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ReTo Eco-Solutions, Inc. Announces First Half 2018 Financial Results

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ReTo Eco-Solutions, Inc. (NASDAQ:RETO) ("ReTo" or the "Company"), a
manufacturer and distributor of eco-friendly construction materials as
well as equipment used for the production of these eco-friendly
construction materials, and consultation, design, project implementation
and construction of urban ecological environments including those for
the purpose of capturing, controlling and reusing rainwater, commonly
called "sponge cities", today announced its financial results for the
six months ended June 30, 2018.

First Half 2018 Financial Highlights

     
For the Six Months Ended June 30,
($ millions, except per share data) 2018       2017       % Change
Revenues $19.14 $14.99 28%
Gross profit $10.41 $7.54 38%
Gross margin 54.4% 50.3% 4 percentage points
Operating income $3.33 $4.23 -21%
Operating margin 17.4% 28.2% -11 percentage points
Net income attributable to ReTo $2.19 $2.64 -17%
Diluted earnings per share $0.09       $0.15       -38%
 
  • Revenues increased by 28% to $19.14 million primarily due to the
    increases in machinery and equipment sales and construction material
    sales.
  • Gross profit increased by 38% to $10.41 million while gross margin
    increased by 4 percentage points to 54.4%.
  • Income from operations was $3.33 million, compared to $4.23 million
    for the same period of last year. The decrease was mainly due to
    increase in bad debt expense of $2.67 million and partially offset by
    the increase in gross profit. Operating margin was 17.4%, compared to
    28.2% for the same period of last year.
  • Net income attributable to ReTo was $2.19 million, or $0.09 per share.
    This compared to $2.64 million, or $0.15 per share, for the same
    period of last year.

Mr. Hengfang Li, Chairman and Chief Executive Officer of ReTo,
commented, "With revenues and gross profit increasing by 28% and 38%,
respectively, our first half of 2018 financial results highlighted
continued strength in our business. However, our bottom line was
negatively impacted by an increase in bad debt expense of $2.67 million
in the first half of 2018. Looking ahead, with a robust order book, we
expect the growth of our business to continue in the near future."

Revenues

Revenues increased by $4.15 million, or 28%, to $19.14 million for the
six months ended June 30, 2018 from $14.99 million for the same period
of last year. The increase was primarily attributable to the increased
sales from our machinery and equipment sales and construction material
sales.

     
For the Six Months Ended June 30,
2018       2017
Revenues
($'000)
      Gross
Profit
($'000)
      Gross
Margin
(%)
Revenues
($'000)
      Gross
Profit
($'000)
      Gross
Margin
(%)

Machinery and
Equipment sales

  8,829   5,658   64 %   6,977   3,987   57 %

Construction materials
sales

10,187 4,718 46 % 8,012 3,554 44 %

Municipal construction
projects

  128   34   27 %              
Total   19,144   10,410   54 %   14,989   7,541   50 %
 

The machinery and equipment we manufacture mostly consist of large-scale
automatic environmental protection materials production equipment with
hydraulic integration, which can be used to produce various types of
eco-friendly construction materials and meet the needs of various
ecological projects. Revenues from our machinery and equipment segment
increased by $1.85 million, or 27%, to $8.83 million for the six months
ended June 30, 2018 from $6.98 million for the same period of last year.

Construction materials are mostly environmental-friendly – made from
mining waste (iron tailings) and fly-ash and used for ground works,
landscaping, hydraulic engineering projects and wall projects. Revenues
from construction materials increased by $2.18 million, or 27%, to
$10.19 million for the six months ended June 30, 2018 from $8.01 million
for the same period of last year. The increase in revenues from our
construction materials was related to increases in both sales volume and
average selling price ("ASP").

Municipal construction includes such projects as sponge city projects,
sewage pipeline construction, public plaza construction, and
landscaping. Our environmental-friendly construction materials such as
brick and block may be used in these municipal construction projects as
required by local governments. Revenues from municipal construction
projects were $0.13 million for the six months ended June 30, 2018. We
did not book revenues from municipal construction projects for the same
period of last year.

We started to provide environmental-protection related consulting
services to customers in the second half of 2016. Our subsidiaries
Beijing REIT and Dingxuan provided such services to customers by
assisting them in planning the environmental-protection projects,
providing market research and feasibility reports, reviewing and
assisting customers to finalize the design, installation, testing and
inspection, as well as providing employee training services. We didn't
book revenues from technological consulting and other services for the
six months ended June 30, 2018 and 2017, respectively.

