beneficial Owner” in Tax Treaties, which was issued on February 3, 2018 by the SAT and took effect on April 1, 2018, when determining the applicant’s status of the “beneficial owner” regarding tax treatments in connection with dividends, interests or royalties in the tax treaties, several factors, including without limitation, whether the applicant is obligated to pay more than 50% of his or her income in twelve months to residents in third country or region, whether the business operated by the applicant constitutes the actual business activities, and whether the counterparty country or region to the tax treaties does not levy any tax or grant tax exemption on relevant incomes or levy tax at an extremely low rate, will be taken into account, and it will be analyzed according to the actual circumstances of the specific cases. This circular further provides that applicants who intend to prove his or her status of the “beneficial owner” shall submit the relevant documents to the relevant tax bureau according to the Announcement on Issuing the Measures for the Administration of Non-Resident Taxpayers’ Enjoyment of the Treatment under Tax Agreements.
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On February 3, 2015, the SAT issued the Public Notice Regarding Certain Enterprise Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or the SAT Public Notice 7. The SAT Public Notice 7 extends its tax jurisdiction to cover not only where a non-resident enterprise transfers the equity interests of a PRC resident enterprise indirectly by disposition of the equity interests of an overseas holding company, or an Indirect Transfer, but also to transactions involving transfer of other taxable assets through offshore transfer of a foreign intermediate holding company. The SAT Public Notice 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer) of taxable assets. Where a non-resident enterprise transfers a taxable asset indirectly by disposing of the equity interests of an overseas holding company, which is an Indirect Transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.
On October 17, 2017, the SAT issued the Public Notice on Issues Relating to Withholding at Source of Income Tax of Non-resident Enterprises, or the SAT Public Notice 37, which came into effect on December 1, 2017. According to SAT Public Notice 37, where the non-resident enterprise fails to declare its tax payable pursuant to Article 39 of the EIT Law, the tax authority may order it to pay its tax due within required time limits, and the non-resident enterprise shall declare and pay its tax payable within such time limits specified by the tax authority. If the non-resident enterprise voluntarily declares and pays its tax payable before the tax authority orders it to do so, it shall be deemed that such enterprise has paid its tax payable in time.
Regulations relating to Foreign Exchange
General Administration of Foreign Exchange
Under the PRC Foreign Currency Administration Rules promulgated on January 29, 1996 and most recently amended on August 5, 2008 and various regulations issued by the State Administration of Foreign Exchange of the PRC, or the SAFE and other relevant PRC government authorities, Renminbi is convertible into other currencies for current account items, such as trade-related receipts and payments and payment of interest and dividends. The conversion of Renminbi into other currencies and remittance of the converted foreign currency outside the PRC for of capital account items, such as direct equity investments, loans and repatriation of investment, requires the prior approval from the SAFE or its local office.
Payments for transactions that take place within the PRC must be made in Renminbi. Unless otherwise approved, PRC companies may not repatriate foreign currency payments received from abroad or retain the same abroad. Foreign-invested enterprises may retain foreign exchange in accounts with designated foreign exchange banks under the current account items subject to a cap set by the SAFE or its local office. Foreign exchange proceeds under the current accounts may be either retained or sold to a financial institution engaged in settlement and sale of foreign exchange pursuant to relevant SAFE rules and regulations. For foreign exchange proceeds under the capital accounts, approval from the SAFE is generally required for the retention or sale of such proceeds to a financial institution engaged in settlement and sale of foreign exchange.
Pursuant to the Circular of the SAFE on Further Improving and Adjusting Foreign Exchange Administration Policies for Direct Investment, or the SAFE Circular 59, promulgated by SAFE on November 19, 2012, which became effective on December 17, 2012 and subsequently amended from time to time, approval of SAFE is not required for opening a foreign exchange account and depositing foreign exchange into the accounts relating to the direct investments. The SAFE Circular 59 also simplified foreign exchange-related registration required for the foreign investors to acquire the equity interests of Chinese companies and further improve the administration on foreign exchange settlement for foreign-invested enterprises.
The Circular on Further Simplifying and Improving the Foreign Currency Management Policy on Direct Investment, or the SAFE Circular 13, effective from June 1, 2015, cancels the administrative approvals of foreign exchange registration of direct domestic investment and direct overseas investment and simplifies the procedure of foreign exchange-related registration. Pursuant to the SAFE Circular 13, the investors shall register with banks for direct domestic investment and direct overseas investment.
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The Circular on Reforming the Management Approach regarding the Settlement of Foreign Capital of Foreign-invested Enterprise, or the SAFE Circular 19, which was promulgated by the SAFE on March 30, 2015 and became effective on June 1, 2015, provides that a foreign-invested enterprise may, according to its actual business needs, settle with a bank the portion of the foreign exchange capital in its capital account for which the relevant foreign exchange administration has confirmed monetary capital contribution rights and interests (or for which the bank has registered the injection of the monetary capital contribution into the account). Pursuant to the SAFE Circular 19, for the time being, foreign-invested enterprises are allowed to settle 100% of their foreign exchange capital on a discretionary basis; a foreign-invested enterprise shall truthfully use its capital for its own operational purposes within the scope of business; where an ordinary foreign-invested enterprise makes domestic equity investment with the amount of foreign exchanges settled, the invested enterprise must first go through domestic re-investment registration and open a corresponding account for foreign exchange settlement pending payment with the foreign exchange administration or the bank at the place where it is registered.
The Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or the SAFE Circular 16, which was promulgated by the SAFE and became effective on June 9, 2016, provides that enterprises registered in the PRC may also convert their foreign debts from foreign currency into Renminbi on self-discretionary basis. The SAFE Circular 16 also provides an integrated standard for conversion of foreign exchange under capital account items (including but not limited to foreign currency capital and foreign debts) on self-discretionary basis, which applies to all enterprises registered in the PRC.
In January 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Genuineness and Compliance Verification, or Circular 3, which stipulates several capital control measures with respect to the outbound remittance of profits from domestic entities to offshore entities, including (i) banks must check whether the transaction is genuine by reviewing board resolutions regarding profit distribution, original copies of tax filing records and audited financial statements, and (ii) domestic entities must retain income to account for previous years’ losses before remitting any profits. Moreover, pursuant to Circular 3, domestic entities must explain in detail the sources of capital and how the capital will be used, and provide board resolutions, contracts and other proof as a part of the registration procedure for outbound investment.
On October 23, 2019, SAFE issued Circular of the State Administration of Foreign Exchange on Further Promoting the Facilitation of Cross-border Trade and Investment, or the Circular 28, which took effect on the same day. Circular 28 allows non-investment foreign-invested enterprises to use their capital funds to make equity investments in China, provided that such investments do not violate the effective special entry management measures for foreign investment (negative list) and the target investment projects are genuine and in compliance with laws. Since Circular 28 was issued only recently, its interpretation and implementation in practice are still subject to substantial uncertainties.
Pursuant to the SAFE Circular 13 and other laws and regulations relating to foreign exchange, when setting up a new foreign invested enterprise, the foreign invested enterprise shall register with the bank located at its registered place after obtaining the business license, and if there is any change in capital or other changes relating to the basic information of the foreign-invested enterprise, including without limitation any increase in its registered capital or total investment, the foreign invested enterprise must register such changes with the bank located at its registered place after obtaining approval from or completing the filing with competent authorities. Pursuant to the relevant foreign exchange laws and regulations, the above-mentioned foreign exchange registration with the banks will typically take less than four weeks upon the acceptance of the registration application.
According to the Foreign Investment Law, Measures for Reporting of Information on Foreign Investment, promulgated by MOFCOM, and State Administration for Market Regulation, or the SAMR on December 30, 2019 and became effective on January 1, 2020, the Administrative Rules on the Company Registration, which was promulgated by the State Council on June 24, 1994, became effective on July 1, 1994 and latest amended on February 6, 2016, and other laws and regulations governing the foreign invested enterprises and company registrations, the establishment of a foreign invested enterprise and any capital increase and other major changes in a foreign invested enterprise shall be registered with the SAMR, or its local counterparts, and investment information shall be submitted to the competent commerce authorities through the enterprise registration system and the National Enterprise Credit Information Publicity System, if such foreign invested enterprise does not involve special access administrative measures prescribed by the PRC government.
Based on the forgoing, if we intend to provide funding to our wholly foreign owned subsidiaries through a capital injection at or after their establishment, we must register the establishment thereof and any follow-on capital increase in our wholly foreign owned subsidiaries with the SAMR or its local counterparts, submit such information via the enterprise registration system and the National Enterprise Credit Information Publicity System and register such with the local banks for the foreign exchange related matters.
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Offshore Investment
Under the Circular of the State Administration of Foreign Exchange on Issues Concerning the Foreign Exchange Administration over the Overseas Investment and Financing and Round-trip Investment by Domestic Residents via Special Purpose Vehicles, or the SAFE Circular 37, issued by the SAFE and effective on July 4, 2014, PRC residents are required to register with the local SAFE branch prior to contributing assets or equity interests in an offshore special purpose vehicle, or SPV, which is defined as offshore enterprises directly established or indirectly controlled by PRC residents for investment and financing purposes, with the enterprise assets or interests they hold in China or overseas. The term “control” means obtain the operation rights, right to proceeds or decision-making power of a SPV through acquisition, trust, holding shares on behalf of others, voting rights, repurchase, convertible bonds or other means. An amendment to registration or subsequent filing with the local SAFE branch by such PRC resident is also required if there is any change in basic information of the offshore company or any material change with respect to the capital of the offshore company. At the same time, the SAFE has issued the Operation Guidance for the Issues Concerning Foreign Exchange Administration over Round-trip Investment regarding the procedures for SAFE registration under the SAFE Circular 37, which became effective on July 4, 2014 as an attachment of Circular 37.
Under the relevant rules, failure to comply with the registration procedures set forth in the SAFE Circular 37 may result in bans on the foreign exchange activities of the relevant onshore company, including the payment of dividends and other distributions to its offshore parent or affiliates, and may also subject relevant PRC residents to penalties under PRC foreign exchange administration regulations.
Regulations on Dividend Distribution
The principal laws and regulations regulating the dividend distribution of dividends by foreign-invested enterprises in the PRC include the PRC Company Law, as amended in 1999, 2004, 2005, 2013 and 2018, and Foreign Investment Law and the Implementing Regulations of FIL which replaced the Wholly Foreign-owned Enterprise Law promulgated in 1986 and amended in 2000 and 2016 and its implementation regulations promulgated in 1990 and subsequently amended in 2001 and 2014, the PRC Equity Joint Venture Law promulgated in 1979 and subsequently amended in 1990, 2001 and 2016 and its implementation regulations promulgated in 1983 and subsequently amended in 1986, 1987, 2001, 2011 and 2014, and the PRC Cooperative Joint Venture Law promulgated in 1988 and amended in 2000, 2016 and 2017 and its implementation regulations promulgated in 1995 and amended in 2014 and 2017. Under the current regulatory regime in the PRC, foreign-invested enterprises in the PRC may pay dividends only out of their retained earnings, if any, determined in accordance with PRC accounting standards and regulations. A PRC company is required to set aside as statutory reserve funds of at least 10% of its after-tax profit, until the cumulative amount of such reserve funds reaches 50% of its registered capital unless laws regarding foreign investment provide otherwise. A PRC company shall not distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with distributable profits from the current fiscal year.
Regulations Relating to M&A Rule and Overseas Listing in the PRC
On August 8, 2006, six PRC governmental and regulatory agencies, including MOFCOM and CSRC, promulgated the Rules on Acquisition of Domestic Enterprises by Foreign Investors, or the M&A Rules, governing the mergers and acquisitions of domestic enterprises by foreign investors that became effective on September 8, 2006 and was revised on June 22, 2009. The M&A Rules, among other things, require that if an overseas company established or controlled by PRC companies or individuals, or PRC Citizens, intends to acquire equity interests or assets of any other PRC domestic company affiliated with the PRC Citizens, such acquisition must be submitted to MOFCOM for approval. The M&A Rules also requires that an offshore SPV that is controlled directly or indirectly by the PRC companies or individuals and that has been formed for overseas listing purposes through acquisitions of PRC domestic interest held by such PRC companies or individuals, shall obtain the approval of CSRC prior to overseas listing and trading of such SPV’s securities on an overseas stock exchange.
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On February 17, 2023, the CSRC released the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Enterprises (the “New Overseas Listing Rules”) with five interpretive guidelines, which took effect on March 31, 2023. The New Overseas Listing Rules require Chinese domestic enterprises to complete filings with relevant governmental authorities and report related information under certain circumstances, such as: a) an issuer making an application for initial public offering and listing in an overseas market; b) an issuer making a subsequent overseas securities offering after having been listed on an overseas market; c) a domestic company seeking an overseas direct or indirect listing of its assets through single or multiple acquisition(s), share swap, transfer of shares or other means. Pursuant to the New Overseas Listing Rules, domestic companies that seek offering or listing securities overseas, both directly and indirectly, shall file with the CSRC within three working days after the submission of overseas offering/listing application. Furthermore, upon the occurrence of any of the material events specified below after an issuer has completed its offering and listed its securities on an overseas stock exchange, the issuer shall submit a report thereof to the CSRC within three working days after the occurrence and public disclosure of the event: (i) change of control; (ii) investigations or sanctions imposed by overseas securities regulatory agencies or other competent authorities; (iii) change of listing status or transfer of listing segment; or (iv) voluntary or mandatory delisting. The New Overseas Listing Rules stipulate the legal consequences to the companies for breaches, including failure to fulfil filing obligations or filing documents having false statement or misleading information or material omissions, which may result in a fine ranging from RMB 1 million to RMB 10 million, and in cases of severe violations, the relevant responsible persons may also be warned and each imposed a fine of between RMB500,000 and RMB5,000,000. The new rules provide that the determination as to whether a domestic company is indirectly offering and listing securities on an overseas market shall be made on a substance over form basis, and if the issuer meets the following conditions, the offering and listing shall be determined as an indirect overseas offering and listing by a Chinese domestic company: (i) any of the revenue, profit, total assets or net assets of the Chinese domestic entity is more than 50% of the related financials in the issuer’s audited consolidated financial statements for the most recent fiscal year; (ii) the senior managers in charge of business operation and management of the issuer are mostly Chinese citizens or with regular domicile in China, the main locations of its business operations are in China or main business activities are conducted in China. We are headquartered in Hong Kong with all our executive officers and directors based in Hong Kong who are not Chinese citizens and most of our revenues and profits are generated by our subsidiaries in Hong Kong. We don’t believe we are subject to the New Overseas Listing Rules.
PRC Laws and Regulations Related to Data Cross-border Transfer and personal information protection
Measures for the Security Assessment of Data Cross-border Transfer
On July 7, 2022, CAC promulgated the Measures for the Security Assessment of Data Cross-border Transfer, effective on September 1, 2022, which requires the data processors to apply for data cross-border security assessment coordinated by the CAC under the following circumstances: (i) any data processor transfers important data to overseas; (ii) any critical information infrastructure operator or data processor who processes personal information of over 1 million people provides personal information to overseas; (iii) any data processor who provides personal information to overseas and has already provided personal information of more than 100,000 people or sensitive personal information of more than 10,000 people to overseas since January 1st of the previous year and ; and (iv) other circumstances under which the data cross-border transfer security assessment is required as prescribed by the CAC.
Personal Information Protection Law of the PRC
On August 20, 2021, the SCNPC promulgated the Personal Information Protection Law of the People’s Republic of China (the “Personal Information Protection Law”), effective from November 1, 2021. The Personal Information Protection Law requires, among others, that (i) the processing of personal information should have a clear and reasonable purpose which should be directly related to the processing purpose, in a method that has the least impact on personal rights and interests, and (ii) the collection of personal information should be limited to the minimum scope necessary to achieve the processing purpose to avoid the excessive collection of personal information. Different types of personal information and personal information processing will be subject to various rules on consent, transfer, and security. Entities handling personal information bear responsibilities for their personal information handling activities, and shall adopt necessary measures to safeguard the security of the personal information they handle. Otherwise, the entities handling personal information could be ordered to correct, or suspend or terminate the provision of services, and face confiscation of illegal income, fines or other penalties.
Company law
The principal laws and regulations regulating the dividend distribution of dividends by foreign-invested enterprises in the PRC include the PRC Company Law, as amended in 1999, 2004, 2005, 2013,2018 and 2024. The Company Law of the People’s Republic of China (Revised in 2023) has come into effect on July 1, 2024. According to regulations, the registered capital of a limited liability company is the amount of capital subscribed by all shareholders registered with the company registration authority. The capital subscribed by all shareholders shall be fully paid within five years from the date of establishment of the company in accordance with the provisions of the company’s articles of association. According to the “Provisions of the State Council on the Implementation of the Registration and Management System for Registered Capital of the Company Law of the People’s Republic of China”, for companies registered and established before June 30, 2024, if the remaining subscribed capital period of a limited liability company exceeds 5 years from July 1, 2027, the remaining subscribed capital period shall be adjusted to within 5 years before June 31, 2027, and shall be included in the company’s articles of association. Shareholders shall fully pay their subscribed capital within the adjusted subscribed capital period. The Company Law also stipulates that if a company fails to adjust its registered capital and subscription period during the transition period and makes actual payments according to the adjusted registered capital and subscription period, it may face penalties from administrative authorities, including fines, revocation of business license, etc. Enterprises may be included in the abnormal credit system list, and their legal representatives may also be subject to corresponding restrictions.
Hong Kong Regulations
As we conduct business in Hong Kong through our wholly subsidiaries Kambo Locksets, Kambo Hardware, Bamberg and Hing Fat, our business operations are subject to various regulations and rules promulgated by the Hong Kong government. The following is a brief summary of the Hong Kong laws and regulations that currently and materially affect our business. This section does not purport to be a comprehensive summary of all present and proposed regulations and legislation relating to the industries in which we operate.
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Hong Kong Laws and Regulations relating to Trade Description
Trade Descriptions Ordinance (Chapter 362 of the Laws of Hong Kong) (“TDO”), which came into full effect in Hong Kong on 1 April 1981 aims to prohibit false or misleading trade description and statements to goods and services provided to the customers during or after a commercial transaction. Pursuant to the TDO, any person in the course of any trade or business applies a false trade description to any goods or supply or offers to supply them commits an offence and a person also commits the same offence if he/she is in possession for sale or for any purpose of trade or manufacture of any goods with a false description. The TDO also provides that traders may commit an offence if they engage in a commercial practice that has a misleading omission of material information of the goods, an aggressive commercial practice, involves bait advertising, bait and switch or wrong acceptance of payment.
Hong Kong Laws and Regulations relating to Sales of Goods
Pursuant to Sale of Goods Ordinance (Chapter 26 of the Laws of Hong Kong) (“SOGO”), which came into full effect in Hong Kong on August 1, 1896, in every contract of sale, there is an implied warranty that the goods are free, and will remain free until the time when the property is to pass, from any charge or encumbrance not disclosed or known to the buyer before the contract is made and that the buyer will enjoy quiet possession of the goods except so far as it may be disturbed by the owner or other person entitled to the benefit of any charge or encumbrance so disclosed or known. The SOGO provides that there is an implied condition that the goods shall correspond with the description where there is a contract for the sale of goods by description, and there is any implied condition or warranty as to the quality or fitness for any particular purpose of goods supplied under a contract of sale. Where the seller sells goods in the course of a business, there is an implied condition that the goods supplied under the contract are of merchantable quality.
Hong Kong Laws and Regulations relating to Intellectual Properties Rights
Trade Marks Ordinance (Chapter 559 of the Laws of Hong Kong) (“TMO”), which came into full effect in Hong Kong on 4 April 2003 provides the framework for the Hong Kong’s system of registration of trademarks and sets out the rights attached to a registered trade mark, including logo and a brand name. The TMO restricts unauthorized use of a sign which is identical or similar to the registered mark for identical and/or similar goods and/or services for which the mark was registered, where such use is likely to cause confusion on the part of the public. The TMO provides that a person may also commit a criminal offence if that person fraudulently uses a trade mark, including selling and importing goods bearing a forged trade mar, or possessing or using equipment for the purpose of forging a trade mark.
Patents Ordinance (Chapter 514 of the Laws of Hong Kong), which came into full effect in Hong Kong on June 27, 1997 provides the framework for “re-registration” system of Chinese, UK and European patents in Hong Kong. Pursuant to Patents (Amendment) Ordinance 2016, which came into full effect in Hong Kong on 19 December 2019 provide a new framework for a new patent system - an “original grant patent” system, running in parallel with the “re-registration” system.
Copyright Ordinance (Chapter 528 of the Laws of Hong Kong) (“CO”), which came into full effect in Hong Kong on June 27 1997 provides comprehensive protection for recognized categories of underlying works such as literary, dramatic, musical and artistic works. The CO restricts unauthorized acts such as copying and/or making available copies to the public of a copy right work.
Hong Kong Laws and Regulations relating to Competition
Competition Ordinance (Chapter 619 of the Laws of Hong Kong) (“Competition Ordinance”), which came into full effect in Hong Kong on December 14, 2015 prohibits and deters undertakings in all sectors from adopting anti-competitive conduct which has the object or effect of preventing, restricting or distorting competition in Hong Kong. The key prohibitions include (i) prohibition of agreements between businesses which have the object or effect of preventing, restricting or distorting competition in Hong Kong; and (ii) prohibiting companies with a substantial degree of market power from abusing their power by engaging in conduct that has the object or effect of preventing, restricting or distorting competition in Hong Kong. The penalties for breaches of the Competition Ordinance include, but are not limited to, financial penalties of up to 10% of the total gross revenues obtained in Hong Kong for each year of infringement, up to a maximum of three years in which the contravention occurs.
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Hong Kong Laws and Regulations relating to Employment
Pursuant to Employment Ordinance (Chapter 57 of the Laws of Hong Kong) (“EO”), which came into full effect in Hong Kong on September 27, 1968, all employees covered by the EO are entitled to basic protection under the EO including but not limited to payment of wages, restrictions on wages deductions and the granting of statutory holidays.
Pursuant to Mandatory Provident Fund Schemes Ordinance (Chapter 485 of the Laws of Hong Kong) (“MPFSO”), which came into full effect in Hong Kong on December 1, 2000, every employer must take all practicable steps to ensure that the employee becomes a member of a Mandatory Provident Fund (MPF) scheme. An employer who fails to comply with such a requirement may face a fine and imprisonment. The MPFSO provides that an employer who is employing a relevant employee must, for each contribution period, from the employer’s own funds, contribute to the relevant MPF scheme the amount determined in accordance with the MPFSO.
Pursuant to Employees’ Compensation Ordinance (Chapter 282 of the Laws of Hong Kong) (“ECO”), which came into full effect in Hong Kong on December 1, 1953, all employers are required to take out insurance policies to cover their liabilities under the ECO and at common law for injuries at work in respect of all of their employees. An employer failing to do so may be liable to a fine and imprisonment.
Pursuant to Minimum Wage Ordinance (Chapter 608 of the Laws of Hong Kong) (“MWO”), which came into full effect in Hong Kong on May 1, 2011, an employee is entitled to be paid wages no less than the statutory minimum wage rate during the wage period. With effect from May 1, 2019, the statutory minimum hourly wage rate is HK$37.5. Failure to comply with MWO constitutes an offence under EO.
Cayman Islands Data Protection
We have certain duties under the Data Protection Act (as revised) of the Cayman Islands, or the DPA, based on internationally accepted principles of data privacy.
Privacy Notice
This privacy notice puts our shareholders on notice that through your investment into us you will provide us with certain personal information which constitutes personal data within the meaning of the DPA, or personal data.
Investor Data
We will collect, use, disclose, retain and secure personal data to the extent reasonably required only and within the parameters that could be reasonably expected during the normal course of business. We will only process, disclose, transfer or retain personal data to the extent legitimately required to conduct our activities of on an ongoing basis or to comply with legal and regulatory obligations to which we are subject. We will only transfer personal data in accordance with the requirements of the DPA, and will apply appropriate technical and organizational information security measures designed to protect against unauthorized or unlawful processing of the personal data and against the accidental loss, destruction or damage to the personal data.
In our use of this personal data, we will be characterized as a “data controller” for the purposes of the DPA, while our affiliates and service providers who may receive this personal data from us in the conduct of our activities may either act as our “data processors” for the purposes of the DPA or may process personal information for their own lawful purposes in connection with services provided to us.
We may also obtain personal data from other public sources. Personal data includes, without limitation, the following information relating to a shareholder and/or any individuals connected with a shareholder as an investor: name, residential address, email address, contact details, corporate contact information, signature, nationality, place of birth, date of birth, tax identification, credit history, correspondence records, passport number, bank account details, source of funds details and details relating to the shareholder’s investment activity.
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Who this Affects
If you are a natural person, this will affect you directly. If you are a corporate investor (including, for these purposes, legal arrangements such as trusts or exempted limited partnerships) that provides us with personal data on individuals connected to you for any reason in relation your investment in us, this will be relevant for those individuals and you should transit the content of this Privacy Notice to such individuals or otherwise advise them of its content.
How We May Use a Shareholder’s Personal Data
We may, as the data controller, collect, store and use personal data for lawful purposes, including, in particular: (i) where this is necessary for the performance of our rights and obligations under any agreements; (ii) where this is necessary for compliance with a legal and regulatory obligation to which we are or may be subject (such as compliance with anti-money laundering and FATCA/CRS requirements); and/or (iii) where this is necessary for the purposes of our legitimate interests and such interests are not overridden by your interests, fundamental rights or freedoms.
Should we wish to use personal data for other specific purposes (including, if applicable, any purpose that requires your consent), we will contact you.
Why We May Transfer Your Personal Data
In certain circumstances we may be legally obliged to share personal data and other information with respect to your shareholding with the relevant regulatory authorities such as the Cayman Islands Monetary Authority or the Tax Information Authority. They, in turn, may exchange this information with foreign authorities, including tax authorities.
We anticipate disclosing personal data to persons who provide services to us and their respective affiliates (which may include certain entities located outside the US, the Cayman Islands or the European Economic Area), who will process your personal data on our behalf.
The Data Protection Measures We Take
Any transfer of personal data by us or our duly authorized affiliates and/or delegates outside of the Cayman Islands shall be in accordance with the requirements of the DPA.
We and our duly authorized affiliates and/or delegates shall apply appropriate technical and organizational information security measures designed to protect against unauthorized or unlawful processing of personal data, and against accidental loss or destruction of, or damage to, personal data.
We shall notify you of any personal data breach that is reasonably likely to result in a risk to your interests, fundamental rights or freedoms or those data subjects to whom the relevant personal data relates.
Contacting the Company
For further information on the collection, use, disclosure, transfer or processing of your personal data or the exercise of any of the rights listed above, please contact us through our website at www. i-l-a-g.com or through phone number +852 2481 7938.
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C. Organizational structure
Below is the Company’s corporate structure chart as of the date of this report.
