F-1 1 ff12017_retoecosolutions.htm REGISTRATION STATEMENT

As submitted to the Securities and Exchange Commission on August 4, 2017

 

Registration No. 333-       

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM F-1

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 

 

 

RETO ECO-SOLUTIONS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

         
British Virgin Islands   3290   Not applicable
(State or Other Jurisdiction of Incorporation or Organization)   (Primary Standard Industrial
Classification Code Number)
 

(I.R.S. Employer

Identification Number)

 

c/o Beijing REIT Technology Development Co., Ltd.

X-702, 60 Anli Road, Chaoyang District, Beijing

People’s Republic of China 100101

(+86) 10-64820312

Vcorp Agent Services, Inc.

25 Robert Pitt Dr., Suite 204

Monsey, New York 10952

(888) 528-2677

(Address, including zip code, and telephone number, including

area code, of principal executive offices)

(Name, address, including zip code, and telephone

number, including area code, of agent for service)

  

 

Copies to:

   
Bradley A. Haneberg, Esq. Clayton E. Parker, Esq.

Matthew B. Chmiel, Esq.

Haneberg Hurlbert PLC

Matthew L. Ogurick, Esq.

Damien A. Grierson, Esq.

310 Granite Avenue, Richmond, VA 23226 K&L Gates LLP
Telephone: (804) 814-2209

200 South Biscayne Boulevard, Suite 3900

Miami, Florida 33131

Telephone: (305) 539-3300

 

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.

Emerging growth company   ☒

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☒ 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012. 

 

 

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

 

 

 
 

 

 

CALCULATION OF REGISTRATION FEE

         
Title of Each Class of
Securities to be Registered 
Amount to be
Registered
Proposed Maximum
Aggregate Price
Per Share
Proposed Maximum
Aggregate Offering
Price(1)
Amount of
Registration Fee(2)
Common Shares, $0.001 per share to be sold by Registrant 3,220,000 $5.50 $17,710,000  
Total 3,220,000 $5.50 $17,710,000 $2,053(2)

 

 

(1)This registration fee is based on an estimate of the proposed maximum offering price of the securities pursuant to Rule 457(a) under the Securities Act of 1933, as amended.

(2)Paid herewith.

 

 

 

 

 

 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED AUGUST 4, 2017

 

2,800,000 Common Shares

 

RETO ECO-SOLUTIONS, INC.

 

This is the initial public offering of ReTo Eco-Solutions, Inc. We are offering 2,800,000 of our common shares. We expect the initial public offering price will be between $4.50 to $5.50 per common share. No public market currently exists for our common shares. We have applied for listing of our common shares on the NASDAQ Capital Market under the symbol “RETO”. We believe that upon the completion of the offering contemplated by this prospectus, we will meet the standards for listing on the NASDAQ Capital Market.

 

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startup Act of 2012, and, as such, have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.

 

Investing in our common shares involves significant risks. See “Risk Factors” beginning on page 12 of this prospectus.

 

    Per Share   Total
Initial public offering price        
Underwriting discounts and commissions (1)        
Proceeds to us, before expenses        

 

 

(1)  See “Underwriting” for more information regarding underwriting compensation.

 

To the extent that the underwriters sell more than 2,800,000 common shares, the underwriters have the option to purchase up to an additional 420,000 common shares from us at the initial public offering price less the underwriting discount, within 45 days from the date of this prospectus.

 

Delivery of the shares will be made on or about        , 2017.

 

These securities have not been approved or disapproved by the Securities and Exchange Commission or any state securities commission nor has the Securities and Exchange Commission or any state securities commission passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

   
VIEWTRADE SECURITIES, INC.

 

Prospectus dated                  , 2017

 

 

 

 

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY 3
RISK FACTORS 13
FORWARD-LOOKING STATEMENTS 35
USE OF PROCEEDS 36
DIVIDEND POLICY 37
EXCHANGE RATE INFORMATION 38
CAPITALIZATION 40
DILUTION 41
POST-OFFERING OWNERSHIP 42
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 43
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 58
CORPORATE HISTORY AND STRUCTURE 59
OUR BUSINESS 61
REGULATION 77
MANAGEMENT 82
RELATED PARTY TRANSACTIONS 88
PRINCIPAL STOCKHOLDERS 89
DESCRIPTION OF SHARE CAPITAL 90
SHARES ELIGIBLE FOR FUTURE SALE 98
TAX MATTERS APPLICABLE TO U.S. HOLDERS OF OUR COMMON SHARES 99
ENFORCEABILITY OF CIVIL LIABILITIES 104

UNDERWRITING

 
EXPENSES RELATED TO THIS OFFERING 109
LEGAL MATTERS 109
EXPERTS 109
INTERESTS OF NAMED EXPERTS AND COUNSEL 109
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION 109
WHERE YOU CAN FIND MORE INFORMATION 110

 

 

 

Through and including                  , 2017 (25 days after the commencement of this offering), all dealers effecting transaction in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

 

 

 

You should rely only on the information contained in this prospectus and any free writing prospectus we may authorize to be delivered to you. We have not, and the underwriters have not, authorized anyone to provide you with information different from, or in addition to, that contained in this prospectus and any related free writing prospectus. We and the underwriters take no responsibility for, and can provide no assurances as to the reliability of, any information that others may give you. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is only accurate as of the date of this prospectus, regardless of the time of delivery of this prospectus and any sale of our common shares. Our business, financial condition, results of operations and prospects may have changed since that date.

 

 

 

 

PROSPECTUS SUMMARY

 

This summary highlights information that we present more fully in the rest of this prospectus. This summary does not contain all of the information you should consider before buying common shares in this offering. You should read the entire prospectus carefully, including the “Risk Factors” section and the financial statements and the notes to those statements, before deciding whether to invest in this offering.

 

Our Company

 

We are a manufacturer and distributor of eco-friendly construction materials (aggregates, bricks, pavers and tiles), made from mining waste (iron tailings) and fly-ash, as well as equipment used for the production of these eco-friendly construction materials. In addition, we provide consultation, design, project implementation and construction of urban ecological environments including those for the purpose of capturing, controlling and reusing rainwater, commonly called “sponge cities”. We also provide parts, engineering support, consulting, technical advice and service, and other project-related solutions for our manufacturing equipment and environmental protection projects.

 

We believe our products are eco-friendly as they contain approximately 70% of reclaimed fly-ash and iron tailings in place of traditional cement and aggregates. The use of reclaimed fly-ash and iron tailings assists in the protection of the environment by saving space in landfills and fly-ash ponds used for the disposal of these materials and assists in the remediation and reclamation of abandoned or closed mining sites. In addition, our eco-friendly construction materials consume less energy during manufacturing than other traditional building materials. We believe our eco-friendly construction materials, with their characteristics, including superior water permeability, and competitive prices, will be in greater demand than traditional materials as governments and others increase their focus on reducing the environmental impact of their activities.

 

Presently, our clients are located in mainland China, and internationally in Canada, the United States, Mongolia, Middle East, India, South Asia, North Africa and Brazil. We seek to establish long-term relationships with our clients by producing and delivering high-quality products and equipment and then providing technical support and consulting after equipment is delivered and projects are completed. We engage in marketing and sales through integrated marketing, services marketing and Internet marketing. We are actively pursuing additional markets for our products, equipment and projects, internationally in the Philippines, Laos, Morocco, Tunisia, Cuba, Kenya, Maldives, Argentina, Mexico and Malaysia and in additional provinces of China.

 

Beijing REIT Technology Development Co., Ltd. (“Beijing REIT”) was founded in 1999 by our Chief Executive Officer, Hengfang Li. Mr. Li has approximately 17 years of experience in the construction materials and construction materials manufacturing equipment industries. Our principal office is located in Beijing, China. As of June 30, 2017 we employed 221 people on a full-time basis, comprised of 24 employees in management, 32 employees in sales and marketing, 28 employees in research and development, 94 employees in manufacturing and installation and 43 employees in administration.

 

We are able to provide a full spectrum of products and services, from producing eco-friendly construction materials and manufacturing equipment used to produce construction materials, to project consulting, design and installation. We utilize our research and development efforts to differentiate us from our competitors. For example, we released our first fully automatic block production line in 1999, and have made advances in our technology, such as intelligent automatic systems, which allows us to access our customers’ equipment remotely to troubleshoot problems. Some of our competitors do not have automatic production lines.

 

Industry and Market Background

 

Construction Market and Opportunity

 

China is the world’s largest construction market and its construction market is expected to continue to grow for the near future, despite economic growth slowing in China. Further, while China’s construction industry only grew around 2% in 2016, China is expected to maintain its position as the world’s largest construction market for the near future and its share of the global construction market is expected to reach 26% by 2025. This growth results in large part from the continued increased urbanization in China and its National New-type Urbanization Plan, which envisions 60% of China’s population living in cities by 2020. This urbanization trend is a key factor in the Chinese government’s emphasis on green building to conserve resources. Focusing on buildings is a key element of its national strategy. We believe our eco-friendly construction materials will be in greater demand than traditional materials as the Chinese construction market continues to grow and the Chinese government increases its focus on reducing the environmental impact of building activities.

 

The construction industries in emerging markets are expected to grow at faster rates than advanced economies. From 2016-2020, the construction industries in advanced economies are expected to grow at 2.2% per year while emerging markets are expected to record a 5.3% annual expansion rate during the same period. The construction markets in the Middle East and African regions are predicted to be the fastest growing in 2016-2020, overtaking the Asia-Africa region. Asia-Pacific’s share of the global construction industry, which includes China, is expected to continue to rise, reaching close to 49% in 2020, up from 40% in 2010. Currently, we have international customers for our equipment used to produce construction materials located in Asia, the Middle East, North Africa and North America and hope to expand our international presence

 

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Sponge Cities

 

Despite the recent slowing of the growth of China’s construction industry, we believe there is a significant market opportunity to expand our business due to, among other things, China’s recent environmental initiatives.

 

In 2013 more than 230 cities in China were affected by flooding. To help combat this problem with a quicker, less expensive and less disruptive solution, Chinese scientists and politicians have proposed an increased use of “sponge cities” or features of sponge cities. A sponge city is an urban environment where rain is captured, controlled and reused, rather than funneling water away. In China, a “sponge city” refers to the “sustainable concept of city including flood control and water conservation,” according to the Opinions of the General Office of the State Council. The recycled water can be used for such purposes as refilling aquifers and for irrigation.

 

In March 2016, China announced its 13th Five Year Plan (2016-2020), which, among other matters, attempts to plug gaps in China’s drinking water safety laws, including those relating to water protection and water conservation. The 13th Five Year Plan highlighted water conservation as its first priority in the nation’s infrastructure network. It emphasized water resource management, water ecology remediation and environmental water protection.

 

To implement portions of the 13th Five Year Plan (2016-2020), China’s Ministry of Housing and Urban Rural Development (MOHURD), and the Ministries of Finance and Water released the ‘Construction Guideline for Sponge City’ at the end of 2014. The program is partially funded by the Ministry of Finance. The initiative aims to maximize water retainment and minimize the effects of drought and flooding. It will utilize buildings, roads, green spaces and other ecosystems to absorb rainwater, increase reservoir permeability and control storm water run-off to be reused in urban settings.

 

We have worked on several notable sponge city projects. Among them, we acted as one of the general contractors for the construction of a sponge-city project in Changjiang County, Hainan Province that was constructed using our eco-friendly construction materials. In addition, we acted as a consultant for the construction of another sponge-city project in Haikou City, Hainan Province. We believe that we will continue to be involved in sponge city construction and that the demand for sponge city construction will continue to be strong. As of 2015, the Chinese government had chosen 16 cities across the country, to become pilot sponge cities. The government is expected to, over the next three years, allocate each sponge city between 400 to 600 million RMB (approximately $85 million to $128 million) in government sponsored funds to construct ponds, filtration pools and wetlands, as well as to build permeable roads and public spaces that enable stormwater to soak into the ground. As such, we expect that sponge city construction will drive the demand for our eco-friendly construction materials and our equipment that is used to manufacture these materials.

 

Products and Projects

 

Eco-Friendly Construction Materials

 

We produce eco-friendly construction materials (aggregates, bricks, pavers and tiles) through our subsidiary, REIT Mingsheng Environment Protection Construction Materials (Changjiang) Co., Ltd. (“REIT Changjiang”), which operates our plant in Changjiang County, Hainan Province. We refer to our construction materials as eco-friendly because we produce them from reclaimed fly-ash and iron mine tailings. Traditional bricks in China consist primarily of clay, which is mixed with water and silt, pressed into a mold for shaping, then fired in a kiln, or furnace. We use reclaimed fly-ash and iron tailings primarily as a substitute for clay. Through vibration technology, with these raw materials inputted, the finished products can come out with different shape and types. Since the whole production is cured without fire, this process has the benefits of less space required for production and less pollution generated to the environment.

 

Samples of our eco-friendly construction materials include the following:

 

Ground works materials. Essential materials for sponge cities to assist in water absorption, flood control and water retention. These construction materials can be used for urban roads, pedestrian streets and sidewalks, city squares, landmarks, parking lots, and docks. 

 

Landscape retaining materials. These construction materials are mainly used for gardens, roads, bridges, city squares, retaining walls and slope construction.

 

Hydraulic engineering materials.. Construction material for sponge city construction, they can be used for hydraulic ecological projects such as slope protection and river transformation.

 

Wall materials. These construction materials are used for insulation, decoration, and for building walls.

 

Eco-friendly Construction Materials Manufacturing Equipment

 

We produce manufacturing equipment used to create eco-friendly construction materials. We have sold equipment to customers in China, South Asia, North America, the Middle East and North Africa. The equipment consists of large-scale fully automated production equipment with hydraulic integration. The equipment can be used to produce various types of eco-friendly construction materials that can be used for a variety of projects such as ground works, hydraulic engineering, landscape retention and wall projects.

 

 4 

Projects

 

Beginning in 2014, we entered the field of urban ecological construction (sponge city construction), including consulting, design and construction. We act as general contractor for the construction of sponge-city projects and are responsible for the planning, construction and design of such projects. We subcontract with architects and subcontractors in order to complete the projects. We also act as a consultant for sponge city construction.

  

Our Competitive Strengths

 

We believe the following competitive strengths differentiate us from our competitors and contribute to our ongoing success.

 

Eco-friendly products. Unlike many of our competitors, who still use traditional materials, we use reclaimed fly-ash and iron tailings in our construction materials production. In doing so, we help reduce environmental waste.

 

Effective operational management. We have fully trained, experienced and skilled employees that are working in concert to ensure the quality of our construction materials and manufacturing equipment. Our management team, led by our Chief Executive Officer, Mr. Hengfang Li, has extensive industry experience and a demonstrated ability to efficiently manage costs, adapt to changing market conditions, and develop new products. 

 

Focus on research and development. We are committed to researching and developing new construction materials, and to the design and manufacturing of the equipment used to produce these materials. In addition, we were recognized as a National High-Tech Enterprise in 2011, which was issued by four authorized departments (Beijing Municipal Bureau of Finance, State Tax Bureau of Beijing, Beijing Municipal Bureau of Local Tax and Beijing Municipal Committee of Science and Technology). In order to obtain a High-Tech Enterprise certification, companies are required to own the proprietary IP rights of the core technology used in their products and services in China.

 

Production Advantages. Our construction materials manufacturing plant is located in close proximity to raw material sources that are used in the manufacturing process. Accordingly, we have an abundant supply of raw materials and believe the cost of these raw materials is lower than the costs for the same materials paid by our competitors.

 

We provide a full range of eco-friendly project solutions and are not limited to the manufacture of eco-friendly construction materials or manufacturing equipment. We provide consulting, design and implementation services relating to sponge-city projects for customers, in addition to manufacturing eco-friendly construction materials and equipment. This one-stop solution allows us to capture revenue from all stages of sponge-city projects. In addition, the ability to provide total solutions allows us to service a broader group of customers, including municipalities and local governments, because we are able to construct sponge-city projects.

 

Experienced Management Team and Personnel with a Demonstrated Track Record. Our management team, led by our Chief Executive Officer Hengfang Li, has extensive industry experience and a demonstrated track record of managing costs, adapting to changing market conditions, and developing new products.

 

Our Strategies

 

      Our objective is to become the leading provider of eco-friendly construction materials and equipment. To achieve this goal, we are pursuing the following strategies: 

  seizing the opportunity presented by China’s current environmental initiatives through construction and consulting of sponge-city projects;

 

expanding our remediation projects in mining regions;

 

continue to develop new construction materials and manufacturing equipment;

 

broadening our business network internationally; and

 

pursue strategic partnerships with domestic and overseas partners.

 

Our Challenges and Risks

 

We recommend that you consider carefully the risks discussed below and under the heading “Risk Factors” beginning on page 13 of this prospectus before purchasing our common shares. If any of these risks occur, our business, prospects, financial condition, liquidity, results of operations and ability to make distributions to our shareholders could be materially and adversely affected. In that case, the trading price of our common shares could decline and you could lose some or all of your investment. These risks include, among others, the following: 

 

our ability to compete in a competitive environment;

 5 

 

the sale of our eco-friendly construction materials are subject to geographic market risks;

 

our ability to adapt to create new eco-friendly construction materials and manufacturing equipment;

 

we may be exposed to intellectual property infringement and other claims by third parties;

 

our ability to maintain an effective system of internal control over financial reporting;

 

  our  ability to produce innovative products and technologies;

 

negative publicity surrounding U.S.-listed Chinese companies may unfairly harm our reputation and adversely affect our ability to access capital markets to grow our business; and

 

the regulatory and legal system in China is complex and developing, and future regulations may impose additional requirements on our business.