Revenues from machinery and equipment, construction materials, and
municipal construction projects accounted for 46.1%, 53.2%, and 0.7%,
respectively, of total revenues for the six months ended June 30, 2018,
compared to 46.5%, 53.5%, and nil, respectively, for the same period of
last year.

Cost of goods sold

Cost of goods sold increased by $1.28 million, or 17%, to $8.73 million
for the six months ended June 30, 2018 from $7.45 million for the same
period of last year. The increase was in line with the increase in
revenue and was also attributable to lower material costs for our
machinery and equipment sales in six months ended June 30, 2018.

Costs of goods sold for machinery and equipment, construction materials,
and municipal construction projects were $3.17 million, $5.47 million,
and $0.09 million, respectively, for the six months ended June 30, 2018,
compared to $2.99 million, $4.46 million, and $nil, respectively, for
the same period of last year.

Gross profit

Gross profit increased by $2.87 million, or 38%, to $10.4 million for
the six months ended June 30, 2018 from $7.54 million for the same
period of last year. Gross margin was 54% for the six months ended June
30, 2018 as compared to 50% for the same period of last year. The
increase in gross margin was primarily attributable to higher selling
prices and higher gross margins related to our machinery and equipment
sales during the six months ended June 30, 2018.

Gross profits for machinery and equipment, construction materials, and
municipal construction projects were $5.66 million, $4.72 million, and
$0.03 million, respectively, for the six months ended June 30, 2018,
compared to $3.99 million, $3.55 million, and $nil, respectively, for
the same period of last year. Gross margins for machinery and equipment,
construction materials, and municipal construction projects were 64.1%,
46.3%, and 26.6%, respectively, for the six months ended June 30, 2018,
compared to 57.1%, 44.4%, and nil, respectively, for the same period of
last year.

Operating expenses

Selling expenses increased by $0.01 million, or 2%, to $0.61 million for
the six months ended June 30, 2018 from $0.60 million for the same
period of last year. As a percentage of revenues, selling expenses
represented 3% of revenues for the six months ended June 30, 2018 as
compared to 4% for the same period of last year. The increase in selling
expenses was in line with the increase of total sales.

General and administrative expenses increased by $0.98 million, or 53%
to $2.82 million for the six months ended June 30, 2018 from $1.84
million for the same period of last year. The increase was mainly due to
increased payroll expenses in 2018, and other professional service fees
incurred after the Company became a public filer.

Bad debt expenses increased by $2.67 million, or 438%, to $3.28 million
for the six months ended June 30, 2018 as compared to $0.61 million for
the same period of last year. The increase was due to slow collections
and the slow down of the economy in China in 2018, especially for the
construction industry together with other general increases in salary
and office expenses.

Research and development expenses increased by $0.11 million, or 44%, to
$0.37 million for the six months ended June 30, 2018 from $0.26 million
for the same period of last year. The increase was in line with the
increase in revenue. The Company is committed to invest more in research
and development for more environmentally friendly construction material
products.

Total operating expenses increased by $3.77 million, or 114%, to $7.08
million for the six months ended June 30, 2018 from $3.31 million for
the same period of last year, which was mainly due to increases in
general and administrative expenses, and the increase in bad debt
expenses of $2.67 million for the six months ended June 30, 2018.

Operating income

Operating income was $3.33 million for the six months ended June 30,
2018, a decrease of $0.90 million or 21% from operating income of $4.23
million for the same period of last year.

Other expenses, net

Other expense was $0.45 million for the six months ended June 30, 2018
as compared to $0.56 million for the same period of last year. The
slight decrease of other expenses was mainly due to less interest
expense incurred for the six months ended June 30, 2018.

Provision for income taxes

Provision for income taxes was approximately $0.74 million for the six
months ended June 30, 2018, a decrease of $0.1 million, or 12%, from
$0.84 million for the same period of last year. The provision was mainly
derived from one of the Company's main operating entities, Beijing REIT
Technology Development Co., Ltd. ("Beijing REIT"), which was profitable
for the six months ended June 30, 2018.

Net income

Net income was $2.14 million for the six months ended June 30, 2018, a
decrease of $0.7 million, or 25%, from net income of $2.84 million for
the same period of last year.