D. Property, Plants and Equipment
Our headquarter and sales office in Hong Kong operate in an approximately 300m2 office in an industrial building. The office is leased from a related company, Kambo Security Products Limited. Kambo Security Products Limited is owned by Mr. Yu Bong Lau (Bong), Mr. Bun Lau, Mr. Wynn Hui and Mr. Po Ching Hui, brother of Mr. Wynn Hui. The rent paid to Kambo Security Products Limited is determined according to the market value of similar property quotes from a Hong Kong property agent. We most recently renewed the lease of the property from January 1, 2025 for one year, with annual rent of HK$576,000 ( US$74,000).
Our manufacturing facility is operated under Dongguan Xingfa Hardware Products Co., Ltd. (“Xingfa”), which is equipped with different types of machines in a 17,560 m2 production facility which can produce about 6,000,000 locksets per annum. Xingfa leases 15,810 m2 of land use rights for our factory from March 1, 2024 to February 28, 2026 from Dongguan Shatian Town Hengliu Equity Economic Union, a third party, with annual rent of RMB 2,032,000 (US$285,000).
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We acquired an electroplating production line at 5/F., Tower A, Shun Hang Environment Projection Industrial Park, Shatian Town, Dongguan, Guangdong. The lease for the production line factory is from April 1, 2023 to September 30, 2026 with Dongguan Shun Hang Metal Productions Company Limited, a third party, with annual rent of RMB 660,000 (US$93,000).
Currently, we mainly lease the following properties to conduct our business:
| Property Address | Lessor | Annual Rent | Lease Expiration Date | Purposes/Use | |||||
| Unit 2, 5/F, Block A, Profit Industrial Building, 1-15 Kwai Fung Crescent, Kwai Chung, New Territories, Hong Kong | Kambo Security Products Limited | $74,000 | December 31, 2024 | Head Quarter Office | |||||
| No. 43, Min Tian Main Street, Shatian Town, Dongguan, Guangdong, PRC | Dongguan Shatian Town Hengliu Equity Economic Union | $285,000 | February 28, 2026 | Production Plant and Office | |||||
| 5/F., Tower A, Shun Hang Environment Projection Industrial Park, Shatian Twon, Dongguan, Guangdong, PRC | Dongguan Shun Hang Metal Productions Company Limited | $93,000 | September 30, 2026 | Production Plant |
We believe we will be able to obtain adequate facilities, principally through leasing, to accommodate our future expansion plans.
| ITEM 4A. | UNRESOLVED STAFF COMMENTS |
Not Applicable
| ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our CFS and the related notes included elsewhere in this annual report on Form 20-F. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Item 3. Key Information—D. Risk Factors” or in other parts of this annual report on Form 20-F.
5A. Operating Results
Overview
Headquartered in Hong Kong, we manufacture and sell high quality mechanical locksets to customers mainly in the United States (US) and Canada and have continued to diversify and refine our product offerings in the past 40 years to meet our customers’ needs. We believe our wholly-owned subsidiary Xingfa is one of the pioneers of mechanical lockset manufacturing in China. Since inception, to cope with our development and increase customer satisfaction in quality, we keep investing in self-designed automated product lines, new craftsmanship and developing new products including smart locks. In order to obtain the confidence of our customers, Xingfa has the ISO9001quality assurance certificate.
Starting in 2000, we offer products that comply with the American National Standards Institute (ANSI) Grade 2 and Grade 3 standards that are developed by the Builders Hardware Manufacturing Association (BHMA) for ANSI. Our focus in producing mechanical locksets - including locksets for outdoors (such as main entrances and gates) and indoors which raised our competitiveness. To maintain our growth, our products are beyond a simple lockset for security purposes, we offer a wide range of Original Design Manufacturer (“ODM”) door locksets to various customer segments from “Premium Series” to “Economy-oriented Series” with classic to contemporary looks, functions and colors.
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Currently, approximately 99% of our revenues are from products sold in the US, and the remaining products are sold in Canada. We build our distribution network by working with our large and small business partners in different geographic areas to sell our products. More information about geographical distribution of our revenues can be found in “Segment reporting in Note 3 of Notes to the Consolidated Financial Statements”.
For 40 years, we manufacture and sell high quality mechanical locksets and continue to grow and increase our product offerings. The predecessor of Hing Fat commenced our business of selling door locksets in 1981. In 1983, we started processing door locksets to fulfill orders from US customers with imported materials at a small manufacturing workshop in China which became our current manufacturing subsidiary, Xingfa. Since then, our mission is to “produce high quality lockset products at affordable prices.”
We sell our products mainly to the US and Canada (“North America”) through one of our Hong Kong registered subsidiaries, Kambo Locksets. Kambo Hardware, another wholly owned subsidiary of the Company targets and distributes locksets and related hardware to countries other than the US and Canada and it mainly serves our customers in Asian countries.
In 1993, as the laws and regulations for processing with imported materials entity changed in China, we established our wholly foreign owned entity (WFOE) subsidiary, Dongguan Xingfa Hardware Products Limited (“Xingfa”) located in Shatian County, Dongguan City, Guangdong Province of PRC. Xingfa is equipped with various types of machines such as die casting, furnace, polishing and other machines for metal processing in a 17,560 m2 manufacturing facility. In light of excess production capacity due to current economic conditions, Xingfa subleased one plant building of approximately 4,300 m2 to reduce our operating costs.
| ● | We restructured our corporate organization in 2009 and incorporated Hing Fat Industrial Limited under Hong Kong law (“Hing Fat”), as the holding company of Xingfa to manage the door lockset manufacturing activities of Xingfa and to conduct research and development. |
| ● | On March 26, 2014, Kambo Locksets Limited was incorporated under Hong Kong law. Kambo Locksets is a trading company focusing on marketing and sales of our products in North America market and became our subsidiary as a result of reorganization. |
| ● | On February 25, 2015, Kambo Hardware Limited was incorporated under Hong Kong law. Its primary business is to sell our products to markets outside of the North America, mainly in Asian countries. |
| ● | Bamberg (HK) Limited (“Bamberg”) was incorporated on June 24, 2016 under Hong Kong law. Through Bamberg, we started marketing our products under our own brand “Bamberg” to establish and focus on internet sales channels, such as Amazon.com |
| ● | On July 17, 2019, Intelligent Living Application Group Inc. was established as a holding company and it is a Cayman Islands exempted company limited by shares and were incorporated as an offshore holding company for listing purposes and for further expansion flexibility. Intelligent Living Application Group Inc. owns 100% of the equity interest in Intelligent Living Application Group Limited, which was incorporated on March 19, 2014 under the laws of BVI. |
| ● | On July 17, 2019, the Company issued 500,000,000 ordinary shares to its shareholders. On August 14, 2019, these shareholders surrendered 499,990,000 ordinary shares to the Company at no consideration. The transaction is considered as a recapitalization prior to the Company’s IPO. |
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| ● | A reorganization of the Company’s legal entity structure was completed in April 2020. The reorganization involved the incorporation of ILAG in July 2019 and execution of the Share Exchange Agreement between ILAG and ILA BVI in April 2020 (the “Share Exchange Agreement”) whereby ILAG took control of ILA BVI and its wholly owned subsidiaries by acquiring all the outstanding shares of ILA BVI with ordinary shares of ILAG. Pursuant to the Share Exchange Agreement, ILAG and ILA BVI exchanged 2,550,000 shares of ILA BVI for 12,990,000 ordinary shares of ILAG. This transaction was treated as a recapitalization of the Company and the financial statements give retroactive effect to this transaction. |
| ● | On July 16, 2021, the BOD and Shareholders of the Company approved the Amended and Restated Memorandum and Articles of Association of the Company and our authorized share capital currently is $50,000 divided into 500,000,000 shares, comprising of (i) 450,000,000 ordinary shares, par value of $0.0001 each; and (ii) 50,000,000 preferred shares, par value of $0.0001 each. |
| ● | Through Intelligent Living Application Group Limited in BVI, we own 100% of the equity interest in Hing Fat, Kambo Locksets, Kambo Hardware and Bamberg, and through Hing Fat, we own 100% of the equity interest in Xingfa. | |
| ● | On February 6, 2025, the Board of Directors (the “Board”) of the Company, pursuant to the Articles of Association of the Company, designated 2,000,000 Preferred Shares of the Company as series A preferred shares of the Company, par value US$0.0001 each (“Series A Preferred Shares”) which shall have twenty (20) votes for every fully paid Series A Preferred Share at any general meeting. The Compensation Committee of the Board and the Board granted the 2,000,000 Preferred Shares to Mr. Bong Lau, the Chairman and CEO of the Company on February 19, 2025. | |
| ● | On February 25, 2025, Intelligent Living Application Group Inc. (the “Company”) entered into a Placement Agency Agreement (the “PAA”) with Craft Capital Management LLC (“Craft Capital”), as the Placement Agent, to issue and sell 1,034,483 ordinary shares (the “Shares”) of the Company, $0.0001 par value per share (“Ordinary Shares”), at a purchase price of $0.58 per Share. The Shares were offered by the Company pursuant to its shelf registration statement on Form F-3 (File No. 333-274495), that was declared effective by the Securities and Exchange Commission on December 4, 2023 (the “Registration Statement”), on a best-efforts basis (the “Offering”). The offer and sale of the Shares in the Offering are described in the Company’s prospectus constituting a part of the Registration Statement, as supplemented by a final prospectus supplement dated February 25, 2025. Pursuant to the terms of the PAA, the Company agreed to pay the Placement Agent a cash fee equal to 8.0% of the gross proceeds of the Offering and to reimburse the Placement Agent for certain of its expenses in an aggregate amount up to $50,000. The Company also agreed to issue, as additional compensation, to the Placement Agent, placement agent warrants to purchase up to 41,380 Ordinary Shares, equivalent to 4% of the Shares, at an exercise price of $0.783 per share. The warrants have a term of three years after February 25, 2025. In addition, the Company and its officers and directors, agreed to a 90-day “lock-up” period from the closing date of the Offering, subject to certain exceptions. The offering closed on February 27, 2025 and the gross proceeds from the offering, before deducting the placement agent’s fees and other offering expenses, is $600,000 |
Until 2018, we have maintained a profitable business with steady growth in our revenues and earnings. In 2018, we experienced the sudden impact caused by the tariff war between the US and China that resulted in a decrease in or suspension of orders in late 2018 and first half of 2019. Our sales orders from our customers in the US stabilized and recovered since the middle of 2019 as the market digested information about the tariff war. However, our factory was temporarily closed in early 2020 and the supply chain and logistics for raw materials and delivery of finished products were disrupted because of COVID-19. In 2022, there were outbreaks of the Omicron variant of the COVID-19 in Hong Kong and many other cities in China, including Shenzhen, Shanghai, Guangzhou, Taiyuan, Changchun as well as Dongguan city where Xingfa is located, and travel restrictions, mandatory COVID-19 tests, quarantine requirements and/or temporary closure of office buildings and facilities were imposed by local governments. China eased the strict lockdown procedures in early December 2022, which led to surge in COVID infections in December 2022 and January 2023 and caused disruption our business operations as our migrant workers from other provinces in the manufacturing factory had to leave and go home early for the new year holidays and did not come back until March 2023. Our recovery after COVID-19 pandemic was negatively impacted by high interest rate which has caused a slowdown in real estate market in US, from which we generate most of our revenues. Our revenues were approximately $7.5 million and $6.4 million for the years ended December 31, 2024 and 2023, respectively. On February 1, 2025, President Trump issued executive orders imposing a 25% tariff on products imported from Canada and Mexico and a 10% tariff on products imported from China, effective February 4, 2025. An additional 10% increase in the China tariffs became effective March 4, 2025. On April 2, 2025, President Trump announced that the United States would impose a 10% tariff on all countries, effective on April 5, 2025, and individualized higher tariff rates on countries with which the United States has proportionately large trade deficits in goods, including, among others, a 34% additional tariff on goods imported from China that brings the total additional tariff rate levied on Chinese goods since 2025 to 54%. On April 4, 2025, the Chinese government announced that China would impose a 34% tariff on goods imported from the United States. President Trump responded by further imposing an additional 50% tariff on goods imported from China that brings the total additional tariff rate levied on Chinese goods since 2025 to 104%. On April 9, 2025, China retaliated against U.S. tariffs by imposing tariffs of 84% on goods from the United States. On April 9, 2025, President Trump suspended reciprocal tariffs imposed on trade surplus countries for 90 days with exception of China, which faces an additional 41% tariff increase that brings the total additional tariff rate levied on products from China since 2025 to 145% which has made export of our products to the United State impossible. We must develop markets in Asia and other regions to mitigate the natively impact caused by this tariff war. On April 11, 2025, China retaliated against U.S. tariffs by imposing tariffs of 125% on goods from the United States.
We deployed alternative pricing strategies to alleviate the negative impact from COVID-19 and previous higher tariffs as we raised our unit product selling price in July 2021. Due to the price increase, slow recovery from COVID-19 and the high interest rate in the US, our revenues decreased by approximately $5.7 million or 47% for the year ended December 31, 2023 compared to 2022. Our profit margin decreased to 9.8% for 2023 from 18.1% for 2022. If the idle capacity impact was removed, our profit margin decreased to 15.2% in 2023. The decrease in margin during 2023 was mainly due to the increase of labor costs and raw materials such as zinc alloy and iron.
Our revenues from sales of door locksets increased by $1,063,194, or 16.5% for the year ended December 31, 2024 to $7,506,551 from $6,443,357 for the year ended December 31, 2023. The increase was mainly due to increase in units sold in 2024. We renegotiated bank borrowings with lower interest rate to sustain our operation cash needs. Our bank borrowings outstanding as of December 31, 2024 was approximately $0.4 million as compared to approximately $0.5 million as of December 31, 2023. Selling and marketing expenses increased to $1,102,778 in 2024 from $59,841 for 2023 because of increase in market research expenses. Our general and administrative expenses decreased to approximately $3.4 million for 2024 from approximately $4.4 million for 2023 because of decrease in compensation to directors and executive officers and professional fees as a public company. Finance costs were decreased to $25,834 for 2024 from $26,935 for 2023. The combination of all above factors, along with decrease in other income and increase of provision for income tax, have resulted in an increase of our net loss of $188,769 to $3,690,287 for 2024 from $3,501,518 for 2023.
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Currently, our customer and geographical market concentration are high. To mitigate the issues of concentration of customers and geographical markets, we are contacting property and hotel/service apartment developers in China and South-east Asia to diversify our customer base and reduce our market concentration. The following table shows revenues from customers that accounted for more than 10% of our total operating revenues:
| For the years ended | ||||||||||||||||||||||||
| December 31, | ||||||||||||||||||||||||
| 2024 | 2023 | 2022 | ||||||||||||||||||||||
| Customer A | $ | 2,823,568 | 37.6 | % | $ | 1,786,656 | 27.5 | % | $ | 5,654,248 | 46.5 | % | ||||||||||||
| Customer B | 1,442,988 | 19.2 | % | 888,595 | 13.7 | % | 1,871,116 | 15.4 | % | |||||||||||||||
| Customer C | 2,213,651 | 29.5 | % | 1,723,506 | 26.5 | % | 1,586,681 | 13.1 | % | |||||||||||||||
| Customer D | — | — | 1,332,746 | 20.5 | % | 1,306,755 | 10.7 | % | ||||||||||||||||
| $ | 6,480,207 | 86.3 | % | $ | 5,731,503 | 88.2 | % | $ | 10,418,800 | 85.7 | % | |||||||||||||
The following table sets forth the Company’s revenues from customers by geographical areas based on the location of the customers:
| For the years ended | ||||||||||||
| December 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| US | $ | 7,393,736 | $ | 6,364,773 | $ | 11,717,347 | ||||||
| Canada | 112,815 | 78,584 | 440,755 | |||||||||
| Total | $ | 7,506,551 | $ | 6,443,357 | $ | 12,158,102 | ||||||
Our profit margin was approximately 6.8% due to the tariff war between US and China started in 2018. To mitigate the impact of tariff war, we have launched a series of procurement actions to reduce the costs, and we managed to gradually improve our profit margins, which was 17.5% for 2024, 9.8% for 2023 and 18.1% for 2022. In addition, once tariff war is settled and inflation is under control along with our continuous efforts in expanding product selections and varieties, better procurement of raw materials, ability to improve production efficiency, attracting new customers and initiatives to reduce our overhead costs, we hope to return to profitability. As the permit for electro-plating production is more stringently regulated in China, we acquired an electro-plating production line in 2022 in an industrial park near our Xingfa factory to reduce outsourced electro-plating costs. However, the high interest rate and tariff war between China and U.S. have made our customers more cautious in placing more orders. As a result, our gross margin was negatively affected by amortization of idle capacity. To increase the utilization rate, the management is developing electro-plating business to provide services to third parties with our newly acquired plant and also continued the development of new smart lock products for mainland China, Cambodia and Hong Kong markets which expect to launch by the end of 2025.
Key Factors Affecting Our Results
We believe the key factors affecting our financial condition and results of operations include the follows:
| ● | Our Relationship with Customers. We rely heavily on customers’ demand to sell our products. Our three and four largest customers accounted for 86.3% and 88.2% for the years ended December 31, 2024 and 2023, respectively. In addition, our five largest customers accounted for approximately 95% and 92% for the years ended December 31, 2024 and 2023, respectively. Our strategy is to attempt to strengthen our direct relationships with these customers to secure and expand the sales orders from these customers in the future. |
| ● | Cost of Goods Sold. Our products are produced in our manufacturing plant Xingfa in Dongguan, Guangdong Province in the PRC. Cost of raw materials, labor costs and manufacturing overhead incurred will affect our product cost, and we generally do not have long-term contractual arrangements with our suppliers. We typically maintain good relationships with our suppliers. Increases to raw material prices, minimum wage requirements of our staff in the PRC and consumables could negatively affect our gross profit margins and results of operations to the extent that we are unable to pass these costs on to our customers. If we experience shortages in the supply of certain raw materials or if we get inferior quality raw materials, we may not be able to find or develop alternative supply sources, which could result in delays, reductions in manufacturing and product shipments and could adversely impact the quality of our products, all of which could adversely affect our results of operations and financial condition. We have not experienced significant shortages of raw materials in the past, and we will continue to monitor the fluctuation of our costs and our relationship with our suppliers. |
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| ● | More Stringent Environmental and OSH Protection Requirements in the PRC. Environmental and OSH protection authorities impose various administrative penalties on persons or enterprises in violation of the Environmental Protection Law and Occupational Safety and Health Law of the PRC and Xingfa is subject to such laws and regulations. Such penalties include warnings, fines, orders to rectify within the prescribed period, orders to cease construction, orders to restrict or suspend production, orders to make recovery, orders to disclose relevant information or make an announcement, imposition of administrative action against relevant responsible persons, and orders to shut down facility. Any person or entity that pollutes the environment resulting in damage could also be held liable under the Tort Law of the PRC. In addition, environmental organizations may also bring lawsuits against any entity that discharges pollutants detrimental to the public welfare. We engaged an independent laboratory to conduct review of the compliance with environmental laws and regulations by Xingfa. We believe Xingfa has established sufficient measures and systems to implement and comply with the requirements of such laws and regulations. We and Xingfa may incur additional costs to ensure compliance with environmental and worker safety and health protection requirements in the PRC. To cope with the green requirements as well as our mission of ESQ achievement, we decided to enhance our production line. |
| ● | Relations Between the US and China. At various times during recent years, the US and China have had disagreements over political and economic issues. Controversies may arise in the future between these two countries. These controversies also could make it more difficult for us to provide our products to our customers in the US. The international trade policies of China and the US could adversely affect our business, and the imposition of trade sanctions and tariffs relating to imports, taxes, import duties and other charges on imports from China, including those applied specifically to our products, or the imposition of taxes, import duties or other charges on exports to the U.S. could increase our costs and affect our operating results negatively. Starting in January 2021, we stopped absorbing tariffs cost from 2018 for our U.S. customers and U.S.. Since February 1, 2025, President Trump has increased tariff levied on products from China to 145% which has made export of our products to the United State impossible. We must develop markets in Asia and other regions to mitigate the natively impact caused by this tariff war. |
| ● | Competition: To continue to compete effectively, we must maintain our reputation for innovation and high-quality products and be flexible and innovative in responding to rapidly changing market demands. The number of our direct competitors and the intensity of competition may increase as we expand into other product lines such as smart locksets. Our competitors may enter into business combinations or alliances that strengthen their competitive positions or prevent us from taking advantage of such combinations or alliances. Our competitors also may be able to respond more quickly and effectively than we can to new or changing opportunities, standards or consumer preferences. Our results of operations and market position may be adversely impacted by our competitors and the competitive pressures in the lockset industries. |
Key Operating Metrics
Our management regularly reviews a number of metrics to evaluate our business, measure our performance, identify trends, formulate financial projections and make strategic decisions. The main metrics we consider are the results for the years ended December 31, 2024, 2023 and 2022, as set forth in the table below.
| For the years ended December 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Revenues | $ | 7,506,551 | $ | 6,443,357 | $ | 12,158,102 | ||||||
| Profit margin | 17.5 | % | 9.8 | % | 18.1 | % | ||||||
| Net loss | $ | (3,690,287 | ) | $ | (3,501,518 | ) | $ | (1,655,903 | ) | |||
| Inventory turnover (in days) | 292 | 294 | 174 | |||||||||
| Accounts receivable turnover (in days) | 14 | 58 | 41 | |||||||||
We project our revenue based on purchase orders from our customers, the current principal driver of our business. Then, we will estimate the expected gross profit based on our in-house standard material and cost table to determine what our profit margin should be. If there will be a downtrend of revenue, we try to lower our costs such as raw materials and direct labor. Normally, when there is no disruption on logistics such as the ones caused by COVID-19 or significant increase on tariff of products to the United States, raw materials and packaging consumables will be kept at a safe level that may sustain potential production needs for about two months. Potential production needs include quantities from purchase orders received and projected sales. Taking into account production time, inventory turnover and accounts receivable turnover and our cash position, we then project our working capital needs and also identify potential sales sources.
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The number of purchase orders from our customers for 2024 were higher than those in 2023. Units of product shipped during 2024 were approximately 1.6 million units (including approximately 0.2 million units of spare parts) compared to approximately 1.3 million units (including approximately 0.1 million units of spare parts) in 2023.
Starting in 2020, we are studying and hope to improve our sales mix, namely more ODM and more self-branded products, geographic market mix, namely the US, South-east Asia and China, cost structure and procurement options in order to further optimize our profit performance. However, as the combined effect of slow recovery post COVID-19 and the amortization of our electroplating production line, we have incurred a lower profit margin during the fiscal year 2023. We continue to promote higher value products to our customers and develop smart lock product series in 2024. Despite our efforts to optimize our product mix and cost structure, purchase orders from our customers were slowed down as the reasons discussed above. As we have to keep our factory running and employees working, we have stocked up to achieve the expected short delivery time to meet potential new customers demand, therefore, our inventory turnover in days was negatively affected. We believe that we can further reduce our cost of raw materials with new processing techniques, to maintain volume rebates of raw materials and enhance our gross margin as we optimize our product-mix to focus our marketing efforts on higher margin products and new products. To better manage our profit margin in light of rising cost of raw materials, we leverage extensive product quality testing to identify alternative raw materials mix that are designed to lower our production costs. Since the second half of 2021, we have used stainless steel to substitute brass. Since February 1, 2025, President Trump has increased tariff levied on products from China to 145% which has made export of our products to the United State impossible. We must develop markets in Asia and other regions to mitigate the natively impact caused by this tariff war. We have started research in Thailand and Southern East Asia markets.
Results of Operations
The following table summarizes our consolidated statements of operations for the periods indicated. This information should be read together with our CFS and related notes included elsewhere in this report. The operating results in any period are not necessarily of the results that may be expected for any future period.
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For the years ended December 31, 2024 and 2023
| For the years ended | ||||||||||||||||
| December 31, | Change | |||||||||||||||
| 2024 | 2023 | Change | % | |||||||||||||
| USD | USD | USD | ||||||||||||||
| Selected Consolidated Statements of Operations and Comprehensive Loss Data: | ||||||||||||||||
| Revenues | $ | 7,506,551 | $ | 6,443,357 | $ | 1,063,194 | 16.5 | % | ||||||||
| Cost of goods sold | (5,831,949 | ) | (5,464,591 | ) | (367,359 | ) | 6.7 | % | ||||||||
| Cost of goods sold – idle capacity | (362,894 | ) | (345,424 | ) | (17,469 | ) | 5.1 | % | ||||||||
| Gross profit | 1,311,708 | 633,342 | 678,366 | 107.1 | % | |||||||||||
| Selling and marketing | (1,102,778 | ) | (59,841 | ) | (1,042,937 | ) | 1,742.8 | % | ||||||||
| General and administrative | (3,403,903 | ) | (4,440,314 | ) | 1,036,411 | (23.3 | )% | |||||||||
| Research and development | (649,753 | ) | — | (649,753 | ) | — | % | |||||||||
| Finance costs | (25,834 | ) | (26,935 | ) | 1,011 | (4.1 | )% | |||||||||
| Loss from operations | (3,870,560 | ) | (3,893,748 | ) | 23,188 | (0.6 | )% | |||||||||
| Other income (expenses) | 263,487 | 448,467 | (184,980 | ) | (41.2 | )% | ||||||||||
| Loss before provision for income taxes | (3,607,073 | ) | (3,445,281 | ) | (161,792 | ) | 4.7 | % | ||||||||
| Provision for income taxes | (83,214 | ) | (56,237 | ) | (26,977 | ) | 48.0 | % | ||||||||
| Net loss | $ | (3,690,287 | ) | $ | (3,501,518 | ) | $ | (188,769 | ) | 5.4 | % | |||||
| Loss per share – basic and diluted | $ | (0.20 | ) | $ | (0.19 | ) | $ | (0.01 | ) | 5.4 | % | |||||
Revenues
Our revenues from sales of door locksets increased by $1,063,194, or 16.5% for 2024 to $7,506,551 from $6,443,357 for 2023. The increase was mainly due to increase in units sold in 2024. Our number of products sold was approximately 1.6 million units (including approximately 0.2 million units of spare parts) for 2024, compared to 1.3 million units (including approximately 0.1 million units of spare parts) for 2023.
Cost of Goods Sold
Cost of goods sold was $5,831,949 for 2024 compared to $5,464,591 for 2023. Cost of goods sold was 77.5% and 84.8% of revenues for the years ended December 31, 2024 and 2023, respectively. The decrease in cost of goods sold as a percentage of revenue mainly caused by (i) improved procurement procedures to reduce the costs for raw materials by using new materials, and (ii) the calibration of production line along with revamping production procedures.
Cost of goods sold includes raw materials (mainly copper, stainless steel, iron and zinc alloy), direct labor (including wages and social security contributions), manufacturing overhead (such as packing materials, direct rental expense and utilities) and taxes. As a small business with limited resources, we lack the ability to hedge our raw materials costs and we monitor raw material price trends to manage our production needs.
