Pinnacle Food Group Ltd-A(PFAI) - 2024 Q4 - Annual Report

PART I Identity of Directors, Senior Management and Advisers This section is marked as not applicable, indicating no specific information is provided under the standard headings for Directors, Senior Management, Advisors, or Auditors in this part of the report - The sections for Directors and Senior Management, Advisors, and Auditors are all listed as 'Not applicable'[17][18][19] Key Information This section outlines the significant risks associated with investing in the company's securities, categorizing them into business, intellectual property, jurisdictional challenges, regulatory issues, and risks related to Class A Common Shares, including a material weakness in internal control over financial reporting D. Risk factors The company faces substantial risks, including dependence on a few distributors for most of its revenue, supply chain disruptions from Chinese OEM manufacturers, and the lack of long-term supplier agreements, alongside technological failures, intense competition, and challenges in market adoption of new farming methods, with a dual-class share structure concentrating voting power and a material weakness in internal financial controls identified, further complicated by intellectual property protection through a proxy arrangement in China and legal complexities from its Canadian operations and Cayman Islands incorporation - The company is highly dependent on a limited number of distributors for a substantial portion of its revenues, with the top three customers accounting for approximately 95% of total revenue in fiscal year 2024[34][194] - The company relies on OEM manufacturers in China, such as Banjia and Seonwo, without long-term supply agreements, exposing it to risks of supply shortages, price volatility, and potential disruptions from trade restrictions or tariffs[37][40][41] - A material weakness in internal control over financial reporting was identified due to a lack of sufficient accounting personnel with U.S. GAAP and SEC reporting knowledge, with remediation efforts underway but not yet complete[120][121][370] - The company's dual-class share structure gives holders of Class B Common Shares five votes per share, concentrating control and limiting the influence of Class A shareholders[117][118] - The company faces risks in protecting its intellectual property for the PFAI Model S system, as the Chinese design patent is held by a proxy, Banjia, due to Chinese legal restrictions on foreign patent ownership, creating risks related to enforcement, potential breach of agreement, and challenges in transferring the patent[82][83] - The company is classified as an "emerging growth company" and a "foreign private issuer," allowing it to follow reduced reporting and certain home country governance standards, which may offer less protection to investors compared to U.S. domestic issuers[131][133] Information on the Company Pinnacle Food Group, a Canada-based company, transitioned from selling ginseng to providing smart farming solutions in 2023, offering hydroponic growing systems (Models S, M, A, R) and associated 'Farming as a Service' (FaaS) subscriptions, utilizing data analytics and machine learning models developed by third parties to optimize growing conditions, completed its IPO on Nasdaq in April 2025, and operates from leased facilities in Vancouver, Canada A. History and Development of the Company Founded in 2015 as Pinnacle Coffee Inc., the company shifted to ginseng products as Pinnacle Food Inc. before pivoting to smart agricultural services in 2022 and launching hydroponic systems in 2023, with a corporate reorganization in 2024 establishing Pinnacle Food Group Limited (Cayman) as the parent company, and completing its initial public offering in April 2025, raising approximately US$7.2 million - The company shifted its business focus from ginseng products to smart farming solutions, beginning to offer hydroponic growing systems and related services in 2023[145][49] - In April 2025, the company completed its IPO on the Nasdaq Capital Market under the symbol "PFAI", raising gross proceeds of approximately US$7.2 million[150][218] - A corporate reorganization occurred in February 2024, resulting in Pinnacle Food Group Limited (Pinnacle Cayman) becoming the parent company of PFAI Investment Limited (PFAI), which in turn owns Pinnacle Food Inc. (Pinnacle Canada)[146][147][148] B. Business Overview The company provides smart farming solutions, focusing on vertical and hydroponic farming under a 'Farming as a Service' (FaaS) model, selling a range of hydroponic growing systems (PFAI Models S, M, A, and R) targeted at households, community groups, and urban farms, complemented by subscription services