F-1/A: Linkage Global Reports Soaring Losses Amid Strategic Shift and Debt

Linkage Global Inc. reported a significant increase in net loss for the six months ended March 31, 2025, driven by declining cross-border sales and substantial interest expenses from new convertible notes, despite growth in new e-commerce services.

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.
• Cross-border sales revenue plummeted by 82.35% to $0.80 million, attributed to poor performance of 3C electronic products in Japan and a strategic shift in focus.
• Integrated e-commerce services revenue surged by 930.08% to $2.70 million, primarily due to the new 'fully managed e-commerce operation services' which contributed $2.59 million in revenue and a high gross profit margin of 95.12%.
• Digital marketing services revenue decreased from $0.13 million to $0.08 million, following the termination of the business agreement with Google in January 2025 and the initiation of HQT NETWORK's deregistration.
• Gross profit increased by 280.57% to $2.70 million, largely due to the high-margin fully managed e-commerce operation services.
• Operating expenses rose by 91.01% to $4.34 million, mainly due to a 123.94% increase in general and administrative expenses, including a significant allowance for credit loss ($1.34 million) and stock-based compensation ($1.21 million).
• Net interest expenses soared by 2364.35% to $1.50 million, primarily from $10 million in convertible notes issued in October 2024 with an actual interest rate of 42.52%.
• Net loss increased by 119.62% to $3.09 million for the six months ended March 31, 2025, compared to $1.41 million in the same period last year.
• The company issued $3.50 million in senior unsecured convertible notes to a selling shareholder on July 17, 2025, with an original issue discount of 10% and a 10% annual interest rate, convertible into up to 9,352,227 Class A Ordinary Shares.
• Mr. Zhihua Wu, the Chairman, holds 91.22% of the voting power due to the dual-class share structure (Class B shares carry 100 votes per share).
• 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.

Sentiment

Score: 3

Explanation: The company faces significant financial headwinds with a substantial increase in net loss and declining core revenues. While new e-commerce services show promise, the high interest burden from convertible notes and ongoing regulatory uncertainties in China and Hong Kong present considerable risks. The potential for significant dilution from convertible notes further dampens investor sentiment.

Positives

• Integrated e-commerce services revenue experienced substantial growth of 930.08% to $2.70 million, driven by the successful launch of 'fully managed e-commerce operation services'.
• The new 'fully managed e-commerce operation services' business boasts a high gross profit margin of 95.12%, indicating strong profitability for this segment.
• Gross profit increased significantly by 280.57% to $2.70 million, primarily due to the success of the new high-margin e-commerce operation services.
• The company is actively pursuing growth strategies, including expansion into Southeast Asian markets (Thailand, Malaysia, Indonesia, Philippines) and developing new product lines like 3C electronic products.
• Initiated the deregistration process for HQT NETWORK in April 2025, which generated a one-time gain of $0.35 million from cleaning up current accounts.

Negatives

• Total revenues decreased by 27.02% for the six months ended March 31, 2025, indicating an overall decline in sales.
• Cross-border sales revenue significantly decreased by 82.35%, primarily due to poor performance of 3C electronic products in Japan and a shift in product portfolio strategy.
• Digital marketing services revenue declined due to the termination of the business agreement with Google in January 2025.
• Net loss increased by 119.62% to $3.09 million, reflecting a worsening financial performance.
• Operating expenses increased by 91.01%, largely due to a significant increase in general and administrative expenses, including a substantial allowance for credit loss and stock-based compensation.
• Interest expenses, net, surged by 2364.35% to $1.50 million, mainly from high-interest convertible notes issued in October 2024 with an actual interest rate of 42.52%.
• The company will not receive any proceeds from the current resale offering of Class A Ordinary Shares by the Selling Shareholder.
• The convertible notes have an 'Alternate Conversion Price' provision that can lead to significant dilution for existing shareholders if the stock price falls, potentially encouraging short sales and further downward pressure.