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Cost of goods sold – idle capacity
Idle capacity consists of direct production costs in excess of charges allocated to the Company’s finished goods in production. Such costs relate primarily to depreciation expense related to the Company’s electroplating equipment that cannot be directly attributable to the production process. Idle capacity expenses were $362,894 and $345,424 for the years ended December 31, 2024 and 2023, respectively.
Gross Profit
Gross profit was $1,311,708 for 2024, an increase of $678,366, or 107.1% from $633,342 for 2023. Profit margin was 17.5% for 2024, increase from 9.8% for 2023 as a result of measures taken by the Company to lower the cost of goods sold during the current period.
We believe we can enhance our profit margin as we (i) negotiate for volume rebates that would reduce our cost of raw materials, and (ii) optimize our product mix to focus our marketing efforts on our higher margin products.
Selling and marketing expenses
Major components of selling and marketing expenses are research expenses, transportation, custom declarations, sales commissions. Selling and marketing expenses increased by $1,042,937, or 1,742.8% to $1,102,778 for 2024 from $59,841 for 2024. The increase was mainly to (i) increase in research in Thailand and Southern East Asia market, and (ii) increase in freight and transportation fees which in line with increase of units sold.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel costs for our accounting and administrative support personnel and executives as well as legal and professional fees, depreciation and amortization of non-production property and equipment. General and administrative expenses decreased by $1,036,411, or 23.3%, to $3,403,903 for 2024 from $4,440,314 for 2023. This decrease was mainly due to reduction of $373,375 in professional fees and $667,016 in stock options to officers and employees of the Company granted in 2023 under the Company’s 2022 Omnibus Equity Plan.
Research and Development Expenses
R&D Expenses were $649,753 and nil year ended December 31, 2024 and 2023. This increase was mainly due to development on smart locks, the Internet of Things (IoT) applications, plus some spending for AI production.
The Company picked and launched certain smart lock designs for sample production and have shipped them to the United State with a plan to sell them on e-commerce websites during the first half of 2025. We will continue to upgrade the new designs for smart lock with IoT functions.
Finance Costs
Finance costs decreased by $1,011, or 4.1%, to $25,834 for 2024 from $26,935 for 2023. The decrease was mainly due decreased interest expense for bank borrowings during the 2024. During 2024 and 2023, interest expense for bank borrowings was $16,559 and $18,859, respectively.
Provision for Income Taxes
Provision for income tax was $83,214 in 2024, an increase of $26,977 from $56,237 for 2023.
Our PRC entity in 2024 and 2023 was subject to the statutory PRC enterprise income tax rate of 25.0%. Our subsidiaries in Hong Kong are subject to Hong Kong taxation on income derived from their activities conducted in Hong Kong at a rate of 16.5%.
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Net loss
Net loss increased $188,769 to $3,690,287 for 2024 from $3,501,518 for 2023.
For the years ended December 31, 2023 and 2022
| For the years ended | ||||||||||||||||
| December 31, | Change | |||||||||||||||
| 2023 | 2022 | Change | % | |||||||||||||
| USD | USD | USD | ||||||||||||||
| Selected Consolidated Statements of Operations and Comprehensive Loss Data: | ||||||||||||||||
| Revenues | $ | 6,443,357 | $ | 12,158,102 | $ | (5,714,745 | ) | (47.0 | )% | |||||||
| Cost of goods sold | (5,464,591 | ) | (9,961,988 | ) | 4,497,397 | (45.1 | )% | |||||||||
| Cost of goods sold – idle capacity | (345,424 | ) | — | — | — | % | ||||||||||
| Gross profit | 633,342 | 2,196,114 | (1,562,772 | ) | (71.2 | )% | ||||||||||
| Selling and marketing | (59,841 | ) | (105,473 | ) | 45,632 | (43.3 | )% | |||||||||
| General and administrative | (4,440,314 | ) | (4,208,197 | ) | (232,117 | ) | 5.5 | % | ||||||||
| Finance costs | (26,935 | ) | (147,588 | ) | 120,653 | (81.7 | )% | |||||||||
| Loss from operations | (3,893,748 | ) | (2,265,144 | ) | (1,628,604 | ) | 71.9 | % | ||||||||
| Total other income, net | 448,467 | 609,241 | (160,774 | ) | (26.4 | )% | ||||||||||
| Loss before provision for income taxes | (3,445,281 | ) | (1,655,903 | ) | (1,789,378 | ) | 108.1 | % | ||||||||
| Provision for income taxes | (56,237 | ) | — | (56,237 | ) | — | % | |||||||||
| Net loss | $ | (3,501,518 | ) | $ | (1,655,903 | ) | $ | (1,845,615 | ) | 111.5 | % | |||||
| Loss per share - basic and diluted | $ | (0.19 | ) | $ | (0.11 | ) | $ | (0.08 | ) | 72.7 | % | |||||
Revenues
Our revenues from sales of door locksets decreased by $5,714,745, or 47.0% for 2023 to $6,443,357 from $12,158,102 for 2022. The decrease was mainly due to decrease in units sold in 2023. Our total number of products sold was approximately 1.3 million units (including approximately 0.1 million units of spare parts) for 2023 comparing to 2.4 million units (including approximately 0.2 million units of spare parts) for 2022.
Cost of Goods Sold
Cost of goods sold was $5,464,591 for 2023 compared to $9,961,988 for 2022. Cost of goods sold was 84.8% and 81.9% of revenues for the years ended December 31, 2023 and 2022, respectively. The increase in cost of goods sold as a percentage of revenue was mainly caused by the addition of new machinery along with revamped production procedures, increase of labor and decrease of sales due to weak demand in our major market.
Cost of goods sold includes the cost of raw materials (mainly copper, stainless steel, iron and zinc alloy), direct labor (including wages and social security contributions), manufacturing overhead (such as packing materials, direct rental expense and utilities) and taxes. As a small business with limited resources, we currently lack the ability to hedge our raw materials position and we monitor raw material price trends closely to manage our production needs.
Cost of goods sold – idle capacity
Idle capacity consists of direct production costs in excess of charges allocated to the Company’s finished goods in production. Such costs relate primarily to depreciation expense related to the Company’s electroplating equipment that cannot be directly attributable to the production process. Idle capacity expenses were $345,424 and nil for 2023 and 2022, respectively.
Gross Profit
Gross profit was $633,342 for 2023, a decrease of $1,562,772, or 71.2% from $2,196,114 for 2022. Profit margin was 9.8% for 2023, decrease from 18.1% for 2022 as a result of depreciation expense of new machinery, increase in direct labor cost and weak demand of our major market in the US, during 2023.
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We believe that we can enhance our gross margin as we are researching new processing procedures to use durable but lower cost materials.
Selling and marketing expenses
Major components of selling and marketing expenses are transportation, custom declarations, sales commissions. Selling and marketing expenses decreased by $45,632, or 43.3% to $59,841 for 2023 from $105,473 for 2022. The decrease was due mainly to reduction in freight and transportation fees.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel costs for our accounting and administrative support personnel and executives as well as legal and professional fees, depreciation and amortization of non-production property and equipment. General and administrative expenses increased by $232,117, or 5.5%, to $4,440,314 for 2023 from $4,208,197 for 2022. This increase was due mainly to additional amortization on leasehold improvement and stock options granted to officers and employees of the company under the Company’s 2022 Omnibus Equity Plan (the “Equity Plan”).
Finance Costs
Finance costs decreased by $120,653, or 81.7%, to $26,935 for 2023 from $147,588 for 2022. The decrease was mainly due reduced interest payment for a short-term loan to a third party during 2023. During the years ended December 31, 2023 and 2022, interest expense for bank borrowings was $18,859 and $26,836, respectively.
Provision for Income Taxes
Provision for income tax was $56,237 in 2023, an increase of $56,237 from $nil for 2022.
Our PRC entity in 2023 and 2022 was subject to the statutory PRC enterprise income tax rate of 25.0%. Our subsidiaries in Hong Kong are subject to Hong Kong taxation on income derived from their activities conducted in Hong Kong at a rate of 16.5%.
Net loss
Net loss increased $1,845,615 to $3,501,518 for 2023 from $1,655,903 for 2022.
5B. Liquidity and Capital Resources
Liquidity and Capital Resources
We are a holding company incorporated in the Cayman Islands. We conduct our operations primarily through our subsidiaries in Hong Kong and China. As a result, our ability to pay dividends depends upon dividends paid by our subsidiaries. If our subsidiaries incur debt on their behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, Xingfa is permitted to pay dividends in accordance with PRC accounting standards and regulations. Under PRC law, Xingfa is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. Additionally, Xingfa may allocate a portion of its after-tax profits based on PRC accounting standards to its enterprise expansion fund and staff bonus and welfare funds, at its discretion. Xingfa may also allocate a portion of its after-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval as long as certain routine procedural requirements are fulfilled. However, capital account transactions, which include foreign direct investment and loans, must be approved by and/or registered with SAFE and its local branches.
Our cost structure is relatively fixed and our working capital requirements are generally influenced by our order backlog. We need substantial operating funds to pay for raw materials; maintain an appropriate level of work-in-process inventory; and keep the production facility open. To support our working capital needs, we maintain a credit facility with the Bank of China (Hong Kong) Limited for approximately $897,000 since 2021, which is guaranteed by our directors and their personal properties. In 2021, a shareholder and director forgave an advance of $717,948 ($153,846 in 2020) to the Company and treated as a shareholder contribution.
Our working capital was $7,395,318, $10,711,197 and $14,201,841 as of December 31, 2024, 2023 and 2022. Our cash and cash equivalents were $1,280,911, $4,483,730 and $9,165,651 as of December 31, 2024, 2023 and 2022, respectively. While our business has been negatively impacted by the tariffs, COVID-19 and high interest rate in all 2024, 2023 and 2022, we believe we are able to obtain sufficient operating funds from our existing shareholders, potential investors or extend Hong Kong government guaranteed low interest bank borrowing to operate our business.
On July 15, 2022, we closed our IPO, raising net proceeds of approximately $16.86 million after deducting underwriting commission and offering expenses. We believe that our current working capital is sufficient to support our operations for the next 12 months. We may, however, need additional cash resources in the future if we experience changes in business conditions or other developments, or if we find and wish to pursue opportunities for investment, acquisition, capital expenditure or similar actions. If we determine that our cash requirements exceed the amount of cash, cash equivalents and restricted cash we have on hand at the time, we may seek to issue equity or debt securities or obtain credit facilities. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. Our obligation to bear credit risk for certain financing transactions we facilitate may also strain our operating cash flow. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.
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Cash Flows
A summary of the sources and uses of cash and cash equivalents is as follows:
| For the years end December 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| USD | USD | USD | ||||||||||
| Selected Consolidated Statements of Cash Flows Data: | ||||||||||||
| Net cash (used in) operating activities | $ | (3,042,081 | ) | $ | (3,163,187 | ) | $ | (4,170,876 | ) | |||
| Net cash (used in) investing activities | (115,161 | ) | (1,360,274 | ) | (4,181,724 | ) | ||||||
| Net cash (used in) provided by financing activities | (44,557 | ) | (154,976 | ) | 17,397,802 | |||||||
| Effect of exchange rate on cash | (1,020 | ) | (3,484 | ) | (10,680 | ) | ||||||
| Net (decrease) increase in cash | (3,202,819 | ) | (4,681,921 | ) | 9,034,522 | |||||||
| Cash and cash equivalents at beginning of year | 4,483,730 | 9,165,651 | 131,129 | |||||||||
| Cash and cash equivalents at end of year | $ | 1,280,911 | $ | 4,483,730 | $ | 9,165,651 | ||||||
Operating Activities
Net cash used in operating activities was $3,042,081 for 2024 and was primarily attributable to (i) the net loss of $3,690,287; (ii) an increase in inventory of $7,647; (iii) an increase in deposits of $301; (iv) a decrease in accounts payable of $71,823; (v) an increase in prepayment of $306,050; (vi) a decrease in other payables and accruals of $134,159; (vii) a decrease in taxes payable of $15,081; and being offset by (i) a decrease in account receivables of $ 290,569; (ii) non-cash item of $797,656 of depreciation and amortization; (iii) increase in other receivables of $95,031; (iv) an increase in cash flow by other elements of $11.
Net cash used in operating activities was $3,163,187 for 2023 and was primarily attributable to (i) the net loss of $3,501,518; (ii) an increase in inventory of $586,551; (iii) an increase in deposits of $ 71,188; (iv) an decrease in accounts payable of $67,945; (v) a increase in prepayment of $ 1,412,318; (vi) a decrease in other payables and accruals of $ 50,253; (vii) a decrease in advance from customers of $6,364; and being offset by (i) a decrease in account receivables of $1,119,804; (ii) non-cash item of $693,531 of depreciation and amortization and $667,016 of options issued for equity compensation plan; (iii) increase in taxes payable of $31,972; (iv) an increase in cash flow by other elements of $20,627.
Net cash used in operating activities was $4,170,876 for 2022 and was primarily attributable to (i) the net loss of $1,655,903; (ii) a decrease in accounts payable of $1,631,595; (iii) an increase in accounts receivable of $697,873; (iv) a decrease of the advance from customers of $216,269; (v) an increase in prepayment of $180,974; (vi) a decrease in other payables and accruals of $960,292; (vii) a decrease in cash flow by other elements of $42,771; and being offset by (i) a decrease in other receivables of $268,621; (ii) non-cash item of $408,473 including $303,269 of depreciation and amortization, $105,204 of bad-debt being offset; (iii) decrease in inventory of $535,182; (iv) an increase in cash flow by other elements of $2,525.
Investing Activities
Net cash used in investing activities was $115,161 for 2024 was primarily attributable to purchase of property and equipment for electroplating production.
Net cash used in investing activities was $1,360,274 for 2023 was primarily attributable to leasehold improvement and purchase of property and equipment for electroplating production.
Net cash used in investing activities was $4,181,724 for 2022 was primarily attributable to purchase of property and equipment for electroplating production.
Financing Activities
Net cash used in financing activities was $44,557 for 2024 and was primarily attributable to repayments of bank borrowings.
Net cash used in financing activities was $154,976 for 2023 and was primarily attributable to repayments of bank borrowings.
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Net cash provided by financing activities was $17,397,802 for 2022 and was primarily attributable to proceeds from public offering of $18,048,369; offset by (i) payments of finance lease liability of $8,391, and (ii) repayment of bank borrowings of $642,176.
Capital Expenditures
We had capital expenditures of $115,161 and $1,360,274 for 2024 and 2023, respectively. Our capital expenditures were mainly used for purchases of production equipment and office equipment. We intend to fund our future capital expenditures with lease financing, if available, proceeds from our offering and other financing alternatives. We will continue to make capital expenditures to support the growth of our business.
Bank Facility
On November 3, 2017, Kambo Locksets Limited obtained banking facilities from the Bank of China (Hong Kong) Limited pursuant to which it may borrow up to HK$ 6.0 million (approximately $0.8 million) for working capital purposes. On June 24, 2021, this banking facilities was increased to HK$ 7.0 million (approximately $0.9 million). The credit facility bears interest at 5.5% and it is personally guaranteed by Mr. Wynn Hui and Mr. Bong Lau (both major shareholders and directors of the Company). The credit facility does not have an expiration date and is collateralized by a property owned by Kambo Security Products Limited, a related party.
Off-Balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity or that are not reflected in our consolidated financial statements.
5C. Research and Development, Patents and Licenses, etc.
See “Item 4. Information on the Company—B. Business Overview —” Intellectual Property.”
D. Trend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events from January 1, 2024 to December 31, 2024 that are reasonably likely to have a material effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
E. Critical Accounting Estimates
We prepare our financial statements in accordance with generally accepted accounting principles of the United States (“GAAP”). GAAP is a comprehensive set of accounting and disclosure rules and requirements. The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Our actual results could differ from those estimates. We use historical data to assist in the forecast of our future results. Deviations from our projections are addressed when our financials are reviewed on a monthly basis. This allows us to be proactive in our approach to managing our business. It also allows us to rely on proven data rather than having to make assumptions regarding our estimates.
When reading our CFS, you should consider our selection of critical accounting policies, the judgment and other uncertainties affecting the application of such policies and the sensitivity of reported results to changes in conditions and assumptions. Our critical accounting policies and practices include the following: (i) leases, and (ii) deferred tax assets.
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(i) Leases
The Company follows FASB ASU 2016-02, “Leases” (Topic 842) and measures the lease liability based on the present value of the lease payments discounted by the relevant borrowing rate and reduces the carrying value of the lease liability for lease payments made.
The Company accounts for all significant leases as either operating or finance leases. At lease inception, if the lease meets any of the following five criteria, the Company will classify it as a finance lease: (i) the lease transfers ownership of the underlying asset to the Company by the end of the lease term, (ii) the lease grants the Company an option to purchase the underlying asset that the lessee is reasonably certain to exercise, (iii) the lease term is for the major part of the remaining economic life of the underlying asset, (iv) the present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments equals or exceeds substantially all (90% or more) of the fair value of the underlying asset, or (v) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. Otherwise, the lease will be treated as an operating lease.
For leases with an initial term of 12 months or less, the Company is permitted to and did make an accounting policy election by class of underlying assets not to recognize lease assets and lease liabilities. During 2024 and 2023, the Company recognized lease expense for such leases on a straight-line basis over the lease term.
(ii) Deferred Tax Assets
We consider the probability that a portion of or all of the deductible temporary differences, carryforward of unused tax losses and carryforward of unused tax credit can be utilized against future taxable profits in the recognition of deferred tax assets. In assessing recoverability of deferred tax assets, we consider the scheduled reversal of deferred tax liabilities, projected future taxable profit and tax planning strategies.
We believe that our accounting for the deferred tax assets is a “critical accounting estimate” because it requires us to evaluate and assess the probability of future taxable profit and our business plan., which are inherently uncertain
Based upon the level of historical taxable profit and projections for future taxable profit over the periods for which the deferred tax assets are deductible. we believe it is probable that we will not utilize the benefits of these deferred tax assets as of December 31, 2024 and 2023. Uncertainty of estimates of future taxable profit could increase due to changes in the economic environment surrounding us, effects by market conditions. effects of currency fluctuations or other factors.
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| ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
6.A. Directors and Executive Officers
The following table sets forth information regarding our executive officers and directors as of the date of this report.
| Directors and Executive Officers | Age | Position/Title | ||
| Bong Lau (Yu Bong Lau) | 47 | Chief Executive Officer, Chairman of the Board and Director | ||
| Frederick Wong (Ching Wan Wong) | 57 | Chief Financial Officer | ||
| Bun Lau (Yu Bun Lau) | 45 | Chief Operations Officer and Director(6) | ||
| Wynn Hui (Po Wang Hui) | 74 | Chief Technical Officer and Director | ||
| Errol Hui (Shun Hong Hui) | 36 | Vice President of Engineering | ||
| Tony Zhong (Wei Zhong) | 41 | Vice President of Finance | ||
| Monique Ho(1)(2)(3) (Ting Mei Ho) | 50 | Independent Director | ||
| Chun Fai (Kenneth) Liu (1)(2)(3)(4) | 36 | Independent Director | ||
| Carina Chui(1)(2)(3) (Wan Yee Carina Chui) | 46 | Independent Director | ||
| Henry Yeung (Wing Hang Yeung)(5) | 41 | Independent Director |
(1) Member of audit committee.
(2) Member of compensation committee.
(3) Member of nominating and corporate governance committee.
(4) Mr. Kenneth Liu was appointed as a director on July 4, 2023.
(5) Mr. Yeung was appointed on January 15, 2024.
(6) Mr. Bun Lau was a director of the Board from July 17, 2019 to May 24, 2022 and was re-appointed as a director of the Board on January 15, 2024.
Bong Lau, Chief Executive Office and Chairman of the Board of the Directors of the Company (the “Board”)
Mr. Bong Lau was appointed as a director of the Board on July 17, 2019 and Chairman of the Board on June 1, 2020. Mr. Lau joined the Company in 1999 and has over 20 years of extensive experience in managing door security hardware businesses. Mr. Lau also works well together with our large and small partners geographically to build solid distribution networks, implements marketing and business expansion strategies. He is primarily responsible for the overall sales strategy, distribution management and corporate strategies of the Company. In 1996, Mr. Lau studied in Civil Engineering at the University of Alberta for 2 years.
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Frederick Wong, Chief Financial Officer
Mr. Wong was appointed as our Chief Financial Officer on June 1, 2020. He has almost 30 years of experience in accounting, internal control, financial control and capital markets. Mr. Wong has served as an independent director of Network CN Inc. (OTC PINK: NWCN) since January 1, 2022. He has served as compliance offer for China Finance Investment Holdings Limited (Stock Code: 0875.HK) from November 1, 2018 to May 31, 2020. Mr. Wong has also served as a member of the board of directors for On Real International Holdings Limited (Stock Code: 8245.HK) from March 31, 2016 to April 22, 2022, Top Standard Corp. (Stock Code: 8510.HK) since January 24, 2020, and Prime Intelligence Solutions Group Limited (Stock Code: 8379.HK) since June 17, 2022. From September 2017 to August 2018, Mr. Wong was the chief financial officer of O Media Limited, a Macau media company in gaming. He was a director of Network CN, Inc. (stock code: NWCN) in U.S.A. between September 2015 and July 2017, and the authorized representative and company secretary of China Oil Gangran Energy Group Holdings Limited (Stock Code: 8132.HK) from December 2015 to November 2016 and continued acting as the authorized representative until January 2017. Mr. Wong is a CPA of Hong Kong, CPA of Canada, CPA of Australia and fellow member of Hong Kong Institute of Taxation. Mr. Wong received a Bachelor of Business Administration from the Chinese University of Hong Kong in 1989, a Bachelor or Business from the University of Southern Queensland, Australia, in 1992 and studied EMBA courses offered by the Troy University (formerly known as Troy State University), Alabama, U.S. from 1999 to 2000.
Bun Lau, Chief Operating Officer and Director
Mr. Bun Lau was appointed as the Chief Operating Officer of the Company on June 1, 2020. Mr. Bun Lau was a director of the Board from July 17, 2019 to May 24, 2022, and he was re-appointed as a director of the Board on January 15, 2024. Mr. Lau joined the Company in 2005 and has over 15 years of working experience in the door security hardware industry. Mr. Bun Lau is the brother of Mr. Bong Lau. Mr. Lau is primarily responsible for the business development and product sales strategy. He is also responsible for the corporate strategies of the Company and the overall administrative management process. Prior to joining the Company, he worked at Citic Ka Wah Bank and was responsible for reviewing credit limits, acceptable levels of risk, terms of payment and enforcement actions with customers from 2003 to 2004. Mr. Lau graduated from The University of Alberta in Canada majoring in Decision Information System and Management in 2003.
Wynn Hui, Chief Technology Officer and Director
Mr. Hui is one of the founders of the Company and he has been with the Company since 2009. He is also the Managing Director of Xingfa, our manufacturing factory in China. Wynn has over 50 years’ experience in factory production specialized in manufacturing plastic, metal and electronic products in the security hardware industry.
Errol Hui, Vice President of Engineering
Mr. Hui joined the Company in 2013. Mr. Hui is primarily responsible for the product development, product management and continuous enhancement of production management. He is also responsible for the corporate strategies of the Company. Mr. Hui graduated from The University of Manchester in U.K. majoring in Actuarial Science in 2011.
Tony Zhong, Vice President of Finance
Mr. Zhong joined the Company on February 1, 2020. Mr. Zhong has over 10 years of experience in accounting, internal control, financial control, SEC reporting and capital markets. Since 2011, Mr. Zhong has been the Vice President of Finance of Troops, Inc. (formerly known as SGOCO Group, Ltd. And NASDAQ: TROO). He was a Financial Manager of China Hydroelectric Corporation, from 2007 to 2011. Mr. Zhong started his career with KPMG in Beijing from 2005 to 2006. He received a Bachelor of Arts in Finance, Accounting and Management from Nottingham University, UK in 2005, and a Bachelor of Science in Applied Accounting from Oxford Brooks University, UK in 2015. Mr. Zhong is a Chartered Global Management Accountant, and was also admitted as a Fellow of the chartered institute of Management Accountants on December 21, 2018. Mr. Zhong was also admitted as a Fellow of the institute Public Accountant (Australia) and a Fellow of the Institute of Financial Accountants (UK) on October 22, 2020. In October 2024, Mr. Zhong was admitted as a Fellow Certified Practising Accountant (Australia).
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Monique Ho, Independent Director
Ms. Ho was appointed as a director of the Company on June 1, 2020. Ms. Ho is a marketing savvy director who has over 20 years of experience in media. She is the founder and Chief Executive Officer of Toppa Media Savvy Limited (TMS) that is listed on the Stock Exchange of Hong Kong under OOH Holdings Limited (Stock Code: 8091.HK) since 2018. Ms. Ho is also the co-founder of an online fashion media ztylez.com, established in 2017. In her early years after graduating with a Bachelor of Science Degree from California State University, Los Angeles in 1997, Ms. Ho was a junior Marketing Officer at Cable News Network (CNN) in CNN Asia Pacific Headquarter in Hong Kong from 1999 to 2000.
Carina Chui, Independent Director
Ms. Chui was appointed as a director of the Company on June 1, 2020. Ms. Chui has over 16 years of finance and accounting experience from accounting, auditing and corporate financial management. She has served as the chief financial officer of Numiracle Group Limited since January 1, 2014. She is a fellow member of the Hong Kong Institute of Certified Public Accountants (HKICPA) since 2013 and The American Institute of Certified Public Accountants (AICPA) since 2011. She received a Bachelor degree in Economics from University of California, Los Angeles in 2001 and an MBA from Hong Kong University of Science and Technology in 2014.
Kenneth Liu, Independent Director
Mr. Chun Fai (Kenneth) Liu , was appointed as a director of the Company on June 30, 2023. Mr. Liu has served as Chairman and Executive Director of China Eco-Farming Limited (HK Stock Exchange Code: 8166) since February 2022. Mr. Liu was the Executive Director of Inves Tech Holdings Limited (HK Stock Exchange Code: 1087) from August 2020 to April 2022 and a director of Blue Sky Solar Energy Management Limited from November 2018 to April 2022. Mr. Liu was the Executive Director of CEFC Hong Kong Financial Investment Company Limited (HK Stock Exchange Code:1520, formally known as Runway Global Holdings Company Limited) from November 2016 to June 2019 and the Manager of FT Corporate Strategy Limited from October 2013 to June 2016. Mr. Liu studied Administrative Studies at York University, Toronto, Ontario from 2007 to 2011 and he is a member of Chaozhou Chamber of Commerce.
Henry Yeung, Independent Director
Mr. Yeung was appointed as a director of the Company on January 15, 2024. Mr. Yeung has more than 19 years of management experience. Mr. Yeung has served as vice chairman and general manager of Jewellery City Group, a retail company of luxury jewelleries and watches, since 2004. Mr. Yeung has also served as the director of Green World Technology Ltd., a company developing environmental protection technologies, since 2017.
