ReTo Eco-Solutions, Inc 6-K, filed Oct 14, 2022
ReTo Eco-Solutions, Inc. (RETO)
About this 6-K
ReTo Eco-Solutions, Inc filed this 6-K on October 14, 2022.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For
the month of October
Commission file number: 001-38307
(Registrant’s name)
c/o Beijing REIT Technology Development Co., Ltd.
X-702, Tower A, 60 Anli Road, Chaoyang District, Beijing
People’s Republic of China 100101
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F ☒ Form 40-F ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ☐
EXHIBIT INDEX
1
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: October 14, 2022 | RETO ECO-SOLUTIONS, INC. | |
| By: | /s/ Hengfang Li | |
| Name: | Hengfang Li | |
| Title: | Chief Executive Officer | |
2
Exhibit 99.1
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and the related notes for the six months ended June 30, 2022 and 2021 and the audited consolidated financial statements and accompanying notes for the year ended December 31, 2021 included in our annual report on Form 20-F (“2021 Annual Report”) filed with the Securities and Exchange Commission (the “SEC”) on May 2, 2022. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors. “ReTo” refers to ReTo Eco-Solutions, Inc., our holding company and a British Virgin Islands business company. “We”, “us”, “our”, or the “Company” refers to ReTo Eco-Solutions, Inc. and its subsidiaries, unless the context requires otherwise.
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements. All statements contained in this report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements include statements relating to:
| ● | the potential impact on our business of the economic, political and social conditions of the PRC; |
| ● | any changes in the laws, regulations or rules of the PRC or local province that may affect our operations; |
| ● | the impact of COVID-19 on our operations; |
| ● | our ability to operate as a going concern; |
| ● | the liquidity of our securities; |
| ● | inflation and fluctuations in foreign currency exchange rates; |
| ● | the ability to realize benefits of the acquisition of REIT Mingde and integrate and expand its businesses into our existing business and grow and manage growth profitably; |
| ● | our projections for our return on investment in client projects; |
| ● | the ability to navigate geographic market risks of our eco-friendly construction materials; |
| ● | the ability to maintain a reserve for warranty or defective products and installation claims; |
| ● | our on-going ability to obtain all mandatory and voluntary government and other industry certifications, approvals, and/or licenses to conduct our business; |
| ● | our ability to maintain effective supply chain of raw materials and our products and equipment; |
| ● | slowdown or contraction in industries in China in which we operate; |
| ● | our ability to maintain or increase our market share in the competitive markets in which we do business; |
| ● | our ability to diversify our product and service offerings and capture new market opportunities; |
| ● | our estimates of expenses, capital requirements and needs for additional financing and our ability to fund our current and future operations; |
| ● | the costs we may incur in the future from complying with current and future laws and regulations and the impact of any changes in the regulations on our operations; and |
| ● | the loss of key members of our senior management. |
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors,” “Operating and Financial Review and Prospects,” and elsewhere in our 2021 Annual Report. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We are under no duty to update any of these forward-looking statements after the date of this report or to conform these statements to actual results or revised expectations.
| A. | Operating Results |
Overview
We, through our operating subsidiaries in China, are engaged in the manufacture and distribution of eco-friendly construction materials (aggregates, bricks, pavers and tiles), made from mining waste (iron tailings), as well as equipment used for the production of these eco-friendly construction materials. In addition, we provide consultation, design, project implementation and construction of urban ecological protection projects through our operating subsidiaries in China. We also provide parts, engineering support, consulting, technical advice and service, and other project-related solutions for our manufacturing equipment and environmental protection projects. In December 2021, through the newly acquired subsidiaries, we expand our product and service offerings to include roadside assistance services, and software development services utilizing Internet of Things (“IoT”) technologies.
Our business consists of four business segments, including machinery and equipment production and sales, construction materials production and distribution, municipal construction projects and other services, which accounted for 70.2%, 11.1%, 3.8% and 14.9% of our total revenue for the six months ended June 30, 2022, respectively; for 65.4%, 34.6%, 0% and 0% of our total revenue for the six months ended June 30, 2021, respectively.
2
Impact of COVID-19
The Company’s operations are affected by the recent and ongoing outbreak and spread of the COVID-19 which was declared a pandemic by the World Health Organization in March 2020. The COVID-19 pandemic is causing lockdowns, travel restrictions, and closures of businesses in China and globally. Our business has been, and may continue to be, materially adversely impacted by the COVID-19 pandemic.
From late January 2020 through March 2020, the Company had to temporarily suspend the manufacturing activities due to government restrictions. During the temporary business closure period, employees had very limited access to our manufacturing facilities and the shipping services were not available and as a result, the Company experienced difficulty in delivering the products to customers on a timely basis. In addition, due to the COVID-19, some of the Company’s customers or suppliers experienced financial distress, delayed or defaulted on their payments, reduced the scale of their business, or suffered disruptions in their business. Our production and sales activities returned to normal after the spread of COVID-19 had been substantially controlled in China in late 2020. However, since 2021, there has been a resurgence of COVID-19 cases caused by new variants such as Delta and Omicron in multiple cities in China, as well as across the world. Restrictions have been re-imposed in certain cities to combat such outbreaks and emerging variants of the virus. The COVID-19 pandemic has had a significant impact on the construction sector, which is sensitive to economic cycles. The nature of the impacts and extent of the ramifications are in large part dependent upon the location of the underlying projects. Direct impacts have ranged from a slowdown of available materials and labor to suspensions and, in some instances, deferral and suspension of entire projects.
In March 2022, a new COVID-19 subvariant (Omicron) outbreak hit China and spread faster and more easily than previous viruses. As a result, a new round of lockdowns, quarantines or travel restrictions has been imposed to date upon different provinces or cities in China by the relevant local government authorities. As a result, the COVID-19 pandemic has, among other things, (i) disrupted our supply chain, delayed our ability to timely fulfill our customer orders and lead to higher fulfilment expenses, (ii) reduced or curtailed our customers’ expenditures and overall demand for our products or services, and increased the volatility of their purchase patterns from period-to-period, (iii) caused higher costs of raw materials for manufacture and sale of our equipment, primarily steel and certain electronic parts due to limited availability or increased commodity prices; (iv) caused delays in production and collection of accounts receivable, and (v) required us to take the initiatives in response to COVID-19 and many other efforts to leverage our technology, products and services to help contain the pandemic, all of which have had a material adverse effect on our business, financial condition and results of operations.
Despite the on-going impact of COVID-19, our revenue increased by 64.7%, or approximately $1.1 million, from approximately $1.8 million in the six months ended June 30, 2021 to approximately $2.9 million in the six months ended June 30, 2022 due to higher machinery and equipment sales, primarily contributable to the sales of newly developed jigging machine with a high sales price and revenue from roadside assistance and software development businesses which were acquired in December 2021.
The extent to which the COVID-19 pandemic may continue to impact the Company’ future financial results will depend on future developments, such as new information on the effectiveness of the mitigation strategies, the duration, spread, severity, and recurrence of COVID-19 and any new COVID-19 variants, the related travel advisories and restrictions, the overall impact of the COVID-19 pandemic on the global and PRC economy and capital markets, and the efficacy of COVID-19 vaccines, which may also take extended time to be widely and adequately distributed, all of which remain highly uncertain and unpredictable. Given this uncertainty, the Company is currently unable to quantify the expected impact of the COVID-19 pandemic on its future operations, financial condition, liquidity, and results of operations.
Recent Development
On March 10, 2022, the Company entered into a Securities Purchase Agreement (the “Agreement”) pursuant to which the Company issued an unsecured convertible promissory note (the “Note”) to Streeterville Capital, LLC, an institutional accredited investor (the “Investor”). The Note will mature 12 months after the purchase price of the Note is delivered from the Investor to the Company (the “Purchase Price Date”). The Note has an original principal amount of $3,105,000 and Investor gave consideration of $3,000,000, reflecting an original issue discount of $90,000 and $15,000 for Investor’s fees, costs and other transaction expenses incurred in connection with the purchase and sale of the Note. The transaction contemplated under the Agreement was closed on March 11, 2022 and the Company used all the proceeds for general working capital purposes.
Investor may convert all or any part the outstanding balance of the Note at any time after six months from the Purchase Price Date upon three trading days’ notice, into the Company’s common shares, par value $0.001 (the “Common Shares”), at a price equal to the lower of (i) $2.00 per share, and (ii) 85% multiplied by the lowest daily volume weighted average price during the ten trading days immediately preceding the applicable measurement date, subject to a floor price of $1.00 per share, as adjusted pursuant to the terms of the Note, as well as certain adjustments and ownership limitations specified in the Note. In the event that the floor price is higher than the conversion price, the Company may either agree to lower the floor price to equal the applicable conversion price or satisfy the conversion in cash in an amount equal to 110% multiplied by the portion of the outstanding balance being converted. The reduction in the floor price will be limited to each specific conversion.
3
On March 28, 2022, ReTo and Investor entered into an amendment to the Note, pursuant to which ReTo has agreed to satisfy any conversion request from Investor by making a cash payment equal to 110% of any converted amount if, at the time of the conversion, the Floor Price (as defined in the Note) is higher than the then current conversion price.
Results of Operations
Comparison of Six Months Ended June 30, 2022 and 2021
The following table summarizes the results of our operations for the six months ended June 30, 2022 and 2021, and provides information regarding the dollar and percentage increase or (decrease) during such periods.
(All amounts, other than percentages, in thousands of U.S. dollars)
| For The Six Months Ended June 30, | Amount | Percentage | ||||||||||||||
| 2022 | 2021 | Increase | Increase | |||||||||||||
| Statements of Income Data: | Amount | Amount |
(Decrease) | (Decrease) | ||||||||||||
| Revenues- third party customers | $ | 2,883 | $ | 1,649 | $ | 1,234 | 74.8 | % | ||||||||
| Revenues- related party customers | 7 | 106 | (99 | ) | (93.4 | )% | ||||||||||
| Total revenues | 2,890 | 1,755 | 1,135 | 64.7 | % | |||||||||||
| Cost of revenues- third party customers | 1,958 | 1,551 | 407 | 26.2 | % | |||||||||||
| Cost of revenues – related party customers | 557 | 86 | 471 | 550.0 | % | |||||||||||
| Total cost of revenues | 2,515 | 1,637 | 878 | 53.7 | % | |||||||||||
| Gross profit | 375 | 118 | 257 | 217.3 | % | |||||||||||
| Operating expenses: | 0 | 0 | ||||||||||||||
| Selling expenses | 289 | 314 | (25 | ) | (8.2 | )% | ||||||||||
| General and administrative expenses | 5,889 | 2,155 | 3,734 | 173.3 | % | |||||||||||
| Bad debt expenses | (651 | ) | 3,150 | (3,801 | ) | (120.7 | )% | |||||||||
| Research and development expenses | 506 | 160 | 346 | 215.2 | % | |||||||||||
| Total operating expenses | 6,032 | 5,779 | 253 | 4.4 | % | |||||||||||
| Loss from operations | (5,658 | ) | (5,661 | ) | 3 | (0.1 | )% | |||||||||
| Other income (expenses): | ||||||||||||||||
| Interest expense | (190 | ) | (296 | ) | 106 | (35.8 | )% | |||||||||
| Interest income | 2 | 1 | 1 | 56.4 | % | |||||||||||
| Investment loss | (39 | ) | - | (39 | ) | - | % | |||||||||
| Change in fair value in convertible debt | (204 | ) | (1,312 | ) | 1,108 | (84.4 | )% | |||||||||
| Other income(expenses), net | 348 | (49 | ) | 397 | (816.2 | )% | ||||||||||
| Total other expenses, net | (82 | ) | (1,655 | ) | 1,573 | (95.0 | )% | |||||||||
| Loss before income taxes | (5,740 | ) | (7,316 | ) | 1,576 | (21.5 | )% | |||||||||
| Provision for income taxes | 29 | - | 29 | - | % | |||||||||||
| Net loss from continuing operations | (5,769 | ) | (7,316 | ) | 1,547 | (21.1 | )% | |||||||||
| Net loss from discontinued operations | - | (1,549 | ) | 1,549 | (100.0 | )% | ||||||||||
| Net loss | $ | (5,769 | ) | $ | (8,865 | ) | $ | 3,096 | (34.9 | )% | ||||||
4
Revenues
Our total revenues increased by approximately $1.1 million, or 64.7%, to approximately $2.9 million for the six months ended June 30, 2022 from approximately $1.8 million for the six months ended June 30, 2021. Among our total revenue, revenue from third party customers increased by approximately $1.2 million, or 74.8%, from approximately $1.6 million in the six months ended June 30, 2021 to approximately $2.9 million in the six months ended June 30, 2022, while revenue from related party customers decreased by approximately $0.1 million, or 93.4%, from $105,868 in the six months ended June 30, 2021 to $6,987 in the six months ended June 30, 2022. The increase in our total revenue was mainly due to higher machinery and equipment sales and revenue from roadside assistance and software development businesses which were acquired in December 2021.