Risks

• Operating in a highly competitive cross-border e-commerce market, with potential adverse effects on results if unable to compete effectively.
• Historical performance may not be sustainable or indicative of future growth, with recent revenue declines raising concerns about business expansion.
• Vulnerability to system interruptions, cybersecurity risks, and other technology infrastructure failures that could damage reputation and operations.
• International operations are subject to various legal, regulatory, political, and economic risks, including trade protection measures, foreign ownership restrictions, and currency exchange fluctuations.
• Reliance on a few major suppliers and third-party manufacturers, with no long-term agreements, poses risks of supply disruption or unfavorable terms.
• Failure to maintain the relationship with Google could materially affect digital marketing services, as evidenced by the recent termination of the agreement and deregistration of HQT NETWORK.
• Inability to retain, attract, and motivate key personnel could hinder business plan implementation and growth.
• Challenges in optimizing warehouse and fulfillment networks, especially with increasing complexity and inventory management for other companies.
• Damage to brand image from unsatisfactory customer experiences, negative publicity, or issues with third-party service providers.
• New product or service launches may not be successful, requiring significant upfront investments without guaranteed returns.
• Real or perceived errors, failures, or bugs in software or technology could adversely affect business and customer satisfaction.
• Limited ability to raise future capital, with potential for significant dilution from equity issuances or increased debt obligations.
• Increases in rental expenses or termination of leases for warehouses and offices could disrupt operations.
• Inability to successfully protect intellectual property and exclusive rights, or accusations of infringing third-party intellectual property rights.
• Exposure to legal and regulatory proceedings, including potential claims for intellectual property infringement or customer complaints.
• Insufficient insurance coverage for all operational risks, including business interruption and product liability.
• PRC subsidiaries have not made adequate social insurance and housing provident fund contributions for all employees, potentially leading to penalties.
• Potential adverse effects from violations of the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws.
• Dual-class share structure concentrates voting control with holders of Class B Ordinary Shares, potentially diluting the voting power of Class A Ordinary Shareholders.
• Controlled company status under Nasdaq rules allows for exemptions from certain corporate governance requirements, potentially reducing protections for public shareholders.
• Identified material weaknesses in internal control over financial reporting, which could lead to inaccurate financial reporting or fraud.
• The market price of Class A Ordinary Shares may be volatile or decline regardless of operating performance, especially given the relatively small public float and potential for rapid price fluctuations.
• Risk of delisting from Nasdaq if continued listing requirements are not met, including the minimum bid price rule (though compliance was regained).
• Anti-takeover provisions in the company's articles of association may discourage changes in control.
• As an emerging growth company, the company benefits from reduced reporting requirements, which may affect investor confidence.
• Cayman Islands laws may not provide shareholders with benefits comparable to those in the United States.
• Potential classification as a Passive Foreign Investment Company (PFIC) could result in adverse U.S. federal income tax consequences for U.S. taxpayers.
• Impact of the Hong Kong National Security Law and HKAA on Hong Kong subsidiaries, including potential sanctions and political risks.
• Uncertainties in the interpretation and enforcement of PRC laws and regulations, which can change quickly with little advance notice, limiting legal protection.
• Difficulties in effecting service of legal process, enforcing foreign judgments, or conducting investigations in China.
• Significant oversight and discretion by the Chinese government over PRC subsidiaries' business, with potential for intervention or influence.
• Actions by the Chinese government, including intervention in operations or control over overseas offerings, could materially change operations or devalue securities.
• Recent greater oversight by the Cyberspace Administration of China (CAC) over data security, particularly for companies seeking foreign listings, could adversely impact PRC subsidiaries' business.
• Uncertainties regarding the interpretation and implementation of the Measures for the Security Assessment of Cross-border Transfer of Data, potentially requiring security assessments for PRC subsidiaries.
• The Opinions issued by the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council may subject the company to additional compliance requirements.
• Uncertainties regarding the application of additional and more stringent criteria by the SEC, PCAOB, and Nasdaq to emerging market companies and their auditors under the HFCA Act.
• Restrictions and limitations by the PRC government on the ability of PRC subsidiaries to distribute earnings or transfer cash/assets outside of the PRC.
• Increases in labor costs in the PRC may adversely affect business and profitability.
• PRC regulations relating to offshore investment activities by PRC residents may subject beneficial owners or PRC subsidiaries to liability or penalties.
• PRC regulation of parent/subsidiary loans and direct investment may delay or prevent the use of offshore offering proceeds for capital contributions to PRC entities.
• Fluctuations in exchange rates (RMB, JPY against USD) could materially and adversely affect results of operations and investment value.
• Uncertainties under the EIT Law regarding withholding tax liabilities of PRC subsidiaries and eligibility for treaty benefits on dividends.

