Reto Eco-Solutions, Inc. — FY2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018; this is an annual report, not a standalone fourth-quarter filing. Financial statements are audited and prepared under U.S. GAAP. The independent auditor issued an unqualified opinion on the financial statements; it did not audit internal control effectiveness.
Business context
Reto manufactures and sells machinery and equipment for recycled construction materials, produces eco-friendly construction materials from waste such as fly ash and iron tailings, and provides municipal construction and environmental consulting services. Most operations are in China. Machinery and equipment contributed 46% of FY2018 revenue, construction materials 50%, municipal projects 2%, and consulting and other services 2%. China represented approximately 93% of sales.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $37.57 million | $35.55 million |
| Gross profit / margin | $17.20 million / 45.8% | $17.85 million / 50.2% |
| Operating income / margin | $7.20 million / 19.2% | $10.25 million / 28.8% |
| Net income | $4.57 million | $6.65 million |
| Net income attributable to Reto | $4.48 million | $5.98 million |
| Basic and diluted EPS | $0.20 | $0.35 |
| Net cash from (used in) operating activities | $(0.90) million | $2.53 million |
| Net cash used in investing activities | $(11.55) million | $(7.37) million |
| Net cash from financing activities | $3.46 million | $14.00 million |
| Cash and cash equivalents at year-end | $1.48 million | $10.86 million |
| Current assets / current liabilities | $29.52 million / $20.68 million | $33.60 million / $26.55 million |
| Total assets / total liabilities | $82.00 million / $28.82 million | $81.13 million / $29.50 million |
| Outstanding borrowings, approximately | $17.4 million | $14.9 million |
FY2018 cost of goods sold was $20.37 million. The company spent approximately $9.28 million on capital expenditures. Year-end inventory was $4.63 million, and net accounts receivable was $15.18 million, including $0.45 million due from a related party. The current ratio was approximately 1.43, versus 1.27 in FY2017. Foreign-currency translation reduced comprehensive income by approximately $3.02 million.
Material changes versus FY2017
- Revenue increased 6%, mainly from a 20% rise in machinery and equipment sales to $17.45 million. Construction-material sales declined 3% to $18.81 million, while consulting revenue fell 57% to $0.59 million.
- Gross margin contracted to 45.8% from 50.2%, primarily because construction-material raw-material and production costs rose. Construction-material segment margin fell to 38% from 47%.
- Operating expenses rose 32% to $10.00 million. Bad-debt expense more than doubled to $1.95 million; general and administrative expense increased 25% to $5.27 million.
- Net income declined 31%. Operating cash flow shifted from positive $2.53 million to negative $0.90 million, and cash and cash equivalents fell by about $9.39 million.
- Investment spending increased, including approximately $5.42 million for construction in progress and equipment, $3.86 million of advances for a new Yancheng facility, and a $2.27 million acquisition deposit. The Xinyi plant project was reported fully completed by year-end.
Outlook, risks and unusual items
- Management said existing resources, operating cash generation, bank financing and supplier advances should cover current operations for the next 12 months, and expects to refinance short-term loans based on past experience. This outlook depends on continued financing access and collections; the filing also warns that failure to refinance could impair operations and expansion. No quantified revenue or earnings guidance was provided.
- Liquidity and cash conversion merit attention: operating cash was negative amid higher supplier advances and inventory and lower customer advances. Receivables turnover was 186 days, and payment terms generally ranged from 90 days to one year. The allowance for doubtful accounts was $3.23 million; the filing reports $3.62 million of subsequent collections through April 30, 2019 against year-end receivables.
- Debt includes $8.94 million of short-term loans and an $8.58 million long-term loan, with collateral pledged and personal guarantees from the CEO and other principal shareholders. Disclosed rates ranged from 5.0025% to 19.2%; the 19.2% short-term borrowing was approximately $0.22 million. Contractual obligations included $8.94 million of short-term loans due within one year.
- Related-party activity increased in 2018: purchases from Shexian Ruibo were $5.84 million, sales to related parties totaled $1.94 million, and a $0.95 million supplier advance and $0.45 million receivable were reported. REIT Holdings and REIT Changjiang guaranteed a related party’s RMB 6 million borrowing; management said the CEO would bear resulting losses, subject to his ability to do so. The company also disclosed a separate RMB 25 million guarantee of a related party’s obligations.
- A potential acquisition remained under negotiation; the $2.18 million deposit was described as refundable if no agreement is reached. A financial intermediary may have collected approximately $2.15 million from investors for a proposed REIT Xinyi investment that the company says it did not receive; the filing reported no related lawsuit as of its date.
- Other risks include China construction-market and regulatory exposure, raw-material and supplier concentration (one supplier accounted for 28% of raw-material purchases), foreign-exchange controls and currency movements, un insured business/property risks, and constraints on moving cash from China. The company reported no cash dividends expected in the foreseeable future.
- The filing says management assessed disclosure controls and internal control over financial reporting as effective. As an emerging growth company, it was not required to obtain an auditor attestation on internal controls.
Most important facts for investors to verify
- Collections after year-end, receivable aging, reserve adequacy, and whether the reported subsequent collections reconcile to bank receipts and customer balances.
- Cash availability and location, near-term debt maturities, collateral and guarantee terms, and the company’s ability to refinance and service borrowings.
- Commercial rationale, approval, recoverability and status of related-party purchases, advances, sales and guarantees, including the disclosed intermediary-investment matter.
- Whether machinery growth can offset construction-material margin pressure, and whether higher raw-material and environmental-compliance costs can be passed through to customers.
- Progress and funding needs for new facilities and the proposed acquisition; confirm that the acquisition deposit remains refundable if negotiations do not result in a transaction.