F-1/A: Softto, Inc. Files F-1/A for IPO Amidst Losses

Softto, Inc., a Cayman Islands holding company with operations in China's personal care market, filed an F-1/A for its initial public offering on the OTCQX, reporting continued net losses and a going concern uncertainty.

Summary

• Softto, Inc. is a Cayman Islands holding company that develops, sells, and distributes hair care, skin care, personal care, and beauty products in China through its operating subsidiaries.
• The company reported revenues of approximately $10.2 million for the year ended December 31, 2024, a 31.5% decrease from $15.0 million in 2023.
• Net loss for 2024 was approximately $1.7 million, an improvement from a $2.3 million net loss in 2023.
• Gross profit margin increased from 25.8% in 2023 to 29.1% in 2024, despite a 22.5% decrease in gross profit.
• The company's auditor has expressed "substantial doubt" about its ability to continue as a going concern due to recurring losses and a net capital deficiency.
• Softto plans to offer ordinary shares at an estimated $5 per share and has applied to list on the OTCQX Market.
• Sales channels include offline wholesale (74.8% of 2024 revenue) and online retail (25.2% of 2024 revenue), with online retail sales declining by 58.5% in 2024 due to increased competition.
• The company relies heavily on third-party OEM manufacturers and had a significant concentration of purchases from a related party supplier (Tianwen), which accounted for 79.4% of total purchases in 2024.
• Softto has decided to terminate cooperation with its major related-party supplier, Tianwen, starting January 2025.
• The company is involved in several legal proceedings, including a significant financial loan dispute with Bank of China where Softto Smart defaulted on a RMB 50 million loan, with an arbitration award issued on August 8, 2025, requiring repayment.
• Management intends to alleviate going concern risk through equity financing, debt from PRC banks, increasing operational cash flow, and collecting related-party receivables.

Sentiment

Score: 2

Explanation: The company faces significant financial challenges, including declining revenues, recurring net losses, and a going concern warning from its auditor. While there are some positive operational improvements (gross margin, operating cash flow), these are overshadowed by the overall financial instability, heavy reliance on related parties, and ongoing legal disputes. The IPO is a capital raise attempt, but the underlying financial health is weak.

Positives

• Net loss decreased by 26.2% from $2.3 million in 2023 to $1.7 million in 2024, indicating improved loss management.
• Gross profit margin improved from 25.8% in 2023 to 29.1% in 2024, suggesting better cost control or pricing strategies.
• Net cash provided by operating activities significantly improved to $1.6 million in 2024, compared to a net cash outflow of $6.0 million in 2023.
• The company has a strong R&D capability with a team of 3 professionals averaging 10 years of experience, holding 7 design patents and 1 invention patent.
• A collaborative research project with Zhongshan Wuhan University of Technology Advanced Engineering Research Institute was initiated in January 2025 to develop a natural botanical anti-hair loss shampoo formula.
• Softto has a reputable brand history in China, established in 1988, and has received various recognitions such as 'Well Known Chinese Trademark' and 'National Exemption of Inspection product'.
• The company has a comprehensive omni-channel sales and marketing management system, including online and offline distribution networks across 238 cities in China.
• Management has implemented an Amoeba management system and an ERP system to enhance operational efficiency, reduce costs, and improve inventory monitoring.

Negatives

• Total revenues decreased by 31.5% from $15.0 million in 2023 to $10.2 million in 2024, primarily due to a decline in online retail sales.
• The company incurred net losses of $1.7 million in 2024 and $2.3 million in 2023, and has an accumulated deficit of $7.48 million as of December 31, 2024.
• Auditors have expressed "substantial doubt" about the company's ability to continue as a going concern.
• Cash and cash equivalents significantly decreased from $1.8 million in 2023 to $681,958 in 2024.
• Online retail sales decreased by 58.5% in 2024 due to an increasingly competitive online shopping environment and rising customer acquisition costs.
• The company has significant outstanding amounts due from related parties ($9.63 million in 2024) and loans to related parties ($80,079 in 2024).
• A major loan dispute with Bank of China for RMB 50 million has resulted in an arbitration award against Softto Smart, with joint and several liability for key management and a related party.
• The company has not fulfilled payment obligations for several effective legal judgments related to logistics and a labor dispute.

