RETO ReTo Eco Solutions Inc

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 audited financial results for the twelve months ended December 31, 2018.

Full Year 2018 Financial Highlights

    For the Twelve Months Ended December 31, ($ millions, except per share data) 2018   2017   % Change Revenues     $37.57       $35.55   5.7% Gross profit $17.20 $17.85 -3.7% Gross margin 45.8% 50.2% -4.4 percentage points Operating income $7.20 $10.25 -29.8% Operating margin 19.2% 28.8% -9.6 percentage points Net income attributable to RETO $4.48 $5.98 -25.1% Diluted earnings per share     $0.20           $0.35       -42.9%

• Revenues increased by 5.7% to $37.57 million. The increase in revenues was mainly attributed to sales increases in our machinery and equipment and municipal construction projects business segments, partially offset by sales decreases in our construction materials and technological consulting and other services business segments.
• Gross profit decreased by 3.7% to $17.20 million while gross margin decreased by 4.4 percentage points to 45.8% for 2018. The decrease in gross profit was primarily due to the increase in per unit costs related to our construction materials business segment.
• Operating income decreased by 29.8% to $7.20 million and operating margin decreased by 9.6 percentage points to 19.2% for 2018. The decrease in operating income was primarily due to the decrease in gross profit and the increases in operating expenses.
• Net income attributable to ReTo was $4.48 million, or $0.20 per basic and diluted share, for 2018, compared to $5.98 million, or $0.35 per basic and diluted share, for 2017.

Full Year 2018 Financial Results

Revenues

For the year of 2018, total revenues increased by $2.02 million, or 5.7%, to $37.57 million from $35.55 million for 2017. The increase in revenues was attributed to sales increases of machinery and equipment and municipal construction projects business segments, partially offset by sales decreases of construction materials and technological consulting and other services.

  For the Twelve Months Ended December 31, 2018   2017

Revenues($'000)

 

GrossProfit($'000)

 

GrossMargin(%)

Revenues($'000)

 

GrossProfit($'000)

 

GrossMargin(%)

Machinery and equipment $  

17,453

 

$  

9,403

 

53.9 % $  

14,485

 

$  

7,749

 

53.5 % Construction materials 18,806 7,206 38.3 % 19,456 9,087 46.7 % Municipal construction projects 720 183 25.4 % 250 90 36.0 % Technological consulting and other services 591 410 69.4 % 1,360 928 68.2 % Total $   37,570     $   17,202     45.8 %   $   35,551     $   17,854     50.2 %  

Revenues from our machinery and equipment segment increased by $2.97 million, or 20.5%, to $17.45 million for 2018 from $14.49 million for 2017. The increase in revenues from our machinery and equipment segment was due to increased market demand for our products as a result of improved brand awareness following our successful IPO at the end of 2017. We also benefited from more stringent environmental regulations in China that forced many companies to eliminate outdated equipment and replace it with more environmentally friendly and more advanced machinery and equipment.

Revenues from our environmental-friendly construction materials decreased by $0.65 million, or 3.3%, to $18.81 million for 2018 from $19.46 million for 2017. The decrease in revenues from construction materials was related to certain regions that implemented more stringent environmental protection regulations during 2018.

Revenues from municipal construction projects increased by $0.47 million, or 187.6%, to $0.72 million for 2018 from $0.25 million for 2017.

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 review and assisting customers to finalize the design, installation, testing and inspection, as well as providing employee training services. Revenues from technological consulting and other services decreased by $0.77 million, or 56.6%, to $0.59 million for 2018 from $1.36 million for 2017. This decrease resulted from less consulting contacts being obtained in 2018.

Revenues from machinery and equipment, construction materials, municipal construction projects and technological consulting and other services accounted for 46.5%, 50.0%, 1.9% and 1.6%, respectively, of total revenues in 2018, compared to 40.8%, 54.7%, 0.7% and 3.8%, respectively, of total revenues in 2017.

On a geographical basis, China remained the largest market for the Company and contributed $15.87 million, or 90.9% of total revenues in 2018, compared to $12.24 million, or 84.5% of total revenues in 2017. North Africa was the second largest market and contributed $1.14 million, or 6.5% of total revenues in 2018.

Cost of goods sold

Total cost of goods sold increased by $2.67 million, or 15.1%, to $20.37 million for 2018 from $17.70 million for 2017. The increase was mainly due to increase in per unit costs related to our construction materials business segment. As a percentage of revenues, total cost of goods sold were 54.2% for 2018, compared to 49.8% for 2017.

