F-1/A: Linkage Global Reports Increased Net Loss Amid Strategic Shift to High-Margin E-commerce Services

Linkage Global Inc. reported a significant increase in net loss for the six months ended March 31, 2025, despite a substantial revenue surge in its new fully managed e-commerce operation services, driven by higher operating expenses and interest costs from recently issued convertible notes.

Summary

• Total revenues decreased by 27.02% to $3.50 million for the six months ended March 31, 2025, from $4.80 million in the prior-year period, primarily due to a sharp decline in cross-border sales.
• Cross-border sales revenue plummeted by 82.35% to $0.80 million for the six months ended March 31, 2025, from $4.54 million, attributed to poor product portfolio strategy in Japan and a shift in company focus.
• Integrated e-commerce services revenue surged by 930.08% to $2.70 million, mainly driven by the new fully managed e-commerce operation services, which contributed $2.59 million in revenue.
• Gross profit increased by 280.57% to $2.70 million, with the overall gross margin improving significantly to 77.04% from 14.77%, largely due to the high-margin fully managed e-commerce operation services (95.12% gross margin).
• Operating expenses increased by 91.01% to $4.34 million, primarily due to a 123.94% increase in general and administrative expenses, including a $1.34 million allowance for credit loss and $1.21 million in stock-based compensation.
• Net loss widened by 119.62% to $3.09 million for the six months ended March 31, 2025, compared to $1.41 million in the prior-year period, heavily impacted by a 2364.35% increase in net interest expenses to $1.50 million from $0.06 million, following the issuance of $10 million convertible notes.
• The company issued $10 million in convertible promissory notes in October 2024 with an 8% annual interest rate and a one-year term, issued at an $800,000 original issue discount, resulting in an actual interest rate of 42.52%.
• HQT NETWORK ceased its business agreement with Google in January 2025, leading to a decrease in digital marketing services revenue from $0.13 million to $0.08 million, and initiated deregistration in April 2025.
• The company completed a 10-for-1 share consolidation on April 7, 2025, reducing authorized Class A Ordinary Shares to 998,000,000 and Class B Ordinary Shares to 2,000,000.
• A private placement offering of 4,000,000 Class A Ordinary Shares at $0.50 per share closed on June 6, 2025, raising gross proceeds of $2.00 million for working capital and general corporate purposes.

Sentiment

Score: 4

Explanation: The company is undergoing a significant strategic shift towards higher-margin services, which is positive for future profitability. However, current financial results show a substantial increase in net loss driven by declining traditional sales and very high interest expenses from recent debt. Operational risks related to China/Hong Kong regulations and internal control weaknesses also weigh heavily. The overall picture is one of transition with notable financial headwinds.

Positives

• The new fully managed e-commerce operation services business, initiated in fiscal year ended March 31, 2025, contributed $2.59 million in revenue and $2.46 million in gross profit, demonstrating strong growth and a high gross profit margin of 95.12%.
• Overall gross profit increased significantly by 280.57% to $2.70 million, and the gross margin improved to 77.04%, indicating a successful shift towards higher-margin service offerings.
• The company regained compliance with Nasdaq's minimum bid price requirement of $1.00 per share as of April 23, 2025.
• The company is establishing a new Singapore subsidiary and intends to transfer operations from HQT NETWORK to this new entity, indicating strategic adaptation and expansion plans.
• The company successfully raised $2.00 million in gross proceeds from a private placement offering of Class A Ordinary Shares in June 2025, providing additional working capital.

Negatives

• Total revenues decreased by 27.02% for the six months ended March 31, 2025, primarily due to an 82.35% decline in cross-border sales, indicating significant challenges in a core business segment.
• Net loss increased by 119.62% to $3.09 million, largely driven by a substantial increase in interest expenses from convertible notes and higher general and administrative expenses.
• Interest expenses, net, surged by 2364.35% to $1.50 million, reflecting the high cost of the recently issued convertible notes with an actual interest rate of 42.52%.
• General and administrative expenses increased by 123.94% to $3.90 million, partly due to a $1.34 million allowance for credit loss and $1.21 million in stock-based compensation.
• The business agreement with Google for digital marketing services ended in January 2025, leading to a decrease in revenue from this segment and the initiation of HQT NETWORK's deregistration.
• The company identified material weaknesses in internal control over financial reporting, including a lack of formal policies and insufficient accounting staff with U.S. GAAP and SEC reporting knowledge.
• The company's ability to raise capital in the future may be limited, and failure to do so could hinder growth, with potential for significant dilution from equity issuances or restrictive covenants from debt.