Risks

• The company is subject to risks related to public health crises such as COVID-19, which can impact demand and supply chains.
• Uncertain economic or social conditions in China may adversely impact demand for products or cause financial hardship for customers and partners.
• Reliance on a limited number of vendors, particularly a related party (Tianwen) for a significant portion of purchases, poses a risk if relationships are disrupted or prices increase.
• A significant change in customer relationships or demand for products could negatively impact business, especially with customer concentration in accounts receivable (one customer accounted for 64.8% in 2024).
• Erosion of the company's or its brands' reputation due to product quality issues, recalls, litigation, or negative social media could materially impact financial results.
• Disruptions in the supply chain, including labor disputes, loss of key manufacturers, or inability to procure raw materials, could adversely affect business.
• Financial results and profitability are subject to prevailing prices, production costs, and inflation pressures, which may decrease margins if not effectively offset.
• Increased scrutiny, criticism, and negative publicity involving U.S.-listed China-based companies could harm business operations and stock price.
• Intense competition in the Chinese beauty and personal care products market may adversely affect market share, sales, and earnings.
• Sales of certain products are seasonal, leading to fluctuations in operating results and working capital requirements.
• The company may need additional capital, and financing may not be available on acceptable terms or at all, exacerbating going concern risks.
• Incurring substantial debt in the future could adversely affect financial condition and operations.
• Interim results may fluctuate significantly and may not fully reflect underlying business performance.
• Inability to effectively promote and maintain the brand in a cost-efficient way could harm business and results of operations.
• Strategic investments or acquisitions could require significant management attention, disrupt business, and adversely affect financial results.
• Dependence on the continued efforts of senior management, with potential disruption if key executives are unable or unwilling to continue.
• Risk of labor disputes or additional compensation costs if basic salaries fail to meet local minimum standards.
• Intense competition for qualified and skilled employees, potentially leading to higher costs or inability to retain talent.
• Lack of business interruption or product liability insurance coverage, exposing the company to uninsured losses.
• Exposure to greater than anticipated tax liabilities due to complex tax structures and uncertain interpretations by tax authorities.
• Cybersecurity incidents could disrupt business operations, result in loss of critical information, and impact reputation and results.
• Product liability claims if customers are harmed by products, with limited recourse against third-party contractors and no product liability insurance.
• Inability to prevent unauthorized use of intellectual property could harm business and competitive position.
• Subject to intellectual property infringement claims, which may be expensive to defend and disrupt business.
• Lack of public company experience of the management team may lead to difficulties in complying with regulatory requirements.
• Malfunction of information systems could harm business operations.
• Increasing focus on environmental, social, and governance (ESG) matters may impose additional costs or risks.
• Lack of requisite approvals, licenses, or permits applicable to the business may have a material adverse impact.
• Changes in China's economic, political, or social conditions or government policies could have a material adverse effect on business and results of operations.
• Reliance on dividends from PRC subsidiaries, with limitations on their ability to pay dividends due to PRC regulations.
• PRC regulation of loans and direct investment by offshore holding companies may restrict the use of IPO proceeds for PRC subsidiaries.
• Uncertainty regarding PRC laws and regulations, including those related to cybersecurity, data transfer, and overseas listings, could negatively impact business and the value of securities.
• Increases in labor costs in the PRC may adversely affect business and results of operations.
• Inability to obtain certain treaty benefits on dividends paid by WFOE to the Hong Kong subsidiary.
• Litigation and negative publicity surrounding China-based companies listed in the U.S. may result in increased regulatory scrutiny.
• The Chinese government's substantial influence and potential intervention in business operations could result in material changes or devaluation of shares.
• Difficulties for shareholders to bring actions against the company or its officers/directors in the U.S. or enforce judgments due to Cayman Islands and PRC legal systems.
• The Holding Foreign Companies Accountable Act (HFCA Act) and related regulations could lead to delisting if the auditor is not subject to PCAOB inspections.
• Regulatory bodies of the United States may be limited in their ability to conduct investigations or inspections of operations in China.
• Uncertainty regarding PRC tax reporting obligations and consequences for certain indirect transfers of equity interests.
• No public market for shares prior to this offering, and if an active trading market does not develop, resale may be difficult.
• Broad discretion in the use of net proceeds from the offering, which may not be used effectively.
• Not likely to pay cash dividends in the foreseeable future.
• Shareholders may face difficulties in protecting their interests due to less protection under Cayman Islands law compared to U.S. laws.
• Increased costs as a public company, particularly after ceasing to qualify as an emerging growth company.
• Obligation to develop and maintain proper and effective internal control over financial reporting, with potential adverse effects if controls are ineffective.
• If a limited number of participants purchase a significant percentage of the offering, the effective public float may be smaller, leading to price volatility and potential litigation.