 

Foreign Private Issuer Status

 

We are incorporated in the British Virgin Islands, and more than 50 percent of our outstanding voting securities are not directly or indirectly held by residents of the United States. Therefore, we are a “foreign private issuer” as defined in Rule 405 under the Securities Act and Rule 3b-4(c) under the Exchange Act. As a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we will be subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports or proxy statements. We will not be required to disclose detailed individual executive compensation information. Furthermore, our directors and executive officers will not be required to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider short-swing profit disclosure and recovery regime.

 

Corporate Information

 

On August 7, 2015, RETO Eco-Solutions, Inc. (“ReTo Eco-Solutions”) was incorporated in the British Virgin Islands. On the same day, the company issued 10,000 common shares at $0.001 per share to its incorporator with cash proceeds of $10.

 

Ownership and Purpose

 

ReTo Eco-Solutions, Inc. – ReTo Eco-Solutions is our British Virgin Islands holding company.

 

REIT Holdings (China) Limited (“REIT Holdings”) – REIT Holdings is our wholly-owned Hong Kong subsidiary.

 

Beijing REIT – Beijing REIT is an operating company in China and a wholly- owned subsidiary of REIT Holdings. Its business scope includes research and development and solutions for solid waste (construction waste, fly-ash and mining waste) disposal and reuse.

 

Xinyi REIT Ecological Technology Co., Ltd (“REIT Ecological”) – REIT Ecological is a wholly-owned subsidiary of REIT Holdings, its business scope will include research and development and solutions for solid wastes.

 

REIT Technology Development (America), Inc. (“REIT US”) – REIT US is a company incorporated in the United States and a wholly-owned subsidiary of Beijing REIT. Its business scope includes customer relationship management with the Company’s North American customers, marketing in North America and maintaining relationships with our partners, such as Alchemy Geopolymer Solutions, LLC.

 

Beijing REIT Ecological Engineering and Technology Co., Ltd. (“REIT Technology”) – REIT Technology is an operating company in China and a wholly-owned subsidiary of Beijing REIT. Its business scope includes the development and construction of municipal eco-friendly sponge city projects.

 

Gu-an REIT Machinery Manufacturing Co., Ltd. (“Gu’an REIT”) – Gu’an REIT is an operating company in China and a wholly owned subsidiary of Beijing REIT. Its business scope includes the development, manufacture and distribution of specialized equipment to manufacture construction materials.

 

Langfang Ruirong Mechanical and Electrical Equipment Co., Ltd. (“Ruirong”) – Ruirong is an operating company in China and a wholly-owned subsidiary of Beijing REIT. Its business scope includes manufacturing assembly parts used in specialized equipment to manufacture construction materials.

 

REIT Mingsheng Environment Protection Construction Materials (Changjiang) Co., Ltd. (“REIT Changjiang”) REIT Changjiang is an operating company in China and a subsidiary of Beijing REIT that is owned 84.32% by Beijing REIT and 15.68% by Venture Business International Limited (“VBI”), a British Virgin Islands company. Its business scope includes hauling and processing construction and mining waste, with which it produces eco-friendly building products (aggregates, bricks, pavers and tiles) for environmental-friendly uses.

 

 6 

 

 

Nanjing Dingxuan Environment Protection Technology Development Co., Ltd. (“Dingxuan”) – Dingxuan is an operating company in China and a wholly owned-subsidiary of Beijing REIT. Its business scope includes technical support and consulting services for environmental protection projects.

 

Hainan REIT Construction Project Co., Ltd. (“REIT Construction”) – REIT Construction is an operating company in China and wholly owned subsidiary of REIT Changjiang. Its business scope includes the development and construction of municipal eco-friendly sponge city projects.

 

REIT Xinyi New Material Co., Ltd. (“REIT Xinyi”) – REIT Xinyi is an operating company in China and a 70% owned subsidiary of Beijing REIT. Its business scope will include the manufacture of specialized equipment to produce recycled building products (aggregates, bricks, pavers and tiles) for eco-friendly building.

 

REIT Q GREEN Machines Private Limited (“REIT India”) – REIT India is an operating company in India and a 51% owned subsidiary of Beijing REIT. We expect to expand our business in the Indian market through this joint venture with Q Green Techcon Private Limited, an Indian company (“Q GREEN”). Its business scope will include the manufacture of specialized equipment to produce recycled building products (aggregates, bricks, pavers and tiles) for eco-friendly building. 

 

Corporate Organizational Chart

Corporate History

 

Beijing REIT was established on May 12, 1999 under the laws of China with registered capital of RMB 24 million (approximately $3.5 million) and additional paid-in capital of RMB 100 million (approximately $15.4 million) contributed by four individual shareholders. Since its formation in 1999, Beijing REIT has established several other wholly-owned subsidiaries:

 

Gu’an REIT incorporated on May 12, 2008;

 

REIT Technology incorporated on April 24, 2014;

 

Ruirong incorporated on May 12, 2014;

 

Dingxuan incorporated on October 17, 2014; and
   
REIT US incorporated on February 27, 2014.

 

 7 

 

REIT Changjiang was incorporated in Hainan Province, China, on November 22, 2011 with the original registered capital of RMB 100 million (approximately $16 million). Its original shareholders were Hainan Wenchang Mingsheng Investment Co., Ltd. (“Hainan Wenchang”), which owned 40% and Zhongrong Huanneng Investment (Beijing) Co., Ltd. (“Zhongrong”), which owned 60%. On July 16, 2013, as result of a capital transfer, Zhongrong increased its equity ownership to 79.5% and Hainan Wenchang’s equity ownership was decreased to 20.5%. Zhongrong was owned by the same four individual shareholders of Beijing REIT by trust.

 

On February 2, 2015, Hainan Wenchang transfered its 20.5% equity ownership to Beijing REIT. On April 20, 2015, Beijing REIT and Zhongrong signed a joint venture agreement with VBI, to turn REIT Changjiang into a joint venture business. In connection with this joint venture agreement, on June 18, 2015, VBI contributed an additional RMB 18.6 million (approximately $2.8 million) to increase the registered capital of REIT Changjiang from RMB 100 million to RMB 118.6 million. On January 10, 2016, Zhongrong signed an equity transfer agreement with Beijing REIT, pursuant to which the shareholders of Zhongrong agreed to transfer all of its equity interests in REIT Changjiang to Beijing REIT. As a result of the above reorganizations, Beijing REIT now holds an 84.32% equity interest in REIT Changjiang and VBI holds the remaining 15.68% equity interest. Zhongrong and Beijing REIT are considered under common control since they are owned by the same four individual shareholders. The above-mentioned transactions were considered as a reorganization.

 

On June 1, 2015, REIT Construction was incorporated as a wholly-owned subsidiary of REIT Changjiang.

 

On July 14, 2015, Beijing REIT established a new subsidiary, REIT Xinyi. Beijing REIT owns a 70% equity interest in REIT Xinyi, and the remaining 30% is owned by a minority shareholder Xinyi Transportation Investment Co., Ltd. (“Xinyi Transportation”).

   

On August 7, 2015, ReTo Eco-Solutions issued 10,000 common shares at $0.001 per share to its incorporator with cash proceeds of $10.

 

In February 2016, Beijing REIT established a joint venture, REIT India, together with an Indian company Q Green. The total registered capital of REIT India is $100,000, and Beijing REIT owns a 51% interest.

  

On February 7, 2016, Beijing REIT and its individual original shareholders entered into an equity transfer agreement, pursuant to which these shareholders agreed to transfer all of their ownership interests in Beijing REIT with a carrying value of RMB 24 million (or $3,466,260) to REIT Holdings (the “Transfer”). After this equity transfer, Beijing REIT became a Wholly Foreign-Owned Enterprise (“WOFE”) and amended the registration with the State Administration for Industry and Commerce (“SAIC”) on March 21, 2016. As part of this equity transfer, the Company issued a total of 17,830,000 of its common shares at $0.25 per share to all of the Company’s original shareholders or former shareholders in Beijing REIT. Among total proceeds of $4,457,500 from the share issuance, the Company paid $3,466,260 (approximately RMB 24 million) to the original shareholders of Beijing REIT as the consideration for the transfer of their equity interests in Beijing REIT. Since these shares were issued to the original shareholders of Beijing REIT, the transaction is considered as a part of the reorganization.

  

On September 30, 2016 Liu Kejia, Tech Sources International Enterprises Limited, Hengfang Li, ReTo Eco-Solutions and REIT Changjiang entered into a Convertible Debt Investment Agreement. Pursuant to the Convertible Debt Investment Agreement a previously provided loan from Liu Kejia in a principal amount of RMB 21,240,000 (approximately $3,273,000) was converted into 800,000 common shares of ReTo Eco-Solutions in satisfaction of all amounts outstanding under such loan. The loan was used to improve REIT Chanjiang’s construction materials manufacturing plant.

 

Further, in December 2016 ReTo Eco-Solutions sold Good Venture Industrial Limited 900,000 common shares for RMB 23,400,000 (approximately $3,600,000). As of December 31, 2016, the Company has not received the funds from the investor. The shares issued are held in escrow. As of date of this report, this transaction has not closed.

 

On March 2, 2017, REIT Ecological was established in Xinyi as a wholly-owned subsidiary of REIT Holdings, with a registered capital of $30 million.

 

Implications of Being an Emerging Growth Company

 

We are an “emerging growth company,” as defined in the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We have not made a decision whether to take advantage of any or all of these exemptions. If we do take advantage of any of these exemptions, we do not know if some investors will find our common shares less attractive as a result. The result may be a less active trading market for our common shares and the price of our common shares may be more volatile.

 

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 (the “Securities Act”) for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

We will remain an “emerging growth company” until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed US$1 billion, (ii) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (iii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934 (the “Exchange Act”), which would occur if the market value of our common shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iv) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period. 

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The Offering

 

Common shares offered by us: 2,800,000  
     
Common shares outstanding immediately prior to this offering: 19,540,000  
     
Common shares outstanding immediately after this offering: 22,340,000  

 

Option to purchase additional common shares from us

420,000

 
     
Offering price per common share: $          per share
     
Use of proceeds:

We expect to receive net proceeds of approximately $11.9 million this offering (or 13.8 million if the underwriters’ option to purchase additional common shares from us is exercised in full), assuming an initial public offering price of $5.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The net proceeds from this offering must be remitted to China before we will be able to use the funds to grow our business.

 

We intend to use the net proceeds of this offering as follows after we complete the remittance process:

 
     
 

●     approximately $5.0 million for working capital of Beijing REIT and REIT Changjiang for the purchase of raw materials, marketing and research and development;

 

●     We may use approximately $3.5 million for acquisitions of complementary businesses, in the area of production of eco-friendly construction materials similar to REIT Changjiang or REIT Xinyi. However, we have no current understandings, agreements or commitments for any specific material acquisitions at this time;

 

●     approximately $2.9 million for the new plant construction for REIT Xinyi;

 

●     approximately $500,000 in escrow for indemnity claims of the underwriters, which sum could be returned to us after two years from the date of this offering; and

 

●     any balance for additional working capital.

 

 
  See “Use of Proceeds”  
     
Risk factors: Investing in these securities involves a high degree of risk. As an investor, you should be able to bear a complete loss of your investment. You should carefully consider the information set forth in the “Risk Factors” section of this prospectus before deciding to invest in our common shares.  
     
Proposed NASDAQ Capital Market symbol:

“RETO” 

 

 

Unless we specifically state otherwise, the information in this prospectus assumes no exercise of the underwriters’ option to purchase additional common shares from us in this offering.

 

 9 

 

Prospectus Conventions

 

Except where the context otherwise requires, “we”, “us”, “company”, “Company”, “our” and “ReTo” collectively refer to:

 

ReTo Eco-Solutions, Inc., a British Virgin Islands holding company (“ReTo Eco-Solutions”);

 

REIT Holdings (China) Limited, a Hong Kong limited company (“REIT Holdings”), and a wholly-owned subsidiary of ReTo Eco-Solutions;

 

Beijing REIT Technology Development Co., Ltd., a China limited company (“Beijing REIT”) and a wholly-owned subsidiary of REIT Holdings;
   
 Xinyi REIT Ecological Technology Co., Ltd (“REIT Ecological”) and a wholly-owned subsidiary of REIT Holdings;

 

Gu’an REIT Machinery Manufacturing Co., Ltd., a China limited company (“Gu’an REIT”) and a wholly-owned subsidiary of Beijing REIT;

 

  Beijing REIT Ecological Engineering and Technology Co., Ltd., a China limited company (“REIT Technology”) and a wholly-owned subsidiary of Beijing REIT;

  

Langfang Ruirong Mechanical and Electrical Equipment Co., Ltd., a China limited company (“Ruirong”) and a wholly-owned subsidiary of Beijing REIT;

 

Nanjing Dingxuan Environment Protection Technology Development Co., Ltd., a China limited company (“Dingxuan”) and a wholly-owned subsidiary of Beijing REIT;

 

REIT Technology Development (America), Inc., a California corporation (“REIT US”) and a wholly-owned subsidiary of Beijing REIT;

 

  REIT MingSheng Environment Protection Construction Materials (Changjiang) Co., Ltd., a China limited company (“REIT Changjiang”) and a 84.32% owned subsidiary of Beijing REIT;

 

Hainan REIT Construction Project Co., Ltd., a China limited company (“REIT Construction”) and a wholly-owned subsidiary of REIT Changjiang; and

 

REIT Xinyi New Material Co., Ltd, a China limited company (“REIT Xinyi”) and a 70% owned subsidiary of Beijing REIT;

 

  REIT Q GREEN Machines Private Limited, an India limited company (“REIT India”) and a 51% owned subsidiary of Beijing REIT.

 

China Operating Companies or China Operating Company refer to, collectively or individually, as the case may be, to Beijing REIT, REIT Ecological, Gu’an REIT, REIT Technology, Ruirong, Dingxuan, REIT Changjiang, REIT Construction and REIT Xinyi.

 

All references to “RMB,” and “Renminbi” are to the legal currency of China, and all references to “USD,” and “U.S. Dollars” are to the legal currency of the United States.

 

This prospectus contains translations of certain RMB amounts into U.S. dollar amounts at a specified rate solely for the convenience of the reader unless otherwise noted, all translations made in this prospectus are based on a rate of RMB 6.9448 to $1.00, which was the exchange rate on December 31, 2016. Unless otherwise stated, we have translated balance sheet amounts with the exception of equity at December 31, 2016 at RMB 6.9448 to $1.00 as compared to RMB 6.4917 to $1.00 at December 31, 2015. We have stated equity accounts at their historical rate. The average translation rates applied to income statement accounts for the year ended December 31, 2016 and the year ended December 31, 2015 were RMB 6.6441 and RMB 6.2288, respectively. We make no representation that the RMB or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or RMB, as the case may be, at any particular rate or at all. On August 3, 2017, the exchange rate was RMB 6.7225 to $1.00. See “Risk Factors – Fluctuation of the Renminbi could materially affect our financial condition and results of operations” for discussions of the effects of fluctuating exchange rates on the value of our common shares. Any discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.

 

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For the sake of clarity, this prospectus follows the English naming convention of first name followed by last name, regardless of whether an individual’s name is Chinese or English. For example, the name of our Chief Executive Officer will be presented as “Hengfang Li,” even though, in Chinese, his name would be presented as “Li Hengfang.”

 

We have relied on statistics provided by a variety of publicly-available sources regarding China’s expectations of growth, which have not been independently verified by us, the underwriters or any of their respective affiliates or advisers. We did not, directly or indirectly, sponsor or participate in the publication of such materials, and these materials are not incorporated in this prospectus other than to the extent specifically cited in this prospectus. We have sought to provide current information in this prospectus and believe that the statistics provided in this prospectus remain up-to-date and reliable.