The following table summarizes the results of our revenues by business segments for the six months ended June 30, 2022 and 2021:
Revenue by Business Segment
(All amounts, other than percentages, in thousands of U.S. dollars)
| For the Six Months Ended June 30, | Variance | |||||||||||||||||||||||
| 2022 | 2021 | Amount | Percentage | |||||||||||||||||||||
| Amount | % of Sales | Amount | % of Sales | Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||
| Machinery and equipment | $ | 2,028 | 70 | % | $ | 1,147 | 65 | % | $ | 881 | 77 | % | ||||||||||||
| Construction materials | 321 | 11 | % | 608 | 35 | % | (287 | ) | (47 | )% | ||||||||||||||
| Municipal construction | 111 | 4 | % | - | - | % | 111 | - | % | |||||||||||||||
| Other services | 430 | 15 | % | - | - | % | 430 | - | % | |||||||||||||||
| Total | $ | 2,890 | 100 | % | $ | 1,755 | 100 | % | $ | 1,135 | 65 | % | ||||||||||||
Machinery and Equipment
Revenue from machinery and equipment sales increased by approximately $0.9 million, or 77%, from approximately $1.1 million for the six months ended June 30, 2021 to approximately $2.0 million for the six months ended June 30, 2022. The increase is mainly due to sales of newly developed jigging machine amounting to approximately $1.0 million.
5
Construction Materials
Sales of our environmental-friendly construction materials decreased by approximately $0.3 million, or 47%, from approximately $0.6 million for the six months ended June 30, 2021 to approximately $0.3 million for the six months ended June 30, 2022. The decrease was due to the decrease in demand resulting from the downturn of the national construction market under the impact of COVID-19.
Municipal Construction
Municipal construction includes such projects known as sponge city projects. Our environmental-friendly construction materials such as brick and block may be used in these municipal construction projects. Revenue from municipal construction projects in our continuing operations increased by $111,014, or 100%, for the six months ended June 30, 2022 as compared to nil for the six months ended June 30, 2021.
Other Services
Revenue from other services was approximately $0.4 million for the six months ended June 30, 2022, which was generated by our newly acquired subsidiary, Hainan Yile IoT Technology Co., Ltd, a PRC limited liability company (“Hainan Yile IoT”). Hainan Yile IoT provides roadside assistance services (“RSA”) to drivers within Hainan Province, China, through our network of RSA services providers of tow providers and automotive repair services. Through Hainan Yile IoT, we are also engaged in the design, development and sales of customized software solutions based on the client specifications.
Cost of Revenues
Our total cost of revenues increased by approximately $0.9 million, or 53.6%, to approximately $2.5 million for the six months ended June 30, 2022 from approximately $1.6 million for the six months ended June 30, 2021. Cost of revenues from third party customers increased by approximately $0.4 million, or 26.2%, from approximately $1.6 million in the six months ended June 30, 2021 to approximately $2.0 million in the six months ended June 30, 2022, while cost of revenues from related party customers increased by approximately $0.5 million, or 550%, from $85,710 in the six months ended June 30, 2021 to approximately $0.6 million in the six months ended June 30, 2022. The increase in our total cost of revenue was in line with the increase in revenue. As a percentage of revenues, the cost of revenues decreased by 6.2% to 87.0% in the six months ended June 30, 2022 from 93.3% in the six months ended June 30, 2021.
Cost by Business Segment
(All amounts, other than percentages, in thousands of U.S. dollars)
| For the Six Months Ended June 30, | Variance | |||||||||||||||||||||||
| 2022 | 2021 | Amount | Percentage | |||||||||||||||||||||
| Amount | % of Costs | Amount | % of Costs | Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||
| Machinery and Equipment | $ | 1,792 | 71 | % | $ | 933 | 57 | % | $ | 859 | 92 | % | ||||||||||||
| Construction materials | 462 | 18 | % | 703 | 43 | % | (241 | ) | (34 | )% | ||||||||||||||
| Municipal construction | 45 | 2 | % | - | - | % | 45 | - | % | |||||||||||||||
| Other services | 215 | 9 | % | - | - | % | 215 | - | % | |||||||||||||||
| Total | $ | 2,514 | 100 | % | $ | 1,636 | 100 | % | $ | 878 | 54 | % | ||||||||||||
Machinery and Equipment
Cost of machinery and equipment sales increased by approximately $0.9 million, or 92%, from approximately $0.9 million for the six months ended June 30, 2021 to approximately $1.8 million for the six months ended June 30, 2022. The increase was primarily due to the increase in revenue, as well as increase in costs of raw material and labor in 2022.
6
Construction Materials
Cost of our environmental-friendly construction materials decreased by approximately $0.2 million, or 34%, from approximately $0.7 million for the six months ended June 30, 2021 to approximately $0.5 million for the six months ended June 30, 2022. The decrease was due to less construction materials sold in downturn of the national construction market. Since we had fixed cost which did not change as a result of the change in sales, the decrease in our cost of sales is not as significant as the decrease in the sales of construction materials.
Municipal Construction
Cost of municipal construction projects in our continuing operations amounted to approximately $45,000. There was no cost of sales for municipal construction projects for the six months ended June 30, 2021 because we did not have any revenue from this segment.
Other Services
Cost of other services amounted to approximately $215,000. There was no cost of other services for the six months ended June 30, 2021 because this business segment was acquired in December 2021.
Gross Profit
Our gross profit increased by approximately $0.3 million, or 217.8%, to approximately $0.4 million for the six months ended June 30, 2022 from approximately $0.1 million for the six months ended June 30, 2021. Gross profit margin was 13.0% for the six months ended June 30, 2022, as compared with 6.7% for the six months ended June 30, 2021. The increase in gross profit margin by 6.2% was primarily attributable to high gross profit margin of other services.
Our gross profit and gross margin by segments are as follows:
| For the Six Months Ended June 30, | Variance | |||||||||||||||||||||||
| 2022 | 2021 | Gross | Gross | |||||||||||||||||||||
Gross Profit | Gross Profit% | Gross Profit | Gross Profit% | Profit Increase (Decrease) | Profit% Increase (Decrease) | |||||||||||||||||||
| Machinery and equipment | $ | 235 | 12 | % | $ | 214 | 19 | % | $ | 21 | 10 | % | ||||||||||||
| Construction material | (141 | ) | (44 | )% | (95 | ) | (16 | )% | (46 | ) | 48 | % | ||||||||||||
| Municipal construction | 66 | 59 | % | - | - | % | 66 | - | % | |||||||||||||||
| Other services | 215 | 50 | % | - | - | % | 215 | - | % | |||||||||||||||
| Total | $ | 375 | 13 | % | $ | 118 | 7 | % | $ | 256 | 216 | % | ||||||||||||
7
Machinery and Equipment
Gross profit for machinery and equipment products in our continuing operations increased by approximately $21,000 to approximately $235,000 for the six months ended June 30, 2022 as compared to approximately $214,000 for the six months ended June 30, 2021. Gross profit margin for this segment was 12% and 19% for the six months ended June 30, 2022 and 2021, respectively. Gross profit margin decreased due to increase in purchase price of raw materials for equipment, such as steel and certain electronic parts.
Construction Materials
Gross loss for construction materials was approximately $141,000 for the six months ended June 30, 2022 compared to a gross loss of approximately $95,000 for the six months ended June 30, 2021. The gross loss margin for this segment was approximately 44% for the six months ended June 30, 2022 as compared to 16% for the six months ended June 30, 2021. The gross margin decrease was mainly due to (i) higher fixed production costs, such as depreciation and (ii) increase in raw material costs as a result of compliance with more rigorous environmental protection procedures implemented by Chinese government which raised the quality standard of construction materials used in the municipal project construction.
Municipal Construction
Gross profit for the municipal construction project segment was approximately $66,000 for the six months ended June 30, 2022. There was no municipal construction revenue for the six months ended June 30, 2021.
Other Services
Gross profit for other services was $215,000 for the six months ended June 30, 2022. There was no other services revenue for the six months ended June 30, 2021.
Selling Expenses
For the six months ended June 30, 2022 and 2021, our selling expenses were approximately $0.3 million for both periods.
General and Administrative Expenses
For the six months ended June 30, 2022, our general and administrative expenses were approximately $5.9 million, representing an increase of approximately $3.7 million, or 173.3%, compared to approximately $2.2 million for the six months ended June 30, 2021. The increase in general and administrative expenses was mainly due to (a) share-based compensation amounted to approximately $3.3 million related to the 4,025,000 shares issued to employees under the 2018 and 2021 Share Incentive Plan; (b) approximately $0.7 million consulting fees related to the 500,000 shares issued to Geniusland International Capital Ltd. As a percentage of revenues, general and administrative expenses were 203.8% and 122.8% of our total revenues for the six months ended June 30, 2022 and 2021, respectively.
Bad Debt Expenses
For the six months ended June 30, 2022, our bad debt expenses were approximately negative $0.7 million, representing a decrease of approximately $3.8 million, or 120.7%, as compared to $3.2 million for the six months ended June 30, 2021. The decrease was due to a approximately $0.4 million recovery of allowance for doubtful accounts of advances to suppliers and a approximately $0.2 million recovery of allowance for doubtful accounts receivable. As a percentage of revenues, bad debt expenses were (22.5%) and 179.5% of our total revenues for the six months ended June 30, 2022 and 2021, respectively.
Research and Development Expenses
Our research and development expenses were approximately $0.5 million and $0.2 million for the six months ended June 30, 2022 and 2021, respectively. The increase in the research and development expenses was due to a newly initiated Resources Comprehensive Utilization Project with Tsinghua University.
Interest Expense
Our interest expenses were approximately $0.2 million and $0.3 million for the six months ended June 30, 2022 and 2021, respectively. The decreased interest expenses for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 was because of lower weighted average loan balance in the current period.
Change in Fair Value in Convertible Debt
Due to change in fair value of convertible loans, the Company recorded an unrealized loss of $204,331 and $ 1,311,852 in other expense for the six months ended June 31, 2022 and 2021, respectively.
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Other Income (Expense)
Other income was approximately $0.3 million for the six months ended June 30, 2022, mainly representing government subsidy. Other expense was $48,626 for the six months ended June 30, 2021, mainly consisting of fines and other miscellaneous expenses.
Loss before Income Taxes
Our loss before income taxes was approximately $5.7 million for the six months ended June 30, 2022, a decrease of approximately $1.6 million as compared to loss before income taxes of approximately $7.3 million for the six months ended June 30, 2021. The decrease in our loss before income taxes was primarily attributable to the decrease in net loss.
Provision for Income Taxes
Our PRC subsidiaries are subject to PRC income tax, which is computed according to the relevant laws and regulations in the PRC. Under the Enterprise Income Tax Law, the corporate income tax rate applicable to all companies, including both domestic and foreign-invested companies, is 25%. However, Beijing REIT Technology Development Co., Ltd., a PRC limited liability company (“Beijing REIT”) and Hainan Yile IoT is each recognized as a High and New Technology Enterprise by PRC government and subject to a favorable income tax rate of 15%. As we had loss before income tax, our income tax expense amounted to $28,767 and nil for the six months ended June 30, 2022 and 2021, respectively.