After deducting for non-controlling interest, net income attributable to
ReTo was $2.19 million, or $0.09 per basic and diluted share, for the
six months ended June 30, 2018. This compared to net income attributable
to ReTo of $2.64 million, or $0.15 per basic and diluted share, for the
same period of last year.

Balance Sheet and Cash Flow

As of June 30, 2018 and December 31, 2017, the Company had cash of
approximately $6.46 million and $10.86 million, and working capital of
approximately $14.93 million and $7.05 million, respectively.

For the six months ended June 30, 2018 and for the year ended December
31, 2017, our accounts receivable turnover in days were 323 days and 171
days, respectively. The deterioration of our accounts receivable was
mainly due to the slow down of the overall economy in China, which has a
negative impact on the construction industry. Although we believe that
we have developed a robust receivable management system and have not
incurred a situation where an accounts receivable has become
uncollectable, as our business continues to scale, we believe that our
accounts receivable balance will continue to grow. This, in turn,
increases our risk for bad debts and uncollectible receivables. To the
extent we incur additional bad debts and/or uncollectible receivables,
our business, financial condition and results of operation may be
materially and adversely affected.

The instances of slow payments and long-aging receivables may have a
negative impact on our short-term operating cash flow and future
liquidity. We periodically review our accounts receivable and allowance
level in order to ensure our methodology used to determine allowances is
reasonable and accrue additional allowances if necessary. We have
recently put a lot of effort into accounts receivable collection by
tightening our customer credit policy and strengthening the monitoring
of our uncollected receivables. If the Company has difficulty collecting
an account, the following steps will be taken, including but not limited
to: cease any additional shipments to the customer, visit the customer
to request payments on past due invoices, and if necessary, take legal
recourse. If all of these steps are unsuccessful, management will
determine whether or not the receivable will be reserved or written off.

Net cash used in operating activities was $5.68 million for the six
months ended June 30, 2018, a decrease of $8.39 million from $2.71
million in net cash provided by operating activities for the six months
ended June 30, 2017. The decrease in operating cash flow was mainly due
to increased accounts receivable of approximately $2.37 million,
increased inventory of approximately $1.60 million, increased advances
to suppliers of approximately $4.35 million, increased prepayment and
other assets of approximately $1.32 million, decreased accounts payable
of approximately $1.99 million, decreased taxes payable of approximately
$0.85 million, and decreased advances from customers of approximately
$1.30 million, offset by increased accruals and other liabilities of
approximately $1.73 million.

Net cash used in investing activities was $0.47 million for the six
months ended June 30, 2018, compared to net cash used in investing
activities of $0.91 million for the same period of last year. The net
cash used in investing activities in the six months ended June 2018 and
2017 were payments for the construction in progress ("CIP") projects to
build a new factory facility and purchase of equipment for the Company's
subsidiary REIT Xinyi.

Net cash provided by financing activities was $2.20 million for the six
months ended June 30, 2018, compared to net cash used in financing
activities of $2.09 million for the same period of last year. Net cash
provided by financing activities for the six months ended June 30, 2018
was primarily due to proceeds from long-term and short-term bank loans
totaling $16.81 million, offset by the repayment of short-term and
long-term bank loans totaling $14.30 million. Net cash used in financing
activities for the six months ended June 30, 2017 was primarily due to
proceeds from bank loans totaling $4.55 million, offset by the repayment
of bank loans totaling $6.64 million.

Recent Developments

On November 6, 2018, the Company held its annual meeting of stockholders
(the "Meeting"). At the Meeting, the Company's stockholders: 1)
re-elected Xingchun Wang and Zhi Li as Class B directors to serve terms
ending at the third succeeding annual meeting of stockholders in 2021 or
until their respective successors are duly elected and qualified; 2)
ratified the appointment of Friedman LLP as the company's independent
registered public accounting firm for the fiscal year ending December
31, 2018; and 3) approved the Company's 2018 Share Incentive Plan.