Costs of goods sold for machinery and equipment, construction materials, municipal construction projects and technological consulting and other services were $8.05 million, $11.60 million, $0.54 million and $0.18 million, respectively, in 2018, compared to $6.74 million, $10.37 million, $0.16 million and $0.43 million, respectively, in 2017.

Gross profit and gross margin

Overall gross profit decreased by $0.65 million, or 3.7%, to $17.20 million for 2018 from $17.85 million for 2017. Gross profits for machinery and equipment, construction materials, municipal construction projects and technological consulting and other services were $9.40 million, $7.21 million, $0.18 million and $0.41 million, respectively, for 2018, compared to $7.75 million, $9.09 million, $0.09 million and $0.93 million, respectively, for 2017.

Overall gross margin was 45.8% for 2018, compared to 50.2% for 2017. Gross margins for machinery and equipment, construction materials, municipal construction projects and technological consulting and other services were 53.9%, 38.3%, 25.4% and 69.4%, respectively, for 2018, compared to 53.5%, 46.7%, 36.0% and 68.2%, respectively, for 2017.

Operating expenses

Selling expenses increased by $0.13 million, or 7.1%, to $1.99 million for 2018 from $1.85 million for 2017. The increase in selling expenses was mainly due to higher sales commissions and increased marketing expenses in 2018. As a percentage of revenues, selling expenses were 5.3% for 2018, compared to 5.2% for 2017.

General and administrative expenses increased by $1.04 million, or 24.7%, to $5.27 million for 2018 from $4.22 million for 2017. The increase in general and administrative expenses was mainly due to increased salaries and benefits, as well as increased consulting and professional fees. As a percentage of revenues, general and administrative expenses were 14.0% for 2018, compared to 11.9% for 2017.

Bad debt expenses increased by $1.08 million, or 122.7%, to $1.95 million for 2018 from $0.88 million for 2017. As a percentage of revenues, bad debt expenses were 5.2% for 2018, compared to 2.5% for 2017.

Research and development expenses increased by $0.15 million, or 23.5%, to $0.80 million for 2018 from $0.65 million for 2017. The increase was due to more research and development activities for our environment friendly equipment business segment in 2018. As a percentage of revenues, research and development expenses were 2.1% for 2018, compared to 1.8% for 2017.

As a result, total operating expenses increased by $2.40 million, or 31.6%, to $10.00 million for 2018 from $7.60 million for 2017. As a percentage of revenues, operating expenses were 26.6% for 2018, compared to 21.4% for 2017.

Operating income and operating margin

Income from operations decreased by $3.05 million, or 29.8%, to $7.20 million for 2018 from $10.25 million for 2017. Operating margin was 19.2% for 2018, compared to 28.8% for 2017.

Other income (expenses)

Net other expenses were $1.05 million, including interest expense of $1.07 million and other expense of $0.02 million, for 2018. As a comparison, net other expenses were $0.85 million, including interest expense of $1.01 million and other income of $0.16 million, for 2017.

Income before income taxes

Income before income taxes decreased by $3.26 million, or 34.6%, to $6.15 million for 2018 from $9.41 million for 2017. The decrease was primarily due to a decrease in gross profit and increases in operating expenses as discussed above.

Provision for income taxes

Provision for income taxes was $1.58 million for 2018, compared to $2.76 million for 2017. The effective tax rates were 25.7% and 29.3% for 2018 and 2017, respectively.

Net income and EPS

Net income decreased by $2.08 million, or 31.3%, to $4.57 million for 2018 from $6.65 million for 2017. After deducting for non-controlling interest, net income attributable to RETO was $4.48 million, or $0.20 per basic and diluted share, for 2018, compared to $5.98 million, or $0.35 per basic and diluted share, for 2017.

Financial Conditions

As of December 31, 2018, the Company had cash and cash equivalents, including restricted cash, of $1.56 million, compared to $10.86 million at the end of 2017. Accounts receivable, Advance to suppliers, inventories were $14.73 million, $4.05 million and $4.63 million, respectively, as of December 31, 2018, compared to $18.50 million, $1.85 million and $1.61 million, respectively, at the end of 2017. The company had bank loans totaling $17.44 million as of December 31, 2018, compared to $14.95 million at the end of 2017. Total working capital was $8.84 million as of December 31, 2018, compared to $7.05 million at the end of 2017.