 

Summary Consolidated Financial Information

 

In the tables below, we provide you with summary consolidated financial data of our Company. This information is derived from our audited consolidated financial statements for the years ended December 31, 2016 and 2015, included elsewhere in this prospectus. Historical results are not necessarily indicative of the results that may be expected for any future period. When you read this historical summary consolidated financial data, it is important that you read it along with the historical statements and notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

   For the Years Ended
December 31,
 
Consolidated Statements of Income and Comprehensive Income Data:  2016   2015 
Revenues  $32,424,269   $17,384,373 
Cost of goods sold   18,272,017    9,265,313 
Gross profit   14,152,252    8,119,060 
Total operating expenses   5,963,222    4,528,236 
Income from operations   8,189,030    3,590,824 
Other income (expense)          
      Interest expense   (1,450,389)   (1,032,329)
      Other income   (283,205)   92,880 
Total other expense, net   (1,733,594)   (939,449)
Income before income taxes   6,455,436    2,651,375 
Provision for income taxes   1,952,356    295,760 
Net income   4,503,080    2,355,615 
Less: net income attributable to non-controlling interest   399,559    41,270 
Net income attributable to RETO Eco-Solutions, Inc.   4,103,521    2,314,345 
Other comprehensive loss:          
      Foreign currency translation loss   (1,699,975)   (905,144)
Comprehensive income   2,803,105    1,450,471 
Less: comprehensive income (loss) attributable to non-controlling interest   (26,394)   (65,195)
Comprehensive income attributable to RETO Eco-Solutions, Inc.   2,829,499    1,515,666 
Earnings per share – basic and diluted   0.25    0.13 
Weighted average number of shares - basic and diluted   18,043,836    17,840,000 

 

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   As of December 31, 2016 
Consolidated Balance Sheet Data:  Actual   Pro Forma 
Cash and cash equivalents  $1,594,594   $17,064,594 
Total current assets   21,144,455    36,614,455 
Total non-current assets   41,516,544    41,516,544 
Total assets   62,660,999    78,130,999 
Total liabilities   34,358,331    34,358,331 
Total equity   28,302,668    43,772,668 
Total liabilities and equity   62,660,999    78,130,999 

 

The pro forma column in the consolidated balance sheet data table above reflects the sale of 2,800,000 common shares in this offering at an assumed initial public offering price of $5.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. In addition, pro forma adjustment also includes the impact from the issuance of 900,000 shares in escrow as of December 31, 2016 to pre-IPO investors for total consideration of $3.6 million.

 

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RISK FACTORS

 

Investment in our securities involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this prospectus before making an investment decision. The risks and uncertainties described below represent our known material risks to our business. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, you may lose all or part of your investment. You should not invest in this offering unless you can afford to lose your entire investment.

 

Risks Related to Our Business

 

Wage increases in China may prevent us from sustaining our competitive advantage and could reduce our profit margins.

 

Labor costs in China have increased with China’s economic development. Rising inflation in China is also putting pressure on wages. Wage costs for our employees form a significant part of our costs. For instance, in both 2016 and 2015, our compensation and benefit costs for our employees were approximately $1 million per year. In addition, we are required by Chinese laws and regulations to pay various statutory employee benefits, including pensions, housing funds, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated governmental agencies for the benefit of our employees. We expect that our labor costs, including wages and employee benefits, will continue to increase, particularly as we seek to expand our operations. In addition, the future issuance of equity-based compensation to our professional staff and other employees would also result in additional stock dilution for our shareholders. Unless we are able to pass on these increased labor costs to our customers by increasing prices for our products and projects, our profitability and results of operations may be materially and adversely affected. Furthermore, the Chinese government has promulgated new laws and regulations to enhance labor protections in recent years, such as the Labor Contract Law and the Social Insurance Law. As the interpretation and implementation of these new laws and regulations are still evolving, our employment practice may not at all times be deemed in compliance with the new laws and regulations. If we are subject to penalties or incur significant liabilities in connection with labor disputes or investigation, our business and profitability may be adversely affected.

 

Our revenue will decrease if the industries in which our customers operate experience a protracted slowdown.

 

Our customers generally operate in the construction industry. Therefore, we are subject to general changes in economic conditions impacting this industry segment of the economy. If the construction industry does not grow or if there is a contraction in this industry, demand for our business would decrease. Demand for our business is typically affected by a number of overarching economic factors, including interest rates, environmental laws and regulations, the availability and magnitude of private and governmental investment in infrastructure projects and the health of the overall economy. If there is a decline in economic activity in China or the other markets in which we operate, or there is a protracted slowdown in industries upon which we rely for our sales, demand for our projects and products and our revenue would likewise decrease, which could have a materially adverse effect on our business.

 

Any decline in the availability or increase in the cost of raw materials could materially impact our earnings.

 

Our construction material products, manufacturing equipment and projects depend heavily on the ready availability of various raw materials. The availability of raw materials may decline, and their prices may fluctuate greatly. If our suppliers are unable or unwilling to provide us with raw materials on terms favorable to us, we may be unable to produce certain products, equipment or complete projects. The inability to produce certain products or projects for customers could result in a decrease in profit and damage to our corporate reputation. In the event our raw material costs increase, we may not be able to pass these higher costs on to our customers in full or at all.

 

We rely on a limited number of vendors, and the loss of any significant vendor could harm our business, and the loss of any one of such vendors could have a material adverse effect on our business.

 

We consider our major vendors to be those vendors that accounted for more than 10% of overall purchases in any given fiscal period. For the years ended December 31, 2016 and 2015, the Company purchased approximately 41% and 39%, and 10% and 5%, of its raw materials from two major suppliers – Changjiang Huasheng Tianya Cement Co., Ltd. and Liu Li, a natural person, respectively. We have not entered into long-term contracts with our significant vendors and instead rely on individual contracts with such vendors. Although we believe that we can locate replacement vendors readily on the market for prevailing prices, any difficulty in replacing a vendor on terms acceptable to us could negatively affect our company’s performance to the extent it results in higher prices or a slower supply chain.

 

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We face substantial inventory risk, which if such risk is not addressed could have a material adverse effect on our business.

 

We must order materials for our products and projects and build inventory in advance of production. We typically acquire materials through a combination of purchase orders, supplier contracts and open orders, in each case based on projected demand.

 

Our inventory includes raw materials, work-in progress products and finished goods. As of December 31, 2016, our inventory was $1.3 million. Inventory turnover for the fiscal 2016 was 35 days. As our markets are competitive and subject to rapid technology and price changes, there is a risk that we will forecast incorrectly and order or produce incorrect amounts of products or not fully utilize firm purchase commitments. If we were unsuccessful in accurately quantifying appropriate levels of inventory, our business, financial condition and results of operation may be materially and adversely affected.

 

Any disruption in the supply chain of raw materials and our products could adversely impact our ability to produce and deliver products which could have a material adverse effect on our business.

 

In order to optimize our product manufacturing, we must manage our supply chain for raw materials and delivery of our products. Supply chain fragmentation and local protectionism within China further increase supply chain disruption risks. Local administrative bodies and physical infrastructure built to protect local interests may pose transportation challenges for raw material transportation as well as product delivery. In addition, profitability and volume could be negatively impacted by limitations inherent within the supply chain, including competitive, governmental, legal, natural disasters, and other events that could impact both supply and price. Any of these occurrences could cause significant disruptions to our supply chain, manufacturing capability and distribution system that could adversely impact our ability to produce and deliver products. If we are unsuccessful in maintaining efficient operation of our supply chain, our business, financial condition and results of operation may be materially and adversely affected.

 

We do not maintain a reserve for warranty or defective products and installation claims. Our costs could increase if we experience a significant number of claims, which could have a material adverse effect on our business.

 

We generally obtain customers’ acceptance when we deliver products, equipment or projects. In practice, we allow our customers to reserve approximately 5-20% of the agreed purchase or installation price as a security retention for a period of one or two years after we deliver or implement a solution. We consider this one or two years term to be a warranty period for our products or projects sold. Historically, we have not experienced significant customer complaints concerning our products or projects, and none of our customers have claimed damages for any loss incurred due to quality problems. In addition to our one to two years reserve, China’s Product Quality Law generally allows customers two years to seek compensation for damages caused by product quality deficiencies in cases in which a product lacks an expiration period.

 

We expect our customer support teams and our quality assurance and manufacturing monitoring procedures to continue to keep claims at a level that does not support a need for a financial reserve. However, if we experience significant increases in claims or customers’ failure to pay the final 5-20% of a purchase/installation price as a result of quality concerns, our financial results could be adversely affected.

 

We face certain risks in collecting our accounts receivable, the failure to collect could have a material adverse effect on our business.

 

With the recent expansion of our business, our accounts receivable has increased significantly. At the end of December 31, 2016 and 2015, our accounts receivable were $15,207,029 and $9,116,558, respectively. These amounts represented 47% of our total revenues in 2016 and 52% of our total revenues in 2015. For the year ended December 31, 2016 accounts receivable turnover was 137 days, decreased from 148 days for the same period in 2015.

 

Although we believe that we have developed a robust receivables management system and have not incurred a situation where an account receivable has become uncollectable, as our business continues to scale, we believe that our accounts receivable balance will continue to grow. This, in turn, increases our risks for bad debts and uncollectible receivables. To the extent we incur additional bad debts and/or uncollectible receivables, our business, financial condition and results of operation may be materially and adversely affected.

 

Our return on investment in client projects may be different from our projections.

 

Our return on investment in client projects will take some time to materialize. At the initial stages of project investment and construction, the depreciation of newly added materials and fixed assets will negatively affect our operating results. In addition, the projects may be subject to changes in market conditions during the installation and implementation phases. Changes in industry

 

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policy, the progress of the projects, project management, raw materials supply, market conditions and other variables may affect the profitability and the time in which we profit on projects, which may be different from our initial forecast, thus affecting the actual return on investment of the projects.

 

The sale of our eco-friendly construction materials are subject to geographic market risks, which could adversely affect our revenues and profitability.

 

Currently, all of our eco-friendly construction materials are sold in China’s Hainan Province. Accordingly, we are subject to risks related to the economy of this geographic market. In addition to economic conditions, the geographic concentration suggests that regional specific legislation, taxes and disasters such as earthquakes could disproportionately affect us and our financial performance. A downturn in the demand for eco-friendly construction materials or economic conditions in Hainan Province could result in a material decline in our business, financial condition and results of operation.

 

We have experienced rapid growth in recent periods. If we fail to manage our growth effectively, we may be unable to execute our business plan and address competitive challenges, which could have a material adverse effect on our business.

 

Our total revenues increase from $17.4 million in 2015 to $32.4 million in 2016. This growth has resulted, and will continue to result, in substantial demands on our managerial, administrative, operational, financial and other resources. Furthermore, we intend to grow by expanding our business, increasing market penetration of our existing products, developing new products and increasing our targeting of domestic and international markets. To manage this growth, we must develop and improve our existing administrative and operational systems and our financial and management controls and further expand, train and manage our work force.

 

As we continue these efforts, we may incur substantial costs and expend substantial resources due to, among other things, different technology standards, legal considerations and cultural differences. We will be required to dedicate additional financial resources and personnel to optimize our operational infrastructure and to recruit more personnel to train and manage our growing employee base. If we cannot successfully implement these measures efficiently and cost-effectively, we may be unable to satisfy a growth in demand for our products and projects, which will impair our revenue growth and hurt our overall financial performance.

 

We cannot assure you that our growth strategy will be successful, which may result in a negative impact on our growth, financial condition, results of operations and cash flow.

 

We intend to grow by expanding our business, increasing market penetration of our existing products, developing new products and increasing our targeting of domestic and international markets. However, many obstacles to this expansion exist, including increased competition from similar businesses, our ability to improve our products and product mix to realize the benefits of our research and development efforts, unexpected costs and costs associated with marketing efforts. As such, we cannot assure you that we will be able to successfully overcome these potential challenges and establish our business in additional markets. Our inability to implement this growth strategy successfully may have a negative impact on our growth, future financial condition, and results of operations or cash flows.

 

If we fail to protect our intellectual property rights, it could harm our business and competitive position.

 

We own thirty-nine patents (seven of which are owned jointly with Luoyang Water-Conservancy Surveying & Design Co., Ltd. (“Luoyang”), an independent third party), and four software copyrights in China covering our construction material products and manufacturing equipment, and we rely on a combination of patent, trademark and trade secret laws and non-disclosure agreements and other methods to protect our intellectual property rights.

 

The process of seeking patent protection on future patents can be lengthy and expensive, our patent applications may fail to result in patents being issued, and our existing and future patents may be insufficient to provide us with meaningful protection or commercial advantage. Our patents and patent applications may also be challenged, invalidated or circumvented.

 

Implementation of Chinese intellectual property-related laws has historically been lacking, primarily because of ambiguities in Chinese laws and enforcement difficulties. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other western countries. Furthermore, policing unauthorized use of proprietary technology is difficult and expensive, and we may need to resort to litigation to enforce or defend patents issued to us or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such litigation and an adverse determination in any such litigation, if any, could result in substantial costs and diversion of resources and management attention, which could harm our business and competitive position.

 

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We may be exposed to intellectual property infringement and other claims by third parties which, if successful, could disrupt our business and have a material adverse effect on our financial condition and results of operations.

 

Our success depends, in large part, on our ability to use and develop our technology and know-how without infringing third party intellectual property rights. We face a high risk of being the subject of claims for intellectual property infringement, invalidity or indemnification relating to other parties’ proprietary rights because we sell our products and manufacturing equipment internationally and litigation is becoming more common in China. Our current or potential competitors, many of which have substantial resources and have made substantial investments in competing technologies, may have or may obtain patents that will prevent, limit or interfere with our ability to make, use or sell our branded products in either China or other countries, including the United States and other countries in Asia. In addition, the defense of intellectual property suits, including patent infringement suits, and related legal and administrative proceedings can be costly, time consuming and may significantly divert the efforts and resources of our technical and management personnel. Furthermore, an adverse determination in any such litigation or proceedings to which we may become a party could cause us to:

 

 

pay damage awards;

     
 

seek licenses from third parties;

     
 

pay ongoing royalties;

     
 

redesign our branded products; or

     
  be restricted by injunctions.

 

Each of these events could effectively prevent us from pursuing some or all of our business and result in our customers or potential customers deferring or limiting their purchase or use of our branded products, which could have a material adverse effect on our financial condition and results of operations.

 

Confidentiality agreements with employees and third parties may not prevent unauthorized disclosure of proprietary information and trade secrets.

 

In addition to patents, we rely on confidentiality agreements to protect our technical know-how and other proprietary information. In addition, our officers and each of our main technical and management employees have signed a confidentiality agreement. Nevertheless, there can be no guarantee that an employee or a third party will not make an unauthorized disclosure of our proprietary confidential information. This might happen intentionally or inadvertently. It is possible that a competitor will make use of such information, and that our competitive position will be compromised, in spite of any legal action we might take against persons making such unauthorized disclosures.

 

The use of unqualified individual subcontractors may result in substantial liability.

 

We, REIT Construction and REIT Technology sometimes subcontract portions of our projects to third parties. According to Construction Law and Qualification Standard for Labor Subcontracting in Construction Business of China, individual contractors are not in a position to obtain any qualification of labor subcontracting. Accordingly, contracts subcontracted out by REIT Construction and REIT Technology to individual contractors may be declared void and unenforceable by applicable courts. Article 29 of the Construction Law requires that “the overall contractors and subcontractors shall bear joint responsibilities to project owners for the subcontracted projects”. It is possible that we may subcontract projects to individuals or parties without required qualifications. If the construction completed by unqualified individual subcontractors does not meet required quality standards and an accident occurs, we may jointly bear the consequences pursuant to the Article 67 of the Construction Law. Also, according to Article 54 of the Regulation on the Quality Management of Construction Projects, the liabilities for the consequences could be indemnifying the damages and paying a penalty ranging from 500,000 RMB (approximately $72,000) up to 1.0 million RMB. (approximately $144,000).

 

If we experience a significant disruption in, or a breach in security of, our information technology systems or if we fail to implement, manage or integrate new systems, software and technologies successfully, it could harm our business.

 

Our information technology (“IT”) systems are an integral part of our business. We depend on our IT systems to process transactions, manage logistics, keep financial records, prepare our financial reporting and operate other critical functions. Security breaches, cyber-attacks or other serious disruptions of our IT systems can create systemic disruptions, shutdowns or unauthorized disclosure of confidential information. If we are unable to prevent or adequately respond to such breaches, attacks or other disruptions, our operations could be adversely affected or we may suffer financial or reputational damage.

 

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In addition, our ability to effectively implement our business plan in a rapidly evolving market requires effective planning, reporting and analytical processes and systems. We are improving and expect that we will need to continue to improve and further integrate our IT systems, reporting systems and operating procedures on an ongoing basis. If we fail to do so effectively, it could adversely affect our ability to achieve our objectives.

 

Product defects and unanticipated use or inadequate disclosure with respect to our products could adversely affect our business, reputation and financial performance.

 

Manufacturing or design defects (including in products or components that we source from third parties), unanticipated use of, or inadequate disclosure of risks relating to, the use of products or equipment that we make and sell may lead to personal injury, death or property damage. These events could lead to recalls or alerts relating to our products, result in the removal of a product or equipment from the market or result in product liability claims being brought against us. Product and equipment recalls, removals and liability claims can lead to significant costs, as well as negative publicity and damage to our reputation that could reduce demand for our products and equipment.

 

Outstanding bank loans may reduce our available funds.

 

We have approximately $17.2 million in bank loans and bank notes payable outstanding as of December 31, 2016. The loans are held at multiple banks, and all of the debt is guaranteed by third-party guaranty companies and certain company officers. There can be no guarantee that we will be able to pay all amounts when due or refinance the amounts on terms that are acceptable to us or at all. If we are unable to make our payments when due or to refinance such amounts, our property could be foreclosed and our business could be negatively affected.

 

Our future growth depends on new products, equipment and new technology innovation, and failure to invent and innovate could adversely impact our business prospects.

 

Our future growth depends in part on maintaining our competitive advantage with current products and equipment in new and existing markets, as well as our ability to develop new products, equipment and technologies to serve such markets. To the extent that competitors develop competitive products, equipment and technologies, or new products, equipment or technologies that achieve higher customer satisfaction, our business prospects could be adversely impacted. In addition, regulatory approvals for new products, equipment or technologies may be required, and these approvals may not be obtained in a timely or cost effective manner, which could adversely impact our business prospects.