Future Outlook

The company expects revenue to maintain slight growth in the coming years, driven by functional products with patented formulas. It plans to increase R&D investment, expand product lines, diversify sales networks through collaborations with influencers and participation in industry expos, and strengthen partnerships with platforms like Meituan. Softto also aims to attract and retain talented professionals and seek strategic partnerships and acquisitions, including exploring the U.S. market. However, the company acknowledges challenges in complying with changing regulatory requirements, managing business growth, responding to consumer preferences, and mitigating the risk of rising raw material prices.

Management Comments

• "Our product and its quality speak for itself." (Company's product development philosophy)
• "We keep up with the development and change of trends in personal care products industry in China and pursue constant improvements of our products."
• "Our management is of the opinion that we will probably not have sufficient funds to meet our working capital requirements and debt obligations as they become due one year from the date of this registration statement." (Regarding going concern)

Industry Context

The Chinese personal care market is highly competitive, with both overseas magnates (P&G, Unilever) and strong domestic brands. Recent trends show Chinese consumers increasingly favoring local brands for quality and innovation, not just price or national pride. Softto aims to leverage this trend with its established brand and diversified product portfolio. The industry is also experiencing rapid changes in consumer preferences and online sales channels, requiring companies to adapt quickly to marketing strategies and product innovation.

Comparison to Industry Standards

• The company's gross profit margin of 29.1% in 2024, while an improvement from 25.8% in 2023, should be assessed against industry averages for personal care products in China, which can vary widely based on product category, brand positioning (mass market vs. premium), and sales channel. Without specific industry benchmarks for comparable companies, a definitive assessment is difficult.
• The significant decline in online retail sales (58.5% in 2024) suggests the company is struggling to compete effectively in the rapidly evolving e-commerce and live-streaming landscape in China, where other players may be more adept at customer acquisition and platform engagement.
• The heavy reliance on a single related-party supplier (Tianwen, 79.4% of purchases in 2024) is a concentration risk that is generally not considered an industry best practice for supply chain resilience and competitive pricing.
• The company's R&D team of 3 people with an average of 10 years of experience, while experienced, is relatively small compared to larger industry players like P&G or L'Oréal, which invest heavily in extensive R&D facilities and personnel globally.
• The 'going concern' uncertainty highlighted by the auditor is a critical indicator of financial distress, which is a significant deviation from the financial stability expected of established companies in the industry.