that include consumables and technical support powered by data analytics from third-party developed machine learning models, and relies on OEM manufacturers like Banjia and Seonwo for key product components - The company's core business is providing smart farming solutions (FaaS) for vertical and hydroponic farming, selling customized systems and integrated services[153] Product and Service Portfolio | Products/Services | Target Customer | Design & Development | Manufacture/Assembly | Sales Channel | | :--- | :--- | :--- | :--- | :--- | | Model S | Households | Pinnacle & Banjia | Banjia (OEM) | Distributors | | Model M | Households | Off-the-shelf | Seonwo & Banjia (OEM) | Distributors | | Model A | Community Groups | Pinnacle (Custom) | Pinnacle | Direct by Pinnacle | | Model R | Urban Farms | Pinnacle (Custom) | Pinnacle | Direct by Pinnacle | | FaaS Subscriptions | All Customers | Pinnacle | N/A | Distributors & Direct | - Core technology relies on real-time data monitoring from third-party sensors, analyzed by big data structures and machine learning models developed for the company by third parties (Ganghua and E-shine)[154][156] - The company holds a Chinese design patent for the PFAI Model S system via a proxy agreement with its OEM manufacturer, Banjia, and has filed for a design patent and trademark in Canada[178][179] C. Organizational structure Pinnacle Food Group Limited, a Cayman Islands holding company, is the parent entity, wholly owning PFAI Investment Limited, a Canadian holding company, which in turn wholly owns the operating subsidiary, Pinnacle Food Inc., also based in Canada - The company operates under a three-tiered structure: Pinnacle Food Group Limited (Cayman holding company) owns PFAI Investment Limited (Canadian holding company), which owns Pinnacle Food Inc. (Canadian operating subsidiary)[183][418] D. Property, Plants and Equipment The company's headquarters are in a leased office space of approximately 738 square feet in Vancouver, Canada, with the lease extending to December 2029, and it also leases a 3,249 square foot commercial unit for laboratory and warehouse purposes, with this lease expiring in September 2025 but subject to automatic renewal - The company leases approximately 738 sq. ft. of office space in Vancouver, with a lease until Dec 31, 2029, at a monthly rent of CAD 4,133[186] - A separate commercial unit of approximately 3,249 sq. ft. is leased for laboratory and warehouse use, with a lease expiring Sep 30, 2025, at a monthly rent of CAD 8,614[186] Operating and Financial Review and Prospects In fiscal year 2024, revenue grew 57% to $3.3 million, driven entirely by the new smart farming business which launched in late 2023 after the company exited its ginseng operations; however, net income declined from $0.9 million in 2023 to $0.3 million in 2024, and gross margin fell from 61% to 47%, due to higher costs of revenue, increased G&A expenses including IPO-related fees, and a provision for credit losses, while the company's liquidity improved significantly, with cash increasing to $0.7 million and working capital becoming positive, bolstered by $1.8 million from private placements and a subsequent $7.2 million IPO in April 2025 A. Operating Results Revenue increased by 57% to $3.3 million in FY2024 from $2.1 million in FY2023, driven by the full-year contribution of the smart farming business launched in late 2023, as the company exited the ginseng business in 2023, while gross profit margin decreased from 61% in 2023 to 47% in 2024, attributed to higher amortization, lower margins on construction services, and changes in distributor commission structures, with operating expenses surging from $0.23 million to $0.94 million, mainly due to a $0.1 million provision for credit losses and $0.3 million in IPO-related audit and legal fees, consequently, net income fell to $0.3 million in 2024 from $0.9 million in 2023 Revenue Breakdown (2024 vs. 2023) | Revenue Stream | FY 2024 (US$) | FY 2023 (US$) | Change (%) | | :--- | :--- | :--- | :--- | | Smart farming systems | 3,289,862 | 1,837,951 | +79.0% | | Ginseng sales | — | 40,596 | -100.0% | | Ginseng product consulting | — | 222,272 | -100.0% | | Total Revenue | 3,289,862 | 2,100,819 | +56.6% | Key Profitability Metrics (2024 vs. 2023) | Metric | FY 2024 (US$) | FY 2023 (US$) | | :--- | :--- | :--- | | Gross Profit | 1,555,518 | 1,282,473 | | Gross Margin | 47.3% | 61.0% | | Operating Income | 614,835 | 1,048,875 | | Net Income | 286,142 | 917,687 | - Gross margin declined from 61% in 2023 to 47% in 2024 due to higher amortization/depreciation, lower-margin construction services, and increased commission expenses[208] - General & Administrative (G&A) expenses increased by $0.6 million in 