TH International (US:THCH)2025-05-15 20:01Introduction Discontinued Operations and Basis of Presentation Financial statements reflect Popeyes China as discontinued operations and a 1-for-5 reverse stock split effective December 31, 2024 - On June 28, 2024, the company sold its 100% equity interest in Popeyes China, which is now treated as a discontinued operation in the financial statements1718 - A 1-for-5 reverse stock split of ordinary shares became effective on December 31, 2024. Historical share and per-share data have been retrospectively adjusted to reflect this change19 PART I ITEM 3: KEY INFORMATION The company's Cayman Islands holding structure and PRC operations present unique risks, including regulatory oversight, cash transfer restrictions, and HFCAA delisting concerns - THIL is a Cayman Islands holding company, and its operations are conducted entirely through its PRC Subsidiaries. This structure presents unique risks to investors, as they hold securities of the holding company, not the operating entities in China30 - The company faces risks from PRC government oversight, which could restrict the ability of its PRC subsidiaries to transfer cash to the parent company for dividends or other purposes. As of the report date, US$329.9 million has been transferred to its Hong Kong subsidiary, which in turn transferred US$282.5 million to its PRC subsidiaries343537 - The company's auditor is based in mainland China. While the PCAOB vacated its previous determination of being unable to inspect firms in China on December 15, 2022, there is a risk that this could change. If the PCAOB is unable to inspect the auditor for two consecutive years, the company's securities could be delisted from U.S. exchanges under the HFCAA40184185 Risk Factors Key risks include limited operating history, intense competition, PRC regulatory uncertainty, potential HFCAA delisting, and three material weaknesses in internal controls - The company has a limited operating history in China, having opened its first store in February 2019 and grown to 1,022 system-wide stores by December 31, 202449 - PRC regulations, such as the Cybersecurity Review Measures, may require approval for foreign listings for internet platform operators with over one million users' personal data. The company believes it is not currently subject to this review but acknowledges the uncertainty in regulatory interpretation109111142 - The company received a Nasdaq non-compliance notice on July 19, 2024, for failing the minimum bid price requirement. After a 1-for-5 reverse stock split, it regained compliance on January 28, 2025194233236 - Three material weaknesses in internal controls over financial reporting were identified as of December 31, 2024, related to (i) lack of sufficient U.S. GAAP/SEC expertise, (ii) inadequate financial closing procedures, and (iii) ineffective IT general controls in the SAP system222224636 ITEM 4: INFORMATION ON THE COMPANY This section details the company's history, rapid expansion in China, strategic focus on localization and digital innovation, and the Popeyes China divestiture History and Development of the Company THIL became publicly traded on Nasdaq in September 2022 and regained Nasdaq compliance in January 2025 after a 1-for-5 reverse stock split - The company completed a business combination with Silver Crest Acquisition Corporation and listed on Nasdaq in September 2022232 - A 1-for-5 reverse stock split was effective on December 31, 2024, and the company regained compliance with Nasdaq's minimum bid price requirement on January 28, 2025234236 Business Overview As the exclusive Tim Hortons franchisee, the company operates 1,022 stores in China, focusing on localization, digital innovation, and divested Popeyes China in June 2024 System-Wide Store Count Growth | Year | Company-owned and operated Stores | Franchise Stores | Total | | :--- | :--- | :--- | :--- | | 2019 | 31 | 3 | 34 | | 2020 | 128 | 9 | 137 | | 2021 | 373 | 17 | 390 | | 2022 | 547 | 70 | 617 | | 2023 | 619 | 283 | 902 | | 2024 | 576 | 446 | 1,022 | Loyalty Program Membership Growth | As of December 31 | Members (in millions) | | :--- | :--- | | 2022 | 11.3 | | 2023 | 18.5 | | 2024 | 24.0 | - Digital orders (delivery and mobile self-pickup) constituted 86.1% of revenues from company-owned and operated stores in 2024, up from 82.1% in 2023 and 80.1% in 2022241249 - The company sold its 100% equity interest in Popeyes China on June 28, 2024, to