 

Changes in demand for our products, equipment and business relationships with key customers and suppliers may negatively affect operating results.

 

To achieve our objectives, we must develop and sell products and equipment that are subject to the demands of our customers. This is dependent on many factors, including managing and maintaining relationships with key customers, responding to the rapid pace of technological change and obsolescence, which may require increased investment by us or result in greater pressure to commercialize developments rapidly or at prices that may not fully recover the associated investment, and the effect on demand resulting from customers’ research and development, capital expenditure plans and capacity utilization. If we are unable to keep up with our customers’ demands, our sales, earnings and operating results may be negatively affected.

 

We may be unable to deliver our backlog on time, which could affect future sales and profitability and our relationships with customers.

 

Our ability to meet customer delivery schedules for backlog is dependent on a number of factors including sufficient manufacturing plant capacity, adequate supply channel access to raw materials and other inventory required for production, an adequately trained and capable workforce, project engineering expertise for certain large projects and appropriate planning and scheduling of manufacturing resources. Many of the contracts we enter into with our customers require long manufacturing lead times. Failure to deliver in accordance with customer expectations could subject us to contract cancellations and financial penalties, and may result in damage to existing customer relationships and could have a material adverse effect on our business, financial condition and results of operations. We cannot assure you that our backlog will result in revenue on a timely basis or at all, or that any cancelled contracts will be replaced.

 

Our operations are subject to various hazards that may cause personal injury or property damage and increase our operating costs, and which may exceed the coverage of our insurance.

 

There are inherent risks to our operations. Our workers are subject to the usual hazards associated with providing services on construction sites, while our plant personnel are subject to the hazards associated with moving and storing large quantities of heavy raw materials and finished products. Operating hazards can cause personal injury and loss of life, damage to or destruction of

 

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property, plant and equipment and environmental damage. Although we conduct training programs designed to reduce these risks, we cannot eliminate these risks. We rely on state mandated social insurance for work-related injuries of our employees. However, any claim that exceeds the scope of our insurance coverage, if successful and of sufficient magnitude, could result in the incurrence of substantial costs and the diversion of resources, which could have a material adverse effect on us. In addition, we do not have any business liability, disruption, litigation or property insurance coverage for our operations. Any uninsured occurrence of loss or damage to property, or litigation or business disruption may also materially and adversely affect our ability to operate.

 

We may incur material costs and losses as a result of claims our products do not meet regulatory requirements or contractual specifications.

 

Our operations involve providing products that must meet building code or other regulatory requirements and contractual specifications for durability, stress-level capacity, weight-bearing capacity and other characteristics. If we fail or are unable to provide products meeting these requirements and specifications, we may face economic penalties, including price adjustments, rejection of deliveries and/or termination of contracts, and our reputation could be damaged. If a significant product-related claim or claims are made and resolved against us in the future, such resolution may have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Our operations may incur substantial liabilities to comply with environmental laws and regulations.

 

Our construction materials manufacturing operations are subject to laws and regulations relating to the release or disposal of materials into the environment or otherwise relating to environmental protection. Our failure to have complied with the applicable laws may result in the assessment of administrative, civil and criminal penalties, the incurrence of investigatory or remedial obligations and the imposition of injunctive relief. Resolution of these matters may require considerable management time and expense. In addition, changes in environmental laws and regulations occur frequently and any changes that result in more stringent or costly manufacturing, storage, transport, disposal or cleanup requirements could require us to make significant expenditures to reach and maintain compliance and may otherwise have a material adverse effect on our industry in general and on our own results of operations, competitive position or financial condition.

 

We depend on our key personnel, and our business and growth prospects may be severely disrupted if we lose their services.

 

Our future success depends heavily upon the continued service of our key executives. In particular, we rely on the expertise and experience of Li Hengfang, our founder, Chairman and Chief Executive Officer. We rely on his industry expertise and experience in our business operations, and in particular, his business vision, management skills, and working relationship with our employees, our other major shareholders, the regulatory authorities, and many of our clients. If he became unable or unwilling to continue in his present position, or if he joined a competitor or formed a competing company in violation of his employment agreement, we may not be able to replace him easily, our business may be significantly disrupted and our financial condition and results of operations may be materially adversely affected.

 

We do not maintain key man life insurance on any of our senior management or key personnel. The loss of any one of them would have a material adverse effect on our business and operations. Competition for senior management and our other key personnel is intense and the pool of suitable candidates is limited. We may be unable to locate a suitable replacement for any senior management or key personnel that we lose. In addition, if any member of our senior management or key personnel joins a competitor or forms a competing company, they may compete with us for customers, business partners and other key professionals and staff members of our Company. Although each of our senior management and key personnel has signed a confidentiality and non-competition agreement in connection with his or her employment with us, we cannot assure that we will be able to successfully enforce these provisions in the event of a dispute between us and any member of our senior management or key personnel.

 

In addition, we compete for qualified personnel with other industry competitors, and we face competition in attracting skilled personnel and retaining the members of our senior management team. These personnel possess technical and business capabilities, including expertise relevant to the construction materials industry, which are difficult to replace. There is intense competition for experienced senior management with technical and industry expertise in the construction materials industry, and we may not be able to retain our key personnel. Intense competition for these personnel could cause our compensation costs to increase, which could have a material adverse effect on our results of operations. Our future success and ability to grow our business will depend in part on the continued service of these individuals and our ability to identify, hire and retain additional qualified personnel. If we are unable to attract and retain qualified employees, we may be unable to meet our business and financial goals.

 

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Our senior management lacks experience in managing a public company and complying with laws applicable to operating as a U.S. public company domiciled in the British Virgin Islands and failure to comply with such laws could have a material adverse effect on our business.

 

Prior to the completion of this offering, the China Operating Companies have operated as private companies located in China and REIT US has operated as a private company located in the United States. In connection with this offering, we formed ReTo Eco-Solutions in the British Virgin Islands and REIT Holdings in Hong Kong. ReTo Eco-Solutions is structured as the parent company of REIT Holdings, which is the parent company of Beijing REIT and REIT Ecological. Beijing REIT operates as the parent company to the other China Operating Companies, REIT US and owns 51% of REIT India, a joint venture in India. In the process of taking these steps to prepare our company for this initial public offering, Beijing REIT’s senior management became the senior management of ReTo Eco-Solutions. None of ReTo Eco-Solutions senior management has experience managing a public company or managing a British Virgin Islands company.

 

As a result of this offering, our company will become subject to laws, regulations and obligations that do not currently apply to it, and our senior management currently has no experience in complying with such laws, regulations and obligations. For example, ReTo Eco-Solutions will need to comply with the British Virgin Islands laws applicable to companies that are domiciled in that country. The senior management is only experienced in operating the business of Beijing REIT in compliance with Chinese laws. Similarly, by virtue of this offering, ReTo Eco-Solutions will be required to file annual and current reports in compliance with U.S. securities and other laws. These obligations can be burdensome and complicated, and failure to comply with such obligations could have a material adverse effect on ReTo. In addition, we expect that the process of learning about such new obligations as a public company in the United States will require our senior management to devote time and resources to such efforts that might otherwise be spent on the operation of our business.

 

We have limited business insurance coverage. Any future business liability, disruption or litigation we experience might divert management focus from our business and could significantly impact our financial results.

 

Availability of business insurance products and coverage in China is limited, and most such products are expensive in relation to the coverage offered. We have determined that the risks of disruption, cost of such insurance and the difficulties associated with acquiring such insurances on commercially reasonable terms make it impractical for us to maintain such insurances. As a result, we do not have any business liability, disruption or litigation insurance coverage for our operations in China. Accordingly, a business disruption, litigation or natural disaster may result in substantial costs and divert management’s attention from our business, which would have an adverse effect on our results of operations and financial condition.

 

We may require additional financing in the future and our operations could be curtailed if we are unable to obtain required additional financing when needed.

 

In addition to the funds raised by the Company in this initial public offering, we may need to obtain additional debt or equity financing to fund future capital expenditures. While we do not anticipate seeking additional financing in the immediate future, any additional equity financing may result in dilution to the holders of our outstanding shares of capital stock. Additional debt financing may impose affirmative and negative covenants that restrict our freedom to operate our business, including covenants that:

 

limit our ability to pay dividends or require us to seek consent for the payment of dividends;

 

increase our vulnerability to general adverse economic and industry conditions;

 

require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund capital expenditures, working capital and other general corporate purposes; and

 

limit our flexibility in planning for, or reacting to, changes in our business and our industry.

 

We cannot guaranty that we will be able to raise funds in this offering or obtain additional financing on terms that are acceptable to us, or any financing at all, and the failure to obtain sufficient financing could adversely affect our business operations.

 

Potential disruptions in the capital and credit markets may adversely affect our business, including the availability and cost of short-term funds for liquidity requirements, which could adversely affect our results of operations, cash flows and financial condition.

 

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Potential changes in the global economy may affect the availability of business and consumer credit. We may need to rely on the credit markets, particularly for short-term borrowings from banks in China, as well as the capital markets, to meet our financial commitments and short-term liquidity needs if internal funds from our operations are not available to be allocated to such purposes. Disruptions in the credit and capital markets could adversely affect our ability to draw on such short-term bank facilities. Our access to funds under such credit facilities is dependent on the ability of the banks that are parties to those facilities to meet their funding commitments, which may be dependent on governmental economic policies in China. Those banks may not be able to meet their funding commitments to us if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests from us and other borrowers within a short period of time.

 

Long-term disruptions in the credit and capital markets could result from uncertainty, changing or increased regulations, reduced alternatives or failures of financial institutions could adversely affect our access to the liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged. Such measures may include deferring capital expenditures, and reducing or eliminating discretionary uses of cash. These events would adversely impact our results of operations, cash flows and financial position.

 

Our bank accounts in China are not insured or protected against loss.

 

The China Operating Companies maintain cash accounts with various banks located in China. Such cash accounts are not insured or otherwise protected. Should any bank holding such cash deposits become insolvent, or if the China Operating Companies are otherwise unable to withdraw funds, those entities would lose the cash on deposit with that particular bank.

 

Changes in China’s environmental laws and policies may affect our financial condition.

 

Our eco-friendly construction materials and projects are primarily used in the construction industry. Our business is in line with China’s current focus on environmental protection policies, specifically the 13th Five Year Plan (2016-2020). However, should China alter its environmental policies towards less regulation, we believe demand for our eco-friendly construction materials and equipment will decrease, adversely impacting our results of operations, cash flows and financial position.

 

Risks Relating to Our Corporate Structure

 

We will likely not pay dividends in the foreseeable future.

 

We have not previously paid any cash dividends, and we do not anticipate paying any dividends on our common shares in the foreseeable future. Although we have achieved net profitability in 2015 and 2016, we cannot assure that our operations will continue to result in sufficient revenues to enable us to operate at profitable levels or to generate positive cash flows from operating activities.  Dividend policy is subject to the discretion of our board of directors and will depend on, among other things, our earnings, financial condition, capital requirements and other factors. If we determine to pay dividends on any of our common shares in the future, we will be dependent, in large part, on receipt of funds from Beijing REIT and REIT Ecological for our cash needs, including the funds necessary to pay dividends and other cash distributions, if any, to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities organized in China is subject to limitations as described herein. Under British Virgin Islands law, we may only pay dividends from surplus (the excess, if any, at the time of the determination of the total assets of our Company over the sum of our liabilities, as shown in our books of account, plus our capital), and we must be solvent before and after the dividend payment in the sense that we will be able to satisfy our liabilities as they become due in the ordinary course of business; and the realizable value of assets of our Company will not be less than the sum of our total liabilities, other than deferred taxes as shown on our books of account, and our capital. If we determine to pay dividends on any of our common shares in the future, as a holding company, we will be dependent on receipt of funds from Beijing REIT and REIT Ecological. See “Dividend Policy.”

 

Pursuant to the Chinese enterprise income tax law, dividends payable by a foreign investment entity to its foreign investors are subject to a withholding tax of 10%. Similarly, dividends payable by a foreign investment entity to its Hong Kong investor who owns 25% or more of the equity of the foreign investment entity is subject to a withholding tax of 5%.

 

The payment of dividends by entities organized in China is subject to limitations, procedures and formalities. Regulations in China currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Beijing REIT and REIT Ecological are also required to set aside at least 10% of its after-tax profit based on Chinese accounting standards each year to its compulsory reserves fund until the accumulative amount of such reserves reaches 50% of its registered capital.

 

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The transfer to this reserve must be made before distribution of any dividend to shareholders. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into registered capital, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital. As of December 31, 2016 and 2015, the accumulated appropriations to statutory reserves amounted to $1,033,524 and $349,663, respectively.

 

Our business may be materially and adversely affected if any of our China Operating Companies declare bankruptcy or become subject to a dissolution or liquidation proceeding.

 

The Enterprise Bankruptcy Law of China provides that an enterprise may be liquidated if the enterprise fails to settle its debts as and when they fall due and if the enterprise’s assets are, or are demonstrably, insufficient to clear such debts.

 

Our China Operating Companies hold certain assets that are important to our business operations. If any of our China Operating Companies undergoes a voluntary or involuntary liquidation proceeding, unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.

 

We may rely on dividends paid by China Operating Companies to satisfy our cash needs.

 

We may rely on dividends and other distributions on equity paid by our China Operating Companies for our cash needs, including the funds necessary to pay dividends and other cash distributions, if any, to our shareholders, to service any debt we may incur and to pay our operating expenses. As of May 2017, two loans governing part of the current debts incurred by Beijing REIT and REIT Changjiang have restrictions on their abilities to pay dividends, and any future financing arrangements may impose such restrictions as well. Further, the payment of dividends by entities organized in China is subject to limitations as described herein. Under British Virgin Islands law, we may only pay dividends from surplus (the excess, if any, at the time of the determination of the total assets of our company over the sum of our liabilities, as shown in our books of account, plus our capital), and we must be solvent before and after the dividend payment in the sense that we will be able to satisfy our liabilities as they become due in the ordinary course of business; and the realizable value of assets of our company will not be less than the sum of our total liabilities, other than deferred taxes as shown on our books of account, and our capital. If we determine to pay dividends on any of our common shares in the future, as a holding company, we will be dependent on receipt of funds from Beijing REIT and REIT Ecological. See “Dividend Policy.”

 

Beijing REIT and REIT Ecological are required to allocate a portion of its after-tax profits, to the statutory reserve fund, and as determined by its board of directors, to the staff welfare and bonus funds, which may not be distributed to equity owners.

 

Pursuant to Company Law of P.R. China (2013 Revision), Wholly Foreign-Owned Enterprise Law of the P.R. China (2016 Revision) and Implementing Rules for the Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises (2014 Revision), Beijing REIT and REIT Ecological are required to allocate a portion of its after-tax profits, to the statutory reserve fund, and in accordance with its Articles of Association, to the staff welfare and bonus funds. No lower than 10% of an enterprise’s after tax-profits should be allocated to the statutory reserve fund. When the statutory reserve fund account balance is equal to or greater than 50% of both Beijing REIT and REIT Ecological’s registered capital, no further allocation to the statutory reserve fund account is required. According to the Articles of Association of Beijing REIT and REIT Ecological, their board of directors determines the amount contributed to the staff welfare and bonus funds. The staff welfare and bonus fund is used for the collective welfare of the staff of Beijing REIT and REIT Ecological. These reserves represent appropriations of retained earnings determined according to Chinese law.

 

As of the date of this prospectus, the amounts of staff welfare and bonus funds have not yet been determined, and we have not committed to establishing such amounts at this time. Under current Chinese laws, Beijing REIT and REIT Ecological are required to set aside staff welfare and bonus funds amounts, but has not yet done so. Beijing REIT and REIT Ecological have not done so because Chinese authorities grant companies flexibility in making a determination. Chinese law requires such a determination to be made in accordance with the company’s organizational documents and both Beijing REIT and REIT Ecological’s organizational documents do not require the determination to be made within a particular timeframe. Although we have not yet been required by Chinese authorities to make such determinations or set aside such amounts, Chinese authorities may require Beijing REIT and REIT Ecological to rectify its noncompliance and we may be fined if we fail to do so after receiving a warning within its set time period.

 

Additionally, Chinese law provides that a foreign-invested company must allocate a portion of after-tax profits to the statutory reserve fund and the staff welfare and bonus funds reserve prior to the retention of profits or the distribution of profits to its foreign shareholders. Therefore, if for any reason, the dividends from Beijing REIT and REIT Ecological cannot be repatriated to us or not in time, our cash flow may be adversely impacted or we may become insolvent.

 

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Our failure to obtain prior approval of the China Securities Regulatory Commission (“CSRC”) for the listing and trading of our common shares on a foreign stock exchange could delay this offering or could have a material adverse effect upon our business, operating results, reputation and trading price of our common shares.

 

On August 8, 2006, six Chinese regulatory agencies, including the Ministry of Commerce of the People’s Republic of China (“MOFCOM”), jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the New “M&A Rule”). The New M&A Rule contains provisions that require that an offshore special purpose vehicle (“SPV”) formed for listing purposes and controlled directly or indirectly by Chinese companies or individuals shall obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published procedures specifying documents and materials required to be submitted to it by an SPV seeking CSRC approval of overseas listings.