2024, primarily due to a $0.1 million provision for credit losses and $0.3 million in audit and legal fees related to the IPO[212] - The company is highly dependent on its distributors, with sales to them accounting for 83% of revenue in 2024 and 81% in 2023[198] B. Liquidity and Capital Resources The company's liquidity position improved significantly in FY2024, with cash on hand increasing to $0.7 million from $0.1 million at YE 2023, and working capital shifting from a deficit of $0.9 million to a surplus of $1.0 million, primarily funded by $1.5 million in net cash from financing activities, including $1.8 million from private placements, with operations providing $0.2 million in cash, and the company also completed a $7.2 million IPO in April 2025, further strengthening its capital resources, while capital expenditures in 2024 were $1.1 million, mainly for property, plant, equipment, and intangible assets Cash and Working Capital (As of Dec 31) | Metric | 2024 (US$) | 2023 (US$) | | :--- | :--- | :--- | | Cash | 685,796 | 121,368 | | Working Capital | 1,000,000 (Surplus) | (900,000) (Deficit) | Summary of Cash Flows (FY 2024 vs. FY 2023) | Cash Flow Activity | 2024 (US$) | 2023 (US$) | | :--- | :--- | :--- | | Net cash from operating activities | 204,347 | 62,351 | | Net cash used in investing activities | (1,098,552) | (3,024) | | Net cash from financing activities | 1,484,839 | 38,888 | | Net increase in cash | 564,428 | 109,840 | - Financing activities in 2024 were driven by $1.8 million in net proceeds from share issuances (private placements) and $0.2 million in advances from a related party, offset by $0.5 million in deferred IPO costs[217][223] - In April 2025, the company raised gross proceeds of approximately US$7.2 million from its IPO[218][534] - Capital expenditures totaled US$1.1 million in 2024, a significant increase from US$3,024 in 2023, for investments in property, plant, equipment, and intangible assets[228] C. Research and Development, Patents and Licenses, etc. The company's R&D strategy is data-driven, utilizing big data and machine learning models developed by third parties to analyze data from its hydroponic systems, and it does not have a formal R&D department and has not incurred significant R&D expenses to date, though it has invested in proprietary software developed by third parties, protecting its intellectual property through a design patent in China (held by a proxy), copyright, trade secret laws, and confidentiality agreements - The company does not have a formal research and development department but employs a data-driven strategy using big data and machine learning models developed by third parties[233] - Intellectual property is protected through a combination of a design patent in China (held by proxy Banjia), copyright laws for software, and confidentiality agreements[234] E. Critical Accounting Estimates The company's most critical accounting estimate is the allowance for expected credit losses on accounts receivable, determined under the CECL model (ASC 326), which requires significant management judgment, using a loss rate method and a provision matrix, adjusted for current and forecasted economic conditions, and for FY2024, the company recognized an allowance of $90,281, compared to zero in the previous year, reflecting the growth and aging of its receivables portfolio - The primary critical accounting estimate is the allowance for expected credit losses (CECL) for accounts receivable, which involves significant management judgment[239][240] - For the year ended December 31, 2024, the company recognized an allowance for expected credit losses of US$90,281, whereas no allowance was recognized in 2023[245][435] Directors, Senior Management and Employees This section details the company's leadership, compensation, and board structure, with key executives including Chairman Li Xia Du, CEO Jiulong You, and CFO Wencai Pan, who received an aggregate of US$0.17 million in cash compensation in FY2024, while the board has established audit, compensation, and nominations committees, all with independent members, and share ownership is highly concentrated, with major shareholders Li Xia Du and her daughter Jin Yang Zhao controlling a significant majority of the voting power through a dual-class share structure, and the company had 7 employees as of year-end 2024 A. Directors and Executive Officers The company is led by a team including Li Xia Du as Director and Chairman, Jiulong You as CEO, Wencai Pan as CFO, Cuihang Yu as COO, and Xuesong Pang as Director and Chief Data Officer, with the board also including three independent directors: Yinglu Qi, Lin Chen, and Yunhao Chen, whose biographies highlight their respective experiences in management, finance, and