focus on the Tim Hortons brand240 Organizational Structure THIL is a Cayman Islands holding company that conducts all its business operations in mainland China through its PRC subsidiaries. Investors hold shares in the Cayman entity, not the operating companies directly - The company operates under a holding company structure, with the parent company incorporated in the Cayman Islands and all substantive business operations conducted through subsidiaries in the People's Republic of China317 ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS The company's 2024 revenue decreased by 10.8%, net loss narrowed, but liquidity remains stressed with a 'going concern' warning due to recurring losses and negative cash flow Operating Results Total revenues decreased by 10.8% to RMB 1,391.2 million in 2024, while net loss significantly improved to RMB 409.0 million, reflecting a shift towards franchising Key Financial Results (in thousands RMB) | Metric | 2023 | 2024 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | 1,560,006 | 1,391,158 | -10.8% | | Operating Loss from Continuing Operations | (667,925) | (349,081) | -47.7% | | Net Loss | (872,926) | (408,985) | -53.1% | - The decrease in 2024 revenue was primarily driven by a reduction in the number of company-owned and operated stores from 619 to 576 and a 14.6% decrease in same-store sales for these stores361 - Other revenues, mainly from the expanding franchise business, increased by 19.1% in 2024 as the number of franchised stores grew from 283 to 446361 - The company presents several non-GAAP financial measures, including adjusted corporate EBITDA, which was a loss of RMB 96.4 million in 2024, improving from a loss of RMB 261.9 million in 2023393 Liquidity and Capital Resources Recurring losses and negative operating cash flows raise substantial doubt about the company's going concern, necessitating external financing and expense reduction - The company has incurred recurring losses and net operating cash outflows, leading to substantial doubt about its ability to continue as a going concern397398673 Cash and Cash Flow Summary (in thousands RMB) | Metric | 2022 | 2023 | 2024 | | :--- | :--- | :--- | :--- | | Cash and cash equivalents (end of period) | 239,077 | 202,315 | 184,237 | | Net cash used in operating activities | (286,929) | (196,130) | (39,667) | - In June 2024, the company entered into a securities purchase agreement to issue new Series A and Series A-1 Convertible Subordinated Notes to raise capital and settle existing obligations402568 Critical Accounting Estimates Critical accounting estimates involve significant judgment for share-based compensation and convertible notes, using models like the Binomial Option Pricing Model - Share-based compensation is a critical estimate, with the fair value of options determined using the Binomial Option Pricing Model. Key assumptions for 2024 grants included 24% expected volatility and a 4.60% risk-free rate441442 - The fair value of convertible notes is another critical estimate. The company uses a Binomial Option Pricing Model with assumptions such as 82% expected volatility for the senior notes and 22% for the junior notes as of December 31, 2024449452 ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section outlines leadership, compensation, board structure, and employee base, noting Chairman Peter Yu's 48.6% ownership makes it a controlled company - As of December 31, 2024, the company had 1,568 full-time employees, with 87.4% (1,370) in operations497498 - For the year ended December 31, 2024, the aggregate cash compensation and benefits paid to executive officers was RMB 3.08 million (US$0.42 million)472 - Chairman Peter Yu beneficially owns approximately 48.6% of the company's outstanding ordinary shares, qualifying the company as a "controlled company" under Nasdaq rules216506 ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS Major shareholders and significant related party transactions are detailed, including agreements and payments with THRI and Cartesian-affiliated entities Transactions with THRI and Affiliates (in millions RMB) | Transaction | 2022 | 2023 | 2024 | | :--- | :--- | :--- | :--- | | Continuing Franchise Fees to THRI | 31.9 | 51.7 | 47.5 | | Upfront Fees to THRI | 23.6 | 27.3 | 10.1 | | Coffee Bean Purchases from TDL Group Corp. | 49.1 | 63.4 | 44.5 | - The company has an Amended and Restated Master Development Agreement with THRI, granting exclusive rights