ReTo(RETO) - 2024 Q4 - Annual Report

PART I Key Information This section details the company's holding structure, cash transfer policies, and significant risks, particularly those related to PRC operations and regulatory compliance Holding Company Structure and Cash Transfers The company operates as a BVI holding company with all business conducted through PRC subsidiaries, facing regulatory restrictions on cash transfers and dividend distributions - The company operates as a BVI holding company with all substantial operations conducted through its subsidiaries in mainland China[32] - As of the report date, no dividends or distributions have been made from the PRC subsidiaries to the offshore holding companies. Future dividends from PRC subsidiaries would be subject to a 10% withholding tax, potentially reducible to 5% under the mainland China-Hong Kong tax agreement[35][38] - PRC regulations require subsidiaries to set aside at least 10% of after-tax profits into a statutory reserve fund until it reaches 50% of registered capital, which restricts the amount of cash available for dividends[42] Shareholder Loans to PRC Subsidiaries | Fiscal Year | Amount Provided | | :--- | :--- | | 2022 | ~$4.2 million | | 2023 | ~$0.1 million | | 2024 | ~$29.4 million | Regulatory Environment and HFCAA The company navigates evolving PRC regulations, including CSRC filing requirements and cybersecurity reviews, while facing delisting risks under the amended HFCAA due to auditor inspection rules - The company's current auditor, YCM CPA INC., is registered with the PCAOB and was not on the list of firms the PCAOB was unable to inspect in 2021. However, the HFCAA has been amended to shorten the non-inspection period for delisting from three years to two[46][47] - The company believes it is not required to apply for a cybersecurity review under the Measures for Cybersecurity Review (2021 Version) as it does not process personal information of over one million users and its data does not have a bearing on national security[55] - The company is subject to the CSRC's Trial Measures, effective March 31, 2023, which require filings for overseas listings and offerings. The company is currently in the process of completing filings for its fiscal 2024 financings and the April 2025 MeinMalzeBier acquisition[59] Risk Factors This section outlines significant risks, including PRC government intervention, HFCAA delisting threats, business operational challenges, and governance issues from the dual-class share structure - The company faces significant risks from the PRC government's oversight and potential intervention, which could materially change operations and share value[74] - The company's independent auditor's report includes an explanatory paragraph expressing substantial doubt about its ability to continue as a going concern due to significant operating losses and a decrease in working capital[66][169] - A dual-class share structure grants holders of Class B shares 1,000 votes per share, giving a small group of executives approximately 99.3% of the total voting power, which limits the influence of Class A shareholders[227][228] - Material weaknesses in internal control over financial reporting have been identified, including a lack of personnel with U.S. GAAP/SEC expertise and inadequate management review processes[219] - The company faces customer and supplier concentration risk. In FY2024, two customers accounted for 36% and 13% of total revenue, while two suppliers accounted for 68% and 13% of raw material purchases[164][284] Information on the Company This section details the company's history, corporate structure, and strategic shift towards ecological protection, intelligent mining, and smart craft beer machines after its 2024 divestiture History and Development of the Company ReTo, established in 2015, underwent a major restructuring in December 2024 by divesting its legacy business and acquiring MeinMalzeBier in April 2025, shifting its strategic focus - In December 2024, ReTo sold all its shares in REIT Holdings for US$80,000, ceasing its business in eco-friendly construction materials and ecological restoration to focus on new ventures[250][263] - In April 2025, ReTo acquired a 51% equity interest in MeinMalzeBier for $3.978 million in cash and 4.68 million Class A Shares, expanding into the craft beer machine and sales market[250][268] - On August 8, 2024, the company implemented a dual-class share structure, redesignating common shares as Class A Shares (1 vote) and creating new Class B Shares (1,000 votes)[259] Business Overview The company's business now focuses on ecological protection, intelligent mining, and smart craft beer machines, pursuing international expansion and strategic acquisitions amid competitive markets - The company's strategic focus has shifted to three core product lines: ecological environment protection equipment, intelligent mining equipment, and smart craft beer machines[256] - Key growth strategies include upgrading existing products, expanding its international business network in Southeast Asia, the Middle East, and Africa, and pursuing strategic acquisitions in sectors like solar energy and wellness[274][275][276] - The company holds 42 patents and 6 software copyrights in China, relying on intellectual property law and confidentiality agreements to protect its proprietary technologies[172][311] Sales of Machinery and Equipment by Geographic Market (Continuing Operations) | Region | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Middle East | $29,965 | $0 | $0 | | India | $236,907 | $0 | $0 | | China | $887,018 | $9,873 | $204,495 | | Total | $1,176,070 | $10,781 | $204,495 | Property, Plants and Equipment The company leases all its operational properties, including its Beijing headquarters and other offices across China, with lease terms extending to 2028 - The company leases all its properties for operations in China, including its headquarters in Beijing and other offices in Xi'an, Hebei, and Yunnan[361] Operating and Financial Review and Prospects This section analyzes