Future Outlook

The company plans to expand its integrated e-commerce services into Southeast Asian markets (Thailand, Malaysia, Indonesia, Philippines) over the next two years, investing in local partnerships, marketing, and hiring. It intends to launch 3C products, including Bluetooth earphones, in October 2024 for these markets. The company will also continue to invest in upgrading its Linkage ERP System with localized functions for Southeast Asia and develop short-form video editing tools for customers. An estimated $2 million to $3 million per year will be incurred for expanding the global business team to support Southeast Asian market entry.

Management Comments

• "The decrease in cross-border sales was mainly due to the following reasons that, due to the poor performance of Japan's own cross-border sales product portfolio strategy, the 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 [of fully managed e-commerce operation services] is mainly due to the low cost, which was mainly composed of the salaries of the operation personnel. The ERP system used for e-commerce operations has been developed, and the related research and development expenses were all recognized as expenses in previous years. Therefore, the system development expenses were not reflected in the current periods costs, resulting in a high gross profit margin for this business."
• "In order to cope with the change of policies from Google, we actively engaged in direct and indirect cooperations with other social platforms, such as TikTok and Facebook, and we also focused on the growth of other e-commerce related services."
• "We believe our current working capital is sufficient to support our operations for the next twelve months."
• "Mr. Wu has advised that his resignation [as CEO] was due to personal reasons and not a result of any disagreement with the Company on any matter related to the operations, policies, or practices of the Company. Mr. Wu will remain as the chairman and a member of the board of directors (the Board) of the Company."

Industry Context

The company operates in the highly competitive and rapidly evolving cross-border e-commerce service provider industry in Japan and China. It is adapting to changing market dynamics by shifting focus from traditional cross-border sales of 3C electronic products to higher-margin integrated e-commerce services, including fully managed operations and digital marketing. The expansion into Southeast Asian markets and leveraging social commerce platforms like TikTok aligns with broader industry trends of regional e-commerce growth and influencer marketing. The termination of the Google agreement highlights the volatility of partnerships in the digital advertising space, requiring diversification of media relationships.

Comparison to Industry Standards

• The filing does not provide specific comparable companies, projects, or results to assess performance against global benchmarks. However, the company acknowledges operating in a 'highly-competitive market' with 'many new companies joining the competition' and notes that competitors 'may have longer operating histories, greater brand recognition, better supplier relationships, larger customer bases, more cost-effective fulfillment capabilities, or greater financial, technical, or marketing resources'.

Management Changes

Corporate Governance

Legal Proceedings

• As of the date of this prospectus, the company is not involved in any legal or administrative proceedings that, if determined adversely, would have a material adverse effect on its business, financial condition, operating results, or cash flows.

Related Party Transactions

• Amounts due to related parties were $0 as of March 31, 2025, down from $314,544 as of September 30, 2024.
• Expenses paid on behalf of the Group by related parties were $0 for the six months ended March 31, 2025, down from $312,815 in the prior year period.
• 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.
• Service fees of $342,988 were provided by Hermann Limited (now a shareholder with 7.1% shareholding via convertible notes) for corporate management and investment/financing consulting services for the six months ended March 31, 2025.
• Stock-based compensation of $1,209,000 was granted to Mr. Zhihua Wu (Chairman and controlling shareholder) through the issuance of 5,000,000 Class B ordinary shares on November 7, 2024.
• Repurchase of $500 worth of Class A shares from Smart Bloom Global Limited (owned by Mr. Zhihua Wu) by issuing Class B shares to Mr. Zhihua Wu.