technology Key Management and Directors | Name | Position/Title | | :--- | :--- | | Li Xia Du | Director and Chairman of the Board | | Jiulong You | Chief Executive Officer | | Wencai Pan | Chief Financial Officer | | Cuihang Yu | Chief Operating Officer | | Xuesong Pang | Director and Chief Data Officer | | Yinglu Qi | Independent Director | | Lin Chen | Independent Director | | Yunhao Chen | Independent Director Nominee | B. Compensation For the fiscal year ended December 31, 2024, the company paid an aggregate of US$0.17 million in cash compensation to its executive officers, with no cash compensation paid to non-executive directors, and the company has not set aside or accrued any funds for pension, retirement, or similar benefits for its officers and directors - In FY2024, the aggregate cash compensation paid to executive officers was US$0.17 million[258] - Non-executive directors received no cash compensation in FY2024, and no pension or retirement benefits have been accrued for any directors or officers[258] C. Board Practices The Board has established an audit, a compensation, and a nominations committee, each composed of independent directors Yinglu Qi, Lin Chen, and Yunhao Chen, with Yunhao Chen designated as the 'audit committee financial expert,' and the company has entered into employment agreements with its key executives, outlining their salaries, benefits, and confidentiality obligations, while there is currently no employee incentive or stock option plan in place - The Board has three committees: Audit, Compensation, and Nominations, each composed of independent directors[259] - Yunhao Chen is the designated 'audit committee financial expert' and chairs the audit committee[260] - The company has formal employment agreements with key executives including Jiulong You (CEO), Wencai Pan (CFO), Xuesong Pang (CDO), Cuihang Yu (COO), and Li Xia Du (Director)[266][270][273][276][279] - The company does not have a stock option or employee incentive plan[282] D. Employees As of December 31, 2024, the company had approximately 7 employees, which is the same number as in 2022, but an increase from 3 employees at the end of 2023, with all employees engaged under standard employment contracts with confidentiality agreements Employee Headcount | As of | Number of Employees | | :--- | :--- | | Dec 31, 2024 | ~7 | | Dec 31, 2023 | ~3 | | Dec 31, 2022 | ~7 | E. Share ownership Share ownership is highly concentrated, as of the report date, Jin Yang Zhao beneficially owned 6,000,000 Class B shares, representing 70.62% of the total voting power, and her mother, Chairman Li Xia Du, owned 1,695,000 Class B shares, representing 19.95% of the voting power, with together, as a group of 5% or greater beneficial owners, they control over 90% of the company's voting power due to the Class B shares carrying 5 votes per share Beneficial Ownership of Major Shareholders | Shareholder | Class B Shares | Approx. % of Outstanding Shares | Approx. % of Voting Power | | :--- | :--- | :--- | :--- | | Jin Yang Zhao | 6,000,000 | 51.28% | 70.62% | | Li Xia Du | 1,695,000 | 14.49% | 19.95% | | Group Total | 7,695,000 | 65.77% | 90.57% | - The dual-class structure grants 5 votes per Class B share versus 1 vote per Class A share, leading to concentrated control by Class B shareholders[289] - Li Xia Du is the mother of Jin Yang Zhao, indicating familial control over the company[289] Major Shareholders and Related Party Transactions This section details transactions with related parties, for the year ended December 31, 2024, the company received advances of $244,064 from its Chairman, Ms. Du, to support working capital, and the company also has an operating lease for one of its facilities with Steel Magnolia Investment Ltd, a company wholly-owned by Ms. Du, incurring $36,205 in lease expense in 2024, with as of year-end 2024, the total amount due to related parties was $518,763, primarily to Ms. Du - During FY2024, the company's Chairman, Ms. Du, advanced an aggregate of US$244,064 to support working capital needs[298][533] - The company leases property from Steel Magnolia Investment Ltd, which is owned by Ms. Du, with lease expenses for this related-party transaction being US$36,205 in FY2024[298][533] Due to Related Parties (As of Dec 31) | Related Party | 2024 (US$) | 2023 (US$) | | :--- | :--- | :--- | | Yongsheng Zhao | — | 30,243 | | Li Xia Du | 518,763 | 310,941 | | Total | 518,763 | 341,184 | - Kowloon Investment Holding Limited, a company wholly-owned by CEO Jiulong You, invested US$400,000 to purchase 380,000 Class A Common Shares in 2024[298][533] Financial Information This section refers to Item 18 for the company's consolidated financial statements and other related financial information, and also states