Net Loss
As a result of the foregoing, net loss from continuing operations amounted to approximately $5.8 million and $7.3 million for the six months ended June 30, 2022 and 2021, respectively. Total net loss amounted to approximately $5.8 million and $8.9 million for the six months ended June 30, 2022 and 2021, respectively.
| B. | Liquidity and Capital Resources |
We have historically funded our working capital needs from operations, bank borrowings, capital contributions from shareholders and related-party loans. Presently, our principal sources of liquidity are generated from our operations, proceeds from our shareholders’ contributions, and loans and banker’s acceptance bills from commercial banks. Our working capital requirements are influenced by the level of our operations, the numerical volume and dollar value of our sales contracts, the progress of execution on our customer contracts, and the timing of collection of accounts receivable.
As reflected in the Company’s unaudited condensed consolidated financial statements for the six months ended June 30, 2022, the Company’s revenue increased to approximately $2.9 million by approximately $1.1 million, or 64.7%, from approximately $1.8 million for the six months ended June 30, 2021. Gross profit amounted to approximately $0.4 million for the six months ended June 30, 2022, compared to a gross profit of approximately $0.1 million for the six months ended June 30, 2021. For the six months ended June 30, 2022 and 2021, the Company had a net loss of approximately $5.8 million and $8.9 million, respectively. As of June 30, 2022 and December 31, 2021, the Company had a working capital deficit of approximately of $1.8 million and $3.7 million, respectively. As of June 30, 2022 and December 31, 2021, the Company had cash of approximately $0.8 million and $0.5 million, respectively.
The Company had outstanding bank borrowings of approximately $2.2 million as of June 30, 2022 and these bank loans will mature and need to be repaid or renewed within the next 12 months. Based on the assessment of the current economic environment, customer demand, and sales trend, and the negative impact from COVID-19 outbreak and spread as more fully described under the section “Impact of COVID-19,” there is an uncertainty that the Company’s revenue and operating cash flows may be significantly lower than expected for the next 12 months.
On March 10, 2022, the Company entered into the Agreement with the Investor for the issuance of the Note with a maturity date of twelve months after the payment of the purchase price of the Note in the aggregate principal amount of $3,105,000, which note may be convertible into Company’s Common Shares. The Note carries an original issue discount of $90,000. In addition, the Company paid $15,000 to Investor to cover legal fees, accounting fees, due diligence etc.
9
Currently, the Company is working to improve its liquidity and capital source mainly through cash flow from its operations, renewal of bank borrowings, and borrowing from related parties. Management expects that it would be able to renew all of its existing bank loans upon their maturity based on past experience and the Company’s good credit history. However, if the Company cannot renew existing loans or borrow additional loans from banks, the Company’s working capital may be negatively impacted. In order to fully implement its business plan and sustain continued growth, the Company may also seek equity financing from outside investors. At the present time, however, the Company does not have commitments of funds from any potential investors. No assurance can be given that additional financing, if required, would be available on favorable terms or at all.
Based on above reasons, there is a substantial doubt about the Company’s ability to continue as a going concern for the next 12 months from the issuance of the unaudited condensed consolidated financial statements.
Cash Flows for The Six months Ended June 30, 2022 and 2021
The following table sets forth a summary of our cash flows for the periods indicated:
(All amounts in thousands of U.S. dollars)
| For The Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Net cash used in operating activities | $ | (9,270 | ) | $ | (976 | ) | ||
| Net cash provided by (used in) investing activities | 4,462 | (390 | ) | |||||
| Net cash provided by financing activities | 4,643 | 484 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 540 | (1 | ) | |||||
| Net (decrease) increase in cash and cash equivalents | 375 | (884 | ||||||
| Cash and cash equivalents, beginning of period | 457 | 1,121 | ||||||
| Cash and cash equivalents, end of period | 832 | 237 | ||||||
Operating Activities
Net cash used in operating activities was approximately $9.3 million for the six months ended June 30, 2022. Net cash used in operating activities for the six months ended June 30, 2022 mainly consisted of net loss of approximately $5.8 million, an adjustments of $3.9 million non-cash items, an increase of approximately $2.3 million in accounts receivable (including related parties), an increase of approximately $4.1 million in advance to suppliers (including related parties), an increase of $1.0 million in prepayments and other current assets, a decrease of approximately $1.1 million in accrued and other liabilities, an increase of approximately $1.0 million in advance from customers (including related parties) and an increase of $0.6 million in accounts payable (including related parties).
Net cash used in operating activities was approximately $1.0 million for the six months ended June 30, 2021. Net cash used in operating activities for the six months ended June 30, 2021 mainly consisted of net loss of $7.3 million from continuing operations, an adjustments of $6.3 million non-cash items, an increase of approximately $0.7 million in advance to suppliers (including related parties), an increase of approximately $0.3 million in prepayments and other current assets and an increase of $0.2 million in inventories, an increase of approximately $1.7 million in accrued and other liabilities, a decrease of approximately $0.5 million in long term accounts payable, a decrease of approximately $0.3 million in advance from customers (including related parties). Net cash provided by discontinued operating activities was approximately $0.3 million.
10
Investing Activities
Net cash provided by investing activities was approximately $4.5 million for the six months ended June 30, 2022. During the six months ended June 30, 2022, we paid approximately $0.2 million for purchase of equipment and received proceeds from disposal of subsidiaries of approximately $4.6 million.
Net cash used in investing activities was approximately $0.4 million for the six months ended June 30, 2021. During the six months ended June 30, 2021, we paid $39,887 for purchase of equipment. Net cash used in investing activities for discontinued operation was approximately $0.4 million.
Financing Activities
Net cash provided by financing activities was approximately $4.6 million for the six months ended June 30, 2022, including proceeds received from stock issuance of approximately $3.7 million, proceeds from issuance of convertible debt of approximately $3.0 million, proceeds from related party loan of approximately $0.8 million, shareholder contribution of approximately $0.7 million offset by the repayments of third-party loans of approximately $1.0 million, repayment to related party loans of approximately $1.5 million and payments to non-controlling shareholders of approximately $0.6 million for purchase of 30% noncontrolling interest in Xinyi REIT.
Net cash provided by financing activities was approximately $0.5 million for the six months ended June 30, 2021, including net proceeds from issuance of convertible debt of approximately $1.4 million, proceeds from related-party loans of approximately $3.1 million and proceeds from short-term bank loans of approximately $0.8 million, offset by the repayment of bank loans of approximately $1.9 million and repayment of related-party loans of approximately $2.9 million.
Statutory Reserves
The Company’s PRC subsidiaries are required to make appropriations to certain reserve funds, comprising the statutory surplus reserve and the discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (“PRC GAAP”). Appropriations to the statutory surplus reserve are required to be at least 10% of the after-tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entity’s registered capital. Appropriations to the discretionary surplus reserve are made at the discretion of the Board of Directors of the PRC subsidiary. The restricted amounts as determined pursuant to PRC statutory laws totaled $1,263,125 and $1,230,387 as of June 30, 2022 and December 31, 2021, respectively.
Capital Expenditures
We had capital expenditures of approximately $0.2 million and $39,887 for the six months ended June 30, 2022 and 2021, respectively, for purchases of equipment and conducting our construction in progress projects construction in connection with our business activities.
Holding Company Structure
ReTo is our holding company incorporated in the British Virgin Islands with no material operations of its own. REIT Holdings (China) Limited, a Hong Kong limited company and our wholly owned subsidiary established in Hong Kong, owns Beijing REIT, REIT Technology Development Co., Ltd., REIT New Materials Xinyi Co., Ltd. REIT Ecological Technology Co., Ltd. and REIT Q GREEN Machines Private Limited, which, in turn, own our assets in China and India either directly or through their respective subsidiaries.
We depend on dividends and other distributions in equity from our subsidiaries, including PRC subsidiaries to satisfy our liquidity requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders or to service any debt we may incur. Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, our PRC subsidiaries are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of their respective registered capital. Our PRC subsidiaries may also allocate a portion of their after-tax profits based on PRC accounting standards to employee welfare and bonus funds at their discretion. These reserves are not distributable as cash dividends. We have relied on direct payments of expenses by our PRC subsidiaries (which generate revenues), to meet our obligations to date.
11
Under Chinese law, RMB is currently convertible into U.S. Dollars under a company’s “current account,” which includes dividends, trade and service-related foreign exchange transactions, without prior approval of the State Administration of Foreign Exchange (“SAFE”), not from a company’s “capital account,” which includes foreign direct investments and loans, without the prior approval of the SAFE. Substantially all of our operations are conducted in China and are denominated in RMB, which is subject to the exchange control regulation in China, and, as a result, we may have difficulty distributing any dividends outside of China due to PRC exchange control regulations that restrict the ability to convert RMB into U.S. Dollars.
10% PRC withholding tax is applicable to dividends payable to investors that are non-resident enterprises. Any gain realized on the transfer of ordinary shares by such investors is also subject to PRC tax at a current rate of 10% which in the case of dividends will be withheld at source if such gain is regarded as income derived from sources within the PRC.
Tabular Disclosure of Contractual Obligations
We have certain potential commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments.
The Company’s subsidiaries lease office spaces under operating leases. Operating lease expense amounted to $178,779 and $51,961 for the six months ended June 30, 2022 and 2021, respectively.
As of June 30, 2022, the Company’s contractual obligations consisted of the following:
| Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
| Operating lease commitment | $ | 548,130 | 293,440 | 254,690 | - | - | ||||||||||||||
| Repayment of bank loans | 2,239,500 | 2,239,500 | - | - | - | |||||||||||||||
| Total | $ | 2,787,630 | 2,532,940 | 254,690 | - | - | ||||||||||||||
Off-Balance Sheet Arrangements
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholders’ equity, or that are not reflected in our consolidated financial statements. There were no off-balance sheet arrangements for the six months ended June 30, 2022 and 2021 that have or that in the opinion of management are likely to have, a current or future material effect on our consolidated financial condition or results of operations.
Recent Accounting Pronouncements
A list of recent relevant accounting pronouncements is included in Note 2 “Summary of Principal Accounting Policies” of our Unaudited Condensed Consolidated Financial Statements.
12
Research and Development, Patent and Licenses
Soon after the establishment, we set up a research and development center in Xi’an. We believe scientific and technological innovation will help our Company achieve its long-term strategic objectives. We conduct research and development in the following areas:
| ● | Manufacturing equipment; |
| ● | Recycling and utilization of solid wastes; |
| ● | New construction materials; |
| ● | Urban ecological construction (sponge cities); |
| ● | thermal insulation products and related production equipment; and |
| ● | IoT, internet and information technologies. |
We conduct our research and development according to strategic objectives, the market and customer needs. Combining application research and advanced research, we will not only improve current products, but also develop future strategic products, realizing technology development in line with the market demand.
Sample research and development projects from 2019 to 2022 include the following:
Year 2019
| ● | Block separated with pallet and reversing device |
| ● | Heat insolation core board pressing forming equipment |
| ● | Gantry kiln car |
| ● | Servo vibration system for block making machine |
| ● | Fully automatic pigment metering feeding device |
| ● | Tilting hopper material lifting device |
| ● | Method of improving the surface structure of permeable pavor |
| ● | Pigment metering device and its application method |
| ● | Intelligent and efficient sewage treatment system V1.1 |
Year 2020
| ● | A low station code brick machine |
Year 2021
| ● | High-position palletizer servo control system V1.0 |
| ● | Sub-mother kiln car transfer control system V1.0 |
| ● | An environmentally friendly permeable concrete PC brick |
| ● | A porous sound-absorbing and noise-reducing PC brick |
| ● | A production, processing, positioning and cutting device for PC bricks |
| ● | A weather-resistant PC brick |
| ● | A permeable PC brick surface layer and chamfer grinding device |
| ● | A self-compensating shrink PC brick |
13
Year 2022
| ● | A social emergency response platform |
| ● | Integration of IoT technology with existing equipment for remote monitor, control, diagnosis and maintenance |
We accounted for the payments as research and development expenses in accordance with ASC 730-20 for the related periods. For the six months ended June 30, 2022 and the years ended December 31, 2021, 2020, and 2019, we spent $505,847, $346,951, $334,904 and $438,371, respectively, on research and development associated with our continuing operations.
