Reto Eco-Solutions, Inc. — FY2020 Form 20-F
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone Q4 filing. Financial statements are presented in U.S. dollars under U.S. GAAP.
Business context
Reto manufactures and sells equipment for producing recycled construction materials, sells eco-friendly construction materials, and undertakes municipal ecological construction projects. Most operations are in China. In January 2020, the Company sold its Gu’an machinery-manufacturing subsidiary; its results are presented as discontinued operations.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $9.73 million | $29.55 million |
| Gross profit / margin | $1.16 million / 11.9% | $7.36 million / 24.9% |
| Operating loss | $13.45 million | $8.16 million |
| Net loss, consolidated | $12.90 million | $15.10 million |
| Net loss attributable to Reto | $11.77 million | $14.80 million |
| Operating cash flow | $0.98 million provided | $0.09 million provided |
| Cash and cash equivalents at year-end | $1.12 million | $0.90 million |
| Total assets | $57.97 million | $70.80 million |
| Current assets / current liabilities | $13.28 million / $22.99 million | $25.46 million / $25.22 million |
| Bank loans | $15.86 million | $17.07 million |
Investing activities provided approximately $0.94 million in 2020, principally reflecting $3.84 million received from the Gu’an disposal, offset by acquisition and capital spending. Financing activities used approximately $1.90 million. The Company reported a $9.4 million working-capital deficit; the listed current assets and liabilities imply a deficit of approximately $9.72 million.
Changes versus the prior year
- Revenue fell 67%, with machinery and equipment sales down 54% and construction-material sales down 80%. Management attributed the decline principally to COVID-19 disruption and weaker market conditions.
- Gross margin contracted to 11.9% from 24.9%. Construction materials generated a $1.04 million gross loss, compared with $2.59 million gross profit in 2019; management cited higher input and production costs and competitive pricing.
- Operating expenses included $5.73 million of bad-debt expense and $2.62 million of fixed-asset impairment. General and administrative expense increased to $4.64 million from approximately $3.95 million.
- Consolidated net loss narrowed from 2019, partly because 2020 included a $2.23 million gain on the Gu’an disposal and no repeat of the prior-year discontinued-operation loss. Continuing-operations net loss widened to $15.13 million from $12.30 million.
- Year-end net accounts receivable declined to $3.42 million from $11.72 million, while the allowance for doubtful accounts increased to $14.72 million from $11.12 million. The filing reports $14.35 million of receivables aged over one year before reserves.
Outlook, risks and unusual items
- Going concern: The auditor gave an unmodified opinion but included a going-concern explanatory paragraph, citing significant operating losses and reduced working capital. Management said it plans to rely on operations, renewals of bank borrowing and related-party borrowing; outside equity funding was possible but not committed. Management expects revenue and operating cash flows in 2021 may be significantly below expectations.
- COVID-19: Manufacturing was temporarily suspended from late January through March 2020, with delivery, supply and collections affected. Management said operations were gradually returning to normal as restrictions eased, but the continuing impact remained uncertain.
- Debt and liquidity: Approximately $9.57 million of bank-loan repayments were scheduled within one year of year-end. Management expected renewals based on past experience, but provided no assurance. Loan interest rates ranged from approximately 5.0% to 19.2%.
- Financing and dilution: A March 2021 agreement provided for a convertible debenture of up to $2.3 million, maturing 12 months after issuance. Conversion pricing is tied to market VWAP, subject to a $0.50 floor; default and low-price provisions include accelerated repayment and a 20% redemption premium. The filing also reports a 2021 share issuance for consulting services.
- Contingencies: The Company guaranteed approximately $3.8 million of a related party’s borrowing. It accrued approximately $0.2 million for two pending equipment-quality lawsuits. A separate lawsuit seeking approximately $101,000 was being retried; management considered it not material.
- Controls and reporting: Management concluded disclosure controls and internal control over financial reporting were ineffective. Disclosed weaknesses included insufficient U.S. GAAP/SEC reporting resources, inadequate management review that resulted in material audit adjustments, and deficiencies in risk assessment.
- Other risks: The filing highlights customer collection and supplier-advance recoverability, reliance on a major raw-material supplier, China regulatory and currency controls, limited insurance, and dependence on bank refinancing. No formal revenue or earnings guidance was provided.
Important facts for investors to verify
- Resolve the share-count discrepancy: the cover reports 25,135,000 shares outstanding at period-end, while the audited balance sheet reports 24,135,000 at December 31, 2020.
- Review the receivables aging, the $14.72 million allowance, subsequent collections, and recoverability of $4.03 million in related-party supplier advances.
- Confirm the amount and timing of bank-loan renewals and repayments, and the actual funding, terms, conversion and dilution effects of the 2021 debenture.
- Track whether revenue, gross margins and operating cash flow recover after the pandemic disruption and the Gu’an disposal.
- Check remediation of the disclosed control weaknesses and progress on the going-concern plan.
- Reconcile disclosures that differ in the filing, including the period-end share count and related-party revenue figures; the filing text does not provide a clear explanation for these differences.