Risks

• Operating in a highly-competitive cross-border e-commerce market in Japan and China, with potential adverse effects on profitability, market share, and customer base due to competitors with greater resources.
• Historical performance may not be sustainable or indicative of future growth, with revenues declining in recent periods due to factors like decreasing consumer spending, increased competition, and economic conditions.
• System interruptions or performance failures in technology infrastructure (e.g., Linkage ERP System, Honeybee product shelving software) could damage reputation and results of operations.
• International operations are subject to various legal, regulatory, political, and economic risks, including restrictive governmental actions, foreign ownership restrictions, and limitations on fund repatriation.
• Failure to maintain and expand relationships with suppliers, especially key suppliers, could harm revenues and results of operations, as the company has no long-term supply agreements.
• Reliance on third-party manufacturers for private label smart products exposes the company to risks related to political/economic instability, financial stability of manufacturers, raw material costs, and quality issues.
• Inability to effectively manage growth could strain existing resources and lead to challenges in operational, administrative, and financial capabilities.
• Unsuccessful expansion into new international markets (e.g., Southeast Asia) due to unfamiliarity with local consumers, competitors, and laws, or difficulties in staffing and managing foreign operations.
• Inability to retain, attract, and motivate key personnel, leading to potential adverse effects on development efforts and increased operating expenses due to competitive compensation.
• Failure to optimize warehouse and fulfillment networks, potentially leading to excess or insufficient capacity, increased costs, and impairment charges.
• Damage to brand image due to unsatisfactory customer or merchant experiences, negative publicity, or issues with third-party e-commerce platforms or delivery providers.
• Real or perceived errors, failures, or bugs in services, software, or technology could result in negative publicity, loss of market acceptance, and claims from customers.
• Exposure to product liability claims if customers are harmed by defectively designed or manufactured products sold through distribution channels, with no product liability insurance currently maintained.
• PRC subsidiaries have not made adequate social insurance and housing provident fund contributions for all employees, potentially leading to penalties and adverse effects on business and financial condition.
• Potential adverse effects from violations of the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws, especially with international business development.
• Cybersecurity risks and cyber incidents could disrupt operations, compromise confidential information, and damage business relationships, despite internal controls and third-party vendor reliance.
• Substantial transactions with related parties present possible conflicts of interest that could materially and adversely affect business and financial conditions.
• Fluctuation of the Japanese yen against foreign currencies may materially affect results of operations, as a significant portion of revenue and expenses are denominated in other currencies.
• Failure to obtain and maintain required licenses and permits or comply with regulations regarding liquor, pharmaceuticals, medical devices, or secondhand goods could lead to loss of licenses.
• Dual class share structure may be dilutive to the voting power of Class A Ordinary Shareholders, concentrating voting control with Class B holders.
• As a controlled company under Nasdaq rules, the company may follow exemptions from certain corporate governance requirements, offering less protection to public shareholders.
• Failure to implement and maintain an effective system of internal controls or remediate identified material weaknesses could lead to inaccurate financial reporting and affect investor confidence.
• Market price volatility or decline of Class A Ordinary Shares, potentially unrelated to operating performance, making it difficult for investors to assess value.
• Prohibition from trading on a national exchange under the HFCA Act if the PCAOB is unable to inspect auditors for two consecutive years, potentially leading to delisting.
• Restrictions and limitations by the PRC government on the ability of PRC/Hong Kong entities to distribute earnings or transfer cash/assets outside of PRC/Hong Kong.
• Uncertainties in the interpretation and enforcement of PRC laws and regulations, which may change quickly with little advance notice, limiting legal protection.
• Difficulties in effecting service of legal process, enforcing foreign judgments, or conducting investigations in China due to PRC legal system characteristics.
• Potential for Chinese government intervention or influence over PRC subsidiaries' operations, leading to material changes or hindering ability to offer securities.
• Recent greater oversight by the Cyberspace Administration of China (CAC) over data security, particularly for companies seeking foreign listings, could impact PRC subsidiaries' business.
• New opinions from the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council may impose additional compliance requirements.
• Uncertainty regarding indirect transfers of equity interests in PRC resident enterprises by non-PRC holding companies, potentially leading to PRC enterprise income tax liabilities.
• Increases in labor costs in the PRC may adversely affect business and profitability, especially if unable to pass on costs to customers.
• Potential requirement for CSRC approval for future offerings, which if not obtained, could lead to sanctions.
• Complex procedures under M&A Rules and other PRC regulations for foreign investor acquisitions of Chinese companies, making growth through acquisitions more difficult.
• Chinese regulatory authorities could disallow the holding company structure, potentially leading to restructuring requirements and adverse effects on operations and share value.

