Reto Eco-Solutions, Inc. annual report, Q4 FY2022

Reto Eco-Solutions, Inc. — FY2022 Form 20-F

Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone Q4 filing. The company is a British Virgin Islands holding company whose operations are primarily in China, spanning eco-friendly construction materials and equipment, municipal projects, roadside assistance and software services. Financial statements are prepared under U.S. GAAP and presented in U.S. dollars.

Financial performance and liquidity

Metric	FY2022	FY2021
Revenue	$6.47 million	$3.60 million
Gross profit / margin	$0.81 million / 12%	$0.39 million / 11%
Operating loss	$15.25 million	$12.00 million
Net loss	$15.38 million	$22.07 million
Cash used in operating activities	$9.96 million	$2.76 million
Cash at year-end	$0.11 million	$0.46 million

Revenue rose 80%, driven mainly by machinery and equipment sales, including gravity separators, and the first full-year contribution from the REIT Mingde acquisition. Machinery and equipment represented 67% of revenue; construction materials 12%; municipal construction 8%; and technology consulting and other services 13%. Gross margin improved slightly, but operating loss widened as operating expenses rose to $16.06 million from $12.39 million. FY2022 included $1.71 million of bad-debt expense and a $1.02 million goodwill impairment. Selling expense increased to $3.77 million and general and administrative expense to $8.59 million, including substantial share-based compensation and professional fees.

Net loss narrowed from FY2021, which included a $6.29 million loss on the REIT Changjiang disposal and a larger loss from changes in convertible-debt fair value. The FY2022 loss remains substantial; it should not be read as an improvement in operating profitability.

At December 31, 2022, cash was $113,895, current assets were $7.54 million and current liabilities were $17.67 million, producing a reported working-capital deficit of about $10.1 million. Total liabilities were $18.98 million against total assets of $24.06 million. Current obligations included $1.32 million of short-term bank loans and $3.92 million of convertible debt; third-party loans totaled about $2.27 million, including $1.16 million noncurrent. Operating cash outflow was funded in part by financing inflows and $5.70 million of subsidiary-disposal proceeds. The auditor’s report highlights substantial doubt about the company’s ability to continue as a going concern for the next 12 months.

Net accounts receivable was $2.23 million, up from $0.54 million; the allowance for doubtful accounts was $1.77 million. The filing says only about $0.3 million, or 7.7% of the relevant third-party receivables, had been collected subsequently, though it expected substantially more collection by year-end 2023. Advances to related-party suppliers totaled $3.79 million, principally for purchases from Shexian Ruibo. FY2022 foreign-currency translation adjustments were a negative $1.18 million.

Material changes and significant events

• Revenue recovered from FY2021’s decline, but remained below FY2020’s $8.34 million. Construction-material sales fell 51% year over year to $0.81 million; machinery and equipment sales increased 139% to $4.30 million.
• The company issued 5.97 million shares in a May 2022 private placement for $3.58 million gross proceeds. It also issued shares through debt conversions and share-based compensation; shares outstanding increased from 28.97 million at year-end 2021 to 43.40 million at year-end 2022.
• The March 2022 convertible note had an original principal amount of $3.105 million and generated $3.0 million in proceeds. A standstill agreement added a $310,500 fee; the year-end fair-value carrying amount was $3.92 million. The note was subject to subsequent conversions and an extension negotiation.
• The company paid $13 million RMB toward an RMB18 million agreement to buy the remaining 30% of Xinyi REIT. A further RMB3 million was paid in 2023; RMB2 million remained due as of the report date.
• The 2021 disposal of REIT Changjiang had RMB7.4 million, approximately $1.1 million, of consideration still expected by June 30, 2024; the company recorded a full allowance against the reported remaining receivable at year-end 2022.

Outlook, risks and contingencies

No quantified revenue, earnings or cash-flow guidance is provided. Management described plans to expand equipment sales, develop software and roadside-assistance services, increase R&D and pursue new markets and distributors. These plans depend on financing and execution; management had no investor financing commitments and could not assure that additional funding would be available. Management expects to renew bank loans based on past experience, but that expectation is not assured.

• Going concern and funding: recurring losses, a working-capital deficit, low cash and negative operating cash flow underpin the auditor’s substantial-doubt statement. Management’s plans include operating cash generation, loan renewals, related-party borrowing and potential equity or debt financing.
• China-related exposure: substantially all revenue and operations are in China. The filing describes risks from evolving regulation, currency controls, restrictions on moving cash or paying dividends, and future CSRC filing requirements for overseas offerings. PRC subsidiaries had the licenses required for current operations, according to the filing and its counsel.
• Listing and audit oversight: Nasdaq notified the company of a minimum-bid-price deficiency; it received an extension through May 30, 2023 and discussed a possible reverse split. The PCAOB reported complete inspection access in December 2022, but the filing notes future access could change and delisting rules remain relevant.
• Controls: management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2022. Identified material weaknesses involved insufficient full-time U.S. GAAP/SEC reporting expertise and ineffective management review of the close and reporting process. Remediation was underway.
• Concentration and collection: one customer represented 21% of FY2022 revenue; four insurance-company customers generated 42% of Hainan Yile IoT revenue. Three customers represented 53% of year-end consolidated receivables. One supplier provided 19% of raw-material purchases in FY2022.
• Legal and other exposures: appeals remained pending in investor-related proceedings involving Xinyi REIT. An April 2023 court order restricted Beijing REIT and its legal representative from frivolous spending. The filing also reports 2023 lawsuits against Xinyi REIT and says outcomes may be unpredictable. The company disclosed underpayment of housing provident-fund contributions and no business liability, disruption or litigation insurance coverage.
• Other uncertainties: COVID-19 and supply-chain disruption, raw-material and labor costs, customer credit, product/warranty claims, acquisition integration, data and cybersecurity regulation, and foreign-exchange movements may affect results. Government subsidies were $235,084 in FY2022; certain subsidiaries’ preferential 15% tax status also has renewal conditions.

Important facts for investors to verify

1. Current cash, near-term maturities, bank-loan renewals and the status and terms of the extended convertible note.
2. Actual collections on the $2.23 million receivable balance and recovery of the Changjiang disposal receivable; assess the large related-party supplier advances.
3. Progress in restoring positive operating cash flow and addressing the $10.1 million working-capital deficit and going-concern risk.
4. Whether internal-control remediation has resolved the reported material weaknesses and whether subsequent filings remain reliable and timely.
5. Nasdaq minimum-bid-price compliance and any subsequent reverse split or other share issuance; consider dilution from incentive-plan shares and financing conversions.
6. Developments in the disclosed litigation, the remaining Xinyi REIT purchase payment, and the court restriction involving Beijing REIT.