On June 28, 2018, the Company and JD.com, China's largest retailer,
announced a partnership in sustainable building. The partnership was
created due to the sustainable building movement, which is picking up
steam in China in the last few years, and consumers are increasingly
looking for ways to reduce their carbon footprints. JD and ReTo will
collaborate on a range of strategic initiatives, including eco-friendly
construction materials, eco-towns, and smart cities, among others.
Working with the China Academy of Building Research, the two companies
are also committed to establishing a joint research program to develop
and promote eco-friendly products. Through the purchase of products such
as ReTo's signature eco-friendly paving tiles, businesses and individual
customers on JD's e-commerce platform will be able to help minimize
carbon emissions to cause their buildings to become more energy
efficient.

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL DATA

RETO ECO-SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

           
June 30, December 31,
2018 2017

ASSETS

Current Assets:
Cash and cash equivalents $ 6,459,312 $ 10,863,040
Notes receivable 15,110 -
Accounts receivable, net 17,810,437 18,503,286
Advances to suppliers, net 5,496,351 1,847,637
Inventories 3,128,193 1,611,836
Prepaid expenses and other current assets   2,126,295 774,665
Total Current Assets 35,035,698 33,600,464
 
Property, plant and equipment, net 39,123,250 39,833,280
Intangible assets, net 7,119,380 7,401,550
Deferred tax assets   291,518 296,535
Total Assets $ 81,569,846 $ 81,131,829
 

LIABILITIES AND EQUITY

 
Current Liabilities:
Short term bank loans, net $ 8,116,900 $ 7,540,381
Long term bank loans-current portion 302,200 4,460,524
Advances from customers 5,718,237 7,078,609
Deferred revenue 512,061 520,872
Accounts payable 544,528 2,506,484
Accrued and other liabilities 2,385,353 716,960
Taxes payable 2,478,478 3,352,512
Due to related parties   50,918 375,697
Total Current Liabilities   20,108,675 26,552,039
 
Long term bank loans   8,763,800 2,951,040
Total Liabilities   28,872,475 29,503,079
 
Commitments and Contingencies
 
Equity:

Common Stock, $0.001 par value, 200,000,000 shares authorized,
22,760,000 shares
issued and outstanding as of June 30, 2018
and December 31, 2017

22,760 22,760
Additional paid-in capital 42,278,252 42,278,252
Statutory reserve 2,266,641 1,989,475
Accumulated earnings 7,157,403 5,246,950
Accumulated other comprehensive loss   (1,250,401) (216,414)
Total RETO Eco-Solutions Inc. Stockholders' Equity   50,474,655 49,321,023
 
Noncontrolling interest   2,222,716 2,307,727
Total Equity   52,697,371 51,628,750
 
Total Liabilities and Equity $ 81,569,846 $ 81,131,829
 

RETO ECO-SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

     
For the Six Months ended
June 30,
2018       2017
 
Revenues $ 19,144,343

$

14,989,339

Cost of goods sold   8,733,593   7,448,217
Gross Profit   10,410,750   7,541,122
 
Operating Expenses
Selling expenses 612,151 599,956
General and administrative expenses 2,817,867 1,838,152
Bad debt expense 3,285,117 614,134
Research and development expenses   368,432   256,507
Total operating expenses   7,083,567   3,308,749
 
Income from Operations   3,327,183   4,232,373
 
Other Income (Expense):
Interest expense, net (483,326) (577,772 )
Other income   37,622   19,063
Total other expense, net   (445,704)   (558,709 )
 
Income Before Income Taxes 2,881,479 3,673,664
 
Provision for Income Taxes   741,630   838,420
 
Net Income 2,139,849 2,835,244
Less: net income (loss) attributable to non-controlling interest   (47,770)   195,393
Net income attributable to ReTo Eco-Solutions, Inc. $ 2,187,619 $ 2,639,851
 
Net income $ 2,139,849 $ 2,835,244
Other Comprehensive Gain (Loss):
Foreign currency translation gain (loss)   (1,071,228)   756,441
Comprehensive income 1,068,621 3,591,685
Less: comprehensive income (loss) attributable to non-controlling
interest
  (85,011)   350,440
Comprehensive Income attributable to RETO Eco-Solutions, Inc. $ 1,153,632 $ 3,241,245
 
Earnings per share
Basic and diluted $ 0.09 $ 0.15
 
Weighted average number of shares
Basic and diluted   22,760,000   18,640,000
 

RETO ECO-SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

     
For the six months ended
June 30,
2018       2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,139,849 $ 2,835,244

Adjustments to reconcile net income to net cash (used in) provided
by
operating activities:

