Reto Eco-Solutions, Inc. annual report, Q4 FY2021

Business context and reporting period

ReTo Eco-Solutions, Inc. filed this annual report on Form 20-F for the fiscal year ended December 31, 2021—not a standalone 2021 fourth-quarter report. The British Virgin Islands holding company conducts substantially all operations in China. Its continuing businesses principally sell machinery and equipment for producing construction materials, eco-friendly construction materials, and municipal construction services. The December 2021 acquisition of REIT Mingde added roadside assistance and software services, but contributed no material revenue in 2021.

During 2021, the Company completed the disposal of REIT Changjiang, a solid-waste-processing business; machinery manufacturing subsidiary Gu’an REIT had been sold in 2020. The Company reported both businesses as discontinued operations.

Financial results and position

Continuing-operations operating cash flow was approximately $(0.04) million in 2021; the larger consolidated outflow included discontinued operations. Investing cash flow was $(1.74) million and financing cash flow was $4.05 million. The Company reported a $3.7 million working-capital deficit and total current liabilities of $16.76 million against current assets of $13.03 million.

At December 31, 2021, short-term bank loans were $2.35 million, all reported as short-term; convertible debt was $1.65 million at fair value; third-party loans were $1.59 million; and amounts due to related parties were $0.47 million. The filing separately describes approximately $2.4 million of bank borrowings. Gross debt and other obligations should not be treated as limited to bank loans alone.

Material changes versus the prior comparable period

• Revenue from continuing operations fell 57% year over year. Machinery and equipment revenue dropped 72% to $1.80 million; construction-material revenue declined 7% to $1.66 million.
• Gross margin contracted to 10.7% from 24.0%, as lower demand, competitive pricing, higher raw-material and labor costs, and supply-chain disruption reduced profitability.
• Operating expenses rose 45% to $12.39 million despite lower sales. Bad-debt expense increased to $2.25 million, while fixed-asset impairment increased to $4.34 million.
• Total net loss widened to $22.07 million from $12.90 million. The 2021 result included a $6.29 million loss on disposal of REIT Changjiang and a $1.91 million noncash loss from the change in fair value of convertible debt.
• Cash from operations moved from a $0.25 million inflow to a $2.76 million outflow on a consolidated basis. The reported balance-sheet cash fell to $0.46 million.

Outlook, commentary and key risks

The filing provides no quantified earnings or revenue guidance. Management said 2022 revenue and operating cash flows could be significantly lower than expected, citing COVID-19 uncertainty, customer demand and sales trends. Management expects to renew existing bank loans based on past experience, but disclosed no committed financing from potential investors. Its plans include improving operating cash flow, renewing borrowings, and seeking debt or equity financing; the filing cautions that funding may not be available on acceptable terms or at all.

The auditor included a going-concern explanatory paragraph, citing recurring losses, negative operating cash flows and a working-capital deficit; substantial doubt was stated for the 12 months following issuance of the financial statements. Management’s financing plans do not eliminate that uncertainty.

• Liquidity and refinancing: Low cash, near-term loan maturities and reliance on renewals, external financing and related-party support create material funding risk.
• China exposure: Operations and most revenue are in China. The Company highlights evolving PRC rules on overseas listings, cybersecurity, data privacy, foreign exchange and cash transfers. It reported no required additional operating permits as of the report date, but future regulatory requirements remain uncertain.
• Customer, supplier and collection concentration: One supplier represented approximately 53% of raw-material purchases in 2021; one customer represented 15% of year-end receivables. Receivables net of reserves were $0.54 million, and $3.84 million of advances to suppliers were related-party balances, principally involving Shexian Ruibo.
• Internal controls: Management concluded internal control over financial reporting and disclosure controls were ineffective. Material weaknesses concerned insufficient qualified U.S. GAAP/SEC reporting staff and ineffective management review of the close and reporting process. Remediation was underway.
• Other uncertainties: COVID-19 and construction-market weakness; raw-material cost and supply risks; no reserve for warranty claims; limited business insurance; possible penalties relating to underpaid housing-provident-fund contributions; and risks from new acquired businesses and customer concentration in Hainan Yile IoT.

Notable subsequent events include a March 2022 convertible note with $3.105 million principal and $3.0 million purchase consideration, due 12 months after funding; a binding obligation to pay RMB18 million for the remaining 30% of Xinyi REIT, with the first RMB4 million installment paid by the report date; and approval in April 2022 of 4.025 million employee, officer and director shares under incentive plans. The REIT Mingde acquisition was accounted for at $1.569 million; 2.58 million shares were issued to the sellers in February 2022 in lieu of cash consideration.

Investor facts to verify

• Confirm the amount, timing and collectability of the remaining REIT Changjiang sale proceeds: the filing reports RMB15 million still payable by June 15, 2022.
• Check whether bank loans were renewed or repaid, and whether the March 2022 note and other financing provide sufficient liquidity without excessive dilution or repayment burden.
• Track subsequent operating cash flow, revenue recovery and gross margins, especially machinery sales and the contribution and profitability of REIT Mingde.
• Verify collections of aged receivables and recovery or utilization of supplier advances, including related-party balances and the adequacy of bad-debt allowances.
• Assess progress in remediating control weaknesses, compliance with evolving PRC requirements, and any changes to the auditor’s PCAOB inspection or Nasdaq-listing risks.
• Confirm completion and funding of the Xinyi REIT minority-interest purchase and the effect of subsequent share issuances on outstanding shares and ownership dilution.