6.B. Compensation
For 2024 and 2023, we paid an aggregate of $971,000 and $950,000 in cash to our directors and executive officers, respectively. For share incentive grants to our officers and directors, see “—Share Incentive Plans.” We have not set aside or accrued any amount to provide pension, retirement or other similar benefits to our executive officers and directors.
Our PRC subsidiary is required by law to make contributions equal to certain percentages of each employee’s salary for his or her pension insurance, medical insurance, unemployment insurance and other statutory benefits and a housing provident fund.
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Employment Agreements, Director Agreements and Indemnification Agreements
We entered into employment agreements with each of our executive officers. Pursuant to these agreements, each of our executive officers is employed for an initial term of one year, renewable upon mutual agreement of the Company and the executive officer.
The executive officers are entitled to a fixed salary and to participate in our equity incentive plans, if any and other company benefits, each as determined by the Board or a committee designated by the Board from time to time.
We may terminate the executive officer’s employment for cause, at any time, without notice or remuneration, for certain acts, such as conviction or plea of guilty to a felony or grossly negligent or dishonest acts to our detriment, or material breach of any term of any employment or other services, confidentiality, intellectual property or non-competition agreements with the Company. In such case, the executive officer will solely be entitled to accrued and unpaid salary through the effective date of such termination, and his/her right to all other benefits will terminate, except as required by any applicable law. The executive officer is not entitled to severance payments upon any termination.
The executive officer may voluntarily terminate his/her employment for any reason and such termination shall take effect 30 days after the receipt by Company of the notice of termination. Upon the effective date of such termination, the executive officer shall be entitled to (a) accrued and unpaid salary and vacation through such termination date; and (b) all other compensation and benefits that were vested through such termination date. In the event the executive officer is terminated without notice, it shall be deemed a termination by the Company for cause.
Each of our executive officers agreed not to use for his/her personal purposes nor divulge, furnish, or make accessible to anyone or use in any way (other than in the ordinary course of the business of the Company) any confidential or secret information or knowledge of the Company, whether developed by him/herself or by others.
In addition, each executive officer agreed to be bound by non-competition restrictions during the term of his or her employment and for six months following the last date of employment.
Each executive officer also has agreed not to (i) solicit or induce, on his/her own behalf or on behalf of any other person or entity, any employee of the Company or any of its affiliates to leave the employ of the Company or any of its affiliates; or (ii) solicit or induce, on his/her own behalf or on behalf of any other person or entity, any customer or prospective customer of the Company or any of their respective affiliates to reduce its business with the Company or any of its affiliates.
We entered into director agreements with each of our independent directors which agreements set forth the terms and provisions of their engagement.
In addition, we entered into indemnification agreements with each of our directors and executive officers that provide such persons with additional indemnification beyond that provided in our current memorandum and articles of association.
Share Incentive Plans
The BOD of the Company approved and adopted Intelligent Living Application Group Inc. 2022 Omnibus Equity Plan (the “Equity Plan”) on October 20, 2022, which was approved at the stockholders’ meeting on December 16, 2022. The total ordinary shares of the Company authorized for issuance during the term of the Equity Plan are 2,500,000 shares.
As of April, 28, 2025, stock options to purchase 820,000 ordinary shares and 1,675,000 ordinary shares have been granted and outstanding under the Equity Plan. The following paragraphs summarize the terms of the Equity Plan:
Administration. The Equity Plan requires that a committee of non-employee directors to administer the Equity Plan. Currently, our Compensation Committee, which we refer here as the Committee, administers the Equity Plan. Among other powers and duties, the Committee determines the employees who will be eligible to receive awards and establishes the terms and conditions of all awards. Unless prohibited by applicable law or the applicable rules of a stock exchange, the Committee may delegate its authority and administrative duties under the Equity Plan.
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Shares Subject to the Equity Plan. The shares issuable under the Equity Plan are our ordinary shares that are authorized but unissued or reacquired ordinary shares, including shares repurchased by the Company as treasury shares. The total ordinary shares of the Company authorized for issuance during the term of the Equity Plan is 2,500,000 shares. The Committee must equitably adjust awards and the number of shares available under the Equity Plan in the event of a recapitalization, stock split, stock dividend, extraordinary cash dividend, split-up, spin-off, reclassification, combination or other exchange of shares.
Types of Awards and Eligibility. The Equity Plan provides for five types of awards and they are: Stock Options, Stock Appreciation Rights (“SAR”), Unrestricted Stock, Restricted Stock and Restricted Stock Units (“RSU”). The Eligible Persons under the Equity Plan include Employees, Outside Directors, Consultants and New Hires of the Company or its subsidiaries, as selected by our Board or the designated committee thereof.
Vesting and Forfeiture. The Committee determines the time and conditions under which the award will vest or the period of time after which the restriction shall lapse as part of making an award. Vesting or the lapse of the period of restriction may, in the Committee’s discretion, be based solely upon continued employment or service for a specified period of time, or may be based upon the achievement of specific performance goals (individual, corporation or other basis), or both. Vesting means the time at which an option, SAR or RSU holder may exercise his or her award at the end of the period of restriction that applies to Restricted Stock. Vesting or lapse provisions need not be uniform among awards granted at the same time or to persons similarly situated. Vesting and lapse requirements will be set forth in the applicable award agreement. The Committee, in its discretion, may accelerate vesting of any award at any time. Unless otherwise determined by the Committee and included in the Participant’s Award Agreement, in the event that a Participant’s Service with the Corporation and all Related Corporations is terminated for any reason, all Awards held by the Participant which are unexercised or have not yet vested as of such date shall expire, terminate, and become unexercisable as of such termination date, provided, however, that if the Participant’s Service terminates for reasons other than Cause, all outstanding vested Options and SARs held by the Participant as of his or her termination date shall continue to be exercisable until the earlier of the expiration of their term or the date that is three months after such termination date..
Prohibition on Repricing. Except as required or permitted pursuant to a corporate transaction (including, without limitation, any recapitalization or reorganization), in no event will an Option or SAR be amended to reduce the exercise or base price or be canceled in exchange for cash, other awards or Options or SARs with an exercise price or base price less than the exercise price of the original Option or base price of the original SAR without shareholder approval.
Limits on Transfers of Awards/Beneficiary Designation. All awards are exercisable only by the participant during the participant’s lifetime, and are transferable only by will or by the laws of descent and distribution; provided, however, that the Committee may permit a transfer of an award, other than an Incentive Stock Option, to a family member of an individual, subject to such restrictions as the Committee may provide. Participants may designate a beneficiary or beneficiaries to receive their benefits under the Equity Plan if they die before receiving any or all of such benefit.
Amendment and Termination. Our BOD may amend, suspend or terminate the Equity Plan, without consent of stockholders or participants, provided, however, that amendments must be submitted to the stockholders for approval if shareholder approval is required by applicable law, and any amendment or termination that may adversely affect the rights of participants with outstanding awards requires the consent of such participants. The Committee may amend any award agreement, provided the amendment is not to re-price or constructively re-price any award.
Term. The Equity Plan is effective immediately and will terminate on the earliest to occur of (i) the 10th anniversary of the Equity Plan’s effective date, or (ii) the date on which all shares available for issuance under the Equity Plan shall have been issued as fully-vested shares.
On February 22, 2023, the Compensation Committee of the Board of Directors (the “Board”) of the Company granted stock options to purchase 820,000 ordinary shares of the Company (the “Shares”) at $1.23 per share, pursuant to the Company’s 2022 Omnibus Equity Plan, to 16 officers, directors and employees of the Company and its subsidiaries (the “Grantees”) The Grants vested immediately on February 22, 2023 and each of the Grantees also entered into a Stock Option Agreement with the Company on February 22, 2023. The options will expire five (5) years from February 22, 2023and may be exercised by cashless exercise pursuant to the terms and conditions of the Stock Option Agreement. As of April 28, 2025, none of the options has been exercised.
On February 19, 2025 (the “Grant Date”), the Compensation Committee (“Committee”) of the Board granted stock awards of ordinary shares of the Company, par value $0.0001 (the “Ordinary Shares”), pursuant to the Company’s 2022 Omnibus Equity Plan, to certain officers and employees of the Company and its subsidiaries (the “Grantees”), including: 400,000 Ordinary Shares to Wynn Hui, Chief Technical Officer and a director of the Company, 400,000 Ordinary Shares to Bun Lau, Chief Operating Officer and a director of the Company, 400,000 Ordinary Shares to Errol Hui, Vice President of Engineering of the Company, 100,000 Ordinary Shares to Frederick Wong, Chief Financial Officer of the Company, 80,000 Ordinary Shares to Wei Zhong, Vice President of Finance of the Company as well as 40,000 Ordinary Shares to each of the independent directors of the Company, namely Monique Ho, Chun Fai (Kenneth) Liu, Carina Chui and Henry Yeung. On the Grant Date, the Committee and the Board also granted 2,000,000 Series A Preferred Shares, par value US$0.0001 to Mr. Bong Lau, the Chief Executive Officer and Chairman of the Board and each Series A Preferred Share is entitled to twenty (20) votes.
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6.C. Board Practices
Terms of Directors and Officers
Our officers are elected by and serve at the discretion of the BOD and may be removed by the BOD. Our directors are not subject to a set term of office and hold office until the next general meeting called for the election of directors and until their successor is duly elected or such time as they die, resign or are removed from office by a shareholders’ ordinary resolution or the unanimous written resolution of all shareholders. A director will be removed from office automatically if, among other things, the director becomes bankrupt or makes any arrangement or composition with his creditors generally or is found to be or becomes of unsound mind.
Our BOD currently consists of 7 directors. We established an audit committee, a compensation committee and a corporate governance and nominating committee. Each of the committees of the BOD has the composition and responsibilities described below.
Board Diversity Matrix
The following table sets forth Board level diversity statistics based on self-identification of members of our Board as of April 28, 2025.
| Board Diversity Matrix (As of April 28, 2025) | ||||||||||||||||
| Country of Principal Executive Offices: | Hong Kong, China | |||||||||||||||
| Foreign Private Issuer: | Yes | |||||||||||||||
| Disclosure Prohibited Under Home Country Law: | No | |||||||||||||||
| Total Number of Directors | 7 | |||||||||||||||
| Female | Male | Non-Binary | Did Not Disclose Gender | |||||||||||||
| Part I: Gender Identity | ||||||||||||||||
| Directors | 2 | 5 | — | — | ||||||||||||
| Part II: Demographic Background | ||||||||||||||||
| Underrepresented Individual in Home Country Jurisdiction | — |
— |
— | — | ||||||||||||
| LGBTQ+ | — |
— |
— | — | ||||||||||||
| Did Not Disclose Demographic Background | — |
— |
— | — | ||||||||||||
Audit Committee
Ms. Carina Chui, Ms. Monique Ho and Mr. Kenneth Liu are members of our Audit Committee, where Ms. Carina Chui serves as the chairlady. All members of our Audit Committee satisfy the independence standards promulgated by the SEC and by Nasdaq as such standards apply specifically to members of audit committees.
We have adopted and approved a charter for the Audit Committee. In accordance with our Audit Committee Charter, our Audit Committee shall perform several functions, including:
| ● | evaluate the independence and performance of, and assess the qualifications of, our independent auditor, and engage such independent auditor; | |
| ● | approve the plan and fees for the annual audit, quarterly reviews, tax and other audit-related services, and approve in advance any non-audit service to be provided by the independent auditor; | |
| ● | monitor the independence of the independent auditor and the rotation of partners of the independent auditor on our engagement team as required by law; | |
| ● | review the financial statements to be included in our Annual Report on Form 20-F and Current Reports on Form 6-K and review with management and the independent auditors the results of the annual audit and reviews of our quarterly financial statements; | |
| ● | oversee all aspects our systems of internal accounting control and corporate governance functions on behalf of the board; |
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| ● | review and approve in advance any proposed related-party transactions and report to the full Board on any approved transactions; and | |
| ● | provide oversight assistance in connection with legal, ethical and risk management compliance programs established by management and the Board, including Sarbanes-Oxley Act implementation, and make recommendations to the Board regarding corporate governance issues and policy decisions. |
We have determined that Ms. Carina Chui possesses accounting or related financial management experience that qualifies her as an “audit committee financial expert” as defined by the rules and regulations of the SEC.
Compensation Committee
Ms. Monique Ho, Ms. Carina Chui and Mr. Kenneth Liu are members of our Compensation Committee and Ms. Monique Ho is the chairlady. All members of our Compensation Committee are qualified as independent under the current definition promulgated by Nasdaq. We have adopted and approved a charter for the Compensation Committee. In accordance with the Compensation Committee’s Charter, the Compensation Committee is responsible for overseeing and making recommendations to the Board regarding the salaries and other compensation of our executive officers and general employees and providing assistance and recommendations with respect to our compensation policies and practices. The Compensation Committee is responsible for, among other things:
| ● | To approve compensation principles that apply generally to Company employees; | |
| ● | To make recommendations to the BOD with respect to incentive compensation plans and equity-based plans and to oversee the application of the Company’s compensation recoupment/clawback policy; | |
| ● | To administer and otherwise exercise the various authorities prescribed for the Compensation Committee by the Company’s incentive compensation plans and equity-based plans; | |
| ● | To select a peer group of companies against which to benchmark/compare the Company’s compensation systems for principal officers elected by the BOD; | |
| ● | To annually review the Company’s compensation policies and practices and assess whether such policies and practices are reasonably likely to have a material adverse effect on the Company; | |
| ● | To determine and oversee stock ownership guidelines and stock option holding requirements, including periodic review of compliance by principal officers and members of the board of directors; |
Nominating and Corporate Governance Committee
Ms. Carina Chui, Ms. Monique Ho and Mr. Kenneth Liu are members of our Nominating and Corporate Governance Committee and Mr. Kenneth Liu is the chairman. All members of our Nominating and Corporate Governance Committee are qualified as “independent” under the current definition promulgated by Nasdaq. We have adopted a charter for the Nominating and Corporate Governance Committee. In accordance with its charter, the Nominating and Corporate Governance Committee is responsible for identifying and proposing new potential director nominees to the BOD for consideration and reviewing our corporate governance policies.
The Nominating and Corporate Governance Committee is responsible for, among other things:
| ● | Identify and screen individuals qualified to become Board members consistent with the criteria approved by the BOD, and recommend to the BOD nominees for election at the next annual or special meeting of shareholders at which directors are to be elected or to fill any vacancies or newly created directorships that may occur between such meetings; | |
| ● | Recommend directors for appointment to Board committees; |
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| ● | Make recommendations to the BOD as to determinations of director independence; | |
| ● | Oversee the evaluation of the BOD; | |
| ● | Make recommendations to the BOD as to compensation for the Company’s directors; and | |
| ● | Review and recommend to the BOD the Corporate Governance Guidelines and Code of Business Conduct and Ethics for the Company. |
Director Independence
Our Board reviewed the materiality of any relationship that each of our directors has with us, either directly or indirectly, and the Company determined that Ms. Monique Ho, Ms. Carina Chui, Mr. Kenneth Liu and Mr. Henry Yeung are “independent directors” as defined by NASDAQ.
Family Relationships
Mr. Bong Lau and Mr. Bun Lau are brothers and Mr. Wynn Hui is the father of Mr. Errol Hui. Except for the foregoing family relationship, there are no family relationships among our other directors or executive officers.
6.D. Employees
As of December 31, 2024, we had 238 employees. We had 255 employees as of December 31, 2023. The following table sets forth the breakdown of our employees as of December 31, 2024 by function:
| Hong Kong | PRC | |||||||||||
| Department | Headcount | Headquarters | Production | |||||||||
| Management | 10 | 7 | 3 | |||||||||
| Finance and accounting | 8 | 5 | 3 | |||||||||
| Sales and Marketing | 4 | 4 | — | |||||||||
| Purchasing | 2 | — | 2 | |||||||||
| Warehouse | 11 | — | 11 | |||||||||
| Production | 181 | — | 181 | |||||||||
| Quality Control | 3 | — | 3 | |||||||||
| Administration | 14 | 3 | 11 | |||||||||
| Technical | 5 | — | 5 | |||||||||
| Total | 238 | 19 | * | 219 | ||||||||
*including one employee, our vice president of finance based in Beijing.
As of December 31, 2024, 18 employees are based in Hong Kong, where our principal executive offices are located, one vice president of finance was based in Beijing, and the remaining employees were located in Dongguan, China.
As required by PRC regulations, Xingfa participates in various government statutory employee benefit plans, including social insurance funds, namely a pension contribution plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity insurance plan, and a housing provident fund. Xingfa is required under PRC law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of its employees, up to a maximum amount specified by the local government from time to time. As of the date of this report, we believe Xingfa has made employee benefit payments in material aspects. However, if Xingfa were found by the relevant authorities that it failed to make adequate payments, it may be required to make up the contributions for these plans as well as to pay late fees and fines. See “Risk Factors—Risks Related to Doing Business in China—Failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.”
We enter into standard labor and confidentiality agreements with our employees. We believe that we maintain a good working relationship with our employees, and we have not experienced any major labor disputes.
We understand that our success depends on our ability to attract, train and retain our employees. Therefore, as part of our human resources strategy, we offer employees competitive salaries, stock awards, performance-based cash bonuses and promotions, engagement activities, various welfare as well as other incentives. We design and provide training to our employees regularly in order to enhance their professional skills and foster their career development. We also recognize the importance of keeping our employees safe. During the outbreak of COVID-19 pandemic, we implemented changes that we determined were in the best interest of our employees and have followed local government orders to prevent the spread of COVID-19.
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6.E. Share Ownership
The following table sets forth information with respect to the beneficial ownership of each class of the Company’s voting securities as of April 25, 2025 for:
| ● | each 5% or more beneficial owners of each class of the Company’s voting securities; | |
| ● | each of our directors and executive officers; and | |
| ● | all of our directors and executive officers as a group. |
Beneficial ownership is determined in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities and include ordinary shares issuable upon the exercise of options that are immediately exercisable or exercisable within 60 days of the date hereof. These shares, however, are not included in the computation of the percentage ownership of any other person.
Except as otherwise indicated, all of the shares reflected in the table are ordinary shares and all persons listed below have sole voting and investment power with respect to the shares beneficially owned by them, subject to applicable community property laws. The information is not necessarily indicative of beneficial ownership for any other purpose.
The calculations in the table below are based on 20,769,483 ordinary shares issued and outstanding as of April 25, 2025. We have adopted a dual-class share structure such that our shares consist of Ordinary Shares and Preferred Shares. In respect of matters requiring the votes of shareholders, each Ordinary Share is entitled to one (1) vote and each Series A Preferred Share is entitled to twenty (20) votes.
Except as otherwise indicated in the table below, addresses of our directors, executive officers and named beneficial owners are in care of Intelligent Living Application Group Inc., Unit 2, 5/F, Block A, Profit Industrial Building, 1-15 Kwai Fung Crescent, Kwai Chung, New Territories, Hong Kong, Tel: + (852) 2481 7938.
| Ordinary Shares Beneficially Owned | Preferred Shares Beneficially Owned | Aggregated Voting Power | ||||||||||||||||||||||
| Number of Shares | Number of Shares | |||||||||||||||||||||||
| (including Share Options) | Percentage of Shares | (including Share Options) | Percentage of Shares | Number | Percentage | |||||||||||||||||||
| Directors and Executive Officers: | ||||||||||||||||||||||||
| Bong Lau | 2,540,000 | (1) | 12.1 | % | 2,000,000 | (8) | 100.0 | % | 42,540,000 | 69.8 | % | |||||||||||||
| Bun Lau | 2,880,000 | (2) | 13.8 | % | — | — | 2,880,000 | 4.7 | % | |||||||||||||||
| Wynn Hui | 2,940,000 | (3) | 14.0 | % | — | — | 2,940,000 | 4.8 | % | |||||||||||||||
| Frederick Wong | 160,000 | (4) | * | — | — | 160,000 | * | |||||||||||||||||
| Errol Hui | 2,840,000 | (5) | 13.6 | % | — | — | 2,840,000 | 4.7 | % | |||||||||||||||
| Tony Zhong | 120,000 | (6) | * | — | — | 120,000 | * | |||||||||||||||||
| Monique Ho | 45,000 | (7) | * | — | — | 45,000 | * | |||||||||||||||||
| Kenneth Liu | 40,000 | * | — | — | 40,000 | * | ||||||||||||||||||
| Carina Chui | 45,000 | (7) | * | — | — | 45,000 | * | |||||||||||||||||
| Henry Yeung | 40,000 | * | — | — | 40,000 | * | ||||||||||||||||||
| All directors and executive officers as a group (10 individuals) | 11,650,000 |
53.5 |
% | 2,000,000 |
(8) | 100.0 | % | 51,650,000 |
84.0 | % | ||||||||||||||
| 5% or Greater Shareholders: | ||||||||||||||||||||||||
| Bong Lau | 2,540,000 | (1) | 12.1 | % | 2,000,000 | (8) | 100.0 | % | 42,540,000 | 69.8 | % | |||||||||||||
| Bun Lau | 2,880,000 | (2) | 13.8 | % | — | — | 2,880,000 | 4.7 | % | |||||||||||||||
| Wynn Hui | 2,940,000 | (3) | 14.0 | % | — | — | 2,940,000 | 4.8 | % | |||||||||||||||
| Errol Hui | 2,840,000 | (5) | 13.6 | % | — | — | 2,840,000 | 4.7 | % | |||||||||||||||
(1) including 200,000 stock options exercisable since February 22, 2023.
(2) including 140,000 stock options exercisable since February 22, 2023.
(3) including 200,000 stock options exercisable since February 22, 2023.
(4) including 60,000 stock options exercisable since February 22, 2023.
(5) including 100,000 stock options exercisable since February 22, 2023.
(6) including 40,000 stock options exercisable since February 22, 2023.
(7) including 5,000 stock options exercisable since February 22, 2023.
(8) Mr. Bong Lau, the Chief Executive Officer and Chairman of the Board, owns 2,000,000 of the Company’s Series A Preferred Shares, par value US$0.0001, since February 19, 2025, and each Series A Preferred Share is entitled to twenty (20) votes.
* less than 1%
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| ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
7.A. Major Shareholders
See Item 6.E., “Share Ownership” for a description of our major shareholders.
7.B. Related Party Transactions
Employment Agreements, Director Agreements and Indemnification Agreements
See “Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers—Employment Agreements, Director Agreements and Indemnification Agreements.”
Share Incentives
See “Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers —Share Incentive Plans.”
Other Transactions with Related Parties
The relationship and the nature of related party transactions are summarized as follow:
In 2018, the Company entered into a rental agreement with Kambo Security Products Limited for office space in Hong Kong. The rental agreement has been renewed annually. Kambo Security Products Limited is owned by Mr. Bong Lau, Mr. Wynn Hui, and Mr. Bun Lau, major shareholders and directors of the Company. Rent expense for the years ended December 31, 2024, 2023 and 2022 was $74,000, $74,000 and $54,000, respectively.
7.C. Interests of Experts and Counsel
Not applicable.
| ITEM 8. | FINANCIAL INFORMATION |
Consolidated Statements and Other Financial Information
The financial statements required by this item may be found at the end of this Annual Report on 20-F, beginning on page F-1.
Legal Proceedings
We are currently not involved in any material legal or administrative proceedings. From time to time, we may be subject to various legal or administrative claims and proceedings arising in the ordinary course of business. Such legal or administrative claims and proceedings, even if without merit, could result in the expenditure of financial and management resources and potentially result in civil liability for damages.
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Dividends
We have not declared or paid cash dividends since the Company was incorporated in July 2019 in Cayman Island and we have no plan to declare or pay any dividends in the near future on our ordinary shares. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
We are a holding company incorporated in the Cayman Islands. We rely principally on dividends from our Hong Kong and PRC subsidiary for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiary to pay dividends to us. See “Item 4.B. Business Overview—Regulations —Regulations on Dividend Distribution.”
Our BOD has discretion as to whether to distribute dividends, subject to applicable laws. Even if our BOD decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the BOD may deem relevant. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.
No Significant Changes
Except as disclosed elsewhere in this annual report, no other significant changes to our financial condition have occurred since the date of the annual financial statements contained herein.
| ITEM 9. | THE OFFER AND LISTING |
9.A. Offer and Listing Details
Our ordinary shares are listed for trading on the NASDAQ Capital Market under the symbol “ILAG” The shares began trading on July 13, 2022 on the NASDAQ Capital Market.
9.B. Plan of Distribution
Not Applicable.
9.C. Markets
Our ordinary shares have been listed on the Nasdaq Capital Market since July 13, 2022 under the symbol “ILAG”.
9.D. Selling Shareholders
Not Applicable.
9.E. Dilution
Not Applicable.
9.F. Expenses of the Issuer
Not Applicable.
| ITEM 10. | ADDITIONAL INFORMATION |
10.A. Share Capital
Not Applicable.
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10.B. Memorandum and Articles of Association
We are a Cayman Islands exempted company limited by shares and our affairs are governed by our current memorandum and articles of association and the Companies Act (As Revised) of the Cayman Islands, which we refer to as the “Companies Act” below, and the common law of the Cayman Islands.
Our authorized share capital is $50,000 divided into 500,000,000 shares, consists of: (i) 450,000,000 Ordinary Shares, par value $0.0001 per share and (ii) 50,000,000 Preferred Shares, par value $0.0001 per share.
On February 6, 2025, the Board of the Company pursuant to the Articles of Association of the Company, designated 2,000,000 Preferred Shares of the Company as Series A preferred shares of the Company, par value US$0.0001 each (“Series A Preferred Shares” or the “Subject Shares”), with the following terms:
I. Voting Right: At any general meeting, (i) on a show of hands every holder of the Subject Shares present in person (or being a corporation, is present by a duly authorized representative), or by proxy shall have twenty (20) votes for every fully paid Subject Share, and (ii) on a poll every holder of the Subject Shares present in person or by proxy or, in the case of a holder being a corporation, by its duly authorized representative shall have twenty (20) votes for every fully paid Subject Share;
II. each Series A Preferred Share is convertible into one (1) ordinary share of the Company, par value $0.0001 (“Ordinary Share”) at any time at the option of the holder thereof. The right to convert shall be exercisable by the holder of the Series A Preferred Share delivering a written notice to the Company that such holder elects to convert a specified number of Series A Preferred Share into Ordinary Shares. In no event shall Ordinary Shares be convertible into Series A Preferred Shares;
III. upon any sale, transfer, assignment or disposition of any Series A Preferred Share by such shareholder of the Company to any person who is not an affiliate of such shareholder, or upon a change of control of any Series A Preferred Share to any person who is not an affiliate of the registered shareholder of such share, as determined by the Board, such Series A Preferred Share shall be automatically and immediately converted into one Ordinary Share (the “Automatic Conversion”). For the avoidance of doubt, (i) a sale, transfer, assignment or disposition shall be effective upon the Company’s registration of such sale, transfer, assignment or disposition in the register of members of the Company; and (ii) the creation of any pledge, charge, encumbrance or other third party right of whatever description on any Series A Preferred Share to secure a holder’s contractual or legal obligations shall not be deemed as a sale, transfer, assignment or disposition unless and until any such pledge, charge, encumbrance or other third party right is enforced and results in the third party holding legal title to the relevant Series A Preferred Shares, in which case all the relevant Series A Preferred Shares shall be automatically converted into the same number of Ordinary Shares; and
IV. other than the Automatic Conversion, any conversion of Series A Preferred Shares into Ordinary Shares by a holder thereof (the “Conversion Shareholder”) shall be effected by means of the repurchase of each relevant Series A Preferred Share for cancellation and allotting and issuance of an Ordinary Share, credited as fully paid (the “Ordinary Conversion”). Both the Automatic Conversion and the Ordinary Conversion shall become effective forthwith upon the Register of Members being updated; and
V. all other rights of the Subject Shares will be the same as the Ordinary Shares and any other Preferred Shares.
As of April 28, 2025, 20,769,483 Ordinary Shares are issued and outstanding and 2,000,000 Series A Preferred Share is issued or outstanding.