Quality control is an important aspect of our research and development department’s work and ensuring quality at every stage of the process has been as key driver in maintaining and developing our brand value. As of June 30, 2022, we employed 40 professionals in research and technology development. We have set up a separate research and development division to account for our investment in research and development. We expect to increase our allocation of research and development funds in an effort to enhance our core competence.
Intellectual Property
We regard our patents, copyrights, trademarks, domain names, know-how, proprietary technologies and similar intellectual property as critical to our businesses, and we rely on patent, copyrights, trademark and trade secret law and confidentiality, invention assignment and non-compete agreements with our employees and others to protect our proprietary rights. However, we do not believe that our business, as a whole, is dependent on, or that its profitability would be materially affected by the revocation, termination, expiration or infringement upon any particular patent. We own an aggregate of 143 PRC patents (ten of which are owned jointly with Luoyang Water-Conservancy Surveying& Design Co., Ltd. (“Luoyang”), an independent third party), including 28 design patents, 81 utility model patents and 10 invention patents. Two of our patents were awarded Gold and Silver Prize of International Exhibition of Inventions of Geneva and one of our patents was awarded Special Award of International Exhibition of Inventions of Geneva. In addition, we own 24 software copyrights in China.
As a result of the acquisition of REIT Mingde, our patent portfolio is increased by an additional 28 patents and 55 pending patent applications] pertaining to IoT, cloud platform, data transmission, gateway technologies and hardware designs, including 23 utility model patents and five invention patents. We also acquired an additional 14 software copyrights in China.
Pursuant to Article 15 of Patent Law of China, if there is any agreement between the joint owners of the right to apply for a patent or a patent right regarding the exercise of the relevant right, the agreement shall be followed. If there is no such agreement, any of the joint owners may exploit the patent independently or license others to exploit the patent by means of ordinary license. In the case of licensing to others to exploit the patent, royalties charged shall be distributed among the joint owners.
In order to minimize our liabilities or loss from the seven joint patents referenced above, Beijing REIT entered into an agreement with Luoyang on January 7, 2017, regarding the use, licensing, and transfer rights for the joint patents. The agreement, among other terms, provides Beijing REIT with sole use and exclusive right of licensing of the joint patents and prohibits Luoyang and Beijing REIT from transferring the joint patents to any other third parties without each parties’ consent. Subsidiaries of Beijing REIT also have the right to use the joint patents under the agreement. In addition, the parties will share any fees generated from any licensing of the joint patents.
14
Trend Information
We are not aware of any trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on our net revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.
Critical Accounting Estimates and Policies
We prepare our financial statements in conformity with accounting principles generally accepted by the United States of America (“U.S. GAAP”), which requires us to make judgments, estimates and assumptions that affect our reported amount of assets, liabilities, revenue, costs and expenses, and any related disclosures. Although there were no material changes made to the accounting estimates and assumptions in the past years, we continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates.
We believe that the following accounting policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations.
Accounts Receivable, Net
Accounts receivable are recognized and carried at the original invoiced amount less an estimated allowance for uncollectible accounts. The Company usually grants credit to customers with good credit standing with a maximum of 180 days and determines the adequacy of reserves for doubtful accounts based on individual account analysis and historical collection trends. The Company establishes a provision for doubtful receivables when there is objective evidence that the Company may not be able to collect amounts due. The allowance is based on management’s best estimates of specific losses on individual exposures, as well as a provision on historical trends of collections. Based on the assessment of customers’ credit and ongoing relationships, the Company’s payment terms typically range from 90 days to 1 year. The provision is recorded against accounts receivables balances, with a corresponding charge recorded in the consolidated statements of income and comprehensive income. Actual amounts received may differ from management’s estimate of credit worthiness and the economic environment. Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the likelihood of collection is not probable. As affected by the recent COVID-19 outbreak and spread, the Company’s accounts receivable collection was negatively affected. As a result, allowance for uncollectible balances amounted to $709,366 and $904,052 as of June 30, 2022 and December 31, 2021, respectively.
Revenue Recognition
The Company adopted ASC Topic 606 Revenue from Contracts with Customers (“ASC 606”) on January 1, 2018 using the modified retrospective approach. Under ASC 606, revenue is recognized when control of promised goods or services is transferred to the Company’s customers in an amount of consideration to which an entity expects to be entitled to in exchange for those goods or services.
To determine revenue recognition for contracts with customers, the Company performs the following five steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation.
15
The Company’s revenues are primarily derived from the following sources:
| ● | Revenue from machinery and equipment sales |
The Company recognizes revenue when the machinery and equipment is delivered and control is transferred. The Company generally provide a warranty for a period of 12 months after the customers receive the equipment. The Company determines that such product warranty is not a separated performance obligation because the nature of warranty is to provide assurance that a product will function as expected and in accordance with customer’s specification and the Company has not sold the warranty separately. From its past experience, the Company has not experienced any material warranty costs and, therefore, the Company does not believe an accrual for warranty cost is necessary for the six months ended June 30, 2022 and 2021, respectively.
| ● | Revenue from construction materials sales |
The Company recognizes revenue, net of sales taxes and estimated sales returns, when the construction materials are shipped to, delivered to or picked up by customers and control is transferred.
| ● | Revenue from municipal construction projects |
The Company provides municipal construction services which includes sponge city projects, sewage pipeline construction, public plaza construction, and landscaping, etc. The Company recognizes revenue associated with these contracts over time as service is performed and the transfer of control occurs, based on a percentage-of-completion method using cost-to-cost input methods as a measure of progress. When the percentage-of-completion method is used, the Company estimates the costs to complete individual contracts and records as revenue that portion of the total contract price that is considered complete based on the relationship of costs incurred to date to total anticipated costs (the cost-to-cost approach).
Under the cost-to-cost approach, the use of estimated costs to complete each contract is a significant variable in the process of determining recognized revenue, requires judgment and can change throughout the duration of a contract due to contract modifications and other factors impacting job completion. The costs of earned revenue include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools and repairs. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.
| ● | Revenue from other services |
The Company recognizes revenue when other services are rendered and accepted by the customers.
Contract Assets and Liabilities
Payment terms are established on the Company’s pre-established credit requirements based upon an evaluation of customers’ credit quality. Contact assets are recognized for in related accounts receivable. Contract liabilities are recognized for contracts where payment has been received in advance of delivery. The contract liability balance can vary significantly depending on the timing of when an order is placed and when shipment or delivery occurs.
As of June 30, 2022 and December 31, 2021, other than accounts receivable and advances from customers, the Company had no other material contract assets, contract liabilities or deferred contract costs recorded on its consolidated balance sheet. Costs of fulfilling customers’ purchase orders, such as shipping, handling and delivery, which occur prior to the transfer of control, are recognized in selling, general and administrative expense when incurred.
Disaggregation of Revenues
The Company disaggregates its revenue from contracts by products and services, as the Company believes it best depicts how the nature, amount, timing and uncertainty of the revenue and cash flows are affected by economic factors.
16
Exhibit 99.2
RETO ECO-SOLUTIONS INC. AND SUBSIDIARIES
INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
F-1
RETO ECO-SOLUTIONS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | (Unaudited) | |||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net – third parties | ||||||||
| Accounts receivable, net – related parties | ||||||||
| Advances to suppliers, net – third parties | ||||||||
| Advances to suppliers, net – related parties | ||||||||
| Due from related parties | ||||||||
| Loans to third-parties | ||||||||
| Inventories, net | ||||||||
| Prepayments and other current assets | ||||||||
| Receivable from disposition of REIT Changjiang | ||||||||
| Total Current Assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Long-term investment in equity investee | ||||||||
| Right-of-use assets | ||||||||
| Goodwill | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Convertible debt | $ | $ | ||||||
| Short term loans | ||||||||
| Advances from customers – third parties | ||||||||
| Advances from customers – related party | ||||||||
| Deferred grants | ||||||||
| Accounts payable – third parties | ||||||||
| Accounts payable – related party | ||||||||
| Accrued expenses and other liabilities | ||||||||
| Loans from third-parties | ||||||||
| Taxes payable | ||||||||
| Due to related parties | ||||||||
| Deferred tax liability | ||||||||
| Payable to acquire minority interest in subsidiary | ||||||||
| Operating lease liabilities – current | ||||||||
| Total Current Liabilities | ||||||||
| Operating lease liabilities – noncurrent | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Shareholders’ Equity: | ||||||||
| Common Shares, $ | ||||||||
| Additional paid-in capital | ||||||||
| Statutory reserve | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total RETO Eco Solutions Inc. Shareholders’ Equity | ||||||||
| Noncontrolling interest | ||||||||
| Total Equity | ||||||||
| Total Liabilities and Equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-2
RETO ECO-SOLUTIONS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
| For the Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| Revenues – third party customers | $ | $ | ||||||
| Revenues – related parties | ||||||||
| Total revenues | ||||||||
| Cost of revenues – third party customers | ||||||||
| Cost of revenues – related parties | ||||||||
| Total Cost | ||||||||
| Gross Profit | ||||||||
| Operating Expenses: | ||||||||
| Selling expenses | ||||||||
| General and administrative expenses | ||||||||
| Bad debt expenses | ( | ) | ||||||
| Research and development expenses | ||||||||
| Total Operating Expenses | ||||||||
| Loss from Operations | ( | ) | ( | ) | ||||
| Other Income (expenses): | ||||||||
| Interest expenses | ( | ) | ( | ) | ||||
| Interest income | ||||||||
| Other income (expenses), net | ( | ) | ||||||
| Investment loss | ( | ) | ||||||
| Change in fair value of convertible debt | ( | ) | ( | ) | ||||
| Total Other Expenses, Net | ( | ) | ( | ) | ||||
| Loss Before Income Taxes | ( | ) | ( | ) | ||||
| Provision for Income Taxes | ||||||||
| Net Loss from Continuing Operations | ( | ) | ( | ) | ||||
| Net Loss from Discontinued Operations | ( | ) | ||||||
| Net Loss | ( | ) | ( | ) | ||||
| Less: net loss attributable to noncontrolling interest | ( | ) | ( | ) | ||||
| Net Loss Attributable to ReTo Eco-Solutions, Inc. | $ | ( | ) | $ | ( | ) | ||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Other comprehensive loss: | ||||||||
| Foreign currency translation adjustment: | ( | ) | ||||||
| Comprehensive Loss | ( | ) | ( | ) | ||||
| Less: comprehensive loss attributable to noncontrolling interest | ( | ) | ( | ) | ||||
| Comprehensive Loss Attributable to ReTo Eco-Solutions, Inc | $ | ( | ) | $ | ( | ) | ||
| Loss Per Share | ||||||||
| $ | ( | ) | $ | ( | ) | |||
| Weighted Average Number of Shares | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
F-3
RETO ECO-SOLUTIONS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021
| Additional | Accumulated Other | |||||||||||||||||||||||||||||||
| Common Shares | paid-in | Statutory | Accumulated | Comprehensive | Noncontrolling | Total | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Reserve | Deficit | Loss | Interest | Equity | |||||||||||||||||||||||||
| Balance at December 31, 2020 | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net Loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Common shares issued for conversion of debt | ||||||||||||||||||||||||||||||||
| Share-based compensation | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
| Balance at December 31, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net Loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Conversion of convertible debt | ||||||||||||||||||||||||||||||||
| Issuance of common shares for acquisition of REIT Mingde | ( | ) | ||||||||||||||||||||||||||||||
| Issuance of common shares for private placement | ||||||||||||||||||||||||||||||||
| Issuance of common shares for services | ||||||||||||||||||||||||||||||||
| Share-based compensation | ||||||||||||||||||||||||||||||||
| Appropriation to statutory reserve | - | ( | ) | |||||||||||||||||||||||||||||
| Shareholders' contribution | - | |||||||||||||||||||||||||||||||
| Purchase of | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Balance at June 30, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-4
RETO ECO-SOLUTIONS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Less: net loss from discontinued operations | ( | ) | ||||||
| Net loss from continuing operations | ( | ) | ( | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Deferred tax benefit | ( | ) | ||||||
| Depreciation and amortization | ||||||||
| Share-based compensation | ||||||||
| Change in fair value of convertible debt | ( | ) | ||||||