that there have been no significant changes since the date of the annual financial statements that are not disclosed elsewhere in the report - The detailed consolidated financial statements are provided under Item 18 of the report[296] - The company reports no significant changes have occurred since the financial statement date that are not otherwise disclosed[297] The Offer and Listing The company's Class A Common Shares are listed and traded on the Nasdaq Capital Market under the trading symbol 'PFAI', with other standard sections like Plan of Distribution, Selling Shareholders, and Dilution marked as not applicable - The company's Class A Common Shares are listed on the Nasdaq Capital Market with the ticker symbol "PFAI"[300][302] Additional Information This section details the company's corporate governance and legal framework, as a Cayman Islands exempted company, its affairs are governed by its Memorandum and Articles of Association and Cayman Islands law, outlining the tax implications for the company and its shareholders in the Cayman Islands (no income or capital gains tax), Canada (subsidiaries subject to federal income tax), and the United States (for U.S. Holders), with a significant disclosure on the potential classification as a Passive Foreign Investment Company (PFIC) - The company is an exempted company incorporated in the Cayman Islands, and as such, is not subject to Cayman Islands income tax, corporation tax, or capital gains tax[307][313] - The company's Canadian subsidiaries are subject to Canadian federal income tax, with the summary assuming the parent company itself is not resident in Canada for tax purposes[316][322] - For U.S. Holders, there is a risk the company could be classified as a Passive Foreign Investment Company (PFIC), and while the company does not expect to be a PFIC, it provides no assurance and does not intend to supply the information needed for investors to make a QEF election[141][336][342] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to several market risks, with the primary risk being foreign currency risk, as its reporting currency is the U.S. dollar, while its main subsidiary operates and generates sales in Canadian dollars and makes purchases from China in U.S. dollars, where a 10% change in the USD/CAD exchange rate would impact net assets by approximately $26,000 to $32,000, and inflation risk has not been material to date but is a potential future concern, while interest rate risk is currently minimal as the company has no bank borrowings - The company is exposed to foreign currency risk due to operations in Canada (CAD) and purchases from China (USD), while reporting in USD, where a 10% fluctuation in the USD/CAD exchange rate would impact net assets by approximately $26,371 to $32,231 as of Dec 31, 2024[360] - Inflation in Canada has not materially impacted results to date, but is acknowledged as a future risk[361] - Interest rate risk is considered minimal as the company currently has no bank borrowings[362] PART II Controls and Procedures Management concluded that as of December 31, 2024, the company's disclosure controls and procedures were not effective, due to a material weakness in internal control over financial reporting, specifically a lack of sufficient accounting and financial reporting personnel with appropriate U.S. GAAP and SEC knowledge, and the company has begun remediation by hiring a full-time finance staff member and intends to hire additional personnel - Management concluded that disclosure controls and procedures were not effective as of December 31, 2024[368] - A material weakness was identified in internal control over financial reporting, stemming from a lack of sufficient and competent accounting personnel with U.S. GAAP and SEC reporting expertise[370] - Remediation efforts include hiring a full-time finance staff member after the IPO and plans to hire more qualified personnel to strengthen the internal control framework[371] Audit Committee Financial Expert The board of directors has determined that Yunhao Chen qualifies as an 'audit committee financial expert' according to Nasdaq standards, and furthermore, the board has confirmed that all members of the Audit Committee, including Yunhao Chen, are 'independent' as per applicable Nasdaq rules - The board has identified Yunhao Chen as the 'audit committee financial expert'[374] - All members of the Audit Committee are considered 'independent' under Nasdaq standards[374] Code of Ethics The company has adopted a Code of Business Conduct and Ethics applicable to all directors, officers, and employees, which is available on the company's website and a copy can be requested in writing - A Code of Business Conduct and Ethics has been adopted for all