Stakeholder Impact

• Shareholders, particularly Class A Ordinary Shareholders, face significant potential dilution due to the terms of the convertible notes and the dual-class share structure concentrating voting power.
• Investors are exposed to increased financial risk due to the company's rising net losses and substantial interest expenses.
• Employees may be impacted by the strategic shift in business focus, with personnel being transferred from cross-border trade to e-commerce operation services.
• Customers and Merchants may benefit from the expansion of fully managed e-commerce operation services and new product offerings, but could be negatively affected by declining cross-border sales and potential service disruptions from regulatory changes or system failures.
• Suppliers face risks related to the company's reliance on a few key partners and the absence of long-term supply agreements, potentially leading to changes in purchasing volumes or terms.
• Creditors, particularly holders of the convertible notes, benefit from high interest rates but are exposed to the company's financial performance and the potential for redemption at a premium upon certain events of default.

Next Steps

• Expand Customer and Merchant bases into Southeast Asia, including Thailand, Malaysia, Indonesia, and the Philippines.
• Partner with local distributors, retailers, or e-commerce platforms in Southeast Asia.
• Attend relevant trade shows and exhibitions in Southeast Asia to raise brand awareness.
• Offer promotions and provide customer support in local languages in Southeast Asia.
• Seek additional authorized agency qualifications of other media to diversify digital marketing channels.
• Leverage TikTok's closed-loop e-commerce ecosystem for social e-commerce business in Southeast Asia.
• Collaborate with Southeast Asian influencers and provide TikTok operational training for them.
• Launch 3C products, including Bluetooth earphones, in October 2024, targeting Southeast Asian countries.
• Establish representative offices or appoint local partners in Southeast Asia.
• Hire key marketing and support employees familiar with local languages and cultures for international expansion.
• Invest in marketing activities to promote brands in new international markets.
• Expand operational teams to serve growing Customer and Merchant bases and maintain supplier relationships.
• Invest in upgrading the Linkage ERP System, including developing localized functions for Southeast Asia markets.
• Invest in developing short-form video editing tools for customers to create informative and attractive product videos for social media platforms.
• Strengthen supply chain integration by attaching labels to products, expanding product selection, and deepening relationships with suppliers and logistics companies.
• Continue to implement measures to remediate material weaknesses in internal control over financial reporting, including hiring qualified accounting personnel and establishing an audit committee.

Key Dates

Recommendation

The company's financial performance for the six months ended March 31, 2025, shows a concerning trend with a significant increase in net loss and a sharp decline in core cross-border sales. While the new 'fully managed e-commerce operation services' segment demonstrates strong growth and high margins, it is currently insufficient to offset the overall revenue decline and soaring operating and interest expenses. The substantial interest rate on convertible notes (42.52%) and the potential for significant dilution from their conversion pose considerable risks to shareholder value. Furthermore, the identified material weaknesses in internal controls and the ongoing regulatory uncertainties in China and Hong Kong add layers of operational and compliance risk. Given the worsening profitability, high debt burden, and dilution potential, a seasoned investor would likely recommend selling the stock to mitigate further losses.

Keywords

Cross-border e-commerce, SEC filing, F-1/A, Linkage Global Inc, LGCB, Convertible notes, Dilution, Net loss, Revenue decline, Integrated e-commerce services, Fully managed e-commerce operation services, Digital marketing, China regulations, Hong Kong risks, Japan operations, Emerging growth company, Foreign private issuer, Corporate governance, Internal controls, Related party transactions, Share price volatility, Nasdaq listing, PCAOB inspection, HFCA Act, Southeast Asia expansion, Supply chain integration, Stock-based compensation