the company's financial performance, highlighting significant 2024 revenue growth from continuing operations, substantial net losses, liquidity challenges, and critical accounting estimates Operating Results FY2024 saw a surge in continuing operations revenue to $1.8 million, but a net loss of $8.3 million, influenced by a $3.6 million disposal loss and reclassified discontinued operations - The significant increase in 2024 revenue was primarily because a large portion of 2023 revenue was generated by disposed subsidiaries and thus reclassified to discontinued operations, creating a low comparison base for continuing operations[372] - The company recognized a loss from the disposal of subsidiaries of approximately $3.6 million in FY2024 related to the December 2024 Divestiture[391] Key Financials from Continuing Operations (2024 vs. 2023) | Metric | 2024 | 2023 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $1,828,976 | $10,781 | 16,865% | | Gross Profit | $825,204 | $1,541 | 53,450% | | Gross Margin | 45% | 14% | N/A | | Total Operating Expenses | $4,956,258 | $6,483,573 | (24)% | | Net Loss from Continuing Operations | ($8,312,576) | ($6,526,322) | 27% | Results of Discontinued Operations | Metric | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Revenues | $2,429,726 | $3,225,505 | $6,269,178 | | Net Loss from Discontinued Operations | ($74,347) | ($9,542,748) | ($8,908,703) | Liquidity and Capital Resources The company faces significant liquidity challenges with a $8.4 million net loss and $2.6 million working capital deficit, raising going concern doubts, despite $29.8 million from 2024 financing activities - The company reported a net loss of approximately $8.4 million and a working capital deficit of approximately $2.6 million for the year ended December 31, 2024, raising substantial doubt about its ability to continue as a going concern[408] - Management plans to improve liquidity through operational cash flow, bank borrowings, related-party loans, and potential equity financing, though no commitments for new financing are in place[409] - Capital expenditures were approximately $33.6 million in 2024, primarily for deposits for equity acquisition and the purchase of intangible assets[422] Summary of Cash Flows (in millions) | Activity | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Net Cash from Operating Activities | $3.1 | ($11.6) | ($10.0) | | Net Cash from Investing Activities | ($33.6) | $0.4 | $4.2 | | Net Cash from Financing Activities | $29.8 | $12.5 | $4.8 | Critical Accounting Estimates The company's financial statements rely on critical accounting estimates for accounts receivable, asset impairment, revenue recognition, share-based compensation, and deferred tax assets - The company's critical accounting policies involve significant judgments and estimates, particularly in the areas of accounts receivable valuation, impairment of long-lived assets, revenue recognition, share-based compensation, and income taxes[425][426] - Revenue from machinery and equipment sales is recognized upon delivery and transfer of control. Revenue from technological consulting services is recognized when services are rendered and accepted by customers[431] - The company accounts for share-based compensation using the fair value-based method in accordance with ASC 718, recognizing expenses over the service period[434] Directors, Senior Management and Employees This section details the company's leadership, compensation, board structure, and employee base, highlighting the dual-class share structure's impact on voting power Directors and Senior Management The company's leadership includes CEO Hengfang Li and a seven-member board with four independent directors, structured into three staggered classes - The senior executive team is led by founder Hengfang Li (CEO & Chairman), with key roles held by Guangfeng Dai (President & COO) and Zhizhong Hu (CTO)[441][447][448][449] - The Board of Directors consists of seven members, with four independent directors, and is divided into three classes with staggered three-year terms[441][473] Compensation FY2024 compensation included $474,982 in executive salaries and $40,000 for non-employee directors, alongside Class A share awards and employment agreements - The company has entered into employment agreements with its executive officers, which include details on salary, termination conditions, severance payments, and restrictive covenants[460][461][462][463][464] FY2024 Compensation Summary | Recipient Group | Cash Compensation | Equity Awards (Class A Shares) | | :--- | :--- | :--- | | Executive Officers | ~$474,982 | 7,726 | | Non-Employee Directors | ~$40,000 | 11,000 | Share Ownership The dual-class share structure grants executive management 99.3% of voting power through Class B shares, significantly limiting Class A shareholder influence - Due to the dual-class share structure, all directors and executive officers as a group hold approximately 99.3% of the aggregate voting power, primarily through their ownership of all 1,000,000 outstanding Class B shares[496][498] - The 2022 Share Incentive Plan allows for the issuance of up to 115,489 Class A Shares to employees, directors, and consultants, with an automatic annual share reserve increase feature[500][504] Major Shareholders and Related Party Transactions This section details major shareholders, highlighting executive voting control, and outlines FY2024 related party transactions including sales and balances due from the CEO - Major shareholders are detailed in Item 6.E, highlighting the concentration of voting power with the executive team[510] Related Party Balances and Transactions (FY2024) | Transaction/Balance | Related Party | Amount (USD) | | :--- | :--- | :--- | | Sales | Q Green Techcon Private Limited | $229,600 | | Due from Related Party (as of Dec 31, 2024) | Mr. Hengfang Li | $24,048 | Financial Information This section covers the company's financial statements, absence of material legal proceedings, and its dividend policy, which prioritizes retaining earnings subject to BVI and PRC