We incorporate by reference into this annual report our amended and restated memorandum and articles of association, which was filed as Exhibits 3.2 and 3.3 to our registration statement on Form F-1 (File Number 333-248684) initially filed with the Securities and Exchange Commission on September 9, 2020, as amended and declared effective on July 12, 2022. Our shareholders adopted our amended and restated memorandum and articles of association by way of a special resolution on July 16, 2021.
Our registered office in the Cayman Islands is located at Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman, KY1-1111.
According to clause 3 of our amended and restated memorandum of association (the “Memorandum”), subject to the provisions of the Memorandum, the objects for which the Company is established are unrestricted.
Board of Directors
See “Item 6. Directors, Senior Management and Employees.”
Ordinary Shares
Dividends. Subject to any rights and restrictions of any other class or series of shares, our BOD may, from time to time, declare dividends on the shares issued and authorize payment of the dividends out of our lawfully available funds. Dividends may be declared and paid out of the profits of the Company, realized or unrealized, or from any reserve set aside from profits which the Directors determine is no longer needed. The Board may also declare and pay dividends out of share premium account or any other fund or account which can be authorized for this purpose in accordance with the Act. “Share premium account,” represents the excess of the price paid to our company on issue of its shares over the par or “nominal” value of those shares, which is similar to the U.S. concept of additional paid in capital.
No dividend shall bear interest against the Company.
Voting Rights. The holders of our ordinary shares are entitled to one vote per share, including the election of directors. Voting at any meeting of shareholders is by show of hands unless a poll is demanded. On a show of hands every shareholder present in person or by proxy shall have one vote. On a poll every shareholder entitled to vote (in person or by proxy) and shall have one vote for each share for which he/she is the holder. A poll may be demanded by the chairman of such meeting or by any one or more shareholders who together hold not less than ten percent (10%) of the votes attached to the then issued share capital of the Company, present in person or in the case of a shareholder being a corporation by its duly authorized representative or by proxy for the time being entitled to vote at the meeting. A any general meeting of the Company, two (2) shareholders entitled to vote and present in person or by proxy or (in the case of a shareholder being a corporation) by its duly authorized representative representing not less than one-third of the votes attached to the then issued share capital of the Company throughout the meeting shall form a quorum for all purposes. While not required by our articles of association, a proxy form will accompany any notice of general meeting convened by the directors to facilitate the ability of shareholders to vote by proxy.
Any ordinary resolution to be made by the shareholders requires the affirmative vote of a simple majority of the votes of the ordinary shares cast in a general meeting, while a special resolution requires the affirmative vote of no less than two-thirds of the votes of the ordinary shares cast. Under Cayman Islands law, some matters, such as amending the memorandum and articles, changing the name or resolving to be registered by way of continuation in a jurisdiction outside the Cayman Islands, require approval of shareholders by a special resolution.
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There are no limitations on non-residents or foreign shareholders to hold or exercise voting rights on the ordinary shares imposed by foreign law or by the memorandum and articles of association of our Company. However, no person will be entitled to vote at any general meeting or at any separate meeting of the holders of the ordinary shares unless the person is registered as of the record date for such meeting and unless all calls or other sums presently payable by the person in respect of ordinary shares in the Company have been paid.
Winding Up; Liquidation. Subject to any special rights, privileges or restrictions as to the distribution of available surplus assets on liquidation for the time being attached to any class or classes of shares (i) if the Company shall be wound up and the assets available for distribution amongst the shareholders of the Company shall be more than sufficient to repay the whole of the capital paid up at the commencement of the winding up, the excess shall be distributed pari passu amongst such shareholders in proportion to the amount paid up on the shares held by them respectively and (ii) if the Company shall be wound up and the assets available for distribution amongst the Shareholders as such shall be insufficient to repay the whole of the paid-up capital such assets shall be distributed so that, a nearly as may be, the losses shall be borne by the Shareholders in proportion to the capital paid up, or which ought to have been paid up, at the commencement of the winding up on the shares held by them respectively. The liquidator may, with the authority of a special resolution and any other sanction required by the Act, divide among the Shareholders in specie or kind the whole or any part of the assets of the Company and whether or not the assets are of the same of different kinds.
Calls on Ordinary Shares and Forfeiture of Ordinary Shares. Our BOD may from time to time make calls upon shareholders for any amounts unpaid on their ordinary shares in a notice served to such shareholders at least 14 days prior to the specified time and place of payment. Any ordinary shares that have been called upon and remain unpaid are subject to forfeiture.
Redemption of Ordinary Shares. We may issue shares that are, or at the Company’s option, or at the option of the holders of such shares are, subject to redemption on such terms and in such manner as it may, before the issuance of the shares, determine. Under the Companies Act, shares of a Cayman Islands exempted company may be redeemed or repurchased out of profits of the company, out of the proceeds of a fresh issue of shares made for that purpose, out of share premium account or out of capital, provided the memorandum and articles authorize this and the company has the ability to pay its debts as they come due in the ordinary course of business.
No Preemptive Rights. Holders of ordinary shares will have no pre-emptive or preferential right to purchase any securities of our company.
Variation of Rights Attaching to Shares. If at any time the share capital is divided into different classes of shares, the rights attaching to any class (unless otherwise provided by the terms of issue of the shares of that class) may, subject to the memorandum and articles, be modified or abrogated with the sanction of a special resolution passed at a general meeting of the holders of the shares of that class.
Anti-Takeover Provisions. Some provisions of our current memorandum and articles of association may discourage, delay or prevent a change of control of our company or management that shareholders may consider favorable, including provisions that authorize our BOD to issue preferred shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preferred shares without any further vote or action by our shareholders.
Transfer of Ordinary Shares. Subject to the restrictions contained in our current articles of association, any of our shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or common form or any other form approved by our BOD.
Our BOD may, in its absolute discretion, decline to register any transfer of any ordinary share which is not fully paid up or on which we have a lien. Our BOD may also decline to register any transfer of any ordinary share unless:
| ● | the instrument of transfer is lodged with us, accompanied by the certificate for the ordinary shares to which it relates and such other evidence as our BOD may reasonably require to show the right of the transferor to make the transfer; | |
| ● | the instrument of transfer is in respect of only one class of shares; | |
| ● | the instrument of transfer is properly stamped, if required; |
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| ● | in the case of a transfer to joint holders, the number of joint holders to whom the share is to be transferred does not exceed four; and | |
| ● | a fee of such maximum sum as the Nasdaq Capital Market may determine to be payable or such lesser sum as our directors may from time to time require is paid to us in respect thereof. |
If our directors refuse to register a transfer, they shall, within three months after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal.
The registration of transfers may, on ten calendar days’ notice being given by advertisement in such one or more newspapers, by electronic means or by any other means in accordance with the Nasdaq Rules, be suspended and the register closed at such times and for such periods as our board of directors may, in their absolute discretion, from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 calendar days in any calendar year.
Inspection of Books and Records. Holders of our ordinary shares have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records (other than the memorandum and articles of association, the register of mortgages and charges, and copies of any special resolutions passed by our shareholders). However, we will provide our shareholders with annual audited financial statements.
General Meeting of Shareholders. Shareholders’ meetings may be convened by a majority of our board of directors or our chairman. Advance notice of not less than ten clear days is required for the convening of our annual general shareholders’ meeting and any other general meeting of our shareholders. A quorum required for and throughout a meeting of shareholders consists of at least two shareholders entitled to vote and present in person or by proxy or (in the case of a shareholder being a corporation) by its duly authorized representative representing not less than one-third of all voting power of our share capital in issue.
Exempted Company. We are an exempted company incorporated with limited liability under the Companies Act. The Companies Act distinguishes between ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company are essentially the same as for an ordinary company except that an exempted company:
| ● | does not have to file an annual return of its shareholders with the Registrar of Companies; | |
| ● | is not required to open its register of members for inspection to the public; | |
| ● | does not have to hold an annual general meeting; | |
| ● | may issue shares with no par value; | |
| ● | may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in the first instance); | |
| ● | may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands; | |
| ● | may register as a limited duration company; and | |
| ● | may register as a segregated portfolio company. |
“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the company.
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Preferred Shares
Each of the class or classes (however designated) as the BOD may determine in accordance with these articles of association. Subject to the Companies Act (As Revised), any preferred shares may be issued or converted into shares that, at a determinable date or at the option of the Company or the holder thereof, are to be redeemed or are liable to be redeemed on such terms and in such manner as the BOD may in its absolute discretion determine.
In particular and without prejudice to the generality of the foregoing, the Board is empowered to authorize by resolution or resolutions from time to time the issuance of one or more classes or series of preferred shares and to fix the designations, powers, preferences and relative, participating, optional and other rights, if any, and the qualifications, limitations and restrictions thereof, if any, including, without limitation, the number of shares constituting each such class or series, dividend rights, conversion rights, redemption privileges, voting powers, full or limited or no voting powers, and liquidation preferences, and to increase or decrease the size of any such class or series (but not below the number of shares of any class or series of preferred shares then outstanding) to the extent permitted by law. Without limiting the generality of the foregoing, the resolution or resolutions providing for the establishment of any class or series of preferred shares may, to the extent permitted by law, provide that such class or series shall be superior to, rank equally with or be junior to the preferred shares of any other class or series.
Except as otherwise expressly provided in the resolution or resolutions providing for the establishment of any class or series of preferred shares, no vote of the holders of preferred shares or ordinary shares shall be a prerequisite to the issuance of any shares of any class or series of the preferred shares authorized by and complying with the conditions of the Memorandum and Articles of Association.
10.C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than those described in this annual report.
10.D. Exchange Controls
Cayman Islands
Currently there is no exchange control regulations in the Cayman Islands and Hong Kong applicable to us and shareholders.
See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Foreign Exchange” for exchange controls in China.
10.E. Taxation
The following summary of the material Cayman Islands, Hong Kong, PRC and U.S. tax consequences of an investment in our ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date hereof, all of which are subject to change, possibly with retroactive effect. This summary is not intended to be, nor should it be construed as, legal or tax advice and is not exhaustive of all possible tax considerations. This summary also does not deal with all possible tax consequences relating to an investment in our ordinary shares, such as the tax consequences under state, local, or under the tax laws of jurisdictions other than the Cayman Islands, Hong Kong, PRC and the United States. Investors should consult their own tax advisors with respect to the tax consequences of the acquisition, ownership and disposition of our ordinary shares.
Cayman Islands Taxation
Under the law of the Cayman Islands as currently in effect, a holder of the securities who is not a resident of the Cayman Islands is not liable for Cayman Islands tax on dividends paid with respect to the securities and all holders of the securities are not liable to the Cayman Islands for tax on gains realized during that year on the sale or disposal of such ordinary shares. The Cayman Islands does not impose a withholding tax on dividends paid by a company incorporated or re-registered under the Companies Act.
There are no capital gains, gift or inheritance taxes levied by the Cayman Islands on companies incorporated under the Companies Act. In addition, shares of companies incorporated under the Companies Act are not subject to transfer taxes, stamp duties or similar charges.
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There is no income tax treaty or convention currently in effect between the United States and the Cayman Islands or between China and the Cayman Islands.
People’s Republic of China Taxation
Pursuant to the Arrangement between the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Tax Arrangement, where a Hong Kong resident enterprise which is considered a non-PRC tax resident enterprise directly holds at least 25% of a PRC enterprise, the withholding tax rate in respect of the payment of dividends by such PRC enterprise to such Hong Kong resident enterprise is reduced to 5% from a standard rate of 10%, subject to approval of the PRC local tax authority. Pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or Circular 81, a resident enterprise of the counter-party to such Tax Arrangement should meet the following conditions, among others, in order to enjoy the reduced withholding tax under the Tax Arrangement: (i) it must directly own the required percentage of equity interests and voting rights in such PRC resident enterprise; and (ii) it should directly own such percentage in the PRC resident enterprise anytime in the 12 months prior to receiving the dividends. Furthermore, the Administrative Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties (For Trial Implementation), or the Administrative Measures, which became effective in October 2009, requires that the non-resident enterprises must obtain the approval from the relevant tax authority in order to enjoy the reduced withholding tax rate under the tax treaties. There are also other conditions for enjoying such reduced withholding tax rate according to other relevant tax rules and regulations. Accordingly, Hing Fat Industrial Limited may be able to enjoy the 5% withholding tax rate for the dividends it receives from the WFOE, if it satisfies the conditions prescribed under Circular 81 and other relevant tax rules and regulations and obtains the approvals as required under the Administrative Measures. However, according to Circular 81, if the relevant tax authorities consider the transactions or arrangements we have are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future.
Hong Kong Taxation
The taxation of income and capital gains of holders of ordinary shares is subject to the laws and practices of Hong Kong and of jurisdictions in which holders of ordinary shares are resident or otherwise subject to tax. The following summary of certain relevant taxation provisions under Hong Kong law is based on current law and practice, is subject to changes therein and does not constitute legal or tax advice. The discussion does not deal with all possible tax consequences relating to an investment in the ordinary shares. Accordingly, each prospective investor (particularly those subject to special tax rules, such as banks, dealers, insurance companies, tax-exempt entities and holders of 10% or more of our voting capital stock) should consult its own tax advisor regarding the tax consequences of an investment in the ordinary shares. The discussion is based upon laws and relevant interpretations thereof in effect as of the date of this report, all of which are subject to change. There is no reciprocal tax treaty in effect between Hong Kong and the United States.
Tax on Dividends
Under the current practices of the Hong Kong Inland Revenue Department, no tax is payable in Hong Kong in respect of dividends paid by us as a company incorporated in Cayman Islands.
Profits Tax
No tax is imposed in Hong Kong in respect of capital gains from the sale of property (such as the ordinary shares). Trading gains from the sale of property by persons carrying on a trade, profession or business in Hong Kong where such gains are derived from or arise in Hong Kong from such trade, profession or business will be chargeable to Hong Kong profits tax, which is currently imposed at the rate of 16.5% and 15% on corporations and unincorporated businesses, respectively, and at a maximum rate of 15% on individuals. Liability for Hong Kong profits tax may thus arise in respect of trading gains from sales of ordinary shares realized by persons carrying on a business or trading or dealing in securities in Hong Kong.
Stamp Duty
Hong Kong stamp duty, currently charged at the rate of HK$1.3 per HK$1,000 or part thereof on the higher of the consideration for or the value of the ordinary shares, will be payable by the purchaser on every purchase and by the seller on every sale of ordinary shares (i.e., a total of HK$2.6 per HK$1,000 or part thereof is currently payable on a typical sale and purchase transaction involving ordinary shares). In addition, a fixed duty of HK$5 is currently payable on any instrument of transfer of ordinary shares. If one of the parties to the sale is a non-Hong Kong resident and does not pay the required stamp duty, the duty not paid will be assessed on the instrument of transfer (if any) and the transferee will be liable for payment of such duty. No Hong Kong stamp duty is payable upon the transfer of ordinary shares outside Hong Kong.
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Estate Duty
The Revenue (Abolition of Estate Duty) Ordinance 2005 came into effect on February 11, 2006 in Hong Kong. No Hong Kong estate duty is payable and no estate duty clearance papers are needed for an application for a grant of representation in respect of holders of ordinary shares whose death occurs on or after February 11, 2006.
United States Federal Income Tax Considerations
The following is a discussion of United States federal income tax considerations relating to the acquisition, ownership, and disposition of our ordinary shares by a U.S. Holder, as defined below, that acquires our ordinary shares and holds our ordinary shares as “capital assets” (generally, property held for investment) under the United States Internal Revenue Code of 1986, as amended (the “Code”). This discussion is based upon existing United States federal income tax law, which is subject to differing interpretations or change, possibly with retroactive effect. No ruling has been sought from the Internal Revenue Service (the “IRS”) with respect to any United States federal income tax consequences described below, and there can be no assurance that the IRS or a court will not take a contrary position. This discussion does not address all aspects of United States federal income taxation that may be important to particular investors in light of their individual circumstances, including investors subject to special tax rules (such as, for example, certain financial institutions, insurance companies, regulated investment companies, real estate investment trusts, broker-dealers, traders in securities that elect mark-to-market treatment, partnerships and their partners, tax-exempt organizations (including private foundations)), investors who are not U.S. Holders, investors that own (directly, indirectly, or constructively) 10% or more of our voting stock, investors that hold their ordinary shares as part of a straddle, hedge, conversion, constructive sale or other integrated transaction), or investors that have a functional currency other than the U.S. dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. In addition, this discussion does not address any tax laws other than the United States federal income tax laws, including any state, local, alternative minimum tax or non-United States tax considerations, or the Medicare tax. Each potential investor is urged to consult its tax advisor regarding the United States federal, state, local and non-United States income and other tax considerations of an investment in our ordinary shares.
General
For purposes of this discussion, a “U.S. Holder” is a beneficial owner of our ordinary shares that is, for United States federal income tax purposes, (i) an individual who is a citizen or treated as a tax resident of the United States, (ii) a corporation (or other entity treated as a corporation for United States federal income tax purposes) created in, or organized under the laws of, the United States or any state thereof or the District of Columbia, (iii) an estate the income of which is includible in gross income for United States federal income tax purposes regardless of its source, or (iv) a trust (A) the administration of which is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust or (B) that has otherwise elected to be treated as a United States person under the Code.
If a partnership (or other entity treated as a partnership for United States federal income tax purposes) is a beneficial owner of our ordinary shares, the tax treatment of a partner in the partnership will depend upon the status of the partner and the activities of the partnership. Partnerships and partners of a partnership holding our ordinary shares are urged to consult their tax advisors regarding an investment in our ordinary shares.
The discussion set forth below is addressed only to U.S. Holders that purchase ordinary shares. Prospective purchasers are urged to consult their own tax advisors about the application of the U.S. federal income tax rules to their particular circumstances as well as the state, local, foreign and other tax consequences to them of the purchase, ownership and disposition of our ordinary shares.
Taxation of Dividends and Other Distributions on our Ordinary Shares
Subject to the passive foreign investment company rules discussed below, the gross amount of distributions made by us to you with respect to the ordinary shares (including the amount of any taxes withheld therefrom) will generally be includable in your gross income as dividend income on the date of receipt by you, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). With respect to corporate U.S. Holders, the dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations.
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With respect to non-corporate U.S. Holders, including individual U.S. Holders, dividends will be taxed at the lower capital gains rate applicable to qualified dividend income, provided that (1) the ordinary shares are readily tradable on an established securities market in the United States, or we are eligible for the benefits of an approved qualifying income tax treaty with the United States that includes an exchange of information program, (2) we are not a passive foreign investment company (as discussed below) for either our taxable year in which the dividend is paid or the preceding taxable year, and (3) certain holding period requirements are met. Because there is no income tax treaty between the United States and the Cayman Islands, clause (1) above can be satisfied only if the ordinary shares are readily tradable on an established securities market in the United States. Under U.S. Internal Revenue Service authority, ordinary shares are considered for purpose of clause (1) above to be readily tradable on an established securities market in the United States if they are listed on certain exchanges, which presently include the Nasdaq. You are urged to consult your tax advisors regarding the availability of the lower rate for dividends paid with respect to our ordinary shares, including the effects of any change in law after the date of this report.
To the extent that the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles), it will be treated first as a tax-free return of your tax basis in your ordinary shares, and to the extent the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain. We do not intend to calculate our earnings and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a distribution will be treated as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.
Taxation of Dispositions of Ordinary Shares
Subject to the passive foreign investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of a share equal to the difference between the amount realized (in U.S. dollars) for the share and your tax basis (in U.S. dollars) in the ordinary shares. The gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, who has held the ordinary shares for more than one year, you may be eligible for reduced tax rates on any such capital gains. The deductibility of capital losses is subject to limitations.
Passive Foreign Investment Company (“PFIC”)
A non-U.S. corporation is considered a PFIC for any taxable year if either:
| ● | at least 75% of its gross income for such taxable year is passive income; or | |
| ● | at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income (the “asset test”). |
Passive income generally includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of a trade or business) and gains from the disposition of passive assets. We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock. In determining the value and composition of our assets for purposes of the PFIC asset test, (1) the cash we hold will generally be considered to be held for the production of passive income and (2) the value of our assets must be determined based on the market value of our ordinary shares from time to time, which could cause the value of our non-passive assets to be less than 50% of the value of all of our assets (including the cash raised in any offering) on any particular quarterly testing date for purposes of the asset test.
We must make a separate determination each year as to whether we are a PFIC. Depending on the amount of cash we hold, together with any other assets held for the production of passive income, it is possible that, for our current taxable year or for any subsequent taxable year, at least 50% of our assets may be assets held for the production of passive income. We will make this determination following the end of any particular tax year. Although the law in this regard is unclear, we treat our consolidated variable interest entity, as being owned by us for United States federal income tax purposes, not only because we exercise effective control over the operation of such entity but also because we are entitled to substantially all of their economic benefits, and, as a result, we consolidate their operating results in our consolidated financial statements. In particular, because the value of our assets for purposes of the asset test will generally be determined based on the market price of our ordinary shares and because cash is generally considered to be an asset held for the production of passive income, our PFIC status will depend in large part on the market price of our ordinary shares and the amount of cash we hold. Accordingly, fluctuations in the market price of the ordinary shares may cause us to become a PFIC. In addition, the application of the PFIC rules is subject to uncertainty in several respects. We are under no obligation to take steps to reduce the risk of our being classified as a PFIC, and as stated above, the determination of the value of our assets will depend upon material facts (including the market price of our ordinary shares from time to time that may not be within our control). If we are a PFIC for any year during which you hold ordinary shares, the shares will continue to be treated as stock in a PFIC for all succeeding years during which you hold ordinary shares. However, if we cease to be a PFIC and you did not previously make a timely “mark-to-market” election as described below, you may avoid some of the adverse effects of the PFIC regime by making a “purging election” (as described below) with respect to the ordinary shares.
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If we are a PFIC for your taxable year(s) during which you hold ordinary shares, you will be subject to special tax rules with respect to any “excess distribution” that you receive and any gain you realize from a sale or other disposition (including a pledge) of the ordinary shares, unless you make a “mark-to-market” election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for the ordinary shares will be treated as an excess distribution. Under these special tax rules:
| ● | the excess distribution or gain will be allocated ratably over your holding period for the ordinary shares; | |
| ● | the amount allocated to your current taxable year, and any amount allocated to any of your taxable year(s) prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and | |
| ● | the amount allocated to each of your other taxable year(s) will be subject to the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year. |
The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale of the ordinary shares cannot be treated as capital, even if you hold the ordinary shares as capital assets.
A U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the tax treatment discussed above. If you make a mark-to-market election for first taxable year which you hold (or are deemed to hold) ordinary shares and for which we are determined to be a PFIC, you will include in your income each year an amount equal to the excess, if any, of the fair market value of the ordinary shares as of the close of such taxable year over your adjusted basis in such ordinary shares, which excess will be treated as ordinary income and not capital gain. You are allowed an ordinary loss for the excess, if any, of the adjusted basis of the ordinary shares over their fair market value as of the close of the taxable year. However, such ordinary loss is allowable only to the extent of any net mark-to-market gains on the ordinary shares included in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition of the ordinary shares, are treated as ordinary income. Ordinary loss treatment also applies to any loss realized on the actual sale or disposition of the ordinary shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such ordinary shares. Your basis in the ordinary shares will be adjusted to reflect any such income or loss amounts. If you make a valid mark-to-market election, the tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by us, except that the lower applicable capital gains rate for qualified dividend income discussed above under “— Taxation of Dividends and Other Distributions on our ordinary shares” generally would not apply.
The mark-to-market election is available only for “marketable stock”, which is stock that is traded in other than de minimis quantities on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other market (as defined in applicable U.S. Treasury regulations), including Nasdaq. If the ordinary shares are regularly traded on Nasdaq and if you are a holder of ordinary shares, the mark-to-market election would be available to you were we to be or become a PFIC.
Alternatively, a U.S. Holder of stock in a PFIC may make a “qualified electing fund” election with respect to such PFIC to elect out of the tax treatment discussed above. A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC will generally include in gross income for a taxable year such holder’s pro rata share of the corporation’s earnings and profits for the taxable year. However, the qualified electing fund election is available only if such PFIC provides such U.S. Holder with certain information regarding its earnings and profits as required under applicable U.S. Treasury regulations.
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We do not currently intend to prepare or provide the information that would enable you to make a qualified electing fund election. If you hold ordinary shares in any taxable year in which we are a PFIC, you will be required to file U.S. Internal Revenue Service Form 8621 in each such year and provide certain annual information regarding such ordinary shares, including regarding distributions received on the ordinary shares and any gain realized on the disposition of the ordinary shares.
If you do not make a timely “mark-to-market” election (as described above), and if we were a PFIC at any time during the period you hold our ordinary shares, then such ordinary shares will continue to be treated as stock of a PFIC with respect to you even if we cease to be a PFIC in a future year, unless you make a “purging election” for the year we cease to be a PFIC. A “purging election” creates a deemed sale of such ordinary shares at their fair market value on the last day of the last year in which we are treated as a PFIC. The gain recognized by the purging election will be subject to the special tax and interest charge rules treating the gain as an excess distribution, as described above. As a result of the purging election, you will have a new basis (equal to the fair market value of the ordinary shares on the last day of the last year in which we are treated as a PFIC) and holding period (which new holding period will begin the day after such last day) in your ordinary shares for tax purposes.
You are urged to consult your tax advisors regarding the application of the PFIC rules to your investment in our ordinary shares and the elections discussed above.
Information Reporting and Backup Withholding
Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related intermediaries may be subject to information reporting and backup withholding, unless (i) the U.S. Holder is a corporation or other “exempt recipient” or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. Backup withholding is not an additional tax. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle it to a refund, provided that the required information is timely furnished to the IRS.
Information with respect to foreign financial assets
Certain U.S. Holders who are individuals (and, under proposed regulations, certain entities) may be required to report information relating to an interest in our ordinary shares, subject to certain exceptions (including an exception for ordinary shares held in accounts maintained by certain U.S. financial institutions). U.S. Holders should consult their tax advisors regarding the effect, if any, of this legislation on their ownership and disposition of our ordinary shares.