directors, officers, and employees[375] Principal Accountant Fees and Services This section discloses the fees paid to the company's independent registered public accounting firm, for the fiscal years ended December 31, 2024 and 2023, the total fees were $200,000 and $290,539, respectively, with the fees primarily consisting of audit and audit-related services Accountant Fees (in USD) | Fee Category | FY 2024 | FY 2023 | | :--- | :--- | :--- | | Audit fees | $200,000 | $230,000 | | Audit related fees | - | $60,539 | | Total | $200,000 | $290,539 | Corporate Governance As a foreign private issuer incorporated in the Cayman Islands, the company utilizes the 'home country rule' exemption under Nasdaq listing standards, specifically, it has elected to be exempt from Nasdaq Marketplace Rule 5635(d), which requires shareholder approval for certain securities issuances of 20% or more of the outstanding voting power, and the company states it is not aware of any other significant differences between its corporate governance practices and those required for U.S. domestic companies under Nasdaq rules - The company follows home country (Cayman Islands) practice in lieu of certain Nasdaq corporate governance requirements[382] - Specifically, the company is exempt from Nasdaq Rule 5635(d), which requires shareholder approval for certain private placements of 20% or more of voting power at a discount[383] Cybersecurity The company acknowledges the criticality of cybersecurity and employs technical safeguards, access controls, and continuous monitoring to manage risks, with the Board of Directors having ultimate oversight, reviewing cybersecurity matters quarterly, and at the management level, the CEO, CFO, and Chief Data Officer (CDO) jointly oversee cybersecurity efforts, with the CDO responsible for risk identification and mitigation - The Board of Directors has ultimate responsibility for overseeing cybersecurity risk management, with quarterly reviews of material incidents or threats[391] - Management oversight is shared by the CEO, CFO, and CDO, with the CDO tasked with identifying, assessing, and mitigating cybersecurity risks[392] - The company's strategy includes technical safeguards, access control, continuous monitoring, and the potential use of third-party security professionals for independent reviews and testing[390] PART III Financial Statements This section contains the company's audited consolidated financial statements for the three-year period ended December 31, 2024, prepared in conformity with U.S. GAAP, including the consolidated balance sheets, statements of operations and comprehensive income, statements of changes in shareholders' equity, and statements of cash flows, along with accompanying notes, and the independent auditor's report expresses an unqualified opinion on these financial statements Consolidated Balance Sheet Highlights (As of Dec 31) | Metric (US$) | 2024 | 2023 | | :--- | :--- | :--- | | Total Current Assets | 3,903,412 | 2,125,689 | | Total Assets | 5,604,664 | 3,816,606 | | Total Current Liabilities | 2,903,760 | 2,978,044 | | Total Liabilities | 3,053,862 | 3,260,187 | | Total Stockholders' Equity (Deficit) | 466,571 | (1,711,084) | Consolidated Statement of Operations Highlights (Year Ended Dec 31) | Metric (US$) | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Revenues | 3,289,862 | 2,100,819 | 177,326 | | Gross Profit | 1,555,518 | 1,282,473 | 17,026 | | Net Profit (Loss) | 286,142 | 917,687 | (205,158) | | EPS (Basic & Diluted) | 0.03 | 0.11 | (0.02) | Consolidated Statement of Cash Flows Highlights (Year Ended Dec 31) | Metric (US$) | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Net Cash from Operating Activities | 204,347 | 62,351 | (90,603) | | Net Cash from Investing Activities | (1,098,553) | (3,024) | (17,252) | | Net Cash from Financing Activities | 1,484,839 | 38,888 | 93,800 | Exhibits This section lists all the exhibits filed with the annual report, with key documents including the company's Memorandum and Articles of Association, employment agreements with key executives, material contracts such as distributor and supplier agreements, the Code of Business Conduct and Ethics, and certifications by the CEO and CFO pursuant to the Sarbanes-Oxley Act - Key exhibits filed include the Memorandum and Articles of Association (1.1), employment agreements for executives like Wencai Pan (4.12) and Jiulong You (4.11), and material contracts like the Distributor Agreement with Billions Trading Company (4.6) and the technical development agreement with Ganghua and E-shine (4.4)[535] - Governance documents such as the Insider Trading Policy (11.1), Code of Business Conduct and Ethics (11.2), and Clawback Policy (97.1) are also filed as exhibits[536]