Net cash used in operating activities was $0.90 million for 2018, compared to net cash provided by operating activities of $2.53 million for 2017. Net cash used in investing activities was $11.55 million for 2018, compared to $7.37 million for 2017. Net cash provided by financing activities was $3.46 million for 2018, compared to $14.00 million for 2017.

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 in mainland China, and internationally, including Canada, the United States, Mongolia, Middle East, India, South Asia, North Africa, Maldives and Brazil.

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 its business outlook 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 the call center business process outsourcing market in China; reputation and brand; the impact of competition and pricing; government regulations; fluctuations in general economic and business conditions in China 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.

RETO ECO-SOLUTIONS INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS

    December 31,   December 31, 2018 2017

ASSETS

Current Assets: Cash and cash equivalents $ 1,477,873 $ 10,863,040 Restricted cash 85,293 - Accounts receivable, net - third parties 14,725,074 18,503,286 Accounts receivable, net - related party 450,473 - Advances to suppliers, net - third parties 4,049,568 1,847,637 Advances to suppliers, net - related party 947,557 - Inventories 4,630,312 1,611,836 Prepaid expenses and other current assets 974,802 774,665 Acquisition deposit   2,181,000   - Total Current Assets 29,521,952 33,600,464   Property, plant and equipment, net 41,382,223 39,833,280 Intangible assets, net 6,841,513 7,401,550 Prepayment for construction of properties 3,707,700 - Deferred tax assets   551,534   296,535 Total Assets $ 82,004,922 $ 81,131,829  

LIABILITIES AND EQUITY

  Current Liabilities: Short term loans, net $ 8,858,457 $ 7,540,381 Long term bank loans - current portion 436,200 4,460,524 Advances from customers 3,565,066 7,078,609 Deferred revenue 473,358 520,872 Accounts payable - third parties 1,815,496 2,506,484 Accounts payable - related party 557,584 - Accrued and other liabilities 1,449,669 716,960 Taxes payable 2,964,524 3,352,512 Due to related parties   561,313   375,697 Total Current Liabilities   20,681,667   26,552,039   Long term bank loans   8,142,400   2,951,040 Total Liabilities   28,824,067   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 December 31, 2018 and 2017 22,760 22,760 Additional paid-in capital 42,278,252 42,278,252 Statutory reserve 2,632,797 1,989,475 Accumulated earnings 9,084,246 5,246,950 Accumulated other comprehensive loss   (3,105,185 )   (216,414 ) Total RETO Eco Solutions Inc. Stockholders’ Equity   50,912,870   49,321,023   Noncontrolling interest   2,267,985   2,307,727 Total Equity   53,180,855   51,628,750   Total Liabilities and Equity $ 82,004,922 $ 81,131,829  

RETO ECO-SOLUTIONS INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

    For the Years ended

December 31,

2018   2017   2016   Revenues $ 37,569,862 $ 35,551,016 $ 32,424,269 Cost of goods sold   20,368,339   17,697,286   18,371,228 Gross Profit   17,201,523   17,853,730   14,053,041   Operating Expenses Selling expenses 1,985,706 1,853,705 1,580,825 General and administrative expenses 5,265,599 4,222,601 2,677,800 Bad debt expense 1,952,646 876,942 1,101,698 Research and development expenses   799,604   647,754   503,688 Total Operating Expenses   10,003,555   7,600,902   5,864,011   Income from Operations   7,197,968   10,252,828   8,189,030   Other Expense: Interest expense (1,065,287 ) (1,012,960 ) (1,450,389 ) Other income (expense)   15,456   (166,997 )   (283,205 ) Total Other Expense, net   (1,049,831 )   (845,963 )   (1,733,594 )   Income Before Income Taxes 6,148,137 9,406,865 6,455,436   Provision for Income Taxes   1,580,455   2,760,080   1,952,356   Net Income 4,567,682 6,646,785 4,503,080 Less: net income attributable to noncontrolling interest   87,064   668,396   399,559 Net income attributable to ReTo Eco-Solutions, Inc. $ 4,480,618 $ 5,978,389 $ 4,103,521   Net Income $ 4,567,682 $ 6,646,785 $ 4,503,080 Other Comprehensive Income (loss): Foreign currency translation income (loss)   (3,015,577 )   2,109,103   (1,699,975 ) Comprehensive Income 1,552,105 8,755,888 2,803,105 Less: comprehensive income (loss) attributable to noncontrolling interest   (39,742 )   1,265,817   (26,394 ) Comprehensive income attributable to ReTo Eco-Solutions, Inc. $ 1,591,847 $ 7,490,071 $ 2,829,499   Earnings per share Basic and diluted $ 0.20 $ 0.35 $ 0.25   Weighted average number of shares Basic and diluted   22,760,000   19,130,137   18,043,836  