10.F. Dividends and Paying Agents
Not Applicable.
10.G. Statement by Experts
Not Applicable.
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10.H. Documents on Display
We are subject to periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers. Accordingly, we are required to file reports, including annual reports on Form 20-F, and other information with the SEC. All information filed with the SEC can be obtained over the internet at the SEC’s website at www.sec.gov or inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site at www.sec.gov that contains reports and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. You may also visit us on the world wide web at http://www.i-l-a-g.com. However, information contained on our website does not constitute a part of this annual report.
10.I. Subsidiary Information
Not Applicable.
10.J. Annual Report to Security Holders
Not Applicable.
| ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Liquidity risk
We are exposed to liquidity risk, which is the risk that we will be unable to provide sufficient capital resources and liquidity to meet our commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When necessary, we will turn to other financial institutions to obtain short-term funding to meet the liquidity shortage.
Inflation risk
Inflationary factors, such as increases in personnel and overhead costs, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and operating expenses as a percentage of sales revenue if the revenues from our products do not increase with such increased costs.
Interest rate risk
We are exposed to interest rate risk on our interest-bearing assets and liabilities. As part of our asset and liability risk management, we review and take appropriate steps to manage our interest rate exposures on our interest-bearing assets and liabilities. We have not been exposed to material risks due to changes in market interest rates, and not used any derivative financial instruments to manage the interest risk exposure during the year ended December 31, 2024 and 2023.
Foreign currency translation and transaction
The Company’s reporting currency is the USD. The functional currency of its Hong Kong subsidiaries is the Hong Kong dollar (the “HKD”), and the functional currency of its PRC subsidiary is the Renminbi (the “RMB”). RMB is not freely convertible into foreign currencies for capital account transactions. The value of RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk.
| ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
| 90 |
PART II
| ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
Not Applicable.
| ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
See “Item 10—Additional Information—B. Memorandum and Articles of Association—Common Shares” for a description of the rights of securities holders, which remain unchanged.
Use of Proceeds
The following “Use of Proceeds” information relates to the registration statement on Form F-1, as amended (File number: 333-248684) in relation to the IPO of 5,060,000 ordinary shares of the Company. Our IPO closed on July 15, 2022. Network1 Financial Securities, Inc. was the representative of the underwriters for our IPO. We offered and sold 5,060,000 ordinary shares and received net proceeds of approximately $16.86 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The registration statement was declared effective by the SEC on July 12, 2022. The total expenses incurred for our company’s account in connection with our IPO was approximately $3.38 million, which included approximately $1.52 million in underwriting discounts and commissions for the IPO and approximately $1.86 million in other costs and expenses for our IPO. None of the transaction expenses included payments to directors or officers of our company or their associates, persons owning more than 10% or more of our equity securities or our affiliates. None of the net proceeds we received from the IPO were paid, directly or indirectly, to any of our directors or officers or their associates, persons owning 10% or more of our equity securities or our affiliates.
As of the date of this annual report, we have used almost all of net proceeds received from our IPO, including approximately $4.5 million to acquire an electroplating production line, approximately $7.8 million for in working capital, approximately $4.4 million for smart lock device and products research and development. There is no material change in the use of proceeds as described in our registration statement on Form F-1. We still intend to use the remainder of the proceeds from our IPO as disclosed in our registration statement on Form F-1.
| ITEM 15. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report, as required by Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our management has concluded that, due to the material weaknesses identified below, as of December 31, 2024, our disclosure controls and procedures were not effective in ensuring that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act was recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act was accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.
| 91 |
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate ICFR, as defined in Rules 13a-15 (f) under the Exchange Act. As required by Section 404 of the Sarbanes-Oxley Act and related rules as promulgated by the SEC, our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our ICFR as of December 31, 2024, based on criteria established in the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that our ICFR was not effective as of December 31, 2024.
Because of its inherent limitations, ICFR may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
In the course of management’s preparation and our independent registered public accounting firm’s auditing of our CFS as of and for the year ended December 31, 2024, we and our independent registered public accounting firm identified one material weakness in our ICFR. As defined in the standards established by the U.S. Public Company Accounting Oversight Board, a “material weakness” is a deficiency, or combination of deficiencies, in ICFR, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis, in accordance with the standards established by the PCAOB.
The material weakness identified relates to our not having sufficient in-house personnel in our accounting department with sufficient knowledge of the U.S. GAAP and SEC reporting rules to prepare and review financial statements and related disclosures in accordance with U.S. GAAP and applicable requirements by SEC. Due to the foregoing material weakness, management concluded that as of December 31, 2024, our ICFR was ineffective.
To remedy our identified material weakness identified to date, we plan to take the steps necessary to remediate the ineffectiveness, such as (i) hiring more qualified accounting personnel with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function and to set up a financial and system control framework, and (ii) implementing regular and continuous U.S. GAAP accounting and financial reporting training programs for our accounting and financial reporting personnel.
However, we cannot assure you that we will remediate our material weakness in a timely manner, or at all. See “Item 3. Key Information—Risk Factors—Risks Related to Our Business— We are obligated to develop and maintain proper and effective ICFR. We may not complete our analysis of our ICFR in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our Ordinary Shares.”
As a company with less than US$1.235 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s ICFR.
Attestation Report of the Registered Public Accounting Firm
As a company with less than $1.235 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, in the assessment of the emerging growth company’s ICFR. This annual report on Form 20-F does not include an attestation report of our registered public accounting firm because we are an emerging growth company.
Changes in Internal Control
Other than as described above, there were no changes in our ICFR that occurred during the period covered by this annual report on Form 20-F that have materially affected, or are reasonably likely to materially affect, our ICFR.
| ITEM 16. | [Reserved] |
| ITEM 16.A. | AUDIT COMMITTEE FINANCIAL EXPERT |
Our BOD has determined that Ms. Carina Chui, Chairlady of our audit committee and an independent director (under the standards set forth in Nasdaq Stock Market Rule 5605(a)(2) and Rule 10A-3 under the Exchange Act), is an audit committee financial expert.
| ITEM 16.B. | CODE OF ETHICS |
Our BOD has adopted a code of ethics that applies to all of the directors, officers and employees of our company. We have filed our code of business conduct and ethics as Exhibit 99.1 of our registration statement on Form F-1 (File Number: 333-248684), as amended, initially filed with the SEC on September 9, 2020.
| ITEM 16.C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The following table sets forth the fees by categories specified below in connection with certain professional services rendered by Wei, Wei & Co., LLP, our independent registered public accounting firm, for the periods indicated.
| Year | Year | |||||||
| Ended | Ended | |||||||
| December 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Audit fees(1) | $ | 288,205 | $ | 295,326 | ||||
| Audit related fees(2) | — | — | ||||||
| Tax fees(3) | — | — | ||||||
| All other fees(4) | — | — | ||||||
| TOTAL | $ | 288,205 | $ | 295,326 | ||||
| (1) | “Audit fees” means the fees billed for each of the fiscal years for professional services rendered by our principal accountant for the audit of our annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years. |
| (2) | “Audit related fees” means the fees billed for each of the fiscal years for assurance and related services by our principal accountant that are reasonably related to the performance of the audit or review of our financial statements and are not reported under paragraph (1). |
| (3) | “Tax Fees” represents the fees billed in each of the fiscal years listed for the professional tax services rendered by our principal auditors. |
| 92 |
| (4) | “All Other Fees” is the aggregate fees billed in each of the fiscal years listed for services rendered by our principal auditors other than services reported under “Audit fees,” “Audit-related fees” and “Tax fees.” |
The policy of our audit committee and our BOD is to pre-approve all audit and non-audit services provided by our principal auditors, including audit services, audit-related services, and other services as described above, other than those for de minimis services which are approved by the audit committee or our BOD prior to the completion of the services.
| ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
Not Applicable.
| ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
Neither we nor any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, purchased any of our equity securities during the period covered by this annual report.
| ITEM 16F. | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT |
Not Applicable.
| ITEM 16G. | CORPORATE GOVERNANCE |
As a Cayman Islands exempted company listed on the Nasdaq Capital Market, or Nasdaq, we are subject to the Nasdaq corporate governance requirements. However, Nasdaq rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the Nasdaq corporate governance requirements. Currently, we follow our home country practice in lieu of the provisions under Rule 5620(a), Rule 5635(a), Rule 5635(c) and Rule 5635(d) of the NASDAQ Stock Market Marketplace Rules (the “Rules”). Rule 5620(a) requires that the Company to hold an annual meeting of shareholders no later than one year after the end of the Company’s fiscal year-end; Rule 5635(a) of the Rules requires shareholder approval for the issuance of securities in connection with the acquisition of the stock or assets of another company; Rule 5635(c) of the Rules requires shareholder approval prior to the issuance of securities when a stock option or purchase plan is to be established or materially amended or other equity compensation arrangement made or materially amended, pursuant to which stock may be acquired by officers, directors, employees; and Rule 5635(d) of the Rules requires shareholder approval prior to an issuance of securities, other than in a public offering, equal to 20% or more of the voting power outstanding at a price less than the lower of: (i) the Nasdaq Official Closing Price (as reflected on Nasdaq.com) immediately preceding the signing of the binding agreement; or (ii) the average Nasdaq Official Closing Price of the common stock (as reflected on Nasdaq.com) for the five trading days immediately preceding the signing of the binding agreement. The corporate governance practice in our home country, the Cayman Islands, does not require the Company to follow or comply with the requirements of Rule 5620(a), Rule 5635(a), Rule 5635(c) and Rule 5635(d). If we choose to follow additional home country practice in the future, our shareholders may be afforded less protection than they would otherwise enjoy under the Nasdaq corporate governance requirements applicable to U.S. domestic issuers.
Furthermore, we are also permitted to rely on exemptions afforded to controlled companies. We are a “controlled company” as defined under the Nasdaq Stock Market Rules because Mr. Bong Lau, our Chairman of board of directors and Chief Executive Officer, beneficially owns all of our issued and outstanding Series A Preferred Shares and is able to exercise over 50% of our total voting power. For so long as we remain a controlled company under that definition, we are permitted to elect to rely, and may rely, on certain exemptions from corporate governance rules. If we choose to rely on these exemptions in the future, our shareholders may not be afforded the same protection that they would otherwise enjoy under these exempted Nasdaq corporate governance rules.
See “Item 3. Key Information — D. Risk Factors— Risks Related to Our Ordinary Shares—Because we are a foreign private issuer and are exempt from certain NASDAQ corporate governance standards applicable to U.S. issuers, you may have less protection than you would have if we were a domestic issuer” and “We are a “controlled company” within the meaning of the NASDAQ Stock Market Rules and, as a result, may rely on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies”
| ITEM 16H. | MINE SAFETY DISCLOSURE |
Not applicable.
| ITEM 16I. | DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS |
Not applicable.
| 93 |
| Item 16J. | Insider Trading Policies |
The Company has an insider trading policy governing the purchase, sale and other dispositions of our securities by directors, senior management and employees that are reasonably designed to promote compliance with applicable insider trading laws, rules and regulations, and any listing standards applicable to the Company. A copy of our Insider Trading Policy is filed as Exhibit 19.1 to this Annual Report.
| Item 16K. | Cybersecurity |
Our Information Security Personnel reports to IT manager and is responsible for coordinating and managing the response to reported weaknesses or events, including documentation, evidence collection, and event closure. He also ensures the incident response plan is regularly updated based on experience, lessons learned, and industry developments, while providing necessary training to employees involved in the procedure.
The IT Manager plays a key role in defining strategies and procedures for cyber incident response, leading the incident response team, and overseeing detection, response, and recovery efforts. He also ensures the regular review and update of the incident response plan based on lessons learned and emerging threats.
The Information Security Personnel reports any substantial threats, risks, and incidents to the IT manager. Subsequently, the IT manager will escalate the report to the Chief Operating Officer, if necessary, who will then report it to the Board for any material threats or breaches.
The Company has set up the password requirement, control of authorization on a need-to-know basis, categorize sensitive information so that they can be managed and transmitted at different security levels.
Other than those, the Company currently does
As of date of this report, there has been no cybersecurity incidents which have materially affected the Company yet.
| 94 |
PART III
| ITEM 17. | FINANCIAL STATEMENTS |
We have elected to provide financial statements pursuant to Item 18.
| ITEM 18. | FINANCIAL STATEMENTS |
The consolidated financial statements and related notes required by this item are contained on pages F-1 through F-20.
| ITEM 19. | EXHIBITS |
* Filed as an exhibit hereto.
| 95 |
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| INTELLIGENT LIVING APPLICATION GROUP INC. | ||
| /s/ Bong Lau | ||
| Name: | Bong Lau | |
| Title: | Chief Executive Officer and Chairman of the Board | |
| Date: April 28, 2025 | ||
| 96 |
INTELLIGENT LIVING APPLICATION GROUP INC.
CONSOLIDATED FINANCIAL STATEMENTS
| 97 |
INTELLIGENT LIVING APPLICATION GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
| F-1 |
 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Intelligent Living Application Group Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Intelligent Living Application Group Inc. and Subsidiaries (collectively, the “Company”) as of December 31, 2024 and 2023, and the related consolidated statements of operations and comprehensive loss, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2024, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America.
Emphasis of Matter – Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2 to the financial statements, the Company has suffered recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/
April 28, 2025
We have served as the Company’s auditor since 2019. |
| F-2 |
INTELLIGENT LIVING APPLICATION GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| 2024 | 2023 | |||||||
| As of December 31, | ||||||||
| 2024 | 2023 | |||||||
| USD | USD | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Inventories | ||||||||
| Prepayments | ||||||||
| Other receivables | ||||||||
| Total current assets | ||||||||
| NON-CURRENT ASSETS | ||||||||
| Deposits | ||||||||
| Property and equipment, net | ||||||||
| Right-of-use assets, net | ||||||||
| Total non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Bank borrowings - current | $ | $ | ||||||
| Accounts payable | ||||||||
| Advance from customers | ||||||||
| Other payables and accruals | ||||||||
| Taxes payable | ||||||||
| Operating lease liabilities - current | ||||||||
| Total current liabilities | ||||||||
| NON-CURRENT LIABILITIES | ||||||||
| Bank borrowings | ||||||||
| Operating lease liabilities | ||||||||
| Total non-current liabilities | ||||||||
| Total liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES (Note 14) | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Preferred shares, par value $ per share; shares authorized; issued and outstanding | ||||||||
| Ordinary shares, par value $ per share; shares authorized; issued and outstanding | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
INTELLIGENT LIVING APPLICATION GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
| 2024 | 2023 | 2022 | ||||||||||
| For the Years Ended | ||||||||||||
| December 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| USD | USD | USD | ||||||||||
| Revenues | $ | $ | $ | |||||||||
| Cost of goods sold | ( | ) | ( | ) | ( | ) | ||||||
| Cost of goods sold – idle capacity | ( | ) | ( | ) | ||||||||
| Gross profit | ||||||||||||
| Selling and marketing | ( | ) | ( | ) | ( | ) | ||||||
| General and administrative | ( | ) | ( | ) | ( | ) | ||||||
| Research and development | ( | ) | ||||||||||
| Finance costs | ( | ) | ( | ) | ( | ) | ||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ||||||
| Other income | ||||||||||||
| Interest income | ||||||||||||
| Foreign exchange gain | ||||||||||||
| Other income | ||||||||||||
| Total other income, net | ||||||||||||
| Loss before provision for income taxes | ( | ) | ( | ) | ( | ) | ||||||
| Provision for income taxes | ( | ) | ( | ) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Other comprehensive loss | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Foreign currency translation adjustments | ( | ) | ( | ) | ( | ) | ||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Weighted average number of ordinary shares outstanding | ||||||||||||
| Basic and diluted | ||||||||||||
| Loss per share – basic and diluted | $ | ) | $ | ) | $ | ) | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
INTELLIGENT LIVING APPLICATION GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
| Shares | Value | Shares | Value | Capital | Deficit | Gain (Loss) | Total | |||||||||||||||||||||||||
| Preferred shares | Common Stock | Additional | Accumulated Other | |||||||||||||||||||||||||||||
| Number of | Par | Number of | Par | Paid-in | Comprehensive | |||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Capital | Deficit | Gain (Loss) | Total | |||||||||||||||||||||||||
| USD | USD | USD | USD | USD | USD | |||||||||||||||||||||||||||
| BALANCE, January 1, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
| Shares issued on initial public offering | - | |||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| BALANCE, December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Stock options granted | - | - | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| BALANCE, December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Balance | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| BALANCE, December 31, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| F-5 |
INTELLIGENT LIVING APPLICATION GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| 2024 | 2023 | 2022 | ||||||||||
| For the Years Ended | ||||||||||||
| December 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| USD | USD | USD | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Adjustments to reconcile net loss to cash (used in) operating activities: | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Bad debt written-off | ||||||||||||
| Options issued | ||||||||||||
| Change in operating assets and liabilities | ||||||||||||
| Accounts receivable | ( | ) | ||||||||||
| Inventories | ( | ) | ( | ) | ||||||||
| Prepayments | ( | ) | ( | ) | ( | ) | ||||||
| Deposits | ( | ) | ( | ) | ||||||||
| Other receivables | ||||||||||||
| Accounts payable | ( | ) | ( | ) | ( | ) | ||||||
| Advance from customers | ( | ) | ( | ) | ||||||||
| Other payables and accruals | ( | ) | ( | ) | ( | ) | ||||||
| Taxes payable | ( | ) | ||||||||||
| Operating lease liabilities | ( | ) | ||||||||||
| Net cash (used in) operating activities | ( | ) | ( | ) | ( | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ( | ) | ||||||
| Net cash (used in) investing activities | ( | ) | ( | ) | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
| Proceeds from IPO | ||||||||||||
| Payments of principal finance lease | ( | ) | ||||||||||
| Proceeds from short-term loan | ||||||||||||
| Repayments of short-term loan | ( | ) | ||||||||||
| Proceeds from bank borrowings | ||||||||||||
| Repayments of bank borrowings | ( | ) | ( | ) | ( | ) | ||||||
| Net cash (used in) provided by financing activities | ( | ) | ( | ) | ||||||||
| EFFECT OF EXCHANGE RATE ON CASH | ( | ) | ( | ) | ( | ) | ||||||
| NET (DECREASE) INCREASE IN CASH | ( | ) | ( | ) | ||||||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | ||||||||||||
| CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | $ | ||||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||||||
| Cash paid for interest | $ | $ | $ | |||||||||
| Cash paid for income taxes | $ | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-6 |
INTELLIGENT LIVING APPLICATION GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars, unless stated otherwise)
NOTE 1 - ORGANIZATION AND BUSINESS
Intelligent Living Application Group Inc. (“ILA”) and its consolidated subsidiaries (collectively referred to as the “Company”) manufacture and sell door locksets. The Company sells its door locksets primarily to customers in the United States of America (“US”) and Canada.
ILA is a holding company incorporated in the Cayman Islands on July 17, 2019, under the Cayman Islands Companies Act as an exempted company with limited liability. ILA has no substantive operations other than holding all of the outstanding share capital of Intelligent Living Application Group Limited (“ILA BVI”). ILA BVI was established under the laws of the British Virgin Islands (“BVI”) on March 19, 2014; and it is a company holding all of the outstanding equity of Kambo Hardware Limited, Kambo Locksets Limited, Bamberg (HK) Limited, Hing Fat Industrial Limited and Dongguan Xingfa Hardware Products Co., Ltd.
On July 15, 2022, the Company closed its
initial public offering (“IPO”) of ordinary shares, par value $ per share, priced at $ per share. The gross proceeds from the IPO were $
| F-7 |
Below is a summary of legal entities controlled by ILA after the reorganization.
SUMMARY OF LEGAL ENTITIES CONTROLLED BY ILA AFTER THE REORGANIZATION
| Date of | Place of | |||||
| Legal Entity | incorporation | incorporation | Principal activities | |||
| Intelligent Living Application Group Inc. | ||||||
| Intelligent Living Application Group Limited | ||||||
| Kambo Locksets Limited | ||||||
| Kambo Hardware Limited | ||||||
| Bamberg (HK) Limited | ||||||
| Hing Fat Industrial Limited | ||||||
| Dongguan Xingfa Hardware Products Co., Ltd. |
NOTE 2 – LIQUIDITY AND GOING CONCERN
As indicated in
the Company’s consolidated financial statements, the Company reported a net loss of approximately $
The Company expects to fund its operations primarily through cash flow from operations and borrowings from related parties or financial institutions. In the event that the Company requires additional funding to finance its operations, the Company’s major shareholders have indicated their intent and ability to provide such financial support. Based on the Company’s production schedule as of the date of this report, the Company has received customer orders with delivery scheduled up to August 2025. After careful consideration of the Company’s most recent cash flow projections and working capital requirements (including but not limited to orders from its key customers), management of the Company believes that the Company will be able to continue to operate as a going concern in the foreseeable future and it will have sufficient working capital to meet its operating needs for at least the next 12 months from the date of filing this report.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments related to the recoverability and classification of the recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying consolidated financial statements (“CFS”) were prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).
Basis of consolidation
The CFS include the financial statements of the Company and its subsidiaries. All subsidiaries are wholly-owned. All significant intercompany transactions and balances were eliminated in consolidation.
The CFS have been prepared on a historical cost basis, except for financial assets and financial liabilities which have been measured at fair value. The CFS are presented in United States dollars (“USD”).
Use of estimates
The preparation of CFS in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the CFS and the reported amounts of revenue and expenses during the reporting periods presented. Significant accounting estimates reflected in the Company’s CFS include the useful lives and residual value of property and equipment. Actual results could differ from those estimates.
Foreign currency translation
The Company’s reporting currency is the USD. The functional currency of its Hong Kong subsidiaries is the Hong Kong dollar (the “HKD”), and the functional currency of its PRC subsidiary is the Renminbi (the “RMB”). Results of operations and cash flows are translated at the average exchange rates during the period, and assets and liabilities are translated at the exchange rate at the end of the period. Capital accounts are translated at their historical exchange rates when the capital transaction occurred. Translation adjustments resulting from this process are included in accumulated other comprehensive gain (loss). Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
| F-8 |
Translation of amounts from HKD into USD was made at the following exchange rates:
SCHEDULE OF EXCHANGE RATE USED FOR FOREIGN CURRENCY TRANSLATION
| Balance sheet items, except for equity accounts: | ||||
| December 31, 2024 | HKD |
|||
| December 31, 2023 | HKD |
|||
| December 31, 2022 | HKD |
| Statement of operations and cash flow items: | ||||
| For the year ended December 31, 2024 | HKD |
|||
| For the year ended December 31, 2023 | HKD |
|||
| For the year ended December 31, 2022 | HKD |
Translation of amounts from RMB into USD has been made at the following exchange rates:
| Balance sheet items, except for equity accounts: | ||||
| December 31, 2024 | RMB |
|||
| December 31, 2023 | RMB |
|||
| December 31, 2022 | RMB |
| Statement of operations and cash flow items: | ||||
| For the year ended December 31, 2024 | RMB |
|||
| For the year ended December 31, 2023 | RMB |
|||
| For the year ended December 31, 2022 | RMB |
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and at banks, which are not restricted as to use; and highly liquid investments that are readily convertible into known amounts of cash, which have a short maturity of generally within three months when acquired. As of December 31, 2024 and 2023, the Company did not have any cash equivalents. The Company maintains bank accounts in the PRC and Hong Kong.
Expected credit losses
On January 1, 2023, the Company adopted ASC 326, Credit Losses (“ASC 326”), which replaced previously issued guidance regarding the impairment of financial instruments with an expected loss methodology that will result in more timely recognition of credit losses. The Company used a modified retrospective approach and did not restate the comparable prior periods. The adoption did not have a material impact on the Company’s CFS.
The Company maintains an allowance for expected credit losses in accordance with ASC 326 and records the allowance for credit losses, if warranted, as an offset to assets such as accounts receivable, and the estimated credit losses charged to the allowance are classified as general and administrative expenses in the consolidated statements of operations and comprehensive loss. The Company assesses collectability by reviewing receivables on a collective basis where similar characteristics exist, primarily based on the size and nature of specific customers’ receivables. In determining the amount of the allowance for credit losses, the Company considers historical collectability based on past due status, the age of the receivable balances, credit quality of the Company’s customers based on ongoing credit evaluations, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect the Company’s ability to collect from customers. Bad debts are written off as incurred.
| F-9 |
Inventories
Inventories consist of raw materials, work-in-progress
and finished goods. They are stated at the lower of cost or net realizable value, as determined using the weighted average cost method.
Management compares the cost of inventories with the related net realizable value and will set up an allowance to write down the cost
of inventories to its net realizable value, if it is lower than cost. As of December 31, 2024 and 2023, the Company determined that
Other receivables
Other receivables primarily include receivables
from employees related to social security benefits and VAT receivable. Management reviews the composition of other receivables and determines
if an allowance for doubtful accounts is needed. A allowance for doubtful accounts is made when collection of the full amount is no longer
probable. As of December 31, 2024 and 2023, the Company determined that
Prepayments and deposits
Prepayments consisted mainly of prepaid
marketing research expenses, prepaid manufacture expenses, prepaid research and development expenses, prepaid taxes, prepaid insurance,
and prepaid software license. Deposits, a non-current asset, are related to long-term office rental. These amounts are refundable and
bear no interest. Prepayments and deposits are classified as either current or non-current based on the terms of the respective agreements.
These prepayments are unsecured and are reviewed periodically to determine whether their carrying value has become impaired. As of December
31, 2024 and 2023, management believes that the Company’s prepayments and deposits are
Prepayments consisted of the following:
SCHEDULE OF PREPAYMENTS
| 2024 | 2023 | |||||||
| As of December 31, | ||||||||
| 2024 | 2023 | |||||||
| Marketing research expenses | $ | $ | ||||||
| Manufacturing expenses | ||||||||
| Research and development expenses | ||||||||
| Prepaid taxes | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
Property and equipment
Property and equipment are stated at cost net of accumulated depreciation, amortization and impairment, if necessary. Depreciation and amortization are provided over the estimated useful lives of the assets using the straight-line method from the time the assets are placed in service. Estimated useful lives are as follows:
SCHEDULE OF USEFUL LIVES OF PROPERTY AND EQUIPMENT
| Category | Estimated useful life | |
| Office equipment | ||
| Production equipment | ||
| Motor vehicles | ||
| Leasehold improvements |
Repairs and maintenance are charged to expense as incurred, whereas the costs of betterments that extend the useful life of property and equipment are capitalized as additions to the related assets. The cost and related accumulated depreciation and amortization of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the consolidated statements of operations and comprehensive loss.