| Accrued interest for convertible debt | ||||||||
| Change in bad debt allowances | ( | ) | ||||||
| Investment loss | ||||||||
| Gain from dissolving of a subsidiary | ( | ) | - | |||||
| Amortization of operating lease right-of-use assets | ||||||||
| Changes in operating assets: | ||||||||
| Accounts receivable – third parties | ( | ) | ( | ) | ||||
| Accounts receivable – related party | ( | ) | ||||||
| Advances to suppliers – third parties | ( | ) | ( | ) | ||||
| Advances to suppliers – related parties | ( | ) | ||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepayments and other current assets | ( | ) | ( | ) | ||||
| Changes in operating liabilities: | ||||||||
| Advances from customers | ( | ) | ||||||
| Advances from customers from related party | ( | ) | ||||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Accounts payable – third parties | ||||||||
| Accounts payable – related party | - | ( | ) | |||||
| Accrued expenses and other liabilities | ( | ) | ||||||
| Long term accounts payable | - | ( | ) | |||||
| Taxes payable | ||||||||
| Lease liabilities | ( | ) | ( | ) | ||||
| Net cash used in continuing operating activities | ( | ) | ( | ) | ||||
| Net cash provided by discontinued operating activities | - | |||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Addition of property, equipment and construction in progress | ( | ) | ( | ) | ||||
| Proceeds from disposal of subsidiary | - | |||||||
| Net cash provided by (used in) continuing investing activities | ( | ) | ||||||
| Net cash used in discontinued investing activities | - | ( | ) | |||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from short-term loans | - | |||||||
| Repayment of short-term bank loans | - | ( | ) | |||||
| Repayment of long-term bank loans | - | ( | ) | |||||
| Proceeds received from share issuance | - | |||||||
| Repayments of loans from third parties | ( | ) | - | |||||
| Loan to third parties | ( | ) | - | |||||
| Share holder contribution | - | |||||||
| Gross proceeds from issuance of convertible debt | ||||||||
| Payments to non-controlling shareholders | ( | ) | - | |||||
| Proceeds from related party loans | ||||||||
| Repayment to related party loans | ( | ) | ( | ) | ||||
| Net cash provided by continuing financing activities | ||||||||
| Net cash provided by discontinued financing activities | - | ( | ) | |||||
| Net cash provided by financing activities | ||||||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH AND RESTRICTED CASH | ( | ) | ||||||
| NET DECREASE IN CASH AND RESTRICTED CASH | ( | ) | ||||||
| CASH AND RESTRICTED CASH, BEGINNING OF PERIOD | ||||||||
| CASH, RESRICTED CASH, END OF PERIOD | ||||||||
| Less: cash and cash equivalents, restricted cash of discontinued operations at end of period | ||||||||
| Cash and cash equivalents, restricted cash of continued operation, at end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||
| Interest paid | $ | $ | ||||||
| Income tax paid | $ | - | $ | |||||
| Non-Cash Investing Activities | ||||||||
| Right-of-use assets obtained in exchange for operating lease obligations | $ | $ | ||||||
| Purchase of 30% noncontrolling interest in Xinyi REIT through payable to non-controlling shareholders | - | |||||||
| Common shares issued for conversion of debt | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-5
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
ReTo Eco-Solutions, Inc. (“ReTo”) is a business company established under the laws of the British Virgin Islands on August 7, 2015 as a holding company to develop business opportunities in the People’s Republic of China (the “PRC” or “China”). ReTo and its subsidiaries are collectively referred to as the Company. ReTo, through its subsidiaries, is engaged in (i) manufacture and distribution of eco-friendly construction materials and equipment used for the production of these eco-friendly construction materials and related consultation and technological services; (ii) consultation, design, project implementation and construction of urban ecological protection projects; (iii) roadside assistance services; and (iv) software development services.
As of June 30, 2022, the accompanying unaudited condense consolidated financial statements of the Company reflected the principal activities of the entities listed below. All inter-company balances and transactions have been eliminated upon consolidation.
| Name of the Entity | Place
of | Ownership | ||||
| ReTo Eco-Solutions, Inc. | ||||||
| REIT Holdings (China) Limited (“REIT Holdings”) | % | |||||
| Beijing REIT Technology Development Co., Ltd. (“Beijing REIT”) | % | |||||
| Beijing REIT Ecological Engineering Technology Co., Ltd. | % | |||||
| Hainan REIT Construction Engineering Co., Ltd. (“REIT Construction”) | % | |||||
| REIT New Materials Xinyi Co., Ltd. (“Xinyi REIT”) | % | |||||
| Nanjing Dingxuan Environmental Protection Technology Development Co., Ltd. (“Dingxuan”) | % | |||||
| REIT Q GREEN Machines Private Ltd (“REIT India”) | % | |||||
| REIT Ecological Technology Co., Ltd. (“REIT Ordos”)* | % | |||||
| Datong Ruisheng Environmental Engineering Co., Ltd. (“Datong Ruisheng”) | % | |||||
| Guangling REIT Ecological Cultural Tourism Co., Ltd. | % | |||||
| REIT (Xiong’an, Hebei) Eco Technology Co., Ltd. | % | |||||
| REIT Technology Development Co., Ltd (“REIT Technology”) | % | |||||
| Hainan REIT Mingde Investment Holding Co., Ltd (“REIT Mingde”) | % | |||||
| Yangpu Fangyuyuan United Logistics Co., Ltd. (“Fangyuyuan”) | % | |||||
| Hainan Kunneng Direct Supply Chain Management Co., Ltd. | % | |||||
| Hainan Yile IoT Technology Co., Ltd (“Hainan Yile IoT”) | % | |||||
| Hainan Yile IoV Technology Research Institute Co., Ltd, (“IoV Technology Research”) | % | |||||
| * | Previously known as “REIT Yangcheng” |
F-6
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of unaudited condensed financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information as of the date of the unaudited condensed consolidated financial statements.
Significant estimates required to be made by management include, but are not limited to, the valuation of accounts receivable, inventories, advances to suppliers, useful lives of property, plant and equipment, intangible assets, the recoverability of long-lived assets, provision necessary for contingent liabilities, revenue recognition under the input method, and realization of deferred tax assets. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents represent cash on hand
and cash deposited in major third-party payment processing platform such as Alipay. In addition, highly liquid investments which have
original maturities of three months or less when purchased are classified as cash equivalents. The Company maintains most of the bank
accounts in the PRC. On May 1, 2015, the PRC’s new Deposit Insurance Regulation came into effect, pursuant to which banking financial
institutions, such as commercial banks, established in the PRC are required to purchase deposit insurance for deposits in RMB and in foreign
currency placed with them. Such Deposit Insurance Regulation would not be effective in providing complete protection for the Company’s
accounts, as its aggregate deposits are much higher than the compensation limit, which is RMB
Accounts Receivable, Net
Accounts receivable are recognized and carried
at original invoiced amount less an estimated allowance for uncollectible accounts. The Company usually grants credit to customers with
good credit standing with a maximum of 180 days and determines the adequacy of reserves for doubtful accounts based on individual account
analysis and historical collection trends. The Company establishes a provision for doubtful receivables when there is objective evidence
that the Company may not be able to collect amounts due. The allowance is based on management’s best estimates of specific losses
on individual exposures, as well as a provision on historical trends of collections. Based on the assessment of customers’ credit
and ongoing relationships, the Company’s payment terms typically range from 90 days to
F-7
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories
Inventories are stated at the lower of cost or net realizable value. Costs include the cost of raw materials, freight, direct labor and related production overhead. The cost of inventories is calculated using the weighted average method. Any excess of the cost over the net realizable value of each item of inventories is recognized as a provision for diminution in the value of inventories.
Net realizable value is the estimated
selling price in the normal course of business less any costs to complete and sell products. The Company evaluates inventories on a
quarterly basis for its net realizable value adjustments, and reduces the carrying value of those inventories that are obsolete or
in excess of the forecasted usage to their estimated net realizable value based on various factors including aging and future demand
of each type of inventories. The Company recorded an inventory reserve of $
Advances to Suppliers, Net
Advances to suppliers consist of balances paid
to suppliers for services and materials that have not been provided or received. Advances to suppliers for service and material are short-term
in nature. Advances to Suppliers are reviewed periodically to determine whether their carrying value has become impaired. The Company
considers the assets to be impaired if the collectability of the advance becomes doubtful. The Company uses the aging method to estimate
the allowance for uncollectible balances. In addition, at each reporting date, the Company generally determines the adequacy of allowance
for doubtful accounts by evaluating all available information, and then records specific allowances for those advances based on the specific
facts and circumstances. Allowance for uncollectible balances from the continuing operations amounted to $
F-8
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Impairment of Long-lived Assets
The Company reviews long-lived assets, including definitive-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the estimated cash flows from the use of the asset and its eventual disposition are below the asset’s carrying value, then the asset is deemed to be impaired and written down to its fair value. Given no events or changes in circumstances indicating the carrying amount of long-lived assets may not be recovered through the related future net cash flows, the Company did not provide any impairment loss for the six months ended June 30, 2022 and 2021.
Long-term Investment in Equity Investee
The Company’s long-term investments include equity method investments and equity investments without readily determinable fair values.
Investments in entities in which the Company can exercise significant influence but does not own a majority equity interest or control are accounted for using the equity method of accounting in accordance with ASC 323, Investments-Equity Method and Joint Ventures (“ASC 323”). Under the equity method, the Company initially records its investment at cost and the difference between the cost of the equity investee and the amount of the underlying equity in the net assets of the equity investee is accounted for as if the investee were a consolidated subsidiary. The share of earnings or losses of the investee are recognized in the consolidated statements of comprehensive loss. Equity method adjustments include the Company’s proportionate share of investee income or loss, adjustments to recognize certain differences between the Company’s carrying value and its equity in net assets of the investee at the date of investment, impairments, and other adjustments required by the equity method. The Company assesses its equity investment for other-than-temporary impairment by considering factors as well as all relevant and available information including, but not limited to, current economic and market conditions, the operating performance of the investees including current earnings trends, the general market conditions in the investee’s industry or geographic area, factors related to the investee’s ability to remain in business, such as the investee’s liquidity, debt ratios, and cash burn rate and other company-specific information.
Investments in equity securities without readily determinable fair values are measured at cost minus impairment adjusted by observable price changes in orderly transactions for the identical or a similar investment of the same issuer. These investments are measured at fair value on a nonrecurring basis when there are events or changes in circumstances that may have a significant adverse effect. An impairment loss is recognized in the consolidated statements of comprehensive loss equal to the amount by which the carrying value exceeds the fair value of the investment. Prior to the adoption of ASU 2016-01 on January 1, 2019, these investments were accounted for using the cost method of accounting, measured at cost less other-than-temporary impairment.
F-9
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Long-term Investment in Equity Investee (continued)
As of June 30,
2022 and December 31, 2021, the Company’s long-term investment in equity investee balance represents its $
The Company continually reviews its investments in equity investees to determine whether a decline in fair value below the carrying value is other-than-temporary. The primary factors the Company considers in its determination include the financial condition, operating performance and the prospects of the equity investee; other company specific information such as recent financing rounds; the geographic region, market and industry in which the equity investee operates; and the length of time that the fair value of the investment is below its carrying value. If the decline in fair value is deemed to be other-than-temporary, the carrying value of the equity investee is written down to fair value. As of June 30, 2022 and December 31, 2021, the Company did not recognize any impairment on its equity investment.
Leases
The Company adopted ASU No. 2016-02—Leases (Topic 842) on January 1, 2019 using the modified retrospective transition method permitted under ASU No. 2018-11. This transition approach provides a method for recording existing leases only at the date of adoption and does not require previously reported balances to be adjusted. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. The standard did not materially impact our consolidated net earnings and cash flows.
Fair Value of Financial Instruments
ASC 825-10 requires certain disclosures regarding the fair value of financial instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
| ● | Level 1 - Quoted prices in active markets for identical assets and liabilities. |
| ● | Level 2 - Quoted prices in active markets for similar assets and liabilities, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
| ● | Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. |
F-10
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair Value of Financial Instruments (continued)
The Company considers the recorded value of its financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable, advance to suppliers, accounts payable, accrued and other liabilities, advances from customers, deferred revenue, taxes payable and due to related parties to approximate the fair value of the respective assets and liabilities at June 30, 2022 and December 31, 2021, based upon the short-term nature of the assets and liabilities.
