Reto Eco-Solutions, Inc. — FY2023 Form 20-F
Reporting period: Fiscal year ended December 31, 2023; this is an annual report, not a quarterly Q4 filing. Filed May 15, 2024. Financial statements are prepared under U.S. GAAP. The company is a BVI holding company with substantially all operations in China.
Business context
ReTo manufactures and sells equipment for producing construction materials and eco-friendly construction materials made partly from reclaimed mining and construction waste. It also provides municipal ecological construction, roadside assistance (RSA), and software services. Machinery and equipment generated 72% of FY2023 revenue, construction materials 23%, and technological consulting and other services 5%; municipal construction generated no revenue. Approximately 85% of sales were in China.
Financial performance and position
| Metric | FY2023 | FY2022 |
|---|---|---|
| Revenue | $3.236 million | $6.474 million |
| Gross profit / margin | $0.210 million / about 6% | $0.807 million / about 12% |
| Operating loss | $11.344 million | $15.251 million |
| Net loss, consolidated | $16.069 million | $15.380 million |
| Net cash used in operating activities | $11.591 million | $9.962 million |
| Cash and cash equivalents at year-end | $1.414 million | $0.114 million |
| Current assets / current liabilities | $10.465 million / $17.313 million | $7.537 million / $17.665 million |
| Total liabilities / total equity | $20.394 million / $4.851 million | $18.984 million / $5.075 million |
Revenue fell 50%, reflecting weaker Chinese real estate and infrastructure demand, fewer equipment orders, and lower technology-services sales. Cost of revenue fell less quickly than sales, and gross margin contracted. Construction materials recorded a $0.304 million gross loss. FY2023 net loss attributable to ReTo shareholders was $15.642 million.
Year-end short-term bank loans were $5.387 million, all reported as current; the filing also reports $4.252 million of third-party loans ($1.275 million current and $2.977 million noncurrent). Convertible debt was zero at year-end after conversion. The company reported a working-capital deficit of approximately $6.8 million. Operating cash outflow was funded principally by financing inflows of $12.465 million, including $6.6 million from a May 2023 share offering, bank loans, and third-party loans.
Material changes and unusual items
- Machinery and equipment revenue decreased 46% to $2.325 million; construction-material revenue decreased 10% to $0.740 million. Municipal construction revenue fell to zero from $0.527 million, and technology consulting and other-services revenue fell 80% to $0.171 million.
- General and administrative expense rose 9% to $9.406 million, including share-based compensation and professional costs. Total FY2023 share-based compensation was $4.911 million. A $0.399 million impairment of long-lived assets was recorded.
- Other expenses, net, were $4.741 million, principally reflecting a stated one-time $4.7 million charge related to a terminated project. Government subsidies were only $191 in FY2023, compared with $235,084 in FY2022.
- The company restated its unaudited six-month 2023 results after identifying incorrect share prices used to measure share-based compensation. The restatement reduced reported expenses and net loss by $34.020 million; the company said there was no tax or cash-flow impact.
- After year-end, a public offering and concurrent private placement closed on March 13, 2024 at an amended price of $4 per share, generating approximately $9.6 million net proceeds. The filing also describes a 10-for-1 share combination effective March 1, 2024.
Outlook, risks and contingencies
The filing gives no quantified revenue or earnings guidance. Management says it is pursuing operating cash generation, renewal of bank borrowings, related-party borrowing, and possible equity financing; it has no commitments from prospective equity investors. Management notes the possibility of exiting municipal construction if infrastructure spending declines further, and intends to focus more on software and RSA services, although RSA revenue was lower in 2023 amid competition.
The auditor’s report includes a going-concern paragraph, citing accumulated losses, a working-capital deficit, continuing losses, and negative operating cash flow; substantial doubt exists about the company’s ability to continue for the next 12 months. Management expects to renew bank loans based on past experience, but renewal and new financing are not assured. Approximately $5.4 million of bank loans were due within one year at December 31, 2023.
Other significant risks include PRC regulatory and foreign-exchange controls that may impede moving cash across borders or paying dividends; evolving rules for overseas offerings, including CSRC filing procedures; customer collections and concentrated counterparties; and Nasdaq listing compliance. Nasdaq notified the company in December 2023 that it was below the $2.5 million stockholders’ equity threshold; the company submitted a compliance plan and received an extension. The filing reports a pending administrative review of a decision revoking REIT Mingde’s registration as owner of 61.548% of Hainan Yile IoT; if the decision stands, the company may lose that interest and may seek compensation. No cash dividends have been paid, and none are expected in the foreseeable future.
Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end due to material weaknesses in accounting staffing, management review, and share-based compensation review. The independent auditor did not audit internal control effectiveness.
Important facts for investors to verify
- Confirm the current cash runway, maturity and renewal status of bank and third-party loans, and the company’s progress toward resolving the going-concern conditions.
- Review the terminated-project charge, the related project circumstances, and whether any further costs or recoveries are expected.
- Track collection of aged receivables and supplier advances, including related-party balances; year-end net receivables were $1.170 million and advances to suppliers were $7.100 million.
- Check the outcome of the Hainan Yile IoT ownership-registration appeal and the status of required CSRC filings for 2023 financings.
- Verify Nasdaq compliance and reconcile share counts: the cover reports 37,451,882 shares at December 31 before the March 2024 combination, while the audited balance sheet reports 1,205,188 shares after share combinations; the filing’s share-count conventions warrant confirmation.
- Monitor remediation of control weaknesses and any further restatements, and assess dilution from share-based awards and completed or future financings.