Impairment of long-lived assets
Long-lived
assets are evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying amounts
may not be recoverable in accordance with FASB ASC 360, “Property, Plant and Equipment”. In evaluating long-lived assets
for recoverability, the Company uses its best estimate of future cash flows expected to result from the use of the asset and eventual
disposition in accordance with FASB ASC 360-10-15. To the extent that estimated future undiscounted cash inflows attributable to the
asset, less estimated future undiscounted cash outflows, are less than the carrying amount, an impairment loss is recognized in an amount
equal to the difference between the carrying value of such an asset and its fair value. Assets to be disposed of and for which there
is a committed plan of disposal, whether through sale or abandonment, are reported at the lower of carrying value or fair value less
costs to sell. There were
Fair value of financial instruments
ASC 820 requires certain disclosures regarding the fair value of financial instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 specifies a hierarchy of valuation techniques, which is based on whether the inputs used in the valuation technique are observable or unobservable. The hierarchy is as follows:
● Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
● Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted market prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable and inputs derived from or corroborated by observable market data.
● Level 3 – inputs to the valuation methodology are unobservable.
Unless otherwise disclosed, the fair values of the Company’s other financial instruments including cash, notes receivable, accounts receivable, advances to suppliers, amounts due from (to) related parties, other assets, bank and other borrowings, accounts payable, contract liabilities and other current liabilities are approximated to their recorded values due to their short-term maturities.
Revenue recognition
The Company follows FASB ASC 606, Revenue from Contracts with Customers in accounting for its revenues. The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
Step 1: Identify the contract with the customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
| F-10 |
Step 4: Allocate the transaction price to the performance obligations in the contract
Step 5: Recognize the allocated revenue when the company satisfies a performance obligation
The Company derives substantially all of its revenue from product sales, specifically sale of door locksets, locksets and related hardware to customers. The contacts with customers specify the product details, delivery terms, and payment conditions. Revenue from product sales is recognized when control passes to the customer, which generally occurs at a point in time when products are delivered FOB (freight on board). Payment terms are generally based on customer agreements, where payments are due within 28 days after products are delivered FOB and the Company issue invoice. In addition, the Company determines itself as principle under trade transaction, and revenue is recorded net of tariffs, VAT and discounts.
Historically, the Company has not experienced any returns, refunds or warranty-related claims. As a result, the Company does not maintain specific accounting policies or provision for those obligations. The Company monitors the nature and frequency of such claims and will establish appropriate policies if circumstances change in the future.
Cost of goods sold
Cost of goods sold consists primarily
of the cost of raw materials (mainly brass, stainless steel, iron and zinc alloy), direct and indirect labor and related benefits,
and manufacturing overhead that is directly attributable to the production process, and related production costs from molding of raw
materials to production of door locksets such as handles, panels and spindles, product assembly, quality control and packaging and
shipping. Write-down of inventory, export tax rebates, if any, are also recorded in cost of goods sold. For 2024, 2023 and 2022, the
Company received export tax rebates of RMB
Cost of goods sold – idle capacity
Idle capacity consists of direct
production costs in excess of charges allocated to the Company’s finished goods in production. Such costs relate primarily to
depreciation expense related to the Company’s electroplating equipment that cannot be directly attributable to the production
process. Idle capacity expenses were $
Other Income
Other income consists primarily of proceeds from sale of raw materials waste (mainly iron), and rental income from sublease of extra factory space.
Leases
The Company follows FASB ASU 2016-02, “Leases” (Topic 842) and measures the lease liability based on the present value of the lease payments discounted by the relevant borrowing rate and reduces the carrying value of the lease liability for lease payments made.
The Company accounts for all significant leases as either operating or finance leases. At lease inception, if the lease meets any of the following five criteria, the Company will classify it as a finance lease: (i) the lease transfers ownership of the underlying asset to the Company by the end of the lease term, (ii) the lease grants the Company an option to purchase the underlying asset that the lessee is reasonably certain to exercise, (iii) the lease term is for the major part of the remaining economic life of the underlying asset, (iv) the present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments equals or exceeds substantially all (90% or more) of the fair value of the underlying asset, or (v) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. Otherwise, the lease will be treated as an operating lease.
| F-11 |
For leases with an initial term of 12 months or less, the Company is permitted to and did make an accounting policy election by class of underlying assets not to recognize lease assets and lease liabilities. During 2024 and 2023, the Company recognized lease expense for such leases on a straight-line basis over the lease term.
Income taxes
The Company accounts for income taxes in accordance with FASB ASC Section 740. The Company is subject to the tax laws of the PRC and Hong Kong (a special administrative region of PRC). The charge for taxation is based on actual results for the year as adjusted for items that are non-assessable or disallowed; and it is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. The Company is not currently subject to tax in the Cayman Islands or the British Virgin Islands.
Deferred taxes are accounted for using the asset and liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the Company’s consolidated financial statements and the corresponding tax basis used in the computation of assessable tax profit of loss. In principle, deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized to the extent that it is probable that future taxable income can be utilized with deferred tax liabilities and/or net operating loss carry forwards. Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized, or the liability is settled. Deferred tax is charged or credited in the statement of operations, except when it is related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Net deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.
An uncertain tax position is recognized
as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax
examination being presumed to occur. The amount recognized is the largest amount of tax benefit that has a
Value added tax
The Company is subject to value added tax
(“VAT”) in the PRC. Revenue generated and purchases within the PRC from domestic suppliers are generally subject to VAT at
the rate of
Related parties
Parties are considered to be related to the Company if they, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its separate interests.
The Board of Directors of the Company approved and adopted Intelligent Living Application Group Inc. 2022 Omnibus Equity Plan (the “Equity Plan”) on October 20, 2022, which was approved at the stockholders’ meeting on December 16, 2022. The total ordinary shares of the Company authorized for issuance during the term of the Equity Plan is .
| F-12 |
On February 22, 2023, (the “Grant Date”), the Compensation Committee of the Board of Directors (the “Board”) of the Company granted stock options to purchase ordinary shares of the Company (the “Shares”) at $ per share, pursuant to the Equity Plan, to 16 officers, directors and employees of the Company and its subsidiaries (the “Grantees”). The Grants vested immediately on the Grant Date and each of the Grantees also entered into a Stock Option Agreement with the Company on February 22, 2023. The options will expire five () years from the Grant Date and may be exercised by cashless exercise pursuant to the terms and conditions of the Stock Option Agreement.
The related cost of share-based payments for the ordinary shares is measured by fair value (“FV”) at the Grant Date. The FV is determined by using a binomial model. The cost is recognized in employee benefit expenses recorded in the Company’s consolidated statements of operations and comprehensive loss, together with a corresponding amount in additional paid-in capital.
Comprehensive income (loss)
Comprehensive income (loss) is defined as the increase or decrease in equity of the Company during a period from transactions and other events and circumstances excluding transactions resulting from investments by owners and distributions to owners. Amongst other disclosures, ASC 220, Comprehensive Income, requires that all items that are required to be recognized under current accounting standards as components of comprehensive income (loss) be reported in a financial statement that is displayed with the same prominence as other financial statements. For each of the periods presented, the Company’s comprehensive loss included the net loss and foreign currency translation adjustments that are presented in the consolidated statements of operations and comprehensive loss.
Segment reporting
The Company follows ASC 280, Segment Reporting. The Company’s Chief Executive Officer as the chief operating decision-maker reviews the consolidated financial results when making decisions about allocating resources and assessing the performance of the Company as a whole and has determined that the Company has only one reportable segment. The Company operates and manages its business as a single segment.
The following table sets forth the Company’s revenue from customers by geographical areas based on the location of the customers:
| For the years ended | ||||||||||||
| December 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| US | $ | $ | $ | |||||||||
| Canada | ||||||||||||
| Total | $ | $ | $ | |||||||||
The following table sets forth the Company’s property and equipment, for the purpose of geographical information:
| As of December 31, | ||||||||
| 2024 | 2023 | |||||||
| PRC | $ | $ | ||||||
| Hong Kong | ||||||||
| Total | $ | $ | ||||||
In accordance with ASC 260, Earnings per Share, basic earnings (loss) per share is computed by dividing net income (loss) attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted income per share is calculated by dividing net income attributable to ordinary shareholders as adjusted for the effect of dilutive ordinary equivalent shares, if any, by the weighted average number of ordinary shares and dilutive ordinary equivalent shares outstanding during the period. Ordinary share equivalents are excluded from the computation of diluted income per share as their effects would be anti-dilutive.
| F-13 |
Commitment and contingencies
In the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of its business, which cover a wide range of matters, including, among others, government investigations and tax matters. In accordance with FASB ASC 450-120, “Loss Contingencies”, the Company records accruals for such loss contingencies when it is probable that a liability has been incurred and the amount of less can be reasonably estimated.
Recent accounting pronouncements
In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”, which requires public entities to disclose expanded information about their reportable segment(s)’ significant expenses and other segment items on an interim and annual basis. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The ASU is required to be applied retrospectively to all prior periods presented in the financial statements once adopted. The Company is evaluating the disclosure requirements for the new standard.
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”, which requires public entities to disclose specific tax rate reconciliation categories, as well as income taxes paid disaggregated by jurisdiction, amongst other disclosure enhancements. The ASU is effective for financial statements issued for annual periods beginning after December 15, 2024, with early adoption permitted. The ASU can be adopted on a prospective or retrospective basis. The Company is evaluating the disclosure requirements for the new standard.
The Company has considered all other recently issued accounting pronouncements and does not believe that the adoption of such pronouncements will have a material impact on the CFS.
Concentrations
Details of the customers accounting for 10% or more of the Company’s total revenues are as follows:
SCHEDULES OF CREDIT RISK
| For the years ended | ||||||||||||||||||||||||
| December 31, | ||||||||||||||||||||||||
| 2024 | 2023 | 2022 | ||||||||||||||||||||||
| Customer A | $ | % | $ | % | $ | % | ||||||||||||||||||
| Customer B | % | % | % | |||||||||||||||||||||
| Customer C | % | % | % | |||||||||||||||||||||
| Customer D | % | % | ||||||||||||||||||||||
| $ | % | $ | % | $ | % | |||||||||||||||||||
Details of the customers which accounted for 10% or more of the Company’s accounts receivable are as follows:
| As of December 31, | ||||||||||||||||
| 2024 | 2023 | |||||||||||||||
| Customer A | $ | % | $ | % | ||||||||||||
| Customer B | % | % | ||||||||||||||
| Customer C | % | % | ||||||||||||||
| $ | % | $ | % | |||||||||||||
Credit risk
Financial assets of the Company that potentially subject to credit risk mainly consist of cash and accounts receivable.
The
Company’s cash deposits are maintained with high credit quality institutions, the composition and maturities of which are regularly
monitored by management. In the PRC, an individual entity’s deposit maintained at a bank is insured for a maximum of RMB
For accounts receivable, the Company has provided no allowance as of December 31, 2024 and 2023 because the account balances were usually collected (realized) within 1 month, and therefore management considered the provision for impairment would be immaterial, if any.
Liquidity risk
The Company reported net loss of
approximately $
| F-14 |
Supplier risk
The Company’s operations are dependent on a limited number of suppliers for its major raw materials. There can be no assurance that the Company will be able to secure the raw materials supply from these suppliers. Any termination or suspension of the supply arrangements, any change in cooperation terms, or the deterioration of cooperation relationships with these suppliers may materially and adversely affect the Company’s results of operations.
Details of the suppliers accounting for 10% or more of total purchases are as follows:
SCHEDULES OF SUPPLIER RISK
| Years Ended December 31, | ||||||||||||||||||||||||
| 2024 | 2023 | 2022 | ||||||||||||||||||||||
| Supplier A | $ | % | $ | % | $ | % | ||||||||||||||||||
| Supplier B | % | % | % | |||||||||||||||||||||
| $ | % | $ | % | $ | % | |||||||||||||||||||
Details of the suppliers which accounted for 10% or more of accounts payable are as follows:
| As of December 31, | ||||||||||||||||
| 2024 | 2023 | |||||||||||||||
| Supplier A | $ | % | $ | % | ||||||||||||
| Supplier B | % | % | ||||||||||||||
| Supplier C | % | % | ||||||||||||||
| $ | % | $ | % | |||||||||||||
Foreign currency risk
The RMB is not a freely convertible currency.
The State Administration for Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion of RMBs
into foreign currencies. The value of the RMB is subject to changes in central government policies and international economic and political
developments that affect supply and demand in the China Foreign Exchange Trading System market of cash and cash equivalents and restricted
cash. The Company had $
Certain transactions of the Company are denominated in HKD which is different from the functional currency of the Company, and therefore the Company is exposed to foreign currency risk. As the HKD is currently pegged to the USD, management considers that there is no significant foreign currency risk arising from the Company’s monetary assets denominated in USD.
The Company currently does not have a foreign currency hedging policy. However, management monitors the Company’s foreign exchange exposure periodically and will consider hedging significant foreign exchange exposure should the need arise.
| F-15 |
NOTE 4 - ACCOUNTS RECEIVABLE
Accounts receivable as of December 31, 2024 and 2023 consisted of the following:
| 2024 | 2023 | |||||||
| As of December 31, | ||||||||
| 2024 | 2023 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: allowance for estimated credit losses | ||||||||
| Accounts receivable, net | $ | $ | ||||||
allowance for estimated credit losses has been established as management believes that amounts outstanding are fully collectible. For
2024, 2023 and 2022, the Company had written-off uncollectible accounts receivable of ,
and $
NOTE 5 - INVENTORIES
The composition of inventories are as follows:
SCHEDULE OF THE COMPOSITION OF INVENTORY
| 2024 | 2023 | |||||||
| As of December 31, | ||||||||
| 2024 | 2023 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-progress | ||||||||
| Finished goods | ||||||||
| Total | $ | $ | ||||||
During the years ended December 31, 2024,
2023 and 2022, there were
NOTE 6 - PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following:
SCHEDULE OF PROPERTY AND EQUIPMENT NET
| 2024 | 2023 | |||||||
| As of December 31, | ||||||||
| 2024 | 2023 | |||||||
| Office equipment | $ | $ | ||||||
| Production equipment | ||||||||
| Motor vehicles | ||||||||
| Leasehold improvements | ||||||||
| Property and equipment, gross | ||||||||
| Less: accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
NOTE 7 - OTHER PAYABLES AND ACCRUALS
Other payables and accruals consist of the followings:
SCHEDULE OF OTHER PAYABLES AND ACCRUALS
| 2024 | 2023 | |||||||
| As of December 31, | ||||||||
| 2024 | 2023 | |||||||
| Accrued production cost | $ | $ | ||||||
| Accrued salary | ||||||||
| Accrued social security benefits | ||||||||
| Accrued utilities | ||||||||
| Accrued business tax and others | ||||||||
| Total | $ | $ | ||||||
| F-16 |
NOTE 8 - RELATED PARTY BALANCES AND TRANSACTIONS
In 2018, the Company entered into a rental
agreement with Kambo Security Products Limited for office space in Hong Kong. The rental agreement is renewed annually. Kambo Security
Products Limited is owned by Mr. Bong Lau, Mr. Wynn Hui, and Mr. Bun Lau, major shareholders of ILA.
NOTE 9 - BANK BORROWINGS
On May 14, 2021, the Company obtained banking
facilities from the Bank of China (Hong Kong) Limited for the maximum of HKD
On October 8, 2020, the Company obtained
banking facilities from the Bank of China (Hong Kong) Limited for the maximum amount of HKD
On April 28, 2020, the Company obtained
banking facilities from the Bank of China (Hong Kong) Limited for the maximum amount of HKD
On November 3, 2017, the Company obtained
banking facilities from the Bank of China (Hong Kong) Limited pursuant to which the Company may borrow up to HKD
During 2024,
2023 and 2022, interest expense for these credit facilities was $
The following table shows the maturity of the Company’s bank borrowings as of December 31, 2024:
SUMMARY OF MATURITY OF BANK BORROWINGS
| For the years ending December 31, | Amount | |||
| 2025 | $ | |||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| Total Bank Borrowings | $ | |||
NOTE 10 - RIGHT-OF-USE ASSETS AND OPERATING LEASE LIABILITIES
The Company determines if a contract contains a lease at inception. US GAAP requires that the Company’s leases be evaluated and classified as operating or finance leases for financial reporting purposes. The classification evaluation begins at the commencement date and the lease term used in the evaluation includes the non-cancellable period for which the Company has the right-to-use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain or failure to exercise such option would result in an economic penalty.
| F-17 |
The Company has the following operating leases:
| ● | Real estate leases for its manufacturing factory and electroplating
production line in the PRC (annual payment of approximately $ | |
| ● | Office equipment lease (annual payment of approximately $ |
The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The leases generally do not contain options to extend at the time of expiration.
The weighted-average remaining lease terms and discount rates of the Company’s operating leases are as follows:
SCHEDULE OF REMAINING LEASE TERMS AND DISCOUNT RATES
| As of December 31, | ||||||||
| 2024 | 2023 | |||||||
| Weighted average remaining lease term (years) | $ | $ | ||||||
| Weighted average discount rate | % | % | ||||||
Operating lease expenses are
allocated between the cost of revenues and selling, general, and administrative expenses. Total operating lease expenses were
approximately $
The following table sets forth the five-year maturity schedule of the Company’s lease liabilities:
SCHEDULE OF MATURITY OF LEASE LIABILITIES
| For the years ending December 31, | Amount | |||
| 2025 | $ | |||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| Total operating lease payments | ||||
| Less: imputed interest | ( | ) | ||
| Present value of operating lease liabilities | $ | |||
NOTE 11 – STOCK-BASED COMPENSATION
The Company operates a share-based payment scheme (the “Scheme”) to provide incentives and rewards to eligible participants who contribute to the success of the Company’s operations. Eligible participants of the Scheme include the Company’s directors, employees and consultants.
The 2022 Omnibus Equity Plan
The BOD of the Company approved and adopted Intelligent Living Application Group Inc. 2022 Omnibus Equity Plan (the “Equity Plan”) on October 20, 2022, which was approved at the stockholders’ meeting on December 16, 2022. The total ordinary shares of the Company authorized for issuance during the term of the Equity Plan is .
On February 22, 2023, (the “Grant Date”), the Compensation Committee of the Board of Directors (the “Board”) of the Company granted stock options to purchase ordinary shares of the Company (the “Shares”) at $ per share, pursuant to Equity Plan, to sixteen officers, directors and employees of the Company and its subsidiaries (the “Grantees”) The Grants vested immediately on the Grant Date and each of the Grantees also entered into a Stock Option Agreement with the Company on February 22, 2023. The options expire five () years from the Grant Date and may be exercised by cashless exercise pursuant to the terms and conditions of the Stock Option Agreement.
| F-18 |
The stock options granted to officers, directors and employees are accounted for as equity awards and measured at their Grant Date fair values of $ by using a binomial model. As of December 31, 2024, none of the Grants was exercised. The Company does not believe that the stock options granted will have any dilution impact on the Company’s earnings per share since these stock options has not been exercised as of December 31, 2024 and the Company operated at a loss for 2024 and 2023.
NOTE 12 – EQUITY TRANSACTIONS
Preferred shares
On July 16, 2021, the Company amended its articles of association and authorized preferred shares with a par value of $. preferred shares were issued or registered in the IPO. There were preferred shares issued and outstanding as of December 31, 2024 and 2023.
Ordinary shares
On July 15, 2022, the Company closed its IPO of ordinary shares priced at $ per share.
NOTE 13 - INCOME TAXES
Corporate income taxes
Cayman Islands
The Company was incorporated in the Cayman Islands and is not subject to tax on income or capital gains under the laws of the Cayman Islands. The Company mainly conducts its operating business through its subsidiaries in the PRC and Hong Kong. Additionally, the Cayman Islands does not impose a withholding tax on payments of dividends to shareholders.
British Virgin Islands
The Company’s subsidiary incorporated in the BVI is not subject to taxation.
Hong Kong
The Company’s Hong Kong subsidiaries,
including Hing Fat Industrial Limited, Kambo Locksets Limited, Bamberg (HK) Limited and Kambo Hardware Limited, are subject to Hong Kong
Profits Tax on their taxable income as reported in their statutory financial statements adjusted in accordance with relevant Hong Kong
tax laws. Hong Kong Profits Tax was calculated at
PRC
The Company’s PRC operating subsidiary,
Dongguan Xingfa Hardware Products Co., Ltd, is governed by the income tax laws of the PRC and the income tax provisions in respect to
operations in the PRC is calculated at the applicable tax rate on the taxable income for the periods based on existing legislation, interpretations
and practices in respect thereof. Under the Enterprise Income Tax Laws of the PRC (the “EIT Laws”), Chinese enterprises are
subject to an income tax rate of
(Loss) income before provision for income taxes is as follows:
SCHEDULE OF PROFIT (LOSS) BEFORE PROVISION FOR INCOME TAXES
| 2024 | 2023 | 2022 | ||||||||||
| For the years ended | ||||||||||||
| December 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Cayman and BVI | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Hong Kong | ( | ) | ( | ) | ( | ) | ||||||
| PRC | ( | ) | ||||||||||
| Total | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| F-19 |
Significant components of deferred tax assets are as follows:
SCHEDULE OF DEFERRED TAX ASSETS AND LIABILITIES
| 2024 | 2023 | |||||||
| As of December 31, | ||||||||
| 2024 | 2023 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carry forwards | $ | $ | ||||||
| Total deferred tax assets | ||||||||
| Deferred tax liabilities: | ||||||||
| Depreciation | ||||||||
| Total deferred tax liabilities | ||||||||
| Total deferred tax assets-net | ||||||||
| Less: Valuation allowance | ( | ) | ( | ) | ||||
| Deferred tax assets, net | $ | $ | ||||||
Future tax benefits which may arise as
a result of net operating loss carry-forward have not been recognized in the accompanying consolidated financial statements as their realization
has not been determined likely to occur. As of December 31, 2024 and 2023, the Company believes it is more likely than not that its PRC
and HK subsidiaries will be unable to fully utilize their deferred tax assets related to their net operating loss carry-forward in the
PRC and Hong Kong. If the Company is unable to generate taxable income in its PRC and Hong Kong operations, it is more likely than not
that it will not have sufficient income to recognize the net deferred tax assets. As a result, the Company provided a 100% valuation allowance
on its net deferred tax assets of approximately $
Reconciliation of effective income tax rate is as follows:
SCHEDULE OF RECONCILIATION OF EFFECTIVE INCOME TAX RATE
| 2024 | 2023 | 2022 | ||||||||||
| For the years ended | ||||||||||||
| December 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| PRC statutory tax rate | % | % | % | |||||||||
| Effect of tax rate differential (HK) | ( | ) | ( | ) | ( | ) | ||||||
| Tax effect of non-deductible expenses | ( | ) | ||||||||||
| Valuation allowance | ( | ) | ( | ) | ( | ) | ||||||
| Effective tax rate | % | % | % | |||||||||
Uncertain tax position
There were
| F-20 |
NOTE 14 - COMMITMENTS AND CONTINGENCIES
From time to time, the Company may be subject to certain legal proceedings, claims and disputes that arise in the ordinary course of business. Although the outcomes of these legal proceedings cannot be predicted, the Company does not believe these actions, in the aggregate, will have a material adverse impact on its financial position, results of income or liquidity.
NOTE 15 - SUBSEQUENT EVENTS
On February 19, 2025 (the
“Grant Date”), the Compensation Committee (“Committee”) of the Board of the Company granted stock awards of
ordinary shares of the Company, par value $,
pursuant to the Company’s 2022 Omnibus Equity Plan, to certain officers and employees of the Company and its subsidiaries (the
“Grantees”), including:
Ordinary Shares to Wynn Hui, Chief Technical Officer and a director of the Company,
Ordinary Shares to Bun Lau, Chief Operating Officer and a director of the Company,
Ordinary Shares to Errol Hui, Vice President of Engineering of the Company,
Ordinary Shares to Frederick Wong, Chief Financial Officer of the Company,
Ordinary Shares to Wei Zhong, Vice President of Finance of the Company as well as
Ordinary Shares to each of the independent directors of the Company, namely Monique Ho, Chun Fai (Kenneth) Liu, Carina Chui and
Henry Yeung. On the Grant Date, the Committee and the Board also granted
Series A Preferred Shares, par value US$
to Mr. Bong Lau, the Chief Executive Officer and Chairman of the Board and
On February 25, 2025, the Company entered
into a Placement Agency Agreement (the “PAA”) with Craft Capital Management LLC (“Craft Capital”), as the Placement
Agent, to issue and sell ordinary shares (the “Shares”) of the Company, $ par value per share (“Ordinary
Shares”), at $ per Share. The Shares were offered by the Company pursuant to its shelf registration statement
on Form F-3 (File No. 333-274495), that was declared effective by the Securities and Exchange Commission on December 4, 2023, on a best-efforts
basis (the “Offering”). On February 27, 2025, the Offering was closed. Total gross proceeds from the offering, before deducting
the placement agent’s fees and other offering expenses, is $
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
The Company performed a test of its restricted net assets of the consolidated subsidiaries in accordance with the Securities and Exchange Commission’s Regulation S-X Rule 4-08 (e) (3), “General Notes to Financial Statements” and concluded that it was applicable for the Company to disclose the financial information of the parent company.
The subsidiaries did not pay any dividends to the Company for the periods presented. For the purpose of presenting parent-only financial information, the Company records its investment in its subsidiaries under the equity method of accounting. Such investment is presented on the separate condensed statement of financial position of the Company as “Investment in subsidiaries”.
ILA became the parent company of the Company as a result of the execution of the Share Exchange Agreement in April 2020. ILA is a holding company with no bank account, did not have any significant capital and other commitments, and did not have any long-term obligations, or guarantees as of December 31, 2024. ILA did not have any business activities during the year ended December 31, 2024.
| F-21 |
The following is the parent company balance sheets:
SCHEDULE OF CONDENSED FINANCIAL INFORMATION
| 2024 | 2023 | |||||||
| As of December 31, | ||||||||
| 2024 | 2023 | |||||||
| USD | USD | |||||||
| (Unaudited) | (Unaudited) | |||||||
| ASSETS | ||||||||
| NON-CURRENT ASSETS | ||||||||
| Investment in subsidiaries | $ | $ | ||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| LIABILITIES | $ | $ | ||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Preferred shares, par value $ per share; shares authorized; issued and outstanding | ||||||||
| Ordinary shares, par value $ per share; shares authorized; shares issued and outstanding | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| TOTAL SHAREHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ | ||||||
The following is the parent company statements of operations and comprehensive loss:
| 2024 | 2023 | 2022 | ||||||||||
| For the Years Ended | ||||||||||||
| December 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| USD | USD | USD | ||||||||||
| EQUITY LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| NET LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| COMPREHENSIVE LOSS | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Foreign currency translation adjustments | ( | ) | ( | ) | ( | ) | ||||||
| COMPREHENSIVE LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| F-22 |
Exhibit 2.2
Description of Rights of Securities Registered Under Section 12 of the Securities Exchange Act of 1934
The Ordinary Shares of Intelligent Living Application Group Inc (the “Company”) are currently listed on the Nasdaq Capital Market and registered under Section 12(b) of the Exchange Act.