Management Changes

Corporate Governance

Legal Proceedings

• **Loan Contract Dispute (Bank of China vs. Softto Smart et al.)**: Softto Smart defaulted on a RMB 50 million loan. An arbitration award on August 8, 2025, ruled Softto Smart must repay RMB 49,990,000 principal, plus interest, penalty interest, and compound interest (totaling RMB 52,228,341.6 as of June 17, 2025). Yuhao Liang, Luhan Wang, and Guangzhou Tianwen Jiaoyan Cosmetics Co., Ltd. (Tianwen) are jointly and severally liable. Yuandong Development Co., Ltd. (controlled by Yuhao Liang's uncle) provided a mortgage on a property valued at RMB 43,578,800. An offset agreement on July 14, 2025, states Yuandong and Tianwen will assume full responsibility for repaying the debt to the Bank of China, after which Softto Smart will owe Tianwen RMB 16,317,602.71, expected to be collected by end of 2025. The company has not yet fulfilled its payment obligation for this judgment.
• **Labor Dispute (Xu Xiuhua vs. Guangzhou Yuebang Personal Care Products Co., LTD)**: Concluded on February 29, 2024. Guangzhou Yuebang was ordered to pay RMB 39,433.29 for salary and RMB 6,951.72 for unused annual leave. Guangzhou Yuebang has fulfilled this payment.
• **Disputes on Contract for Carriage of Goods (Guangzhou Douyue, Tikas Guangzhou vs. Guangzhou Zhongmai Logistics Co.)**: Concluded on April 15, 2025. Guangzhou Douyue and Tikas Guangzhou were found to owe Guangzhou Zhongmai Logistics Co. RMB 482,225.57 and RMB 239,239.46, respectively, for logistics services and liquidated damages. The company has not yet fulfilled its payment obligation for this judgment.
• **Disputes on Contract for Carriage of Goods (Guangzhou Yuebang, Softto Smart vs. Guangzhou Zhongmai Logistics Co.)**: Concluded on May 15, 2025. Softto Smart and Guangzhou Yuebang were jointly and severally ordered to pay Guangzhou Zhongmai Logistics Co. RMB 333,583.84 for transportation fees and RMB 200,000 for liquidated damages. The company has not yet fulfilled its payment obligation for this judgment.
• **Disputes on Contract (Tikas (Guangzhou) High-tech Co., LTD vs. Zhejiang Jiacheng Media Co., Ltd)**: Concluded on May 16, 2025. Zhejiang Jiacheng Media Co., Ltd. was ordered to return RMB 98,963.7 (including liquidated damages) and pay RMB 5,000 for lawyers' fees to Tikas (Guangzhou) High-tech Co., LTD. The defendant has not yet fulfilled its payment obligation for this judgment.
• **Ongoing Loan Contract Dispute (Guangzhou Conghua Liuyin Village Bank Co., Ltd. vs. Guangzhou Softto Snow Muscle Cosmetics Co., Ltd. et al.)**: Softto Smart is a co-defendant in a lawsuit regarding a RMB 4.5 million loan. The case was heard on April 29, 2025, and no judgment has been issued yet.

Related Party Transactions

• **Amounts due from related parties**: As of December 31, 2024, the company had $9,633,684 due from related parties, including $109,599 from Mr. Min Wang (50% bad debt provision), $112,399 from Mrs. Lu Han Wang, $9,392,126 from Tianwen, and $19,560 from Qianlang. These were advances for business operations or reclassified prepayments for goods.
• **Amounts due to related parties**: As of December 31, 2024, the company owed $115,327 to Mr. Yuhao Liang for daily operations (interest-free, due on demand). A debt of $242,017 to Mr. Yuhao Liang was settled via an offset agreement.
• **Advances to supplier-related parties**: As of December 31, 2023, the company had $10,667,309 in advances to Tianwen. This was reclassified as 'amounts due from related parties' in 2024 as cooperation with Tianwen was terminated.
• **Loans to related parties**: As of December 31, 2024, the company had $80,079 in interest-free loans to related parties (Tianwen, Xueji, Xueli, Zhimei). Loans to Tianwen ($8,034,299) and Guangxi Group ($1,764,005) were settled via offset agreements in 2024.
• **Loans from related parties**: As of December 31, 2024, the company had $415,000 in loans from related parties (Zhimei and others) for daily operations.
• **Accounts receivables related parties**: As of December 31, 2024, the company had $17,918 in accounts receivable from related parties. A $769,157 receivable from Yunshang was settled via a repayment declaration with Yuhao Liang.
• **Accounts payable related parties**: As of December 31, 2024, the company had $644,507 in accounts payable to related parties, including $418,094 to Tianwen for goods purchases.
• **Sales to related parties**: Totaled $6,440 in 2024 and $4,763 in 2023.
• **Purchases from related parties**: Totaled $5,239,062 in 2024 and $8,725,260 in 2023. Tianwen accounted for 79.4% of total purchases in 2024 (down from 96.6% in 2023).
• **Rental expenses**: $0 in 2024 and $64,782 in 2023 from Tianwen. The company now leases office space from an affiliated company of Mr. Yuhao Liang at no cost.
• **Offset Agreements**: Multiple complex offset agreements were executed in 2024 and 2025 to settle various claims and debts among Softto Smart, Guangzhou Softto, Huiming, Tianwen, Softto Group, Guangzhou Yuebang, Luhan Wang, and Yuhao Liang, involving millions of RMB.

