Reto Eco-Solutions, Inc. — FY2017 Form 20-F
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter filing. Financial statements are audited and prepared under U.S. GAAP; the auditor issued an unqualified opinion on the financial statements.
Business context
Reto manufactures and sells eco-friendly construction materials made partly from fly ash and iron tailings, production equipment, and sponge-city consulting and construction services. Operations are primarily in China. The company completed its Nasdaq IPO in November 2017, issuing 3.22 million shares at $5.00 each; net proceeds were approximately $14.3 million. Year-end shares outstanding were 22.76 million.
Financial performance and position
| Metric (USD) | FY2017 | FY2016 |
|---|---|---|
| Revenue | $35.55 million | $32.42 million |
| Gross profit / margin | $17.96 million / 51% | $14.15 million / 44% |
| Operating income / margin | $10.25 million / 29% | $8.19 million / 26% |
| Net income | $6.65 million | $4.50 million |
| Net income attributable to Reto | $5.98 million | $4.10 million |
| Basic and diluted EPS | $0.35 | $0.25 |
| Operating cash flow | $2.53 million | $3.94 million |
| Cash and cash equivalents | $10.86 million | $1.59 million |
| Total assets / liabilities | $81.13 million / $29.50 million | $62.66 million / $34.36 million |
| Current assets / current liabilities | $33.60 million / $26.55 million | $21.14 million / $28.11 million |
| Bank loans and notes payable | Approximately $14.95 million | Approximately $16.45 million |
- Revenue grew 10%. Equipment revenue rose 10% to $14.48 million; construction-material revenue rose 6% to $19.46 million; consulting revenue rose 63% to $1.36 million. Municipal construction contributed $0.25 million, versus none in 2016.
- Gross margin improved primarily due to higher average selling prices and lower construction-material costs. Equipment gross margin declined to 54% from 59%, while construction-material margin increased to 47% from 33%.
- G&A expense rose 37% to $5.31 million; management cited bad-debt expense and higher consulting fees. Interest expense declined to $1.01 million from $1.45 million.
- Operating cash flow fell despite higher earnings, with receivables growth and reduced accounts payable among the stated factors. Investing cash outflow was $7.37 million, mainly for the Xinyi plant and acquisition of the remaining minority interest in REIT Changjiang. Financing cash inflow was $14.24 million, principally reflecting the IPO and borrowings.
- Net accounts receivable was $18.50 million, equal to 57% of annual revenue; days sales outstanding increased to 186 from 137. The allowance for doubtful accounts was $1.82 million. Management reported approximately $3.65 million of subsequent collections through April 20, 2018, or 18% of year-end receivables.
Outlook, risks and notable items
- No formal revenue or earnings guidance is provided. Management said available resources, operating cash, bank facilities and supplier advances should cover current operations for the next 12 months, while noting refinancing and future cash-flow risks.
- The company plans to expand international distribution, develop products and pursue acquisitions; it also expects capital expenditures to increase. The Xinyi manufacturing plant had approximately $1.7 million of remaining commitments at year-end. The filing gives inconsistent completion dates—May 2018 in the financial-statement note and May 2019 in the MD&A.
- Liquidity and cash conversion warrant attention: collection periods lengthened, and operating cash flow was substantially below net income. Two loans restrict dividend payments; Chinese reserve requirements, foreign-exchange controls and withholding taxes may also constrain upstreaming cash. No dividends are anticipated in the foreseeable future.
- Approximately 31% of 2017 raw-material purchases came from one supplier. Construction-industry weakness, raw-material costs, labor costs, supply-chain disruption, product or project claims, and geographic concentration in China are identified risks. The company does not maintain a product-warranty reserve or business-interruption/property-liability insurance for its China operations.
- Outstanding borrowings are guaranteed by third-party guaranty companies and certain company officers; some assets are pledged. Separately, REIT Changjiang guaranteed a related party’s RMB 25 million obligation. The company also disclosed underpaid housing-provident-fund contributions estimated below $20,000 for 2017 and 2016, with an indemnity from the CEO.
- A lawsuit resulted in a judgment of approximately $126,000, paid in December 2017 after an unsuccessful appeal; management did not expect a material adverse effect. The filing reports no other significant changes since the audited statements.
- Management concluded disclosure controls were effective at year-end. The report did not include management’s internal-control assessment or auditor attestation because of the newly public company transition period.
Important facts for investors to verify
- Receivable aging, collection progress after April 20, 2018, reserve adequacy, and the basis for management’s collectability assessment.
- Whether the Xinyi plant was completed on schedule, its final cost and funding, and the filing’s conflicting completion dates.
- Near-term loan maturities, refinancing terms, guarantees and collateral, dividend restrictions, and the use and location of IPO proceeds.
- Whether margins can be sustained if raw-material costs rise or selling prices weaken, and how the company manages dependence on its largest supplier.
- Resolution of housing-fund compliance and related-party guarantee exposures; confirm any later developments in the disclosed litigation.