We are a Cayman Islands exempted company limited by shares and our affairs are governed by our current memorandum and articles of association and the Companies Act (As Revised) of the Cayman Islands, which we refer to as the “Companies Act” below, and the common law of the Cayman Islands.
Our authorized share capital is $50,000 divided into 500,000,000 shares, comprising of (i) 450,000,000 ordinary shares, par value of $0.0001 each; and (ii) 50,000,000 preferred shares, par value of $0.0001 each.
On February 6, 2025, the Board of the Company pursuant to the Articles of Association of the Company, designated 2,000,000 Preferred Shares of the Company as Series A preferred shares of the Company, par value US$0.0001 each (“Series A Preferred Shares” or the “Subject Shares”), with the following terms:
I. Voting Right: At any general meeting, (i) on a show of hands every holder of the Subject Shares present in person (or being a corporation, is present by a duly authorized representative), or by proxy shall have twenty (20) votes for every fully paid Subject Share, and (ii) on a poll every holder of the Subject Shares present in person or by proxy or, in the case of a holder being a corporation, by its duly authorized representative shall have twenty (20) votes for every fully paid Subject Share;
II. each Series A Preferred Share is convertible into one (1) ordinary share of the Company, par value $0.0001 (“Ordinary Share”) at any time at the option of the holder thereof. The right to convert shall be exercisable by the holder of the Series A Preferred Share delivering a written notice to the Company that such holder elects to convert a specified number of Series A Preferred Share into Ordinary Shares. In no event shall Ordinary Shares be convertible into Series A Preferred Shares;
III. upon any sale, transfer, assignment or disposition of any Series A Preferred Share by such shareholder of the Company to any person who is not an affiliate of such shareholder, or upon a change of control of any Series A Preferred Share to any person who is not an affiliate of the registered shareholder of such share, as determined by the Board, such Series A Preferred Share shall be automatically and immediately converted into one Ordinary Share (the “Automatic Conversion”). For the avoidance of doubt, (i) a sale, transfer, assignment or disposition shall be effective upon the Company’s registration of such sale, transfer, assignment or disposition in the register of members of the Company; and (ii) the creation of any pledge, charge, encumbrance or other third party right of whatever description on any Series A Preferred Share to secure a holder’s contractual or legal obligations shall not be deemed as a sale, transfer, assignment or disposition unless and until any such pledge, charge, encumbrance or other third party right is enforced and results in the third party holding legal title to the relevant Series A Preferred Shares, in which case all the relevant Series A Preferred Shares shall be automatically converted into the same number of Ordinary Shares; and
IV. other than the Automatic Conversion, any conversion of Series A Preferred Shares into Ordinary Shares by a holder thereof (the “Conversion Shareholder”) shall be effected by means of the repurchase of each relevant Series A Preferred Share for cancellation and allotting and issuance of an Ordinary Share, credited as fully paid (the “Ordinary Conversion”). Both the Automatic Conversion and the Ordinary Conversion shall become effective forthwith upon the Register of Members being updated; and
V. all other rights of the Subject Shares will be the same as the Ordinary Shares and any other Preferred Shares.
As of April 28, 2025, 20,769,483 Ordinary Shares are issued and outstanding and 2,000,000 Series A Preferred Shares are issued or outstanding.
Our registered office in the Cayman Islands is located at Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman, KY1-1111.
According to clause 3 of our amended and restated memorandum of association (the “Memorandum”), subject to the provisions of the Memorandum, the objects for which the Company is established are unrestricted.
Ordinary Shares
Dividends. Subject to any rights and restrictions of any other class or series of shares, our board of directors may, from time to time, declare dividends on the shares issued and authorize payment of the dividends out of our lawfully available funds. Dividends may be declared and paid out of the profits of the Company, realized or unrealized, or from any reserve set aside from profits which the Directors determine is no longer needed. The Board may also declare and pay dividends out of share premium account or any other fund or account which can be authorized for this purpose in accordance with the Act. “Share premium account,” represents the excess of the price paid to our company on issue of its shares over the par or “nominal” value of those shares, which is similar to the U.S. concept of additional paid in capital.
No dividend shall bear interest against the Company.
Voting Rights. The holders of our ordinary shares are entitled to one vote per share, including the election of directors. Voting at any meeting of shareholders is by show of hands unless a poll is demanded. On a show of hands every shareholder present in person or by proxy shall have one vote. On a poll every shareholder entitled to vote (in person or by proxy) and shall have one vote for each share for which he/she is the holder. A poll may be demanded by the chairman of such meeting or by any one or more shareholders who together hold not less than ten percent (10%) of the votes attached to the then issued share capital of the Company, present in person or in the case of a shareholder being a corporation by its duly authorized representative or by proxy for the time being entitled to vote at the meeting. A any general meeting of the Company, two (2) shareholders entitled to vote and present in person or by proxy or (in the case of a shareholder being a corporation) by its duly authorized representative representing not less than one-third of the votes attached to the then issued share capital of the Company throughout the meeting shall form a quorum for all purposes. While not required by our articles of association, a proxy form will accompany any notice of general meeting convened by the directors to facilitate the ability of shareholders to vote by proxy.
Any ordinary resolution to be made by the shareholders requires the affirmative vote of a simple majority of the votes of the ordinary shares cast in a general meeting, while a special resolution requires the affirmative vote of no less than two-thirds of the votes of the ordinary shares cast. Under Cayman Islands law, some matters, such as amending the memorandum and articles, changing the name or resolving to be registered by way of continuation in a jurisdiction outside the Cayman Islands, require approval of shareholders by a special resolution.
There are no limitations on non-residents or foreign shareholders to hold or exercise voting rights on the ordinary shares imposed by foreign law or by the memorandum and articles of association of our Company. However, no person will be entitled to vote at any general meeting or at any separate meeting of the holders of the ordinary shares unless the person is registered as of the record date for such meeting and unless all calls or other sums presently payable by the person in respect of ordinary shares in the Company have been paid.
Winding Up; Liquidation. Subject to any special rights, privileges or restrictions as to the distribution of available surplus assets on liquidation for the time being attached to any class or classes of shares (i) if the Company shall be wound up and the assets available for distribution amongst the shareholders of the Company shall be more than sufficient to repay the whole of the capital paid up at the commencement of the winding up, the excess shall be distributed pari passu amongst such shareholders in proportion to the amount paid up on the shares held by them respectively and (ii) if the Company shall be wound up and the assets available for distribution amongst the Shareholders as such shall be insufficient to repay the whole of the paid-up capital such assets shall be distributed so that, a nearly as may be, the losses shall be borne by the Shareholders in proportion to the capital paid up, or which ought to have been paid up, at the commencement of the winding up on the shares held by them respectively. The liquidator may, with the authority of a special resolution and any other sanction required by the Act, divide among the Shareholders in specie or kind the whole or any part of the assets of the Company and whether or not the assets are of the same of different kinds.
Calls on Ordinary Shares and Forfeiture of Ordinary Shares. Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their ordinary shares in a notice served to such shareholders at least 14 days prior to the specified time and place of payment. Any ordinary shares that have been called upon and remain unpaid are subject to forfeiture.
Redemption of Ordinary Shares. We may issue shares that are, or at the Company’s option, or at the option of the holders of such shares are, subject to redemption on such terms and in such manner as it may, before the issuance of the shares, determine. Under the Companies Act, shares of a Cayman Islands exempted company may be redeemed or repurchased out of profits of the company, out of the proceeds of a fresh issue of shares made for that purpose, out of share premium account or out of capital, provided the memorandum and articles authorize this and the company has the ability to pay its debts as they come due in the ordinary course of business.
No Preemptive Rights. Holders of ordinary shares will have no pre-emptive or preferential right to purchase any securities of our company.
Variation of Rights Attaching to Shares. If at any time the share capital is divided into different classes of shares, the rights attaching to any class (unless otherwise provided by the terms of issue of the shares of that class) may, subject to the memorandum and articles, be modified or abrogated with the sanction of a special resolution passed at a general meeting of the holders of the shares of that class.
Anti-Takeover Provisions. Some provisions of our current memorandum and articles of association may discourage, delay or prevent a change of control of our company or management that shareholders may consider favorable, including provisions that authorize our board of directors to issue preferred shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preferred shares without any further vote or action by our shareholders.
Transfer of Ordinary Shares. Subject to the restrictions contained in our current articles of association, any of our shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or common form or any other form approved by our board of directors.
Our board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share which is not fully paid up or on which we have a lien. Our board of directors may also decline to register any transfer of any ordinary share unless:
| ● | the instrument of transfer is lodged with us, accompanied by the certificate for the ordinary shares to which it relates and such other evidence as our board of directors may reasonably require to show the right of the transferor to make the transfer; | |
| ● | the instrument of transfer is in respect of only one class of shares; | |
| ● | the instrument of transfer is properly stamped, if required; | |
| ● | in the case of a transfer to joint holders, the number of joint holders to whom the share is to be transferred does not exceed four; and |
| ● | a fee of such maximum sum as the Nasdaq Capital Market may determine to be payable or such lesser sum as our directors may from time to time require is paid to us in respect thereof. |
If our directors refuse to register a transfer, they shall, within three months after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal.
The registration of transfers may, on ten calendar days’ notice being given by advertisement in such one or more newspapers, by electronic means or by any other means in accordance with the Nasdaq Rules, be suspended and the register closed at such times and for such periods as our board of directors may, in their absolute discretion, from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 calendar days in any calendar year.
Inspection of Books and Records. Holders of our ordinary shares have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records (other than the memorandum and articles of association, the register of mortgages and charges, and copies of any special resolutions passed by our shareholders). However, we will provide our shareholders with annual audited financial statements.
General Meeting of Shareholders. Shareholders’ meetings may be convened by a majority of our board of directors or our chairman. Advance notice of at least seven (7) calendar days is required for the convening of our annual general shareholders’ meeting and any other general meeting of our shareholders. A quorum required for and throughout a meeting of shareholders consists of at least one shareholder entitled to vote and present in person or by proxy or (in the case of a shareholder being a corporation) by its duly authorized representative representing not less than one-third of all voting power of our share capital in issue.
Exempted Company. We are an exempted company incorporated with limited liability under the Companies Act. The Companies Act distinguishes between ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company are essentially the same as for an ordinary company except that an exempted company:
| ● | does not have to file an annual return of its shareholders with the Registrar of Companies; | |
| ● | is not required to open its register of members for inspection to the public; | |
| ● | does not have to hold an annual general meeting; | |
| ● | may issue shares with no par value; | |
| ● | may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in the first instance); | |
| ● | may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands; | |
| ● | may register as a limited duration company; and | |
| ● | may register as a segregated portfolio company. |
“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the company.
Warrants
On July 15, 2022, the Company issued warrants to purchase an aggregate of 253,000 Ordinary Shares to the representative of underwriters of our IPO and its designees in connection with our initial public offering. Such warrants have a term of five years until July 12, 2027 with an exercise price of $5.00 per share. The warrants also have cashless exercise options and are subject to standard anti-dilution adjustments for share sub-divisions and similar transactions.
On February 27, 2025, the Company issued warrants to purchase up to 41,380 Ordinary Shares to the placement agent of an offering closed on the same day. Such warrants are exercisable at any time on or after August 24, 2025 with an exercise price of $0.783 per share and have a term of three years after February 25, 2025. The warrants also have cashless exercise options and are subject to standard anti-dilution adjustments for share sub-divisions and similar transactions
As of December 31, 2024 and April 28, 2025, there were 294,380 warrants outstanding, respectively.
Differences in Corporate Law
The Companies Act is modelled after that of English law but does not follow many recent English law statutory enactments. In addition, the Companies Act differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Act applicable to us and the laws applicable to companies incorporated in the State of Delaware.
Mergers and Similar Arrangements. A merger of two or more constituent companies under Cayman Islands law requires a plan of merger or consolidation to be approved by the directors of each constituent company and authorization by (a) a special resolution of the shareholders and (b) such other authorization, if any, as may be specified in such constituent company’s articles of association.
A merger between a Cayman Islands parent company and its Cayman Islands subsidiary or subsidiaries does not require authorization by a resolution of shareholders of that Cayman Islands subsidiary if a copy of the plan of merger is given to every member of that Cayman Islands subsidiary to be merged unless that member agrees otherwise. For this purpose, a subsidiary is a company of which at least ninety percent (90%) of the issued shares entitled to vote are owned by the parent company.
The consent of each holder of a fixed or floating security interest over a constituent company is required unless this requirement is waived by a court in the Cayman Islands.
Save in certain circumstances, a dissenting shareholder of a Cayman constituent company is entitled to payment of the fair value of his shares upon dissenting to a merger or consolidation. The exercise of appraisal rights will preclude the exercise of any other rights save for the right to seek relief on the grounds that the merger or consolidation is void or unlawful.
In addition, there are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that the arrangement is approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must, in addition, represent three-fourths of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meetings, convened for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder has the right to express to the court the view that the transaction ought not to be approved, the court can approve the arrangement if it determines that:
| ● | the statutory provisions as to the required majority vote have been met; | |
| ● | the shareholders have been fairly represented at the meeting in question and the statutory majority are acting bona fide without coercion of the minority to promote interests adverse to those of the class; | |
| ● | the arrangement is such that may be reasonably approved by an intelligent and honest man of that class acting in respect of his interest; and | |
| ● | the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Act. |
When a takeover offer is made and accepted by holders of 90.0% of the shares the subject of such offer within four months, the offeror may, within a two-month period commencing on the expiration of such four month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but may not succeed in the case of an offer which has been so approved unless there is evidence of fraud, bad faith or collusion.
If an arrangement and reconstruction is thus approved, the dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of certain Delaware corporations, providing rights to receive payment in cash for the judicially determined value of the shares where the vote of shareholders is required to approve the transaction.
Shareholders’ Suits. In principle, we will normally be the proper plaintiff and as a general rule a derivative action may not be brought by a minority shareholder. However, based on English authorities, which may be persuasive authority in the Cayman Islands, there are exceptions to the foregoing principle, including when:
| ● | a company acts or proposes to act illegally or ultra vires; | |
| ● | the act complained of, although not ultra vires, could only be effected if duly authorized by more than a simple majority vote that has not been obtained; and | |
| ● | those who control the company are perpetrating a “fraud on the minority.” |
Indemnification of Directors and Executive Officers and Limitation of Liability. Cayman Islands law does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our current memorandum and articles of association permit indemnification of officers and directors for actions, losses, damages, costs and expenses incurred in their capacities as such unless such losses or damages arise from dishonesty or fraud of such directors or officers. This standard of conduct is similar to but little more lax than that required under the Delaware General Corporation Law for a Delaware corporation which permits indemnification if the person to be indemnified acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Delaware corporation, and, with respect to any criminal action or proceeding, such person to be indemnified had no reasonable cause to believe such person’s conduct was unlawful. In addition, we have entered into indemnification agreements with our directors and executive officers that provide such persons with additional indemnification beyond that provided in our current memorandum and articles of association.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted for our directors, officers or persons controlling us under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Directors’ Fiduciary Duties. Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to shareholders, all material information reasonably available regarding a significant transaction and base such director’s decision on such information. In doing so, a Delaware director is entitled to rely in good faith on corporation’s records and on information, opinions, reports or statements presented to the board by the company’s officers, employees or board committees, or by other parties as to matters the director reasonably believes are within such other parties’ professional or expert competence and who have been selected for the company with reasonable care. Further, Delaware corporations may include in their certificates of incorporation an exculpation provision for the benefit of its directors. At its maximum strength, such an exculpatory provision eliminates the personal liability of a director to the corporation or its stockholders for monetary damages for breaches of the duty of care (but not, among other things, breaches of the duty of loyalty). The duty of loyalty requires that a director act independently and in a manner he reasonably believes to be in the best interests of the corporation. He must not use his corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation (the “Business Judgement Rule”). However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. To rebut the presumption, a party attempting to so rebut has the burden of presenting evidence that directors were at least grossly negligent in not becoming adequately informed or were motivated by interests other than those of the company’s stockholders as a whole (or acted in bad faith by consciously disregarding a known duty). Should such evidence be presented concerning a transaction by a director, the director must prove the procedural fairness of the transaction, and that the transaction was of fair value to the corporation.
As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company and therefore it is considered that he or she owes the following duties to the company—a duty to act in the bona fide best interests of the company, a duty not to make a profit based on his or her position as director (unless the company permits him or her to do so) and a duty not to put himself or herself in a position where the interests of the company conflict with his or her personal interest or his or her duty to a third party. A director of a Cayman Islands company owes to the company a duty to act with skill and care. It was previously considered that a director need not exhibit in the performance of his or her duties a greater degree of skill than may reasonably be expected from a person of his or her knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required skill and care and these authorities may be followed in the Cayman Islands.
Shareholder Action by Written Consent. Under the Delaware General Corporation Law, a corporation may eliminate the right of shareholders to act by written consent by amendment to its certificate of incorporation. Cayman Islands law and our current articles of association provide that shareholders may approve corporate matters by way of a unanimous written resolution signed by or on behalf of each shareholder who would have been entitled to vote on such matter at a general meeting without a meeting being held.
Shareholder Proposals. Under the Delaware General Corporation Law, the by-laws may afford shareholders the right to put any proposal before the annual meeting of shareholders, provided it complies with the notice provisions in the governing documents. A special meeting may be called by the board of directors or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings.
Cayman Islands law does not provide shareholders any right to put proposals before a meeting or requisition a general meeting. However, these rights may be provided in articles of association. Our current articles of association allow our shareholders holding not less than one-third of all voting power of our share capital in issue to requisition a shareholder’s meeting. Other than this right to requisition a shareholders’ meeting, our current articles of association do not provide our shareholders other right to put proposal before a meeting. As a Cayman Islands exempted company, we are not obligated by law to call shareholders’ annual general meetings.
Cumulative Voting. Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with respect to electing such director. There are no prohibitions in relation to cumulative voting under the laws of the Cayman Islands but our current articles of association do not provide for cumulative voting. As a result, our shareholders are not afforded any less protections or rights on this issue than shareholders of a Delaware corporation.
Removal of Directors. Under the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause with the approval of a majority of the outstanding shares entitled to vote at an election of directors, unless the certificate of incorporation provides otherwise. Under our current articles of association, directors may be removed with or without cause, by an ordinary resolution of our shareholders.
Transactions with Interested Shareholders. The Delaware General Corporation Law contains a business combination statute applicable to Delaware corporations whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following the date that such person becomes an interested shareholder. An interested shareholder generally is a person or a group who or which owns or owned 15% or more of the target’s outstanding voting share within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware corporation to negotiate the terms of any acquisition transaction with the target’s board of directors.
Cayman Islands law has no comparable statute. As a result, we cannot avail ourselves of the types of protections afforded by the Delaware business combination statute. However, although Cayman Islands law does not regulate transactions between a company and its significant shareholders, it does provide that such transactions must be entered into in the bona fide best interests of the company and not with the effect of constituting a fraud on the minority shareholders.
Dissolution; Winding up. Under the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board. Under Cayman Islands law, a company may be wound up by either an order of the courts of the Cayman Islands or by a special resolution of its members or, if the company is unable to pay its debts as they fall due, by an ordinary resolution of its members. The court has authority to order winding up in a number of specified circumstances including where it is, in the opinion of the court, just and equitable to do so. Under the Companies Act and our current articles of association, our company may be dissolved, liquidated or wound up by a special resolution of our shareholders.
Variation of Rights of Shares. Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of such class. Under Cayman Islands law and our current articles of association, if our share capital is divided into more than one class of shares, we may vary the rights attached to any class with the written consent of the holders of three-fourths of the issued shares of that class or with the sanction of a resolution passed by not less than three-fourths of such holders of the shares of that class as may be present at a general meeting of the holders of the shares of that class.
Amendment of Governing Documents. Under the Delaware General Corporation Law, a corporation’s governing documents may be amended with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides for a greater required number of shares for approval. As permitted by Cayman Islands law, our current memorandum and articles of association may only be amended with a special resolution of our shareholders.
Rights of Non-resident or Foreign Shareholders. There are no limitations imposed by our post-offering amended and restated memorandum and articles of association on the rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our current memorandum and articles of association governing the ownership threshold above which shareholder ownership must be disclosed.
Listing
Our ordinary shares are listed on the Nasdaq Capital Market under the symbol “ILAG”.
Transfer Agent and Registrar
The transfer agent and registrar for our ordinary shares is VStock Transfer LLC. The transfer agent and registrar’s address is 18 Lafayette Pl, Woodmere, NY 11598.
Exhibit 4.18
Reference: Renewal of Employment Agreement
Intelligent Living Application Group Inc. (the “Company”) and Bong Lau entered into an Employment Agreement (“Employment Agreement”) on June 1, 2020, which has been renewed until June 1, 2024. By signing below both parties agree to further renew the term of the Employment Agreement until June 1, 2025. Except as expressly set forth herein, all terms of the Employment Agreement remain in full force and effect, and constitute the legal, valid, binding and enforceable obligations of the parties thereto.
| Executive: | ||
| By: | /s/Bong Lau | |
| Bong Lau | ||
| Intelligent Living Application Group Inc. | ||
| By | /s/Fred Wong | |
| Name: | Fred Wong | |
| Title: | Chief Financial Officer | |
Exhibit 4.19
Reference: Renewal of Employment Agreement
Intelligent Living Application Group Inc. (the “Company”) and Bun Lau entered into an Employment Agreement (“Employment Agreement”) on June 1, 2020, which has been renewed until June 1, 2024. By signing below both parties agree to further renew the term of the Employment Agreement until June 1, 2025. Except as expressly set forth herein, all terms of the Employment Agreement remain in full force and effect, and constitute the legal, valid, binding and enforceable obligations of the parties thereto.
| Executive: | ||
| By: | /s/Bun Lau | |
| Bun Lau | ||
| Intelligent Living Application Group Inc. | ||
| By | /s/Bong Lau | |
| Name: | Bong Lau | |
| Title: | Chief Executive Officer | |
Exhibit 4.20
Reference: Renewal of Employment Agreement
Intelligent Living Application Group Inc. (the “Company”) and Fred Wong entered into an Employment Agreement (“Employment Agreement”) on June 1, 2020, which has been renewed until June 1, 2024. By signing below both parties agree to further renew the term of the Employment Agreement until June 1, 2025. Except as expressly set forth herein, all terms of the Employment Agreement remain in full force and effect, and constitute the legal, valid, binding and enforceable obligations of the parties thereto.
| Executive: | ||
| By: | /s/Fred Wong | |
| Fred Wong | ||
| Intelligent Living Application Group Inc. | ||
| By | /s/Bong Lau | |
| Name: | Bong Lau | |
| Title: | Chief Executive Officer | |
Exhibit 4.21
Reference: Renewal of Employment Agreement
Intelligent Living Application Group Inc. (the “Company”) and Wynn Hui entered into an Employment Agreement (“Employment Agreement”) on June 1, 2020, which has been renewed until June 1, 2024. By signing below both parties agree to further renew the term of the Employment Agreement until June 1, 2025. Except as expressly set forth herein, all terms of the Employment Agreement remain in full force and effect, and constitute the legal, valid, binding and enforceable obligations of the parties thereto.
| Executive: | ||
| By: | /s/Wynn Hui | |
| Wynn Hui | ||
| Intelligent Living Application Group Inc. | ||
| By | /s/Bong Lau | |
| Name: | Bong Lau | |
| Title: | Chief Executive Officer | |
Exhibit 8.1
List of Principal Subsidiaries of the Registrant
| Principal Subsidiaries | Place of Incorporation | ||
| Intelligent Living Application Group Limited | British Virgin Islands | ||
| Kambo Locksets Limited | Hong Kong | ||
| Kambo Hardware Limited | Hong Kong | ||
| Bamberg (HK) Limited | Hong Kong | ||
| Hing Fat Industrial Limited | Hong Kong | ||
| Dongguan Xingfa Hardware Products Co. Ltd. | PRC |
Exhibit 12.1
Certification by the Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Bong Lau, certify that:
| 1. | I have reviewed this annual report on Form 20-F of Intelligent Living Application Group Inc. (the “Company”); |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; |
| 4. | The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles | |
| (c) | Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and |
| 5. | The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and | |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting. |
| Date: April 28, 2025 | ||
| By: | /s/ Bong Lau | |
| Name: | Bong Lau | |
| Title: | Chief Executive Officer | |
Exhibit 12.2
Certification by the Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Frederick Wong, certify that:
| 1. | I have reviewed this annual report on Form 20-F of Intelligent Living Application Group Inc. (the “Company”); |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; |
| 4. | The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| (c) | Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and |
| 5. | The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and | |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting. |
| Date: April 28, 2025 | ||
| By: | /s/ Frederick Wong | |
| Name: | Frederick Wong | |
| Title: | Chief Financial Officer | |
Exhibit 13.1
Certification by the Principal Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Intelligent Living Application Group Inc. (the “Company”) on Form 20-F for the year ended December 31, 2024 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Bong Lau, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: April 28, 2025 | ||
| By: | /s/ Bong Lau | |
| Name: | Bong Lau | |
| Title: | Chief Executive Officer | |
Exhibit 13.2
Certification by the Principal Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Intelligent Living Application Group Inc. (the “Company”) on Form 20-F for the year ended December 31, 2024 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Frederick Wong, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: April 28, 2025
| By: | /s/ Frederick Wong | |
| Name: | Frederick Wong | |
| Title: | Chief Financial Officer |
Exhibit 15.1
 |
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (File No. 333-269458) and Form F-3 (No. 333-274495) of our report dated April 28, 2025, relating to the consolidated financial statements of Intelligent Living Application Group, Inc. and subsidiaries as of December 31, 2024 and 2023, and for each of the three years in the period ended December 31, 2024, which appears in this Annual Report on Form 20-F.
/s/ Wei, Wei & Co., LLP
Flushing, New York April 28, 2025 |
Exhibit 15.2
Intelligent Living Application Group Inc.
Unit 2, 5/F, Block A, Profit Industrial Building
1-15 Kwai Fung Crescent, Kwai Chung
New Territories, Hong Kong
Re: Consent Letter on Intelligent Living Application Group Inc. Form 20-F
We act as the PRC counsel to Intelligent Living Application Group Inc. (the “Company”), a company incorporated under the laws of the Cayman Islands, in connection with the Company’s annual report on Form 20-F. For the purpose of our opinion, the PRC excludes the Hong Kong Special Administrative Region (“Hong Kong”), the Macau Special Administrative Region, and Taiwan.
We hereby consent to the reference to our firm under the headings “Item 3. Key Information”, “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects” which pertain to PRC laws in the annual report of the Company for the year ended December 31, 2024 (the “Annual Report”) to be filed with the U.S. Securities and Exchange Commission (the “SEC”). We also consent to the filing with the SEC of this consent letter as an exhibit to the Annual Report.
This Consent is rendered solely to you for the Form 20-F and may not be used for any other purpose. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the United States Securities Act of 1933, as amended, or the rules and regulations promulgated thereunder.
/s/ Guangdong Wesley Law Firm
April 28, 2025