 

However, the application of the New M&A Rule remains unclear with no consensus currently existing among leading Chinese law firms regarding the scope and applicability of the CSRC approval requirement. Our Chinese counsel, Kaitong Law Firm, has given us the following advice, based on their understanding of current Chinese laws and regulations:

 

At the time of our equity interest acquisition, as the acquiree, Beijing REIT was not related to or connected with the acquirer, REIT Holdings. Accordingly, we did not need the approval from MOFCOM. In addition, we have received all relevant approvals and certificates required for the acquisition;

 

The CSRC approval under the New M&A Rule only applies to overseas listings of SPVs that have used their existing or newly issued equity interest to acquire existing or newly issued equity interest in Chinese domestic companies, or the SPV-domestic company share swap, due to the fact there has not been any SPV-domestic company share swap in our corporate history, ReTo Eco-Solutions does not constitute a SPV that is required to obtain approval from the CSRC for overseas listing under the New M&A Rule; and

 

In spite of the lack of clarity on this issue, the CSRC has not issued any definitive rule or interpretation regarding whether offerings like the one contemplated by this prospectus are subject to the New M&A Rule.

 

The CSRC has not issued any such definitive rule or interpretation, and we have not chosen to voluntarily request approval under the New M&A Rule. If the CSRC requires that we obtain its approval prior to the completion of this offering, the offering will be delayed until we obtain CSRC approval, which may take several months. There is also the possibility that we may not be able to obtain such approval. If prior CSRC approval was required, we may face regulatory actions or other sanctions from the CSRC or other Chinese regulatory authorities. These authorities may impose fines and penalties upon our operations in China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from this offering into China, or take other actions that could have a material adverse effect upon our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our common shares. The CSRC or other Chinese regulatory agencies may also take actions requiring us, or making it advisable for us, to terminate this offering prior to closing.

 

Substantial uncertainties exist with respect to the enactment timetable and final content of draft China Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.

 

MOFCOM published a discussion draft of the proposed Foreign Investment Law in January 2015 (the “Draft FIL”). The Draft FIL embodies an expected Chinese regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. MOFCOM is currently soliciting comments on this draft and substantial uncertainties exist with respect to its enactment timetable, final content, interpretation and implementation.

 

Among other things, the Draft FIL expands the definition of foreign investment and introduces the principle of “actual control” in determining whether a company is considered a foreign-invested enterprise (“FIE”). The Draft FIL specifically provides that entities established in China but “controlled” by foreign investors will be treated as FIEs, whereas an entity set up in a foreign jurisdiction would nonetheless be, upon market entry clearance, treated as a Chinese domestic investor provided that the entity is “controlled” by Chinese entities and/or citizens. Once an entity is determined to be an FIE, it will be subject to the foreign investment restrictions or prohibitions set forth in a “negative list,” to be separately issued by the State Council later. Unless the underlying business of the FIE falls within the negative list, which calls for market entry clearance, prior approval from the government authorities as mandated by the existing foreign investment legal regime would no longer be required for establishment of the FIE.

 

The development, manufacture and sales of construction materials products and manufacturing equipment are not currently subject to foreign investment restrictions set forth in the Catalogue of Industries for Guiding Foreign Investment (Amended in 2017), or the Catalogue,

  

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issued by the National Development and Reform Commission and the Ministry of Commerce on June 28, 2017 and became effective on July 28, 2017. The Draft FIL, if enacted as proposed, will not materially impact the viability of our current corporate structure, corporate governance and business operations in many aspects. However, should the development, manufacture and sales of construction materials products and manufacturing equipment become subject to foreign investment restrictions set forth in the Catalogue of Industries for Guiding Foreign Investment then the viability of our current corporate structure, corporate governance and business operations may be materially impacted in many aspects.

 

Risks Related to Doing Business in China

 

If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed China-based companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, this offering and our reputation and could result in a loss of your investment in our shares, especially if such matter cannot be addressed and resolved favorably.

 

Recently, U.S. public companies that have substantially all of their operations in China have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in some cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this type of scrutiny, criticism and negative publicity might have on our Company, our business and this offering. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend the Company. This situation may be a major distraction to our management. If such allegations are not proven to be groundless, our Company and business operations could be severely hampered and your investment in our shares could be rendered worthless.

 

Fluctuations in exchange rates could adversely affect our business and the value of our securities.

 

Changes in the value of the RMB against the U.S. dollar, Euro and other foreign currencies are affected by, among other things, changes in China’s political and economic conditions. Any significant revaluation of the RMB may have a material adverse effect on our revenues and financial condition, and the value of, and any dividends payable on our shares in U.S. dollar terms. For example, to the extent that we need to convert U.S. dollars into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on RMB amount we would receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of paying dividends on our common shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. In addition, fluctuations of the RMB against other currencies may increase or decrease the cost of imports and exports, and thus affect the price-competitiveness of our products against products of foreign manufacturers or products relying on foreign inputs.

 

Since July 2005, the RMB is no longer pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future Chinese authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

 

We reflect the impact of currency translation adjustments in our financial statements under the heading “Total foreign currency translation loss.” For the years ended December 31, 2016 and 2015, we had a negative adjustment of $1,699,975 and a negative adjustment of $905,144, respectively, for foreign currency translations. Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by China exchange control regulations that restrict our ability to convert RMB into foreign currencies.

 

Since the majority of our operations and assets are located in China, shareholders may find it difficult to enforce a U.S. judgment against the assets of our Company, our directors and executive officers.

 

Other than REIT US and REIT India, our operations and assets are located in China. In addition, our executive officers and directors are non-residents of the U.S., and substantially all the assets of such persons are located outside the U.S. As a result, it could be difficult for investors to effect service of process in the U.S., or to enforce a judgment obtained in the U.S. against us or any of these persons. See “Enforceability of Civil Liabilities.”

 

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We must remit the offering proceeds to China before they may be used to benefit our business in China, this process may take a number of months and we will be unable to use the proceeds to grow our business in the meantime.

 

Under Chinese law, the proceeds of this offering must be sent back to China, and the process for sending such proceeds back to China may take several months after the closing of this offering. In order to remit the offering proceeds to China, we will take the following actions:

 

First, we will open a special foreign exchange account for capital account transactions. To open this account, we must submit to State Administration of Foreign Exchange approval (“SAFE”) certain application forms, identity documents, transaction documents, form of foreign exchange registration of overseas investments by domestic residents, and foreign exchange registration certificate of the invested company.

 

Second, we will remit the offering proceeds into this special foreign exchange account.

 

Third, we will apply for settlement of the foreign exchange. In order to do so, we must submit to SAFE certain application forms, identity documents, payment order to a designated person, and a tax certificate.

 

The timing of the process is difficult to estimate because the efficiencies of different SAFE branches can vary materially. Ordinarily, the process takes several months to complete. We may be unable to use these proceeds to grow our business until we receive such proceeds in China.

 

Fluctuation of the RMB may indirectly affect our financial condition by affecting the volume of cross-border money flow.

 

Although we use the United States dollar for financial reporting purposes, all of the transactions effected by the China Operating Companies are denominated in China’s currency, the RMB. The value of the RMB fluctuates and is subject to changes in China’s political and economic conditions. We do not currently engage in hedging activities to protect against foreign currency risks. Even if we choose to engage in such hedging activities, we may not be able to do so effectively. Future movements in the exchange rate of the RMB could adversely affect our financial condition as we may suffer financial losses when transferring money raised outside of China into the country or paying vendors for services performed outside of China.

 

If any dividend is declared in the future and paid in a foreign currency, you may be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually ultimately receive.

 

In the event we pay dividends in the future, you will be taxed on the U.S. dollar value of your dividends, if any, at the time you receive them, even if you actually receive a smaller amount of U.S. dollars when the payment is in fact converted into U.S. dollars. Specifically, if a dividend is declared and paid in a foreign currency, the amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the payments made in the foreign currency, determined at the spot rate of the foreign currency to the U.S. dollar on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Thus, if the value of the foreign currency decreases before you actually convert the currency into U.S. dollars, you may be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually ultimately receive.

 

We may become a passive foreign investment company, which could result in adverse U.S. tax consequences to U.S. investors.

 

Based on the nature of our business activities, we may be classified as a passive foreign investment company (“PFIC”), by the U.S. Internal Revenue Service (“IRS”), for U.S. federal income tax purposes. Such characterization could result in adverse U.S. tax consequences to you if you are a U.S. investor. For example, if we are a PFIC, a U.S. investor will become subject to burdensome reporting requirements. The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets from time to time. Specifically, we will be classified as a PFIC for U.S. tax purposes if either:

 

75% or more of our gross income in a taxable year is passive income; or

 

the average percentage of our assets by value in a taxable year that produce or are held for the production of passive income (which includes cash) is at least 50%.

 

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The calculation of the value of our assets is based, in part, on the then market value of our common shares, which is subject to change. In addition, the composition of our income and assets will be affected by how, and how quickly, we spend the cash we raise in this offering. We cannot assure that we will not be a PFIC for any taxable year. See “Taxation – United States Federal Income Taxation-Passive Foreign Investment Company.”

 

Introduction of new laws or changes to existing laws by the Chinese government may adversely affect our business.

 

The Chinese legal system is a codified legal system made up of written laws, regulations, circulars, administrative directives and internal guidelines. Unlike common law jurisdictions such as the U.S., decided cases (which may be taken as precedent) do not form part of the legal structure of China and thus have no binding effect. Furthermore, in line with its transformation from a centrally planned economy to a more market-oriented economy, the Chinese government is still in the process of developing a comprehensive set of laws and regulations. As the legal system in China is still evolving, laws and regulations or their interpretation may be subject to further changes. Such uncertainty and prospective changes to the Chinese legal system could adversely affect our results of operations and financial condition.

 

We may be subject to foreign exchange controls in China, which could limit our use of funds raised in this offering, which could have a material adverse effect on our business.

 

Beijing REIT and REIT Ecological are subject to Chinese rules and regulations on currency conversion. In China, SAFE regulates the conversion of the RMB into foreign currencies. Currently, FIEs are required to apply to SAFE for “Registration of Establishment as FIEs”. Beijing REIT and REIT Ecological are FIE, with such registration, Beijing REIT and REIT Ecological are allowed to open foreign currency accounts including the “current account” and the “capital account”. Currently, conversion within the scope of the “current account” and general “capital account” can be effected without requiring the approval of SAFE. However, conversion of currency in some restricted “capital account” (e.g. for capital items such as direct investments, loans, securities, etc.) still requires the approval of SAFE.

 

In particular, if Beijing REIT and REIT Ecological borrow foreign currency through loans from ReTo Eco-Solutions or other foreign lenders, these loans must be registered with SAFE. If Beijing REIT and REIT Ecological are financed by means of additional capital contributions, certain Chinese government authorities, including MOFCOM, or the local counterparts of SAFE and MOFCOM, must approve these capital contributions. These restrictions could limit our use of funds raised in this offering, which could have an adverse effect on our business.

 

Governmental control of currency conversion may affect the value of your investment.

 

The Chinese government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China, which may take as long as six months in the ordinary course. We receive the majority of our revenues in Renminbi. Under our current corporate structure, our income is derived from payments from Beijing REIT and REIT Ecological. Shortages in the availability of foreign currency may restrict the ability of Beijing REIT and REIT Ecological to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing Chinese foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies. The Chinese government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders. See “Regulations – Regulations on Foreign Currency Exchange and Dividend Distribution.”

 

Fluctuation of the Renminbi could materially affect our financial condition and results of operations.

 

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. On July 21, 2005, the Chinese government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an appreciation of the Renminbi against the U.S. dollar. While the international reaction to the Renminbi revaluation has generally been positive, there remains international pressure on the Chinese government to adopt an even more flexible currency policy, which could result in a further and more rapid appreciation of the Renminbi against the U.S. dollar. Any material revaluation of Renminbi may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our common shares in U.S. dollars. For example, an appreciation of Renminbi against the U.S. dollar would make any new Renminbi denominated investments or expenditures more costly to us, to the extent that we need to convert U.S. dollars into Renminbi for such purposes. See “Exchange Rate Information.”

 

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Recent changes in China’s labor law restrict our ability to reduce our workforce in China in the event of an economic downturn and may increase our production costs which could have a material adverse effect on our business.

 

To clarify certain details in connection with the implementation of the Labor Contract Law, the China State Council promulgated the Implementing Rules for the Labor Contract Law on September 18, 2008, which came into effect immediately. The legislation formalized workers’ rights concerning overtime hours, pensions, layoffs, employment contracts and the role of trade unions. Among other things, this new law provides for specific standards and procedures for the termination of an employment contract and places the burden of proof on the employer. In addition, the law requires the payment of a statutory severance pay upon the termination of an employment contract in most cases, including the case of the expiration of a fixed-term employment contract. Further, the law requires an employer to conclude an “employment contract without a fixed-term” with any employee who either has worked for the same employer for 10 consecutive years or more or has had two consecutive fixed-term contracts with the same employer. An “employment contract without a fixed term” can no longer be terminated on the ground of the expiration of the contract, although it can still be terminated pursuant to the standards and procedures set forth under the new law. Because of the lack of precedent for the enforcement of such a law, the standards and procedures set forth under the law in relation to the termination of an employment contract have raised concerns among foreign investment enterprises in China that such an “employment contract without a fixed term” might in fact become a “lifetime, permanent employment contract.” Finally, under the new law, downsizing of either more than 20 people or more than 10% of the workforce may occur only under specified circumstances, such as a restructuring undertaken pursuant to China’s Enterprise Bankruptcy Law, or where a company suffers serious difficulties in production and/or business operations, or where there has been a material change in the objective economic circumstances relied upon by the parties at the time of the conclusion of the employment contract, thereby making the performance of such employment contract not possible. To date, there has been very little guidance or precedent as to how such specified circumstances for downsizing will be interpreted and enforced by the relevant Chinese authorities. All of our employees working for us exclusively within China are covered by the new law and thus, our ability to adjust the size of our operations when necessary in periods of recession or less severe economic downturns may be curtailed. Accordingly, if we face future periods of decline in business activity generally or adverse economic periods specific to our business, this new law can be expected to exacerbate the adverse effect of the economic environment on our results of operations and financial condition.

 

Our business benefits from certain government subsidies and incentives. Expiration, reduction or discontinuation of, or changes to, these incentives will increase our burden and reduce our net income, which could have a material adverse effect on our business and operations.

 

We have received subsidies from some governmental agencies after meeting certain conditions, such as developing certain technologies, which are chosen as annual key research and development, or obtaining certain technological certifications. In particular, our subsidiary REIT Changjiang received RMB 4 million in 2015 as an incentive to upgrade our current production capacity of eco-friendly construction materials to an annual output of 1.06 million cubic meters. REIT Changjiang was subject to further research and development obligations, therefore, this incentive was recognized as deferred income in 2015, but none in 2016.

 

In addition, Beijing REIT obtained the Hi-Tech Enterprise certificate and is entitled to a preferential income tax rate of 15% for 2015 and 2016. The 15% tax rate is less than the standard 25% income tax rate in China. In addition, since the products manufactured by REIT Changjiang qualify as eco-friendly construction materials, 10% of its revenue is exempt from income tax in fiscal 2015. The Company did not receive the similar exemption in fiscal 2016. The estimated tax savings as a result of the Company’s tax benefits for the years ended December 31, 2016 and 2015 amounted to $196,303 and $369,478, respectively. The local Chinese government authorities may reduce or eliminate these incentives through new legislation at any time in the future. In the event Beijing REIT is no longer entitled to receive this tax exemption, its applicable tax rate will increase from 15% to up to 25%, the standard business income tax rate in China. In addition, the termination of one-time subsidies for eco-friendly construction materials could increase the burden of manufacturing and selling these materials in the future. The reduction or discontinuation of any of these economic incentives could negatively affect our business and operations.

 

Labor laws in China may adversely affect our results of operations.

 

China’s Labor Contract Law imposes significant liabilities on employers and affects the cost of an employer’s decision to reduce its workforce. Further, it requires certain terminations be based upon seniority and not merit. In the event we decide to significantly change or decrease our workforce, the Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our business or in a timely and cost-effective manner, thus materially and adversely affecting our financial condition and results of operations. The Labor Contract Law also mandates that employers provide social welfare packages to all employees, increasing our labor costs. To the extent competitors from outside China are not affected by such requirements, we could be at a comparative disadvantage.

 

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Chinese regulations relating to the establishment of offshore special purpose companies by Chinese residents may subject our Chinese resident shareholders to personal liability and limit our ability to inject capital into our Chinese subsidiaries, limit our subsidiaries’ ability to increase its registered capital, distribute profits to us, or otherwise adversely affect us.

 

On July 4, 2014, China’s SAFE issued the Circular of the State Administration of Foreign Exchange on Issues concerning Foreign Exchange Administration over the Overseas Investment and Financing and Round-trip Investment by Domestic Residents via Special Purpose Vehicles, or Circular 37, which became effective as of July 4, 2014. According to Circular 37, prior registration with the local SAFE branch is required for Chinese residents to contribute domestic assets or interests to offshore companies, known as SPVs. Moreover, Circular 37 applies retroactively. As a result, Chinese residents who have contributed domestic assets or interests to a SPV, but failed to complete foreign exchange registration of overseas investments as required before July 4, 2014 shall send a letter to SAFE and its branches for explanation. SAFE and its branches shall, under the principle of legality and legitimacy, conduct supplementary registration, and impose administrative punishment on those in violation of the administrative provisions on the foreign exchange pursuant to the law.