The Company believes that the carrying amount of the short-term and long-term borrowings approximates fair value at June 30, 2022 and December 31, 2021 based on the terms of the borrowings and current market rates as the rates of the borrowings are reflective of the current market rates.
The Company elected the fair value option to account
for its convertible loans. The Company engaged an independent valuation firm to perform the valuation. The fair value of the convertible
loans included in short term debts as of June 30, 2022 was $
As the inputs used in developing the fair value for level 3 instruments are unobservable, and require significant management estimate, a change in these inputs could result in a significant change in the fair value measurement.
The following is a reconciliation of the beginning and ending balances for convertible loans measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of June 30, 2022:
| June 30, 2022 | ||||
| (Unaudited) | ||||
| Opening balance | $ | |||
| New convertible loans issued | ||||
| Accrued interest | ||||
| Loss on change in fair value of convertible loan | ||||
| Conversion of convertible loans | ( | ) | ||
| Total | $ | |||
F-11
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition
The Company adopted ASC Topic 606 Revenue from Contracts with Customers (“ASC 606”) on January 1, 2018 using the modified retrospective approach. Under ASC 606, revenue is recognized when control of promised goods or services is transferred to the Company’s customers in an amount of consideration to which an entity expects to be entitled to in exchange for those goods or services.
To determine revenue recognition for contracts with customers, the Company performs the following five steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation.
The Company’s revenues are primarily derived from the following sources:
| ● | Revenue from machinery and equipment sales |
The Company recognizes revenue when the machinery and equipment is delivered and control is transferred. The Company generally provide a warranty for a period of 12 months after the customers receive the equipment. The Company determines that such product warranty is not a separated performance obligation because the nature of warranty is to provide assurance that a product will function as expected and in accordance with customer’s specification and the Company has not sold the warranty separately. From its past experience, the Company has not experienced any material warranty costs and, therefore, the Company does not believe an accrual for warranty cost is necessary for the six months ended June 30, 2022 and 2021, respectively.
| ● | Revenue from construction materials sales |
The Company recognizes revenue, net of sales taxes and estimated sales returns, when the construction materials are shipped to, delivered to or picked up by customers and control is transferred.
F-12
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition (continued)
| ● | Revenue from municipal construction projects |
The Company provides municipal construction services which includes sponge city projects, sewage pipeline construction, public plaza construction, and landscaping, etc. The Company recognizes revenue associated with these contracts over time as service is performed and the transfer of control occurs, based on a percentage-of-completion method using cost-to-cost input methods as a measure of progress. When the percentage-of-completion method is used, the Company estimates the costs to complete individual contracts and records as revenue that portion of the total contract price that is considered complete based on the relationship of costs incurred to date to total anticipated costs (the cost-to-cost approach).
Under the cost-to-cost approach, the use of estimated costs to complete each contract is a significant variable in the process of determining recognized revenue, requires judgment and can change throughout the duration of a contract due to contract modifications and other factors impacting job completion. The costs of earned revenue include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools and repairs. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.
| ● | Revenue from other services |
The Company recognizes revenue when other services are rendered and accepted by the customers.
Contract assets and liabilities
Payment terms are established on the Company’s pre-established credit requirements based upon an evaluation of customers’ credit quality. Contact assets are recognized for in related accounts receivable. Contract liabilities are recognized for contracts where payment has been received in advance of delivery. The contract liability balance can vary significantly depending on the timing of when an order is placed and when shipment or delivery occurs.
As of June 30, 2022 and December 31, 2021, other than accounts receivable and advances from customers, the Company had no other material contract assets, contract liabilities or deferred contract costs recorded on its consolidated balance sheet. Costs of fulfilling customers’ purchase orders, such as shipping, handling and delivery, which occur prior to the transfer of control, are recognized in selling, general and administrative expense when incurred
Disaggregation of Revenues
The Company disaggregates its revenue from contracts by products and services, as we believe it best depicts how the nature, amount, timing and uncertainty of the revenue and cash flows are affected by economic factors. The Company’s disaggregation of revenues for the six months ended June 30, 2022 and 2021 is disclosed in Note 16.
F-13
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Shipping and Handling
Shipping and handling costs are expensed as incurred
and are included in operating expenses, as a part of selling, and general and administrative expenses, in the Company’s consolidated
statements of income and comprehensive income. Shipping and handling costs associated with the Company’s continuing operations were
$ $
Government Grants
Government grants represent cash subsidies received
from PRC government or related institutions. Cash subsidies which have no defined rules and regulations to govern the criteria necessary
for companies to enjoy the benefits are recognized as other income, net when received. Specific subsidies that local government has provided
for a specific purpose, such as research and development are recorded as other non-current liabilities when received and recognized as
other income or reduction of related expense when the specific performance is meet. As of December
31, 2020, the Company received related grants of $
Income Taxes
The Company accounts for income taxes under ASC 740. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period including the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
F-14
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes (continued)
The Company accounts for income taxes under ASC 740. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period including the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The provisions of ASC 740-10-25, “Accounting for Uncertainty in Income Taxes,” prescribe a more-likely-than-not threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. This interpretation also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and related disclosures. The Company records a liability for uncertain tax positions when it is probable that a loss has been incurred and the amount can be reasonably estimated.
To the extent applicable, the Company records interest and penalties as a general and administrative expense. The Company’s subsidiaries in China and Hong Kong are subject to the income tax laws of the PRC and Hong Kong. No significant taxable income was generated outside the PRC for the six months ended June 30, 2022 and 2021. As of June 30, 2022, the tax years ended December 31, 2017 through December 31, 2021 for the Company’s PRC subsidiaries remain open for statutory examination by PRC tax authorities.
Value Added Tax (“VAT”)
Sales revenue represents the invoiced value of goods, net of VAT. The
VAT is based on gross sales price and VAT rates range up to
Loss per Share
The Company computes loss per share (“EPS”) in accordance with ASC 260, “Earnings per Share” (“ASC 260”). ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income (loss) divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. For the six months ended June 30, 2022 and 2021, the Company had no dilutive security outstanding that could potentially dilute EPS in the future.
F-15
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign Currency Translation
The Company’s principal country of operations is the PRC. The financial position and results of its operations located in PRC are determined using RMB, the local currency, as the functional currency. RETO and REIT Holdings use U.S. Dollars as their functional currency, while REIT India uses Indian rupee as the functional currency. The Company’s financial statements are reported using U.S. Dollars. The results of operations and the consolidated statements of cash flows denominated in foreign currency are translated at the average rate of exchange during the reporting period. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange in effect at that date. The equity denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. Because cash flows are translated based on the average translation rate, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets. Translation adjustments arising from the use of different exchange rates from period to period are included as a separate component of accumulated other comprehensive income (loss). Gains and losses from foreign currency transactions are included in the results of operations.
The value of RMB against US$ and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions. Any significant revaluation of RMB may materially affect the Company’s financial condition in terms of US$ reporting. The following table outlines the currency exchange rates that were used in creating the consolidated financial statements in this report:
| June 30, 2022 | December 31, 2021 | June 30, 2021 | ||||||||||
| Period-end spot rate | US$ | US$ | US$ | |||||||||
| Average rate | US$ | US$ | US$ |
Risks and Uncertainties
The main operation of the Company is located in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by political, economic, and legal environments in the PRC, as well as by the general state of the PRC economy. The Company’s results may be adversely affected by changes in the political, regulatory and social conditions in the PRC. Although the Company has not experienced losses from these situations and believes that it is in compliance with existing laws and regulations including its organization and structure disclosed in Note 1, this may not be indicative of future results.
The coronavirus disease 2019 (“COVID-19”) outbreak has, and continues to have, a severe and negative impact on the Chinese and the global economy. The Company’s business has been negatively impacted by the COVID-19 outbreak.
F-16
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Risks and Uncertainties (continued)
From late January 2020 through March 2020, the Company had to temporarily suspend the manufacturing activities due to government restrictions. During the temporary business closure period, employees had very limited access to its manufacturing facilities and the shipping companies were not available and as a result, the Company experienced difficulty delivering the products to customers on a timely basis. In addition, due to the COVID-19 outbreak, some of the Company’s customers or suppliers experienced financial distress, delayed or defaulted on their payments, reduced the scale of their business, or suffered disruptions in their business due to the outbreak. Any increased difficulty in collecting accounts receivable, delayed raw materials supply, bankruptcy of small and medium businesses, or early termination of agreements due to deterioration in economic conditions could negatively impact its results of operations. The Company’s production and sales activities from its continuing operations returned to normal after the spread of COVID-19 had been substantially controlled in China in late 2020. However, since 2021, there has been a resurgence of COVID-19 cases caused by new variants such as Delta and Omicron in multiple cities in China, as well as across the world. Restrictions have been re-imposed in certain cities to combat such outbreaks and emerging variants of the virus. The COVID-19 pandemic has had a significant impact on the construction sector, which is sensitive to economic cycles. The nature of the impacts and extent of the ramifications are in large part dependent upon the location of the underlying projects. Direct impacts have ranged from a slowdown of available materials and labor through to suspensions and, in some instances, deferral and suspension of entire projects. COVID-19 had a significant impact on the Company’s financial results for the six months ended June 30, 2022 and 2021. The extent to which the COVID-19 pandemic may impact the Company’ future financial results will depend on future developments, such as new information on the effectiveness of the mitigation strategies, the duration, spread, severity, and recurrence of COVID-19 and any COVID-19 variants, the related travel advisories and restrictions, the overall impact of the COVID-19 pandemic on the global economy and capital markets, and the efficacy of COVID-19 vaccines, which may also take extended time to be widely and adequately distributed, all of which remain highly uncertain and unpredictable. Given this uncertainty, the Company is currently unable to quantify the expected impact of the COVID-19 pandemic on its future operations, financial condition, liquidity, and results of operations.
Reclassifications
In connection with the discontinued operations of a business, certain prior-period amounts have been reclassified for consistency with the current-year presentation. These reclassifications had no effect on the reported results of operations. The results of operations related to the discontinued operations, including comparatives, were reported as losses from discontinued operations. Certain prior-year balance sheet accounts have been reclassified to conform to the current- period presentation.
Concentrations and Credit Risk
A majority of the Company’s transactions are denominated in RMB and a significant portion of the Company and its subsidiaries’ assets and liabilities are denominated in RMB. RMB is not freely convertible into foreign currencies. In the PRC, certain foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China (“PBOC”). Remittances in currencies other than RMB by the Company in China must be processed through the PBOC or other China foreign exchange regulatory bodies which require certain supporting documentation in order to affect the remittance.
As of June
30, 2022 and December 31, 2021, $
For the
six months ended June 30, 2022, one customer accounted for
As of June
30, 2022, two customers accounted for
For the
six months ended June 30, 2022 and 2021, the Company purchased approximately
As of June
30, 2022, two suppliers accounted for
F-17
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent Accounting Pronouncements
The Company considers the applicability and impact of all accounting standards updates (“ASUs”). Management periodically reviews new accounting standards that are issued.
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) (“ASU 2016-13”), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. ASU 2016-13 was subsequently amended by Accounting Standards Update 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Accounting Standards Update 2019-04 Codification Improvements to Topic 326, Financial Instruments — Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, and Accounting Standards Update 2019-05, Targeted Transition Relief. For public entities, ASU 2016-13 and its amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For all other entities, this guidance and its amendments will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. As an emerging growth company, the Company plans to adopt this guidance effective January 1, 2023. The Company is currently evaluating the impact of its pending adoption of ASU 2016-13 on its consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) (“ASU 2020-01”), which is intended to clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. ASU 2020-01 is effective for the Company beginning January 1, 2021. The adoption did not impact the Company’s financial position.
In August 2020, the FASB issued ASU 2020-06, “Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40)”. This ASU reduces the number of accounting models for convertible debt instruments and convertible preferred stock. As well as amend the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. In addition, this ASU improves and amends the related EPS guidance. This standard became effective for the Company on January 1, 2022. The ASU did not have a significant impact on the Company’s consolidated financial statements.