Future Outlook

The company plans to continue its strategic shift by expanding its fully managed e-commerce operation services into Southeast Asian markets (Thailand, Malaysia, Indonesia, Philippines) over the next two years, leveraging existing data analysis technology. This expansion will involve establishing representative offices, hiring local personnel, and investing in marketing. The company also intends to further develop its private label smart products and invest in upgrading its Linkage ERP System and developing short-form video editing tools. It anticipates increased research and development expenses and plans to fund these initiatives through shareholder investments, bank borrowings, and cash inflows from operations.

Management Comments

• The decrease in cross-border sales was mainly due to the poor performance of Japan's own cross-border sales product portfolio strategy, as previously 3C electronic products were not favored by the market, leading to a significant decline in sales.
• The company has now changed its development strategy, shifting its focus to Fully managed e-commerce operation services business with higher profit margins, and employees have also been transferred from the original cross-border trade business to the store agency operation business.
• For the cross-border sales business, the company is also reselecting products and exploring the possibility of launching Japanese TikTok stores and live-streaming sales.
• The high gross profit margin for the fully managed e-commerce operation services is mainly due to the low cost, which was primarily composed of the salaries of the operation personnel, as the ERP system used has been developed and related R&D expenses were recognized in previous years.
• The increase in general and administrative expenses was primarily attributable to the allowance for credit loss, stock-based compensation, and financial and legal related consulting services after the IPO proceeds.
• The drop in research and development expenses was due to personnel who participated in ERP system development and testing in previous years now being engaged in fully managed e-commerce operation services, with their salaries included in business costs.
• The increase in interest expense was due to the issuance of $10 million convertible notes with an actual interest rate of 42.52% in October 2024.
• The company believes its current working capital is sufficient to support operations for the next twelve months, but may need additional cash resources for future growth opportunities.

Industry Context

The company operates in the highly competitive and rapidly evolving cross-border e-commerce service provider industry in Japan and China. It faces competition from various players including supply chain providers, retailers, wholesalers, advertising providers, and software support services. The shift towards integrated e-commerce services, particularly fully managed operations, aligns with the growing demand for comprehensive solutions for online sellers. The company's focus on Southeast Asian markets reflects the rapid growth and increasing penetration of cross-border e-commerce in that region, especially leveraging social commerce platforms like TikTok. The regulatory environment in China and Hong Kong, particularly concerning data security and overseas listings, continues to pose significant uncertainties and compliance challenges for companies with operations in these regions.

Comparison to Industry Standards

• The company's shift to fully managed e-commerce operation services with a 95.12% gross margin is significantly higher than its traditional cross-border sales (21.31% gross margin), indicating a move towards a more profitable business model, which is a positive trend compared to traditional e-commerce retail margins.
• The cessation of the Google digital marketing agreement and the deregistration of HQT NETWORK suggest a failure to maintain a key partnership, which could be a competitive disadvantage if alternative media partnerships are not secured or if the new Singapore subsidiary does not effectively replace the lost business.
• The high effective interest rate of 42.52% on the convertible notes is substantially above typical corporate borrowing rates, indicating a high cost of capital and potentially a weaker financial position compared to more established industry players with access to lower-cost financing.
• The identified material weaknesses in internal controls over financial reporting and the lack of sufficient U.S. GAAP/SEC reporting expertise suggest a gap in corporate governance and financial infrastructure compared to well-established public companies, which could impact investor confidence and regulatory compliance.

Management Changes

Corporate Governance

Legal Proceedings

• No material allegations or complaints have been subject to the Operating Entities in the past.
• No pending or threatened claims or actions that would have a material adverse effect on the business, financial condition, operating results, or cash flows as of March 31, 2025.