to operate Tim Hortons in mainland China, Hong Kong, and Macau, with a development target of at least 1,700 restaurants by August 31, 2028513 - In June 2024, the company and THRI entered into a Second Amendment to the Master Development Agreement to amend the development schedule and requirements for sub-franchising516520 ITEM 10: ADDITIONAL INFORMATION Corporate structure, material contracts, and tax considerations are detailed, including share rights, key agreements, and PFIC risk for investors - All outstanding warrants were exchanged for ordinary shares in June 2023, simplifying the capital structure. No warrants remain outstanding345555 - In June 2024, the company executed a series of transactions including the sale of Popeyes China and a Securities Purchase Agreement for the issuance of new Series A and Series A-1 Convertible Notes to investors including entities controlled by Cartesian and RBI563 - The company does not believe it was a Passive Foreign Investment Company (PFIC) for the 2024 taxable year, but notes that this is a factual determination made annually and is subject to uncertainty609 ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Primary market risks include foreign currency fluctuations, with a 5% USD depreciation impacting comprehensive loss by RMB 41.5 million, and concentrated credit risk in bank deposits - The company's main market risk is foreign currency risk, as its operations are in RMB but it has transactions in other currencies. A 5% depreciation of the USD against the RMB would increase comprehensive loss by RMB 41.5 million (US$5.7 million) for 2024620 - Credit risk is concentrated in bank deposits held in mainland China and Hong Kong, which exceed government-insured limits. As of December 31, 2024, insured deposits amounted to RMB 12.3 million (US$1.7 million)621 PART II ITEM 15: CONTROLS AND PROCEDURES Management concluded internal controls over financial reporting were ineffective as of December 31, 2024, due to three material weaknesses, with remediation plans outlined - Management concluded that internal control over financial reporting was not effective as of December 31, 2024632 - Three material weaknesses were identified: (i) lack of sufficient competent financial reporting and accounting personnel with U.S. GAAP and SEC reporting knowledge; (ii) inadequate period-end financial closing policies and procedures; and (iii) deficiencies in general information technology controls in the SAP system636 - Remediation plans include hiring additional qualified personnel, enhancing training and policies, and engaging specialists to improve processes and system controls637 ITEM 16K: CYBERSECURITY The company's cybersecurity risk management program is overseen by the board committee, with no material incidents reported to date - The nominating and corporate governance committee of the board of directors is responsible for overseeing cybersecurity risk management658 - A data management team at the management level, led by the head of IT and general counsel, handles daily cybersecurity matters and reports to the board committee quarterly658 - As of the report date, the company has not experienced any material cybersecurity incidents that have materially affected its business or financial condition657 PART III ITEM 18: FINANCIAL STATEMENTS Audited consolidated financial statements for 2022-2024 are presented, with the auditor highlighting a going concern uncertainty due to recurring losses and negative cash flow - The independent auditor's report includes a paragraph highlighting substantial doubt about the company's ability to continue as a going concern due to recurring losses, net operating cash outflow, and net current liabilities673744 Consolidated Balance Sheet Data (in thousands RMB) | Metric | Dec 31, 2023 | Dec 31, 2024 | | :--- | :--- | :--- | | Total Current Assets | 458,620 | 417,081 | | Total Assets | 2,215,439 | 1,563,534 | | Total Current Liabilities | 1,395,833 | 1,535,932 | | Total Liabilities | 2,637,868 | 2,396,549 | | Total Shareholders' Deficit | (422,429) | (833,015) | Consolidated Statement of Operations Data (in thousands RMB) | Metric | 2022 | 2023 | 2024 | | :--- | :--- | :--- | :--- | | Total Revenues | 1,011,064 | 1,560,006 | 1,391,158 | | Operating Loss from Continuing Operations | (581,184) | (667,925) | (349,081) | | Net Loss | (744,748) | (872,926) | (408,985) | | Basic and Diluted Loss per Share (RMB) | (28.99) | (28.41) | (12.70) |