regulations - The company has never declared or paid cash dividends on its Class A Shares and does not expect to in the foreseeable future, planning to retain earnings for operations and growth[517] - Any future dividend payments would be subject to BVI solvency tests and PRC regulations, which require payments to come from accumulated profits and mandate setting aside funds for a statutory reserve[518][520] - The company is not currently a party to any material legal or administrative proceedings[516] Additional Information This section details material contracts, PRC foreign exchange controls, and taxation, including potential PFIC classification for U.S. shareholders - On December 3, 2024, the company entered into a Forest Rights Transfer Agreement to acquire rights to approximately 3,000 acres of forest land for RMB 56 million (approx. $8.4 million) to develop a cultural tourism project[530] - The company's operations are subject to PRC foreign exchange controls, which restrict the conversion of RMB and the movement of capital, potentially impacting its ability to fund offshore activities or pay dividends[535] - The company may be classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, which could result in adverse tax consequences for U.S. shareholders[579] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks including foreign exchange fluctuations between RMB and USD, credit risk from cash deposits, inflation, and commodity price volatility - The company's primary market risk is foreign exchange risk, as its operations are in RMB but financial statements are presented in USD. Fluctuations in the RMB/USD exchange rate can significantly impact reported results[599][600] - Other market risks include credit risk from cash deposits, inflation risk affecting operating costs, and commodity price risk for raw materials such as steel[601][602][603] PART II Controls and Procedures As of December 31, 2024, disclosure controls were ineffective due to material weaknesses in U.S. GAAP/SEC expertise and financial review processes, prompting remediation efforts - Management concluded that as of December 31, 2024, the company's disclosure controls and procedures were not effective[612] - Material weaknesses in internal control were identified, including: (i) a lack of personnel with appropriate knowledge of U.S. GAAP and SEC reporting, and (ii) a lack of an effective management review for year-end accounting and reporting[614] - Remediation plans include hiring external financial consultants and implementing regular U.S. GAAP and SEC reporting training for accounting personnel[615] Corporate Governance As a foreign private issuer, the company can follow BVI corporate governance but intends to comply with Nasdaq practices despite electing certain exemptions - As a foreign private issuer, the company is permitted to follow its home country (BVI) practices instead of certain Nasdaq corporate governance rules[626] - The company has elected exemptions from Nasdaq rules concerning the timing of annual shareholder meetings and shareholder approval for certain security issuances, but states it currently intends to comply with Nasdaq practices[627][628] Cybersecurity The company maintains a cybersecurity risk management policy overseen by leadership and the audit committee, with no significant threats identified as of the report date - The company has a cybersecurity risk management policy, with oversight provided by the CEO, CTO, and the audit committee[634][636] - As of the report date, the company has not identified any significant cybersecurity threats that are reasonably likely to have a material impact on its business or financial results[637] PART III Financial Statements This section presents the company's audited consolidated financial statements for FY2022-2024, including the auditor's report, balance sheets, income statements, equity changes, and cash flows Report of Independent Registered Public Accounting Firm The auditor's report expresses a 'Going Concern' doubt due to net losses and working capital deficit, and identifies a Critical Audit Matter regarding forest land concession valuation - The auditor's report contains a "Going Concern" paragraph, citing the company's net losses of approximately $8.4 million in 2024 and a working capital deficit of $2.6 million as conditions that raise substantial doubt about its ability to continue operations[651] - A Critical Audit Matter was identified concerning the valuation of the concession right on forest land acquired in December 2024 for $7.67 million. The valuation involved significant and challenging auditor judgment regarding management's estimates and assumptions[657][658] Consolidated Financial Statements The consolidated financial statements show total assets of $34.3 million and a net loss of $8.4 million in FY2024, reflecting the impact of divestitures and significant financing activities - Note 4 details the discontinued operations of REIT Holdings, which were sold on December 31, 2024, resulting in a recorded loss on disposition of $3,577,279[749] - Note 16 details the company's share combinations, redesignation into Class A and Class B shares, and significant equity issuances through private placements, which raised net proceeds of $29.4 million in 2024[795][818] Consolidated Balance Sheet Highlights (As of Dec 31) | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Total Current Assets | $1,368,648 | $10,464,678 | | Total Assets | $34,256,918 | $25,245,248 | | Total Current Liabilities | $3,948,634 | $17,313,078 | | Total Liabilities | $4,332,232 | $20,394,074 | | Total Shareholders' Equity | $29,924,686 | $4,851,174 | Consolidated Statement of Operations Highlights (Year Ended Dec 31) | Metric | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Total Revenues (Continuing) | $1,828,976 | $10,781 | $204,495 | | Net Loss from Continuing Operations | ($8,312,576) | ($6,526,322) | ($6,470,955) | | Net Loss from Discontinued Operations | ($74,347) | ($9,542,748) | ($8,908,703) | | Total Net Loss | ($8,386,923) | ($16,069,070) | ($15,379,658) |