Except for the above-mentioned pronouncements, there are no recently issued accounting standards that will have a material impact on the audited consolidated financial position, statements of operations, and cash flows of the Company.
F-18
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – GOING CONCERN
In addition, the Company had large bank borrowings as of June 30, 2022 and some of the bank loans will mature and need to be repaid within the next 12 months. If the Company cannot renew existing loans or borrow additional loans from banks, the Company’s working capital may be further negatively impacted. The outbreak and spread of the COVID-19 throughout China and worldwide has caused significant volatility in the PRC and international markets. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the PRC and international economies. To reduce the spread of the COVID-19, the Chinese government has employed measures including city lockdowns, quarantines, travel restrictions, suspension of business activities, and school closures. Due to difficulties and challenges resulting from the COVID-19 outbreak, the Company temporarily closed its facilities and operations until late March 2020. During this temporary business closure period, there was limited support from the Company’s employees, delayed access to raw material supplies, reduced customer sales orders, and the Company’s inability to promote the sales to customers on a timely basis. Based on the assessment of the current economic environment, customer demand, and sales trend, and the negative impact from COVID-19 outbreak and spread, there is an uncertainty that the Company’s revenue and operating cash flows may be significantly lower than expected for the next 12 months.
As of June 30, 2022, the Company had cash of approximately
$
Management expects that it would be able to renew all of its existing bank loans upon their maturity based on past experience and the Company’s good credit history. Currently, the Company is working to improve its liquidity and capital source mainly through cash flow from its operations, renewal of bank borrowings, and borrowing from related parties. In order to fully implement its business plan and sustain continued growth, the Company may also seek equity financing from outside investors. At the present time, however, the Company does not have commitments of funds from any potential investors. No assurance can be given that additional financing, if required, would be available on favorable terms or at all.
Based on above reasons, there is a substantial doubt about the Company’s ability to continue as a going concern for the next 12 months from the issuance of the consolidated financial statements.
F-19
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – DISCONTINUED OPERATION
The Company’s subsidiary, REIT Changjiang
was primarily engaged in solid waste processing business. On November 12, 2021, the Company signed a share transfer agreement with Zhixin
Group (Hong Kong) Co., Ltd. and Xiamen Zhixin Building Materials Co., Ltd. (collectively, “Zhixin”) to sell
The discontinued operation represents a strategic shift that has a major effect on the Company’s operations and financial results, which trigger discontinued operations accounting in accordance with ASC 205-20-45. The results of operations related to the discontinued operations for the six months ended June 30, 2021 were reported as loss from discontinued operations.
The results of discontinued operations of REIT Changjiang for the six months ended June 30, 2022, 2021 and 2020 are as follows:
| For the Six Months Ended June 30, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Revenue | $ | $ | ||||||||||
| Cost of revenues | ||||||||||||
| Gross loss | ( | ) | ( | ) | ||||||||
| Operating expenses | ||||||||||||
| Loss from discontinued operations | ( | ) | ( | ) | ||||||||
| Other income (expense), net | ( | ) | ( | ) | ||||||||
| Loss before tax | ( | ) | ( | ) | ||||||||
| Income tax provision | ||||||||||||
| Net loss from discontinued operations | $ | $ | ( | ) | ( | ) | ||||||
F-20
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – ACQUISITION
On December 27, 2021, the Company entered into
an acquisition agreement to acquire
The acquisition was accounted for as business
combinations in accordance with ASC 805. The purchase price was RMB
| Amount | ||||
| Cash acquired | $ | |||
| Other current assets | ||||
| Total current assets | ||||
| Property and equipment | ||||
| Intangible assets, net | ||||
| Goodwill | ||||
| Total assets | ||||
| Current liabilities | ||||
| Deferred tax liability | ||||
| Total liabilities | ||||
| Non-controlling interest | ||||
| Total consideration | $ | |||
Goodwill is mainly attributable to the excess of the consideration paid over the fair value of the net assets acquired that cannot be recognized separately as identifiable assets, and comprise (a) the assembled work force and (b) the expected but unidentifiable business growth as a result of the synergy resulting from the acquisition. None of the goodwill is expected to be deductible for income tax purposes.
F-21
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – ACCOUNTS RECEIVABLE, NET
Accounts receivable consisted of the following:
| June 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Trade accounts receivable from third-part customers | $ | $ | ||||||
| Less: allowances for doubtful accounts | ( | ) | ( | ) | ||||
| Total accounts receivable from third-party customers, net | ||||||||
| Add: accounts receivable, net, related parties | ||||||||
| Accounts receivable, net | $ | $ | ||||||
Allowance for doubtful accounts movement is as follows:
| June 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Beginning balance | $ | $ | ||||||
| Bad debt provision | ||||||||
| Write off | ( | ) | ||||||
| Reduction due to divestitures | ( | ) | ||||||
| Recovery | ( | ) | ||||||
| Foreign exchange translation | ( | ) | ||||||
| Ending balance | $ | $ | ||||||
Below is the aging schedule of accounts receivable as of June 30, 2022 and December 31, 2021:
| June 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Accounts Receivable Aging: | ||||||||
| Less than 3 months | $ | $ | ||||||
| From 4 to 6 months | ||||||||
| From 7 to 9 months | ||||||||
| From 10 to 12 months | ||||||||
| Over 1 year | ||||||||
| Bad debt reserve | ( | ) | ( | ) | ||||
| Accounts Receivable, net | $ | $ | ||||||
F-22
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – ADVANCES TO SUPPLIERS, NET
Advances to suppliers include prepayments for raw materials used for production and construction materials for the Company’s construction projects, which consisted of the following:
| June 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Raw material prepayments for equipment production | $ | $ | ||||||
| Land reclamation prepayments | ||||||||
| Advances to construction subcontractors (1) | ||||||||
| Total: | ||||||||
| Less: allowances for doubtful accounts | ( | ) | ( | ) | ||||
| Advances to suppliers, net, third parties | $ | $ | ||||||
(1) The Company obtained a land development
project in Longxi County, Gansu Province. The Company prepaid $
Our suppliers generally require refundable prepayments
from us before delivery of goods or service.
Allowance for doubtful accounts movement is as follows:
| June 30, 2022 | December, 2021 | |||||||
| (Unaudited) | ||||||||
| Beginning balance | $ | $ | ||||||
| Bad debt provision | ||||||||
| Write off | ( | ) | ||||||
| Recovery | ( | ) | ||||||
| Foreign exchange translation | ( | ) | ||||||
| Ending balance | $ | $ | ||||||
F-23
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – INVENTORIES, NET
Inventories, net, consisted of the following:
| June 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Raw materials | $ | $ | ||||||
| Finished goods | ||||||||
| Subtotal | ||||||||
| Less: Inventory allowance | ( | ) | ( | ) | ||||
| Inventories, net | $ | $ | ||||||
Inventories include raw material and finished goods. Finished goods include direct material costs, direct labor costs and manufacturing overhead.
NOTE 9 – PREPAYMENTS AND OTHER CURRENT ASSETS
The Company’s prepaid expenses and other current assets are as follows:
| June 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Other receivable, net (1) | $ | $ | ||||||
| Prepayment for software (2) | - | |||||||
| Value added tax receivable | ||||||||
| Total | $ | $ | ||||||
| (1) | Other receivables mainly consisted of advances to employees for business development purposes and prepaid employee insurance and welfare benefit which will be subsequently deducted from the employee’s payroll. |
F-24
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – LEASE
The Company has several operating
leases for manufacturing facilities and offices. The Company’s lease agreements do not contain any material residual value guarantees
or material restrictive covenants. For leases with lease term less than
Lease expense for the six months ended June 30,
2022 and 2021 was $
The Company’s operating leases primarily
include leases for office space and manufacturing facilities. The current portion of operating lease liabilities and the non-current portion
of operating lease liabilities are presented on the consolidated balance sheet. Total lease expense related to right-of-use assets amounted
to $
| June 30, 2022 | ||||
| (Unaudited) | ||||
| Right-of-use assets | $ | |||
| Operating lease liabilities - current | $ | |||
| Operating lease liabilities - non-current | ||||
| Total operating lease liabilities | $ | |||
The weighted average remaining lease terms and discount rates for all of operating leases were as follows as of June 30, 2022:
| Remaining lease term and discount rate: | ||||
| Weighted average remaining lease term (years) | ||||
| Weighted average discount rate | % | |||
The following is a schedule of maturities of lease liabilities as of June 30, 2022:
| For the twelve months ending June 30, 2022 | Lease payment | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| Total lease payments | ||||
| Less: imputed interest | ||||
| Less: current portion of operating lease labilities | ||||
| Non-current portion of operating lease labilities | $ | |||
F-25
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – CONVERTIBLE LOANS
March Debenture
On March
1, 2021, the Company entered into a securities purchase agreement with an accredited investor (the “Debenture Holder”) for
the issuance of a Convertible Debenture (the “March Debenture”) in the aggregate principal amount of up to $
The Debenture Holder may convert the March
Debenture in its sole discretion to Company’s common shares at any time at the lower of $
The Company has elected to recognize the March
Debenture at fair value and therefore there was no further evaluation of embedded features for bifurcation. The March Debenture was fully
converted into
July Debenture
On July 6, 2021, the Company entered into another
securities purchase with the Debenture Holder for the issuance of a Convertible Debenture (the “July Debenture”) in the aggregate
principal amount of up to $
The Debenture Holder may convert the July Debenture
in its sole discretion to Company’s common shares at any time at the lower of $
The principal balance of $
On March
10, 2022, the Company entered into a securities purchase agreement with an accredited investor for the issuance of a Convertible
Promissory Note (the “Note”) in the aggregate principal amount of $
For the six months ended June 30, 2022, due to
change in fair value of convertible debentures, the Company recorded an unrealized loss of $
F-26
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – SHORT-TERM LOANS
Short-term loans consisted of the following:
| June 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Hunyuan Rural Credit Cooperative Association (1) | $ | $ | ||||||
| Bank of Jiangsu (2) | ||||||||
| Huaxia Bank (3) | ||||||||
| Total | $ | $ | ||||||
| (1) | On December 6, 2021, Datong Ruisheng entered into a bank loan agreement with Hunyuan Rural Credit Cooperative Association to borrow approximately $ |
| (3) | On November 19, 2021, Beijing REIT entered into a new line of credit agreement with Huaxia Bank. The agreement allows Beijing REIT to obtain loans to approximately $ |
For the six months ended June 30, 2022 and 2021,
interest expense on all short-term loans amounted to $
F-27
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – LOANS FROM THIRD PARTIES
| Loans from third parties | June 30 2022 | December 31, 2021 | ||||||
| Sanya Guohong Municipal Projects Construction Co., Ltd. | $ | $ | ||||||
| Changshu Tongjiang Engineering Co., Ltd. | ||||||||
| Zhang Miao | ||||||||
| Pen Jing | ||||||||
| Chen Guo | ||||||||
| Chai Guirong | ||||||||
| Hainan Boxinda Science Technology Partnership | ||||||||
| Xu Liming | ||||||||
| Total | $ | $ | ||||||
On May 9, 2021, Beijing REIT obtained a working
capital loan of $
On July 29, 2021, Beijing REIT obtained a working
capital loan of $
On February 8, 2021, Beijing REIT obtained a working
capital loan of $
On August 1, 2021, Hainan Yile IoT obtained a
working capital loan of $
On October 21, 2021, Hainan Yile IoT obtained
a working capital loan of $
On August 2, 2021, Hainan Yile IoT obtained a
working capital loan of $
On July 4, 2021, IoV Technology Research obtained
a working capital loan of $
On February 23, 2021, Xinyi REIT obtained a working
capital loan of $
F-28
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – TAXES
| (a) | Corporate income taxes |
The Company is subject to income taxes on an entity basis on income arising in or derived from the location in which each entity is domiciled.
RETO is incorporated in the British Virgin Islands and is exempt from paying income tax. REIT Holdings is registered in Hong Kong as a holding company.