Deferred tax benefit - (145,319)
Depreciation and amortization 957,200 752,691
Bad debt provisions 3,285,117 620,043
Changes in operating assets:
Notes receivable (10,997) -
Accounts receivable (2,369,988)

(889,453)

 

Advances to suppliers (4,346,296) (128,154)
Inventories (1,604,918) (505,352)
Other assets (1,322,906) 413,824
 
Changes in operating liabilities:
Advances from customers (1,995,779) (665,772)
Accounts payable (1,289,893) 202,783
Accrued and other liabilities 1,732,245 863,231
Taxes payable   (849,778)

(641,432)

 

Net cash (used in) provided by operating activities   (5,676,144) 2,712,334
 
CASH FLOWS FROM INVESTING ACTIVITIES
Addition of construction in progress and property and equipment   (473,758) (907,103)
Net cash used in investing activities   (473,758) (907,103)
 
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans 16,809,700 4,553,900
 
Repayment of bank loans (14,299,395) (6,642,884)
Proceeds from (repayment of) related party loans, net (318,579) (87,499)
Change in restricted cash   - 88,140
Net cash provided by (used in) financing activities   2,191,726 (2,088,343)  
 

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS

  (445,552)   (98,297)
 
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,403,728) (381,409)
 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   10,863,040   1,594,594
 
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,459,312 $ 1,213,185
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 1,059,331 $ 520,975
Income tax paid $ 1,903,343 $ 1,379,693
 

About ReTo Eco-Solutions, Inc.

Founded in 1999 and headquartered in Beijing, ReTo is a manufacturer and
distributor of eco-friendly construction materials (aggregates, bricks,
pavers and tiles), made from mining waste (iron tailings) and fly-ash,
as well as equipment used for the production of these eco-friendly
construction materials. The Company also provides a full range of
eco-friendly project solutions, including consultation, design, project
implementation and construction, relating to all stages of sponge-city
projects for customers. The Company's clients are located or have been
located in mainland China, and internationally, including Canada, the
United States, Middle East, India, Maldives North Africa and Brazil.

Notice

Rounding amounts and percentages: Certain amounts and percentages
included in this press release have been rounded for ease of
presentation. Percentage figures included in this press release have not
in all cases been calculated on the basis of such rounded figures, but
on the basis of such amounts prior to rounding. For this reason, certain
percentage amounts in this press release may vary from those obtained by
performing the same calculations using the figures in the financial
statements. In addition, certain other amounts that appear in this press
release may not sum due to rounding.

Forward-Looking Statements

This press release contains forward-looking statements as defined by the
Private Securities Litigation Reform Act of 1995. Forward-looking
statements include statements concerning plans, objectives, goals,
strategies, future events or performance, and underlying assumptions and
other statements that are other than statements of historical facts.
When the Company uses words such as "may," "will," "intend," "should,"
"believe," "expect," "anticipate," "project," "estimate" or similar
expressions that do not relate solely to historical matters, it is
making forward-looking statements. Specifically, the Company's
statements regarding: 1) the Company's business outlook and growth; 2)
the Company's ability to manage its accounts receivables; 3) the
Company's plan to invest more in research and development for more
environmentally friendly construction material products; 4) the success
of its partnership with JD.com; 5) the planned joint research program
with the China Academy of Building Research and JD.com to develop and
promote eco-friendly products; and 6) the ability of ReTo's products to
help minimize carbon emissions to cause their buildings to become more
energy efficient are forward-looking statements. Forward-looking
statements are not guarantees of future performance and involve risks
and uncertainties that may cause the actual results to differ materially
from the Company's expectations discussed in the forward-looking
statements. These statements are subject to uncertainties and risks
including, but not limited to, the following: the Company's goals and
strategies; the Company's future business development; product and
service demand and acceptance; changes in technology; economic
conditions; the growth of construction in China and internationally;
reputation and brand; the impact of competition and pricing; government
regulations; fluctuations in general economic and business conditions in
China and internationally and assumptions underlying or related to any
of the foregoing and other risks contained in reports filed by the
Company with the Securities and Exchange Commission. For these reasons,
among others, investors are cautioned not to place undue reliance upon
any forward-looking statements in this press release. Additional factors
are discussed in the Company's filings with the U.S. Securities and
Exchange Commission, which are available for review at www.sec.gov.
The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise
after the date hereof.

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