 

We have requested our shareholders who are Chinese residents to make the necessary applications, filings and amendments as required under Circular 37 and other related rules. We attempt to comply, and attempt to ensure that our shareholders who are subject to these rules comply, with the relevant requirements. However, we cannot provide any assurances that all of our shareholders who are Chinese residents will comply with our request to make or obtain any applicable registrations or comply with other requirements required by Circular 37 or other related rules. The failure or inability of our Chinese resident shareholders to make any required registrations or comply with other requirements may subject such shareholders to fines and legal sanctions and may also limit our ability to contribute additional capital into or provide loans to (including using the proceeds from this offering) Beijing REIT and REIT Ecological, limiting both Beijing REIT and REIT Ecological’s ability to pay dividends or otherwise distributing profits to us.

 

We may be subject to fines and legal sanctions by SAFE or other Chinese government authorities if we or our employees who are Chinese citizens fail to comply with Chinese regulations relating to employee stock options granted by offshore listed companies to Chinese citizens.

 

On February 15, 2012, SAFE promulgated the Circular of the State Administration of Foreign Exchange on Issues Concerning the Administration of Foreign Exchange Used for Domestic Individuals’ Participation in Equity Incentive Plans of Companies Listed Overseas, or Circular 7. Under Circular 7, Chinese citizens who are granted share options by an offshore listed company are required, through a qualified Chinese agent of the offshore listed company, to register with SAFE and complete certain other procedures, including applications for foreign exchange purchase quotas and opening special bank accounts. We and our Chinese employees who have been granted share options are subject to Circular 7. Failure to comply with these regulations may subject us or our Chinese employees to fines and legal sanctions imposed by SAFE or other Chinese government authorities and may prevent us from further granting options under our share incentive plans to our employees. Such events could adversely affect our business operations.

 

Failure to comply with the Individual Foreign Exchange Rules relating to the overseas direct investment or the engagement in the issuance or trading of securities overseas by our Chinese resident stockholders may subject such stockholders to fines or other liabilities.

 

Other than Circular 37, our ability to conduct foreign exchange activities in China may be subject to the interpretation and enforcement of the Implementation Rules of the Administrative Measures for Individual Foreign Exchange promulgated by SAFE in January 2007 (as amended and supplemented, the “Individual Foreign Exchange Rules”). Under the Individual Foreign Exchange Rules, any Chinese individual seeking to make a direct investment overseas or engage in the issuance or trading of negotiable securities or derivatives overseas must make the appropriate registrations in accordance with SAFE provisions. Chinese individuals who fail to make such registrations may be subject to warnings, fines or other liabilities.

 

We may not be fully informed of the identities of all our beneficial owners who are Chinese residents. For example, because the investment in or trading of our shares will happen in an overseas public or secondary market where shares are often held with brokers in brokerage accounts, it is unlikely that we will know the identity of all of our beneficial owners who are Chinese residents. Furthermore, we have no control over any of our future beneficial owners and we cannot assure you that such Chinese residents will be able to complete the necessary approval and registration procedures required by the Individual Foreign Exchange Rules.

 

It is uncertain how the Individual Foreign Exchange Rules will be interpreted or enforced and whether such interpretation or enforcement will affect our ability to conduct foreign exchange transactions. Because of this uncertainty, we cannot be sure whether the failure by any of our Chinese resident stockholders to make the required registration will subject our subsidiaries to fines or legal sanctions on their operations, delay or restriction on repatriation of proceeds of this offering into the China, restriction on remittance

 

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of dividends or other punitive actions that would have a material adverse effect on our business, results of operations and financial condition.

 

Changes in China’s political and economic policies could harm our business.

 

Substantially all of our business operations are conducted in China. Accordingly, our results of operations, financial condition and prospects are subject to economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources.

 

The Chinese economy has historically been a planned economy subject to governmental plans and quotas and has, in certain aspects, been transitioning to a more market-oriented economy. Although we believe that the economic reform and the macroeconomic measures adopted by the Chinese government have had a positive effect on the economic development China, we cannot predict the future direction of these economic reforms or the effects these measures may have on our business, financial position or results of operations. In addition, the Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development (“OECD”). These differences include, without limitation:

 

economic structure;

 

level of government involvement in the economy;

 

level of development;

 

level of capital reinvestment;

 

control of foreign exchange;

 

methods of allocating resources; and

 

balance of payments position.

 

As a result of these differences, our business may not develop in the same way or at the same rate as might be expected if the Chinese economy were similar to those of the OECD member countries.

 

Since 1979, the Chinese government has promulgated many new laws and regulations covering general economic matters. Despite these efforts to develop a legal system, China’s system of laws is not yet complete. Even where adequate law exists in China, enforcement of existing laws or contracts based on existing law may be uncertain or sporadic, and it may be difficult to obtain swift and equitable enforcement or to obtain enforcement of a judgment by a court of another jurisdiction. The relative inexperience of China’s judiciary, in many cases, creates additional uncertainty as to the outcome of any lawsuit. In addition, interpretation of statutes and regulations may be subject to government policies reflecting domestic political changes. Our activities in China will also be subject to administration review and approval by various national and local agencies of the Chinese government. Because of the changes occurring in China’s legal and regulatory structure, we may not be able to secure the requisite governmental approval for our activities. Although we have obtained all required governmental approvals to operate our business as currently conducted, to the extent we are unable to obtain or maintain required governmental approvals, the Chinese government may, in its sole discretion, prohibit us from conducting our business.

 

If relations between the United States and China worsen, our share price may decrease and we may have difficulty accessing U.S. capital markets.

 

At various times during recent years, the United States and China have had disagreements over political and economic issues. Controversies may arise in the future between these two countries. Any political or trade controversy between the United States and China could adversely affect the market price of our common shares and our ability to access U.S. capital markets.

 

The Chinese government could change its policies toward private enterprise or even nationalize or expropriate private enterprises, which could result in the total loss of our investment in that country.

 

Our business is subject to political and economic uncertainties and may be adversely affected by political, economic and social developments in China. Over the past several years, the Chinese government has pursued economic reform policies including the encouragement of private economic activity and greater economic decentralization. The Chinese government may not continue to pursue these policies or may alter them to our detriment from time to time with little, if any, prior notice.

 

Changes in policies, laws and regulations or in their interpretation or the imposition of confiscatory taxation, restrictions on currency conversion, restrictions or prohibitions on dividend payments to shareholders, devaluations of currency or the nationalization

 

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or other expropriation of private enterprises could have a material adverse effect on our business. Nationalization or expropriation could even result in the total loss of our investment in China and in the total loss of any investment in us.

 

Because our operations are substantially located in China, information about our operations is not readily available from independent third-party sources.

 

Because the China Operating Companies are based in China and REIT India will be based in India, our shareholders may have greater difficulty in obtaining information about them on a timely basis than would shareholders of a U.S.-based company. The majority of our operations will continue to be conducted in China and shareholders may have difficulty in obtaining information about from sources other than the companies themselves. Information available from newspapers, trade journals, or local, regional or national regulatory agencies such as issuance of construction permits and contract awards for development projects will not be readily available to shareholders and, where available, will likely be available only in Chinese. Shareholders will be dependent upon management for reports of their progress, development, activities and expenditure of proceeds.

 

Chinese economic growth slowdown may cause negative effect to our business.

 

Since 2010, the annual growth rate of the Chinese economy has declined, from approximately 10.3% gross domestic product in 2010 to 6.7% in 2016. This situation has impacted many types of service industries, such as restaurant and tourism, and some manufacturing industries. Our business operations in China rely primarily on the construction industry, which is influenced by economic growth slowdowns. If China’s economic growth continues to slow down, then our business could be materially adversely affected if such slow down results in reduced activity by the construction industry.

 

Risks Associated with this Offering and Ownership of Our Common Shares

 

We are an “emerging growth company,” and we cannot be certain if choosing to elect the reduced reporting requirements applicable to emerging growth companies will make our common shares less attractive to investors.

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although we could lose that status sooner if our revenues exceed $1 billion, if we issue more than $1 billion in non-convertible debt in a three year period, or if the market value of our common shares held by non-affiliates exceeds $700 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31. We cannot predict if investors will find our common shares less attractive because we may rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and our stock price may be more volatile.

 

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail our Company of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common shares may decline.

 

As a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. In addition, beginning with our 2017 annual report on Form 20-F to be filed in 2018, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We are in the process of designing, implementing, and testing the internal control over financial reporting required to comply with this obligation, which process is time consuming, costly, and complicated. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting beginning with our annual report on Form 20-F following the date on which we are no longer an “emerging growth company,” which may be up to five full years following the date of this offering. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting when required, investors may lose confidence in the

 

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accuracy and completeness of our financial reports and the market price of our common shares could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the Securities and Exchange Commission, or the SEC, or other regulatory authorities, which could require additional financial and management resources.

 

There may not be an active, liquid trading market for our common shares.

 

Prior to this offering, there has been no public market for our common shares. An active trading market for our common shares may not develop or be sustained following this offering. You may not be able to sell your shares at the market price, if at all, if trading in our shares is not active. The initial public offering price was determined by negotiations between us and the underwriters based on a number of factors. The initial public offering price may not be indicative of prices that will prevail in the trading market.

 

The market price of our common shares may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

 

The initial public offering price for our common shares will be determined through negotiations between the underwriters and us and may vary from the market price of our common shares following our initial public offering. If you purchase our common shares in our initial public offering, you may not be able to resell those shares at or above the initial public offering price. We cannot assure you that the initial public offering price of our common shares, or the market price following our initial public offering, will equal or exceed prices in privately negotiated transactions of our shares that have occurred from time to time prior to our initial public offering. The market price of our common shares may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

actual or anticipated fluctuations in our quarterly operating results;

 

the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our Company, or our failure to meet these estimates or the expectations of investors;

 

announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;

 

price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;

 

lawsuits threatened or filed against us; and

 

other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.

 

In addition, the securities markets have from time to time experienced price and volume fluctuations that are not related to the operating performance of particular companies. As a result, to the extent shareholders sell our shares in a negative market fluctuation, they may not receive a price per share that is based solely upon our business performance. We cannot guarantee that shareholders will not lose some or all of their investment in our common shares.

 

If a limited number of participants in this offering purchase a significant percentage of the offering, the effective public float may be smaller than anticipated and the price of our common shares may be volatile which could subject us to securities litigation and make it more difficult for you to sell your shares.

 

As a company conducting a relatively small public offering, we are subject to the risk that a small number of investors will purchase a high percentage of the offering. While the underwriters are required to sell shares in this offering to at least 300 round lot shareholders (a round lot shareholder is a shareholder who purchases at least 100 shares) in order to ensure that we meet NASDAQ Capital Market initial listing standards, we have not otherwise imposed any obligations on the underwriters as to the maximum number of shares they may place with individual investors. If, in the course of marketing the offering, the underwriters were to determine that demand for our shares was concentrated in a limited number of investors and such investors determined to hold their shares after the offering rather than trade them in the market, other shareholders could find the trading and price of our shares affected (positively or negatively) by the limited availability of our shares. If this were to happen, investors could find our shares to be more volatile than they might otherwise anticipate. Companies that experience such volatility in their stock price may be more likely to be the subject of securities litigation. In addition, if a large portion of our public float were to be held by a few investors, smaller investors may find it more difficult to sell their shares.

 

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If we are unable to comply with certain conditions, our common shares may not trade on the NASDAQ Capital Market.

 

We have applied to list our common shares on the NASDAQ Capital Market, which provides that we pay the balance of our entry fee and show that we satisfy NASDAQ’s initial listing requirements. If we are unable to meet these final conditions our shares may not trade on the NASDAQ Capital Market. Even when we receive conditional approval to have our shares trade on the NASDAQ Capital Market, investors should be aware that they will be required to commit their investment funds before we provide NASDAQ with confirmation that we have met the final conditions. However, investor funds will be held in escrow with Signature Bank and we will not close this offering unless we meet the listing conditions. In addition, we have relied on an exemption to the blue sky registration requirements afforded to “covered securities”. Securities listed on the NASDAQ Capital Market are “covered securities.” If we were unable to meet the NASDAQ conditions for listing, then we would be unable to rely on the covered securities exemption to blue sky registration requirements and we would need to register the offering in each state in which we planned to sell shares. Consequently, we will not complete this offering until we have met the required listing conditions.

 

If we are listed on the NASDAQ Capital Market and our financial condition deteriorates, we may not meet continued listing standards on the NASDAQ Capital Market.

 

The NASDAQ Capital Market also requires companies to fulfill specific requirements in order for their shares to continue to be listed. In order to qualify for continued listing on the NASDAQ Capital Market, we must meet the following criteria:

 

Our shareholders’ equity must be at least $2,500,000; or the market value of our listed securities must be at least $35,000,000; or our net income from continuing operations in our last fiscal year (or two of the last three fiscal years) must have been at least $500,000;

 

The market value of our publically held shares must be at least $1,000,000;

 

The minimum bid price for our shares must be at least $1.00 per share;

 

We must have at least 300 shareholders;

 

We must have at least 500,000 publically held shares;

 

We must have at least 2 market makers; and

 

We must have adopted NASDAQ-mandated corporate governance measures, including a board of directors comprised of a majority of independent directors, an Audit Committee comprised solely of independent directors and the adoption of a code of ethics among other items.

 

If our shares are listed on the NASDAQ Capital Market but are delisted from the NASDAQ Capital Market at some later date, our shareholders could find it difficult to sell our shares. In addition, if our common shares are delisted from the NASDAQ Capital Market at some later date, we may apply to have our common shares quoted on the Bulletin Board or in the “pink sheets” maintained by the National Quotation Bureau, Inc. The Bulletin Board and the “pink sheets” are generally considered to be less efficient markets than the NASDAQ Capital Market. In addition, if our common shares are not so listed or are delisted at some later date, our common shares may be subject to the “penny stock” regulations. These rules impose additional sales practice requirements on broker-dealers that sell low-priced securities to persons other than established customers and institutional accredited investors and require the delivery of a disclosure schedule explaining the nature and risks of the penny stock market. As a result, the ability or willingness of broker-dealers to sell or make a market in our common shares might decline. If our common shares are not so listed or are delisted from the NASDAQ Capital Market at some later date or become subject to the penny stock regulations, it is likely that the price of our shares would decline and that our shareholders would find it difficult to sell their shares.

 

We will incur increased costs as a result of being a public company, which could have a material adverse effect on our profitability.

 

As a public company, we will incur legal, accounting and other expenses that we did not incur as a private company. For example, we must now engage U.S. securities law counsel and U.S. GAAP auditors that we did not need prior to this offering, and we will have annual payments for listing on a stock exchange, if we are so listed. In addition, the Sarbanes-Oxley Act, as well as new

 

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rules subsequently implemented by the SEC and NASDAQ, has required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. In addition, we will incur additional costs associated with our public company reporting requirements. While it is impossible to determine the amounts of such expenses in advance, we expect that we will incur expenses of between $500,000 and $1,000,000 per year that we did not experience prior to commencement of this offering. Added costs of this nature will naturally reduce our profitability and could have a material adverse effect on our business.

 

The requirements of being a public company may strain our resources and divert management’s attention, which could have a material adverse effect on our business.

 

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the securities exchange on which we list, and other applicable securities rules and regulations. Despite recent reforms made possible by the JOBS Act, compliance with these rules and regulations will nonetheless increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results.

 

As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business, brand and reputation and results of operations.

 

We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

 

The obligation to disclose information publicly may put us at a disadvantage to competitors that are private companies which could have an adverse effect on our results of operations.

 

Upon completion of this offering, we will be a reporting company in the United States. As a reporting company, we will be required to file periodic reports with the Securities and Exchange Commission upon the occurrence of matters that are material to our Company and shareholders. In some cases, we will need to disclose material agreements or results of financial operations that we would not be required to disclose if we were a private company. Our competitors may have access to this information, which would otherwise be confidential. This may give them advantages in competing with our Company. Similarly, as a U.S.-listed public company, we will be governed by U.S. laws that our competitors, which are mostly private Chinese companies, are not required to follow. To the extent compliance with U.S. laws increases our expenses or decreases our competitiveness against such companies, our public listing could affect our results of operations.

 

Our classified board structure may prevent a change in control of our Company.

 

Our board of directors is divided into three classes of directors. Directors of the first class hold office for a term expiring at the next annual meeting of shareholders, directors of the second class hold office for a term expiring at the second succeeding annual meeting of shareholders and directors of the third class hold office for a term expiring as the third succeeding annual meeting shareholders. Directors of each class are chosen for three-year terms upon the expiration of their current terms. The staggered terms of our directors may reduce the possibility of a tender offer or an attempt at a change in control, even though a tender offer or change in control might be in the best interest of our shareholders. See “Management – Board of Directors and Board Committees.”

 

Shares eligible for future sale may adversely affect the market price of our common shares, as the future sale of a substantial amount of outstanding common shares in the public marketplace could cause the price of our common shares to decline.