Stakeholder Impact

• **Shareholders**: Face significant dilution from the IPO and substantial risk due to the company's recurring losses, going concern uncertainty, and potential delisting under the HFCA Act. The controlling shareholders (Yuhao Liang and Luhan Wang) will maintain significant influence.
• **Employees**: Subject to intense competition for talent and potential labor disputes if minimum salary standards are not met. The company aims to enhance its ability to attract, incentivize, and retain professionals.
• **Customers**: May be impacted by product quality issues, supply chain disruptions, or changes in product offerings and pricing due to competitive pressures. The company's strategy focuses on meeting consumer demands and expanding sales networks.
• **Suppliers**: The termination of cooperation with major related-party suppliers like Tianwen could impact their business, while the company seeks new third-party suppliers.
• **Creditors**: Face risk due to the company's financial instability, recurring losses, and the ongoing loan default with Bank of China, which has led to property preservation measures.

Next Steps

• Complete the initial public offering and list Ordinary Shares on the OTCQX Market.
• Negotiate with banks for obtaining banking facilities to strengthen liquidity.
• Implement various cost control measures to tighten operational costs.
• Execute strategies to enhance sales and profitability, particularly in online channels.
• Negotiate repayment plans with related parties to settle outstanding receivables and loans.
• Increase investment in R&D to upgrade product innovation capability and expand product lines.
• Cooperate with contract manufacturers to improve production efficiency and quality.
• Expand sales network through collaborations with celebrities, KOLs, live commerce, and industry exhibitions.
• Integrate online explosive products into offline physical stores and strengthen partnerships with new retail platforms like Meituan.
• Actively pursue and attract more talented professionals and strengthen internal talent training.
• Seek strategic partnerships and acquisitions, including exploring opportunities in the U.S. market.
• Fulfill payment obligations for outstanding legal judgments by the end of 2025.
• Apply for a tax resident certificate from the Hong Kong tax authority if WFOE plans to declare and pay dividends to Softto HK.

Key Dates

Recommendation

The company exhibits severe financial distress, evidenced by recurring net losses, a significant accumulated deficit, and a 'going concern' warning from its independent auditor. While gross margins improved, revenues declined substantially, and cash reserves are critically low. The heavy reliance on related-party transactions, coupled with ongoing legal disputes including a major loan default, introduces considerable operational and financial risk. The IPO is an attempt to raise capital, but the underlying business fundamentals are weak, and the regulatory environment in China poses additional uncertainties. Investors face a high probability of capital loss and significant dilution, making the stock a strong sell.

Keywords

Personal Care Products, Beauty Products, Hair Care, Skin Care, Cosmetics, China Market, SEC Filing, F-1/A, IPO, OTCQX, Going Concern, Related Party Transactions, PRC Regulations, OEM Manufacturing, E-commerce, Offline Wholesale, Financial Performance, Net Loss, Revenue Decline, R&D, Intellectual Property, Corporate Governance, Risk Factors, Capital Raise