Related Party Transactions

• Amounts due to related parties were nil as of March 31, 2025, down from $314,544 as of September 30, 2024, consisting of expenses paid on behalf of the Group and interest-free loans.
• Expenses paid on behalf of the Group by related parties (Mr. Fuyunishiki Ryo, Mrs. Qi Xiaoyu, Ms. Wu Shunyu) totaled $312,815 for the six months ended March 31, 2024, but were nil for the same period in 2025.
• Repayments to related parties totaled $314,238 for the six months ended March 31, 2025, including $105,601 to Ms. Wu Shunyu and $208,637 to Mr. Fuyunishiki Ryo.
• An interest-bearing loan of $99,876 was provided to Mrs. Qi Xiaoyu (shareholder) at an annual interest rate of 4% for the six months ended March 31, 2025, which was returned in April 2025.
• A service agreement with Hermann Limited (a shareholder) for corporate management and investment/financing consulting services, with a contract amount of $2,060,000, resulted in an amortized expense of $342,988 for the six months ended March 31, 2025, and a remaining amount due from related parties of $1,142,885.
• Stock-based compensation of $1,209,000 was recognized for the issuance of 5,000,000 Class B ordinary shares to WU Zhihua (Chairman and controlling shareholder) on November 7, 2024.
• Repurchase of 2,000,000 Class A Shares from Smart Bloom Global Limited (owned by Wu Zhihua) for $500 by issuing Class B Shares to WU Zhihua on March 13, 2025.

Stakeholder Impact

• **Shareholders:** Increased net loss and high interest expenses from convertible notes could negatively impact shareholder value. The dual-class share structure concentrates voting power with Class B holders, limiting influence for Class A shareholders. Dilution risk exists from potential future equity raises. However, the strategic shift to high-margin services and successful capital raises could provide long-term growth potential.
• **Employees:** Shift in business focus has led to employee transfers from cross-border trade to fully managed e-commerce operations. The company is expanding its manpower and talent pool, including a global business team for Southeast Asia expansion, which could create new opportunities. However, past inadequate social insurance and housing provident fund contributions for PRC employees pose a compliance risk.
• **Customers:** The company is diversifying its product offerings and expanding services (e.g., fully managed e-commerce operations, TikTok anchors agent services) to meet evolving customer needs. However, reliance on key suppliers and potential product liability claims could impact customer satisfaction.
• **Suppliers:** The company maintains an extensive network of suppliers but has no long-term supply agreements, creating potential for disruption if relationships are not maintained. The company's quality control procedures aim to ensure product quality from manufacturers.
• **Creditors:** The issuance of $10 million in convertible notes with a high effective interest rate (42.52%) significantly increases the company's debt obligations and interest burden, posing a higher risk for creditors compared to lower-cost debt. The company also has various short-term and long-term bank debts.

Next Steps

• Continue expanding fully managed e-commerce operation services into Southeast Asian markets (Thailand, Malaysia, Indonesia, Philippines).
• Establish representative offices and hire local personnel in new international markets.
• Promote brands in new countries by investing in marketing activities.
• Broaden private label product offerings, including Bluetooth headphones, digital watches, and Bluetooth speakers, to optimize product mix and drive profitability.
• Invest in upgrading the Linkage ERP System and developing short-form video editing tools.
• Actively layout social e-commerce channels, leveraging platforms like TikTok for marketing and sales.
• Monitor popular and up-and-coming media to secure additional authorized agency qualifications.
• Remediate identified material weaknesses in internal control over financial reporting by hiring qualified accounting staff and implementing formal policies.

Key Dates

Recommendation

The company is undergoing a significant strategic pivot towards higher-margin integrated e-commerce services, which is a positive long-term development. The substantial increase in gross profit margin reflects the success of this shift. However, the immediate financial results show a sharp increase in net loss, primarily driven by very high interest expenses from recently issued convertible notes and increased general and administrative costs, including a large allowance for credit loss. The decline in traditional cross-border sales is also a concern. While the company has addressed Nasdaq listing compliance and raised additional capital, the high cost of debt and ongoing regulatory uncertainties in China and Hong Kong present considerable risks. A 'hold' recommendation is appropriate as the company navigates this transition; investors should monitor the execution of its new strategy, its ability to manage debt, and its progress in addressing internal control weaknesses before considering further investment.

Keywords

Cross-border e-commerce, Integrated e-commerce services, Digital marketing, Supply chain management, SEC filing, F-1/A, Convertible notes, Financial results, Net loss, Revenue decline, Gross profit margin, China regulations, Hong Kong regulations, Cayman Islands company, Nasdaq listing, PCAOB inspection, HFCA Act, Related party transactions, Corporate governance, Share consolidation, Private placement, E-commerce training, Software support, TikTok Shop partner, Southeast Asia expansion