 

The market price of our shares could decline as a result of sales of substantial amounts of our shares in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of our common shares. An aggregate of 18,640,000 were outstanding as of the date of this filing, and after giving effect to this offering, 22,340,000 shares will be outstanding immediately after this offering (including 900,000 shares in escrow as of May 31, 2017 issued to pre-IPO investors for total consideration of $3.6 million). All of the shares sold in the offering, including any shares sold upon exercise of the underwriters’ option to purchase additional common shares, will be freely transferable without restriction or further registration under the Securities Act. The remaining shares will be “restricted securities” as defined in Rule 144. These shares may be sold in the future without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act. See “Shares Eligible for Future Sale.”

 

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You will experience immediate and substantial dilution as a result of sales of shares under this offering.

 

The assumed initial public offering price of $5.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, is substantially higher than the pro forma net tangible book value per share of our common shares. If you purchase shares in this offering, you will incur immediate dilution of approximately 68.3% or approximately $3.42 in the pro forma net tangible book value per share from the price per share that you pay for the shares, based on the assumed initial public offering price of $5.00 per share and 2,800,000 shares to be offered in this offering. Accordingly, if you purchase shares in this offering, you will incur immediate and substantial dilution of your investment. See “Dilution.”

 

We have not finally determined the uses of the proceeds from this offering, and we may use the proceeds in ways with which you may not agree.

 

While we have identified the priorities to which we expect to put the proceeds of this offering, our management will have considerable discretion in the application of the net proceeds received by us. In addition, in the event we are unable to purchase the equipment or the assembly line required for production, we have reserved the right to re-allocate funds currently allocated to that purpose to our general working capital. If that were to happen, then our management would have discretion over even more of the net proceeds to be received by our company in this offering. You will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our efforts to achieve profitability or increase our stock price. The net proceeds from this offering may be placed in investments that do not produce profit or increase value. See “Use of Proceeds.”

 

$500,000 from the proceeds of this offering will be placed in escrow for two years from the date of this offering for the purpose of indemnifying the underwriters and may not be used during the two years, or potentially at all, for further developing our business which could adversely impact our earnings and cash flows.

 

We have entered into an indemnity escrow agreement, whereby, we have agreed to place $500,000 from the proceeds of this offering into an escrow account in the United States for a period of two years following this offering for the purpose of satisfying an initial $500,000 in bona fide indemnity claims of the underwriters. Accordingly, we will not be able to use $500,000 from the proceeds of this offering to develop our business operations for two years, or at all, if we are required to indemnify the underwriters, which could adversely impact our earnings and cash flows, thereby having an adverse effect on our financial condition, results of operations, and per share trading price of our common shares.

 

The $500,000 of indemnity funds will be placed in a non-interest bearing escrow account and we are free to invest the $500,000 in securities with certain limitations, which may result in a loss of investment.

 

Pursuant to the terms of the indemnity escrow agreement, the $500,000 will be placed in a non-interest bearing account; in addition, we are free to invest the escrowed indemnity funds in securities under certain limitations. Investments in securities carry the risk of the loss of capital. Depending upon the investment strategies employed and market conditions, the investment of the escrowed indemnity funds in securities may be adversely affected by unforeseen events involving such matters as political crises, changes in interest rates and forced redemptions of securities. Further, no guarantee or representation can be made that our investment strategy will be successful. Accordingly, we may lose all or some of our investment of the $500,000 and be unable to use a portion, or all of the escrowed indemnity funds, on our business, which will adversely impact our financial condition.

 

Our employees, officers and/or directors will control a sizeable amount of our common shares, limiting your influence on shareholder decisions.

 

Upon the conclusion of this offering, our employees, officers and/or directors will, in the aggregate, beneficially own approximately 40% of our outstanding shares, based on the number of shares held by them as of December 31, 2016. As a result, our employees, officers and directors will possess substantial ability to impact our management and affairs and the outcome of matters submitted to shareholders for approval. These shareholders, acting individually or as a group, could exert substantial influence over matters such as electing directors and approving mergers or other business combination transactions. This concentration of ownership and voting power may also discourage, delay or prevent a change in control of our Company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our Company and might reduce the price of our common shares. These actions may be taken even if they are opposed by our other shareholders, including those who purchase shares in this offering. See “Principal Stockholders.”

 

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As the rights of stockholders under British Virgin Islands law differ from those under U.S. law, you may have fewer protections as a shareholder.

 

Our corporate affairs will be governed by our Amended and Restated Memorandum and Articles of Association, the British Virgin Islands Business Companies Act, 2004 (the “BVI Act”), and the common law of the British Virgin Islands. The rights of shareholders to take legal action against our directors, actions by minority stockholders and the fiduciary responsibilities of our directors under British Virgin Islands law are to a large extent governed by the common law of the British Virgin Islands and by the BVI Act. The common law of the British Virgin Islands is derived in part from comparatively limited judicial precedent in the British Virgin Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the British Virgin Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States. In particular, the British Virgin Islands has a less developed body of securities laws as compared to the United States, and some states (such as Delaware) have more fully developed and judicially interpreted bodies of corporate law.

 

As a result of all of the above, holders of our shares may have more difficulty protecting their interests through actions against our management, directors or major shareholders than they would as shareholders of a U.S. company. For a discussion of material differences between the provisions of the BVI Act and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital – Differences in Corporate Law.”

 

British Virgin Islands companies may not be able to initiate shareholder derivative actions in a federal court of the United States and may have to proceed with such action in the British Virgin Islands, thereby limiting shareholders’ ability to protect their interests.

 

British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States and may have to proceed with such action in the British Virgin Islands. The circumstances in which any such action may be brought, and the procedures and defenses that may be available with respect to any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize or enforce against us judgments of courts in the United States based on certain liability provisions of U.S. securities law; and to impose liabilities against us, in original actions brought in the British Virgin Islands, based on certain liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will generally recognize and enforce the non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. This means that even if shareholders were to sue us successfully, they may not be able to recover anything to make up for the losses suffered.

 

The laws of the British Virgin Islands provide little protection for minority shareholders, so minority shareholders will have little or no recourse if the shareholders are dissatisfied with the conduct of our affairs.

 

Under the law of the British Virgin Islands, there is little statutory law for the protection of minority shareholders other than the provisions of the BVI Act dealing with shareholder remedies. The principal protection under statutory law is that shareholders may bring an action to enforce the constituent documents of the corporation, in our case, our Memorandum and Articles of Association. Shareholders are entitled to have the affairs of the company conducted in accordance with the general law and the Memorandum and Articles.

 

There are common law rights for the protection of shareholders that may be invoked, largely dependent on English company law, since the common law of the British Virgin Islands for business companies is limited. Under the general rule pursuant to English company law known as the rule in Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of the company’s affairs by the majority or the board of directors. However, every shareholder is entitled to have the affairs of the company conducted properly according to law and the constituent documents of the corporation. As such, if those who control the company have persistently disregarded the requirements of company law or the provisions of the company’s Memorandum and Articles of Association, then the courts will grant relief. Generally, the areas in which the courts will intervene are the following: (1) an act complained of which is outside the scope of the authorized business or is illegal or not capable of ratification by the majority; (2) acts that constitute fraud on the minority where the wrongdoers control the company; (3) acts that infringe on the personal rights of the shareholders, such as the right to vote; and (4) where the company has not complied with provisions requiring approval of a special or extraordinary majority of shareholders, which are more limited than the rights afforded minority shareholders under the laws of many states in the United States.

 

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We are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies. As a result, we may not provide you the same information as U.S. domestic reporting companies or we may provide information at different times, which may make it more difficult for you to evaluate our performance and prospects.

 

We are a foreign private issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we will be subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports or proxy statements and we do not intend to file quarterly reports. We will not be required to disclose detailed individual executive compensation information and we do not intend to disclose detailed executive compensation information. Furthermore, our directors and executive officers will not be required to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider short-swing profit disclosure and recovery regime and we do not intend to file Section 16 reports for officers and directors.

 

As a foreign private issuer, we will also be exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors. However, we do plan to disclose material information to all investors at this time. In addition, we will still be subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5 under the Exchange Act. Since many of the disclosure obligations imposed on us as a foreign private issuer differ from those imposed on U.S. domestic reporting companies, you should not expect to receive the same information about us and at the same time as the information provided by U.S. domestic reporting companies.

 

FORWARD-LOOKING STATEMENTS

 

We have made statements in this prospectus, including under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Our Business” and elsewhere that constitute forward-looking statements. Forward-looking statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “we believe,” “we intend,” “may,” “should,” “will,” “could” and similar expressions denoting uncertainty or an action that may, will or is expected to occur in the future. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements.

 

Examples of forward-looking statements include:

 

the timing of the development of future business;

 

projections of revenue, earnings, capital structure and other financial items;

 

statements regarding the capabilities of our business operations;

 

statements of expected future economic performance;

 

statements regarding competition in our market; and

 

assumptions underlying statements regarding us or our business.

 

The ultimate correctness of these forward-looking statements depends upon a number of known and unknown risks and events. We discuss our known material risks under the heading “Risk Factors” above. Many factors could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Consequently, you should not place undue reliance on these forward-looking statements.

 

The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

 

In addition, we cannot assess the impact of each factor 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.

 

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USE OF PROCEEDS

 

After deducting the underwriting discounts and commissions and estimated expenses of this offering payable by us, we expect net proceeds from this offering of approximately $11.9 million (or $13.8 million if the underwriters’ option to purchase additional common shares from us is exercised in full), based on an assumed initial public offering price of $5.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus. The net proceeds from this offering must be remitted to China before we will be able to use the funds to grow our business. The procedure to remit funds may take several months after completion of this offering, and we will be unable to use the offering proceeds in China until remittance is completed. See “Risk Factors – We must remit the offering proceeds to China before they may be used to benefit our business in China, and this process may take a number of months.”

 

We intend to use the net proceeds of this offering as follows after we complete the remittance process:

 

  approximately $5.0 million for working capital of Beijing REIT and REIT Changjiang for the purchase of raw materials, marketing and research and development;

 

  approximately $3.5 million for acquisitions of other complimentary businesses, in the area of production of eco-friendly construction materials similar to REIT Changjiang or REIT Xinyi. However, we have no current understandings, agreements or commitments for any specific material acquisitions at this time;

 

  approximately $2.9 million for the new plant construction for REIT Xinyi;

 

  approximately $500,000 in escrow for indemnity claims of the underwriters, which sum could be returned to us after two years from the date of this offering; and

 

  any balance for additional working capital.

 

The precise amounts and percentage of proceeds we devote to particular categories of activity, and their priority of use, will depend on prevailing market and business conditions as well as on the nature of particular opportunities that may arise from time to time. Accordingly, we reserve the right to change the use of proceeds that we presently anticipate and describe herein. Pending remitting the offering proceeds to China, we intend to invest our net proceeds in short-term, interest bearing, and investment-grade obligations. These investments may have a material adverse effect on the U.S. federal income tax consequences of an investment in our common shares. It is possible that we may become a passive foreign investment company for U.S. federal income taxpayers, which could result in negative tax consequences to you. These consequences are discussed in more detail in “Material Tax Matters Applicable to U.S. Holders of Our Common Shares.”

 

Indemnification Escrow Agreement

 

We have agreed with the underwriters to establish an escrow account in the United States and to fund such account with $500,000 from this offering that may be utilized by the underwriters to fund any bona fide indemnification claims of the underwriters arising during a two-year period following the offering. The escrow account will not be interest bearing, and we will be free to invest the assets in certain securities during the two-year period. All funds that are not subject to an indemnification claim will be returned to us after the two-year period expires.

 

 36 

 

DIVIDEND POLICY

 

We have never declared or paid any cash dividends on our common shares. We anticipate that we will retain any earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions and future prospects and other factors the board of directors may deem relevant.

 

Under British Virgin Islands law, we may only pay dividends from surplus (the excess, if any, at the time of the determination of the total assets of our company over the sum of our liabilities, as shown in our books of account, plus our capital), and we must be solvent before and after the dividend payment in the sense that we will be able to satisfy our liabilities as they become due in the ordinary course of business; and the realizable value of assets of our company will not be less than the sum of our total liabilities, other than deferred taxes as shown on our books of account, and our capital.

 

If we determine to pay dividends on any of our common shares in the future, as a holding company, we will be dependent on receipt of funds from Beijing REIT and REIT Ecological. Current Chinese regulations permit our China Operating Companies to pay dividends to REIT Holdings only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. Further, as of May 2017, two loans governing part of the current debts incurred by Beijing REIT and REIT Changjiang have restrictions on their abilities to pay dividends, and any future financing arrangements may impose such restrictions as well. In addition, each of our subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Our China Operating Companies are also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at the discretion of its board of directors. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation. Our subsidiaries in China are required to set aside statutory reserves and have done so.

 

In addition, pursuant to the China Enterprise Income Tax Law (“EIT Law”) and its implementation rules, dividends generated after January 1, 2008 and distributed to us by Beijing REIT and REIT Ecological are subject to withholding tax at a rate of 10% unless otherwise exempted or reduced according to treaties or arrangements between the Chinese central government and governments of other countries or regions where the non-Chinese-resident enterprises are incorporated.

 

Under existing Chinese foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of the State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations in China may be used to pay dividends to our company.

 

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EXCHANGE RATE INFORMATION

 

Our business is conducted in China, and the financial records of the China Operating Companies are maintained in RMB, their functional currency. However, we use the U.S. dollar as our reporting currency; therefore, periodic reports made to shareholders will include current period amounts translated into U.S. dollars using the then-current exchange rates. Our financial statements have been translated into U.S. dollars in accordance with Accounting Standards Codification (“ASC”) 830-10, “Foreign Currency Matters.” We have translated our asset and liability accounts using the exchange rate in effect at the balance sheet date. We translated our statements of income using the average exchange rate for the period. We reported the resulting translation adjustments under other comprehensive income. The consolidated balance sheet amounts, with the exception of equity at December 31, 2016 and 2015 were translated at RMB 6.9448 and RMB 6.4917 to $1.00, respectively. The equity accounts were stated at their historical rates. The average translation rates applied to consolidated statements of income and cash flows for the years ended December 31, 2016 and 2015 were RMB 6.6441 and RMB 6.2288 to $1.00, respectively.

 

We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, or at all. The Chinese government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. On August 3, 2017, the Forex exchange rate was RMB 6.7225 to $1.00. We do not currently engage in currency hedging transactions.

 

The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated.

 

Forex Exchange Rate

The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated.

         
  

(RMB per U.S. Dollar)

 
  

Period End

  

Average (1)

 
         
 2012   6.3090    6.3115 
            
 2013   6.1090    6.1938 
            
 2014   6.1484    6.1458 
            
 2015   6.4917    6.2288 
            
 2016   6.9448    6.6441 
            

   (RMB per U.S. Dollar) 
   Period High   Period Low 
         
February 2017   6.8842    6.8541 
           
March 2017   6.9155    6.8681 
           
April 2017   6.9087    6.8451 
           
May 2017   6.8098    6.9060 
           
June 2017   6.8382     6.7768 
           
July 2017    6.8045    6.7247 
           

August 2017 (through August 4)

   6.7247    6.7191 

   
(1)Annual averages were calculated by using the average of the midpoint exchange rate of each day during the relevant year.

 

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The following table outlines the currency exchange rates that were used in creating the consolidated financial statements in this report:

 

   December 31, 2016  December 31, 2015
       
Year-end spot rate  US$1=RMB 6.9448  US$1=RMB 6.4917
Average rate  US$1=RMB 6.6441  US$1=RMB 6.2288

  

 39 

 

CAPITALIZATION

 

The following table sets forth our capitalization as of May 31, 2017 on an actual basis and on a pro forma basis giving effect to the sale of 2,800,000 shares at an assumed initial public offering price of $5.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, and to reflect the application of the proceeds after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

You should read this table in conjunction with our financial statements and related notes appearing elsewhere in this prospectus and “Use of Proceeds” and “Description of Share Capital.”

 

Pre- and Post-Offering Capitalization 

 

May 31, 2017

 

    Actual       Pro Forma(1)  
     
Long term bank loans, including current portion  $9,244,549   $9,244,549 
Common shares, $0.001 par value; 200,000,000 shares authorized; 18,640,000 shares issued and outstanding as of May 31, 2017, actual; 22,340,000 shares issued and outstanding, pro forma   18,640    22,340 
Additional paid-in capital   23,741,828    39,208,128 
Statutory reserve   1,475,799    1,475,799 
Accumulated earnings   3,128,808    3,128,808 
Accumulated other comprehensive loss   (1,323,556)   (1,323,556)
Total RETO Eco Solutions, Inc. stockholders’ equity   27,041,519    42,511,519 
Noncontrolling interest   5,955,477    5,955,477 
Total stockholders’ equity   32,996,996    48,466,996 
Total capitalization  $42,241,545   $57,711,545 

 

 

  (1)

Pro forma additional paid in capital reflects the net proceeds we expect to receive, after deducting the underwriting discounts and commissions and other expenses payable by us. We expect to receive net proceeds of approximately $11,870,000, after deducting the underwriting discounts and commissions and estimated offering expenses, at the assumed initial public offering price of $5.00, the midpoint of the estimated price range set forth on the cover page of this prospectus, calculated as follows: $14,000,000 gross offering proceeds, less underwriting discounts and commissions of $1,120,000, estimated offering expenses of $800,000, and a non-accountable expense allowance of $210,000. In addition, Pro forma adjustment also includes the impact from the issuance of 900,000 shares in escrow as of May 31, 2017 to pre-IPO investors for total consideration of $3.6 million.