The Company’s operating subsidiaries are
all incorporated in the PRC and are subject to PRC income tax, which is computed according to the relevant laws and regulations in the
PRC. Under the Corporate Income Tax Law of PRC, the corporate income tax rate applicable to all companies, including both domestic and
foreign-invested companies, is
The following table reconciles the statutory rate to the Company’s effective tax rate:
For the six months ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| China Statutory income tax rate | % | % | ||||||
| Effect of favorable income tax rate in certain entity in PRC | ( | )% | ( | )% | ||||
| Non-PRC entities not subject to PRC tax (3) | ( | )% | ( | )% | ||||
| Research & Development (“R&D”) tax credit (1) | % | ( | )% | |||||
| Non-deductible expenses - permanent difference (1) | ( | )% | % | |||||
| Change in valuation allowance | ( | )% | ( | )% | ||||
| Effective tax rate | ( | )% | 0.0 | )% | ||||
| (1) | According to PRC tax regulations, |
| (2) | Represents expenses incurred by the Company that were not deductible for PRC income tax. |
| (3) | Represents the tax losses incurred from operations outside of China. |
The breakdown of the Company’s loss before income tax provision is as follows:
For the six months ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Loss before income tax expense from China | $ | ( | ) | $ | ( | ) | ||
| Loss before income tax expense from outside of China | ( | ) | ( | ) | ||||
| Total loss before income tax provision | $ | ( | ) | $ | ( | ) | ||
F-29
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – TAXES (continued)
| (a) | Corporate income taxes (continued) |
Loss before income tax expense from outside of China represents the losses incurred in RETO, REIT Holdings and REIT US, which are mainly holding companies incorporated outside of China.
The income tax provision (benefit) for the six months ended June 30, 2022 and 2021 were as follows:
For the six months ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Current | $ | $ | ||||||
| Deferred | ( | ) | ||||||
| Total | $ | $ | ||||||
Deferred income taxes reflect the net effects of temporary difference between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. The Company periodically evaluates the likelihood of the realization of deferred tax assets and reduces the carrying amount of the deferred tax assets by a valuation allowance to the extent it believes a portion will not be realized. Due to continuous losses incurred, the Company provided full allowance on the deferred tax assets as of June 30, 2022 and December 31, 2021.
| Deferred tax asset | June 30, 2022 | December 31, 2021 | ||||||
| (Unaudited) | ||||||||
| Provision of doubtful accounts | $ | $ | ||||||
| Tax loss carried forwards | ||||||||
| Valuation allowance on tax losses | ( | ) | ( | ) | ||||
| $ | $ | |||||||
| (b) | Value added tax |
The Company is subject to a value added tax (“VAT”)
for selling merchandise.
F-30
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – TAXES (continued)
| (c) | Taxes Payable |
The Company’s taxes payable consists of the following:
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| VAT tax payable | $ | $ | ||||||
| Corporate income tax payable | ||||||||
| Land use tax and other taxes payable | ||||||||
| Total | $ | $ | ||||||
As of June 30, 2022 and December 31, 2021, the
Company had tax payables of approximately $
F-31
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – COMMITMENTS AND CONTIGENCIES
Contingencies
From time to time, the Company is a party to various legal actions arising in the ordinary course of business. The majority of these claims and proceedings are related to, or arise from, lease disputes, commercial disputes, worker compensation complaints, default on guaranteeing third-party lease obligations, and default on loans. The Company first determines whether a loss from a claim is probable, and if it is reasonable to estimate the potential loss, the loss will be accrued. The Company discloses a range of possible losses, if a loss from a claim is probable but the amount of loss cannot be reasonably estimated.
Contractual commitments
As of June 30, 2022, the Company’s contractual obligations consisted of the following:
| Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
| Operating lease commitment | $ | |||||||||||||||||||
| Repayment of bank loans | ||||||||||||||||||||
| Total | $ | |||||||||||||||||||
NOTE 16 – RELATED PARTY TRANSACTIONS
The Company records transactions with various related parties. These related party balances as of June 30, 2022 and December 31, 2021 and transactions for the six months ended June 30, 2022 and 2021 are identified as follows:
| (1) | Related parties with transactions and related party relationships |
| Name of Related Party | Relationship to the Company | |
| Mr. Hengfang Li | ||
| Ms. Hong Ma | ||
| Q Green Techcon Private Limited | ||
| Shexian Ruibo Environmental Science and Technology Co., Ltd (Shexian Ruibo) | ||
| Hunyuan Baiyang Food Co., Ltd. | ||
| Handan Ruisheng Construction Material Co., Ltd. | ||
| Zhongtou Ruitu Information Service (Beijing) Co., Ltd | ||
| Bei Qi Yin Jian Yi Le (Haikou) Smart Move Science Technology Co., Ltd. | ||
| Handan Ruisheng Construction Material Technology Co., Ltd. |
F-32
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 – RELATED PARTY TRANSACTIONS (continued)
| (2) | Due to related parties |
As of June 30, 2022and December 31, 2021, the balance of due to related parties were as follows:
| June 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Mr. Hengfang Li | $ | $ | ||||||
Mr. Hengfang Li is the Chief Executive Officer (“CEO”) and major shareholder of the Company. Mr. Li periodically provides working capital loans to support the Company’s operations when needed. Such advance was non-interest bearing and due on demand.
| (3) | Accounts receivable from related parties |
Accounts receivable from related party consisted of the following:
| June 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Accounts receivable – related party | ||||||||
| Hunyuan Baiyang Food Co., Ltd. | ||||||||
| Bei Qi Yin Jian Yi Le (Haikou) Smart Move Science Technology Co., Ltd. | ||||||||
| Q Green Techcon Private Limited | ||||||||
| Total accounts receivable from related party | $ | $ | ||||||
As of August 31, 2022, the accounts receivable
balance of $
| (4) | Advance to suppliers, related parties |
Advance to suppliers, related party, consisted of the following:
| June 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Advance to supplier – related party | ||||||||
| Q Green Techcon Private Limited | $ | $ | ||||||
| Shexian Ruibo* | ||||||||
| Handan Ruisheng Construction Material Co., Ltd. | ||||||||
| Total | $ | $ | ||||||
| * | The balance represents the Company’s purchase advances for eco-friendly materials and equipment supplied by Shexian Ruibo. |
| (5) | Advance from related parties |
Advance from related parties consisted of the following:
| June 30, 2022 | December 31, 2021 | |||||||
| Advance from – related parties | ||||||||
| - Q Green Techcon Private Limited | $ | $ | ||||||
| Total | $ | $ | ||||||
F-33
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 – RELATED PARTY TRANSACTIONS (continued)
| (6) | Sales to related parties |
Sales to related parties consisted of the following:
For the six months ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Sales to related parties | ||||||||
| Hunyuan Baiyang Food Co., Ltd. | $ | $ | ||||||
| Bei Qi Yin Jian Yi Le (Haikou) Smart Move Science Technology Co., Ltd. | ||||||||
| Q Green Techcon Private Limited | ||||||||
| Total | $ | $ | ||||||
Cost of revenue associated with the sales to these
related parties amounted to $ and $
| (7) | Purchases from related parties |
Purchases from related parties consisted of the following:
For the six months ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Purchase from a relate party | ||||||||
| Shexian Ruibo Environmental Science and Technology Co., Ltd. | $ | $ | ||||||
| Q Green Techcon Private Limited. | ||||||||
| Total | $ | $ | ||||||
| (8) | Loan guarantees provided by related parties |
The Company’s principal shareholders also provide personal guarantees for certain of the Company’s short-term loans.
F-34
RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 – EQUITY
Statutory reserve
The Company is required to make appropriations
to certain reserve funds, comprising the statutory surplus reserve and the discretionary surplus reserve, based on after-tax net income
determined in accordance with generally accepted accounting principles of the PRC (“PRC GAAP”).
Shares issuances
The Company is a company limited by shares established
under the laws of the British Virgin Islands with
On September 5, 2019, the Company entered into
a consulting service agreement with FirstTrust Group, Inc. (“FirstTrust”), pursuant to which FirstTrust would assist the Company
with strategic initiatives over the service period from August 16, 2019 to August 15, 2020. The Company issued
Pursuant to the Company’s 2018 Incentive
Plan, on January 22, 2020, the Company’s board of directors approved the issuance of an aggregate of
In addition, on February 3, 2020, the Company’s
board of directors further approved the issuance of
In
April 2021, the Company entered into a consulting service agreement with Geniusland International Capital Ltd., (“Geniusland”)
Pursuant to the agreement, Geniusland will assist the Company with strategic initiatives over the service period between January 23, 2021
to January 24, 2024. For the first-year service, the Company issued
In
January 2022, the Company revised the consulting service agreement with Geniusland International Capital Ltd., (“Geniusland”).
Pursuant to the new agreement, the service will cease on March 28, 2022. For the service provided between December 29, 2021 to March 28,
2022. The Company issued
| Number of shares | Weighted average grant date value | |||||||
| Nonvested as of December 31, 2021 | ||||||||
| Granted | $ | |||||||
| Vested | ||||||||
| Nonvested as of June 30, 2022 | $ | |||||||
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RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 – EQUITY (continued)
On May 11, 2021, the Company issued
On December 27, 2021, the Company entered into
an acquisition agreement to acquire
On April
22, 2022, the Company’s board of directors approved the issuance of an aggregate of
On May 25, 2022, the
Company issued
Conversion of convertible loans
For the six months ended June 30, 2022, the Company
issued
Purchase of non-controlling interest in Xinyi REIT
On April
8, 2022, the Company signed an agreement with the minority shareholder of Xinyi REIT. Pursuant to the agreement, the Company agreed to
purchase the minority shareholder’s
Non-controlling shareholder contribution
On April
6, 2022, Hainan Shi Yuan Tong Da Ye Feng Private Equity Partnership (Limited Partnership) signed an investment agreement with REIT
Mingde to invest RMB
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RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 – SEGMENT REPORTING
ASC 280, “Segment Reporting”, establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organizational structure as well as information about geographical areas, business segments and major customers in financial statements for details on the Company’s business segments. The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. Management, including the chief operating decision maker, reviews operation results by the revenue of different products or services. Based on management’s assessment, the Company has determined that it has four operating segments as defined by ASC 280, including machinery and equipment, construction material, municipal construction projects, and other services.
Construction material segment manufactures and sells eco-friendly construction material. Machinery and equipment segment manufactures and sells machinery and equipment used to manufacture construction material. Construction service segment generates revenue from contracting municipal construction projects. Other services segment generates revenue from providing roadside assistance services and software development services to customers.
The following table presents summary information by segments for the Company’s continuing operations for the six months ended June 30, 2022 and 2021, respectively:
Machinery | Construction materials | Municipal | Other services | Total | ||||||||||||||||
| Revenue | $ | |||||||||||||||||||
| Cost of goods sold | ||||||||||||||||||||
| Gross profit (loss) | ( | ) | ||||||||||||||||||
| Interest expense and charges | ||||||||||||||||||||
| Interest income | ||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||
| Capital expenditures | ( | ) | ||||||||||||||||||
| Income tax expenses | ||||||||||||||||||||
| Segment loss | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Segment assets as of June 30, 2022 | $ | |||||||||||||||||||
Machinery | Construction | Municipal | Other | Total | ||||||||||||||||
| Revenue | $ | |||||||||||||||||||
| Cost of goods sold | ||||||||||||||||||||
| Gross profit | ( | ) | ||||||||||||||||||
| Interest expense and charges | ||||||||||||||||||||
| Interest income | ||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||
| Capital expenditures | ||||||||||||||||||||
| Income tax expenses | ||||||||||||||||||||
| Segment loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Segment assets as of June 30, 2021 | $ | |||||||||||||||||||
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RETO ECO-SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 – SUBSEQUENT EVENTS
The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to October 14, 2022, the date that the unaudited condensed consolidated financial statements were issued. Based on the review, the Company did not identify any material subsequent event except the following event that is required disclosure in the unaudited condensed consolidated financial statements.
On August 25, 2022, the Company incorporated Hainan
Coconut Network Freight Co., Ltd., a
On September 30, 2022, the Company incorporated Ruishi
Tongda Ecological Management Co., Ltd., a
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