RETO ECO-SOLUTIONS INC.CONSOLIDATED STATEMENTS OF CASH FLOWS

   

For the Years endedDecember 31,

2018   2017   2016 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,567,682 $ 6,646,785 $ 4,503,080 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Deferred tax benefit (282,010 ) (194,045 ) (44,685 ) Depreciation and amortization 1,734,255 1,566,739 1,361,260 Bad debt provisions 1,952,646 876,924 1,101,698 Changes in operating assets: Accounts receivable - third parties 1,338,352 (3,174,381 ) (7,451,292 ) Accounts receivable - related party (468,752 ) - - Advances to suppliers - third parties (2,775,574 ) 198,355 (1,761,639 ) Advances to suppliers - related party (986,006 ) - - Inventories (3,220,965 ) (207,182 ) 745,161 Prepaid expenses and other current assets (42,477 ) (320,500 ) 6,281 Changes in operating liabilities: Advances from customers (3,226,669 ) (1,328,663 ) 3,028,340 Deferred revenue (20,173 ) (19,733 ) (20,067 ) Accounts payable - third parties (578,181 ) (2,113,907 ) 231,012 Accounts payable - related party 557,584 - - Billings in excess of costs and estimated earnings - - (174,038 ) Taxes payable (214,627 ) 853,072 2,078,982 Accrued and other liabilities   801,212   (248,546 )   333,863 Net cash provided by (used in) operating activities   (903,883 )   2,534,918   3,937,956   CASH FLOWS FROM INVESTING ACTIVITIES Addition of property, equipment and construction in progress (5,417,535 ) (4,639,003 ) (9,372,067 ) Purchase of intangible assets - - (1,681,870 ) Deposit made for acquisition (2,269,500 ) - (565,000 ) Advance payment for construction of properties (3,858,150 ) - - Acquisition of minority interest - (2,735,000 ) - Collection on project deposit   -   -   2,317,700 Net cash used in investing activities   (11,545,185 )   (7,374,003 )   (9,301,237 )   CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from short-term loans 10,182,490 9,767,793 7,597,297 Repayment of short-term loans (8,790,530 ) (8,244,905 ) (6,772,500 ) Deferred financing costs paid - (98,774 ) Proceeds from long-term bank loans 9,304,950 - 752,500 Repayment of long-term bank loans (7,454,248 ) (3,799,654 ) (1,962,331 ) Repayment of bank notes, net - (739,984 ) - Proceeds received from stock issuance for reorganization - - 4,457,500 Payments to original shareholders of Beijing REIT - - (3,466,260 ) Proceeds from investor loan - - 3,200,000 Gross proceeds from Initial Public Offering – stock issuance - 16,100,000 - Direct costs disbursed from Initial Public Offering proceeds - (1,829,806 ) - Proceeds from private placement sale of stock - 3,600,000 - Proceeds from (repayment of) related party loans, net 213,454 (854,401 ) 817,495 Capital contribution from noncontrolling shareholders   -   -   2,218,617 Net cash provided by financing activities   3,456,116   13,999,046   6,743,544   EFFECT OF EXCHANGE RATE CHANGES ON CASH AND RESTRICTED CASH   (306,922 )   (121,912 )   (241,896 )   NET INCREASE (DECREASE) IN CASH AND RESTRICTED CASH (9,299,874 ) 9,038,046 1,138,367   CASH AND RESTRICTED CASH, BEGINNING OF YEAR   10,863,040   1,824,994   686,627   CASH AND RESTRICTED CASH, END OF YEAR $ 1,563,166 $ 10,863,040 $ 1,824,994   SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 1,012,174 $ 997,948 $ 1,430,901 Income tax paid $ 1,895,202 $ 1,903,343 $ 719,479   Non-Cash Financing Activities Conversion of investor loan to equity $ - $ - $ 3,200,000

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At the Company:Email: ir@retoeco.com

Investor Relations:Tony Tian, CFAWeitian Group LLCEmail: tttian@weitianco.comPhone: +1-732-910-9692