 

If the underwriters’ option to purchase additional common shares from us were exercised in full, pro forma (i) common shares would be 22,760,000 shares, (ii) additional paid-in capital would be $41,108,208, (iii) total stockholders’ equity would be $50,367,496 and (iv) total capitalization would be $59,612,045.

 

 40 

 

DILUTION

 

If you invest in our common shares, your interest will be diluted to the extent of the difference between the initial public offering price per common share and the pro forma net tangible book value per common share after the offering. Dilution results from the fact that the per common share offering price is substantially in excess of the book value per common share attributable to the existing shareholders for our presently outstanding common shares. Our net tangible book value attributable to shareholders (including 900,000 shares in escrow as of May 31, 2017 issued to pre-IPO investors for total consideration of $3.6 million) at May 31, 2017 was $23,510,016 or approximately $1.20 per common share. Net tangible book value per common share as of May 31, 2017 represents the amount of total tangible assets less goodwill, acquired intangible assets, total liabilities and non-controlling interest, divided by the number of common shares outstanding.

 

Upon completion of this offering, our post offering pro forma net tangible book value, which gives effect to receipt of the net proceeds from the offering and issuance of additional shares in the offering, but does not take into consideration any other changes in our net tangible book value after May 31, 2017, will be approximately $35,380,016 or $1.58 per common share. This would result in dilution to investors in this offering of approximately $3.42 per common share or approximately 68.3% from the assumed initial public offering price of $5.00 per common share, the midpoint of the estimated price range set forth on the cover page of this prospectus. Net tangible book value per common share would increase to the benefit of present shareholders by $0.38 per share attributable to the purchase of the common shares by investors in this offering.

 

The following table sets forth the estimated net tangible book value per common share after the offering and the dilution to persons purchasing common shares based on the foregoing offering assumptions.

 

   Post-Offering(1) 
Assumed offering price per common share  $5.00 
Net tangible book value per common share before the offering  $1.20 
Increase per common share attributable to payments by new investors  $0.38 
Pro forma net tangible book value per common share after the offering  $1.58 
Dilution per common share to new investors  $3.42 

 

 

  (1)

Assumes net proceeds of $ 11,870,000 from offering of common shares, calculated as follows: $14,000,000 offering, less underwriting discounts and commissions of $1,120,000 estimated offering expenses of $800,000, and a non-accountable expense allowance of $210,000.

 

If the underwriters exercise their option to purchase additional common shares in full, the pro forma net tangible book value per common share would be $1.64 per share, and the dilution per common share to new investors in this offering would be $3.36 per share. 

  

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POST-OFFERING OWNERSHIP

 

The following table illustrates our pro forma proportionate ownership, upon completion of the offering, by present shareholders and investors in this offering, compared to the relative amounts paid by each. The table reflects payment by present shareholders as of the date the consideration was received and by investors in this offering at the assumed initial public offering price of $5.00, the midpoint of the estimated price range set forth on the cover page of this prospectus, before deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The table further assumes no changes in net tangible book value other than those resulting from the offering.

 

   Shares Purchased   Total Consideration   Average Price 
   Amount (#)   Percent (%)   Amount ($)   Percent (%)   Per Share ($) 
                     
Existing shareholders   19,540,000(1)   87%   23,510,016    66%   1.20 
New investors   2,800,000    13%   11,870,000    34%   4.24 
Total   22,340,000    100%   35,380,016    100%   1.58 

 

A $1.00 increase (or decrease) in the assumed initial public offering price of $5.00 per share would increase (or decrease) total consideration paid by new investors by $2.8 million, assuming that the number of shares offered by us on the cover page of this prospectus remains the same.

 

  (1) Includes 900,000 shares in escrow as of December 31, 2016 issued to pre-IPO investors for total consideration of $3.6 million.

 

After giving effect to the sale of common shares in this offering by us, if the underwriters exercise in full their option to purchase additional common shares from us, our existing shareholders would own 86% and purchasers of common shares in this offering would own 14% of the total number of common shares outstanding upon completion of this offering.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in the “Risk Factors” section.

 

Overview of Company

 

We are a manufacturer and distributor of eco-friendly construction materials (aggregates, bricks, pavers and tiles), made from mining waste (iron tailings) and fly-ash, as well as equipment used for the production of these eco-friendly construction materials. In addition, we provide project implementation and construction of urban ecological environments including those for the purpose of capturing, controlling and reusing rainwater, commonly called “sponge cities”. We also provide parts, engineering support, consulting, technical advice and service, and other project-related solutions for our manufacturing equipment and environmental protection projects. We mainly conduct our operations in China through our wholly owned subsidiary, REIT Ecological, Beijing REIT and its subsidiaries in China.

 

Beijing REIT was established on May 12, 1999 under the laws of China, with the registered capital of RMB 24 million (approximately $3.5 million) and additional paid in capital of RMB 100 million (approximately $15.4 million) contributed by four individual shareholders. Over the years, Beijing REIT has established several other wholly-owned subsidiaries consisting of: Gu’an REIT incorporated on May 12, 2008; REIT Technology incorporated on April 24, 2014; Ruirong incorporated on May 12, 2014; Dingxuan incorporated on October 17, 2014; and REIT US incorporated in the United States on February 27, 2014. Gu’an REIT is the main operating entity focusing on the development, manufacture and distribution of specialized equipment to manufacture construction materials, while the other four subsidiaries are relatively new and have limited activities.

 

REIT Changjiang was incorporated in Hainan Province, China, on November 22, 2011 with the original registered capital of RMB 100 million (approximately $16 million). REIT Changjiang is owned 84.32% by Beijing REIT and 15.68% by Venture Business International (“VBI”), a British Virgin Islands company. REIT Changjiang is engaged in hauling and processing construction and mining waste, with which it produces recycled aggregates, bricks, pavers and tiles for environmental-friendly uses.

 

On June 1, 2015, REIT Construction was incorporated as a wholly-owned subsidiary of REIT Changjiang.

 

On July 14, 2015, Beijing REIT established a new subsidiary, REIT Xinyi wherein Beijing REIT owns 70% equity interest, with the remaining 30% owned by a minority shareholder Xinyi Transportation.

 

In February 2016, Beijing REIT established a joint venture, REIT India, together with a third-party, Q Green Techcon Private Limited (“Q Green”), an Indian company. Total registered capital of REIT India is approximately $100,000, wherein Beijing REIT owns 51% equity interest, with the remaining 49% owned by Q Green. The Company expects to expand its business in the Indian market through this joint venture.

 

Our business consists of four business segments, including construction materials production and distribution, machinery and equipment production and sales, municipal construction projects and technological consulting and other services, which accounted for 56%, 40%, 0% and 4% of our total revenue for the year ended December 31, 2016 and 46%, 38%, 7% and 9% of our total revenue respectively for the year ended December 31, 2015. Our environmentally-friendly construction materials are made from mining waste (iron tailings) and fly-ash and are used for ground works, landscaping, hydraulic engineering projects and wall projects. Our production facilities include factories operated by REIT Changjiang and Gu’an REIT, and we will build a new manufacturing plant for REIT Xinyi in the near future. We have 39 registered patents (seven of which are owned jointly with Luoyang) and four software copyrights in China and have 27 ongoing research and development projects that are crucial for our businesses. 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.

 

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The equipment and machinery we manufacture mostly consist of large-scale automatic environmental protection equipment with hydraulic integration, which can be used to produce various types of eco-friendly construction materials and meet the needs of various ecological projects. In addition, we have entered into the urban ecological construction (sponge cities) business which includes design and construction for urban ecological environments. This business focuses on resource utilization of solid wastes and urban ecological construction.

 

Our domestic customers are located throughout China and our international customers are mainly located in Asia, the Middle East, North Africa and North America. Sales to customers in China and internationally accounted for approximately 95% and 5%, respectively, of our total sales for the year ended December 31, 2016, and approximately 90% and 10%, respectively, of the total sales in the year ended December 31, 2015. As of December 31, 2016, our products were sold in more than 10 countries.

 

Our primary raw materials in production of construction materials are from iron ore refining, concrete and steel. Our cost of raw material is relatively stable in recent years. Cost of revenues mainly includes costs of raw materials, costs of direct labor, utilities, depreciation expenses and other overhead costs.

 

Factors Affecting Our Results of Operations

 

Government Policy May Impact our Business and Operating Results.

 

Our business and operating results are affected by China’s overall economic growth and government policy, especially its policy for construction, real estate development and environmental protection. Unfavorable changes in government policies (as well as government policies affecting our customers) could affect the demand for our products and could materially and adversely affect our results of operations. Our products are currently not subject to the government restrictions in China. However, any future changes in the government’s policy upon the manufacturing industry may have a negative effect on our business.

 

Our revenue will suffer if we lose major customers

 

Our construction materials are mainly sold to construction companies. For the years ended December 31, 2016 and 2015, no customer accounted for over 10% of the Company’s total revenue. As of December 31, 2016, no customer accounted for more than 10% of the total outstanding accounts receivable balance. As of December 31, 2015, one customer accounted for 12% of the total outstanding accounts receivable balance. Should we lose any large scale customers in the future and are unable to offset any such loss with increased sales to existing customers or sales to new customers, our revenues will suffer.

 

Product innovation has significant impact on our revenue and profit

 

Our construction materials are eco-friendly. We strive to produce the most advanced products for our customers. Our customers’ needs for eco-friendly construction materials and the equipment used to produce these materials are constantly evolving. If our research and development efforts are not sufficient to adapt to the change in technology in the industry, our products may not meet the needs of our customers and compete within the industry.

 

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Results of Operations

 

Years ended December 31, 2016 and 2015

 

The following table summarizes the results of our operations during the fiscal years ended December 31, 2016 and 2015, and provides information regarding the dollar and percentage increase or (decrease) during such years.

 

(All amounts, other than percentages, in thousands of U.S. dollars)

   2016   2015         
Statement of Operations Data:  Amount   As % 
of
Sales
   Amount   As % 
of
Sales
   Amount
Increase
(Decrease)
   Percentage
Increase
(Decrease)
 
                         
Revenues  $32,424    100%  $17,384    100%  $15,040    87%
Cost of goods sold   18,272    56%   9,265    53%   9,007    97%
Gross profit   14,152    44%   8,119    47%   6,033    74%
Operating expenses                              
Selling expenses   1,581    5%   1,462    8%   119    8%
General and administrative expenses   3,879    12%   2,608    15%   1,271    49%
Research and development expense   504    2%   458    3%   46    10%
Total operating expenses   5,964    18%   4,528    26%   1,436    32%
Income from operations   8,188    26%   3,591    21%   4,597    128%
Other income (expenses)                              
Interest expense, net   (1,450)   -4%   (1,032)   -6%   (418)   40%
Other expense, net   (283)   -1%   93    1%   (376)   -404%
Total other income (expenses)   (1,733)   -5%   (939)   -5%   (794)   85%
Income before income taxes   6,455    20%   2,652    15%   3,803    143%
Provision for income taxes   (1,952)   -6%   (296)   -2%   (1,656)   559%
Net income  $4,503    14%  $2,356    14%  $2,147    91%

 

Revenues. Revenues increased by approximately $15.0 million, or 87%, to approximately $32.4 million for the year ended December 31, 2016 from approximately $17.4 million for the year ended December 31, 2015. The increase in net sales was driven by more than doubled sales of our machinery and equipment products and environmental-friendly construction materials.

 

Revenue by Business Segment

 

(All amounts, other than percentages, in thousands of U.S. dollars)

   December 31, 2016   December 31, 2015   Variance 
   Amount   % of  Sales   Amount   % of  Sales   Amount
Increase
(Decrease)
   Percentage
Increase
(Decrease)
 
Machinery and Equipment  $13,166    40%  $6,549    38%  $6,617    101%
Construction materials   18,425    57%   7,941    46%   10,484    132%
Municipal construction   -    -    1,250    7%   (1,250)   -100%
Technological consulting services   833    3%   1,644    9%   (811)   -49%
Total  $32,424    100%  $17,384    100%  $15,040    87%

 

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Machinery and Equipment

 

Revenue from machinery and equipment increased by $6.6 million, or 101%, from $6.5 million for the year ended December 31, 2015 to $13.2 million for the year ended December 31, 2016. We sold 32 production lines and 20 large equipment sets to customers for the year ended December 31, 2016, compared to 15 production lines and 10 large equipment sets sold during fiscal 2015. The increase is mainly due to increased customer demand for our new machinery model released in 2016, which has higher capacity compared to our prior models, with more automated functions.

 

Construction materials

 

Sales of our environmental-friendly construction materials increased by $10.5 million or 132% for the year ended December 31, 2016 as compared to the year ended December 31, 2015. During fiscal 2016, we started to introduce our customized construction material products to the market and we increased our selling efforts to expand our market to other areas of Hainan province, as well developed wholesale customers other than construction companies. As a result, our overall sales volume doubled from approximately 2.4 million square meters of brick and block in fiscal 2015 to 5.0 million square meters of brick and block in fiscal 2016. In addition, we are able to set higher selling price due to customization of the products. The overall average selling price in fiscal 2016 increased by approximately 13% from fiscal 2015. Both the increase in the sales volume and higher selling price contributed to our increased sales in fiscal 2016.

 

Municipal construction

 

Municipal construction includes such projects as sponge city projects, sewage pipeline construction, public plaza construction, and landscaping. Our environmental-friendly construction materials such as brick and block may be used in these municipal construction projects as required by local governments. Revenue from municipal construction projects is recognized based on percentage of completion method. Revenue from municipal construction projects decreased by $1.3 million in fiscal 2016 as compared to fiscal 2015 because we did not have municipal construction projects in fiscal 2016, but we were engaged in two municipal construction projects in fiscal 2015.

 

Technological consulting services

 

We started to provide environmental-protection related consulting services to customers in the second half of 2015. Our subsidiaries Beijing REIT and Dingxuan provided such services to customers by assisting them in planning the environmental-protection projects, providing market research and feasibility reports reviewing and assisting customers to finalize the design, installation, testing and inspection, as well as providing employee training services. Revenue from our consulting service agreements with our customers range from approximately $100,000 to $250,000 per agreement. Revenue from technology consulting service decreased by $0.8 million, or 49%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This decrease resulted from the Company not obtaining as many new contracts in 2016 as in 2015.

 

Cost of goods sold.

 

Our cost of goods sold increased by approximately $9.0 million or 97% to approximately $18.3 million for the year ended December 31, 2016 from approximately $9.3 million for the year ended December 31, 2015. The increase in cost of goods sold was due to increased sales volume in our construction materials and equipment and machinery in fiscal 2016. We incurred more raw material costs, labor costs and overhead costs to produce these products to meet customer demand and fulfill the sales orders. As a percentage of revenues, the cost of goods sold increased by approximately 3% to 56% in fiscal 2016 from 53% in fiscal 2015, which was mainly attributable to increased raw material cost and labor cost in fiscal 2016.

 

Gross profit.

 

Our gross profit increased by approximately $6.0 million, or 74%, to approximately $14.1 million for the year ended December 31, 2016 from approximately $8.1 million for the year ended December 31, 2015. Gross profit margin was 44% for fiscal 2016, as compared with 47% in fiscal 2015. The decrease in gross profit margin by 3% was primarily attributable to increased raw material costs in the construction material segments and increases in the labor cost in the technology consulting service segment. In addition, the municipal construction segment contributed 42% gross margin to the Company in fiscal 2015, however, the Company did not have revenue from this segment in fiscal 2016.

 

Our gross profit and gross margin by segments are as follows:

 

(All amounts, other than percentages, in thousands of U.S. dollars)

   2016   2015   Variance 
   Gross Profit   Gross
Profit %
   Gross Profit   Gross
Profit %
   Gross Profit
Increase (Decrease)
  

Gross
Profit %

Increase (Decrease)

 
Machinery and equipment  $7,743    59%  $3,200    49%  $4,543    10%
Construction material   6,091    33%   3,101    39%   2,990    (6)%
Municipal construction   -    -    524    42%   (524)   (42)%
Technological consulting services   318    38%   1,294    79%   (976)   (41)%
Total  $14,152    44%  $8,119    47%  $6,033    (3)%

 

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Gross profit for machinery and equipment products increased by approximately $4.5 million to approximately $7.7 million for the year ended December 31, 2016 as compared to $3.2 million for fiscal 2015. Gross profit margins for this segment were 59% and 49%, respectively for fiscal 2016 and 2015. Machinery and equipment represented the second largest portion of our total sales in both fiscal 2016 and 2015. The gross margin increased by 10% which was due to increased sales from our new model RT with higher gross margin.

 

Gross profit for construction materials was approximately $6.0 million for the year ended December 31, 2016 compared to approximately $3.1 million for the year ended December 31, 2015. The gross profit margin for this segment was approximately 33% for the year ended December 31, 2016 as compared to 39% for the year ended December 31, 2015. The gross margin decrease was mainly due to higher raw material cost in fiscal 2016.

 

Gross profit for the municipal construction project segment was $0 and $0.5 million for the years ended December 31, 2016 and 2015, respectively. In fiscal 2015, the Company had two projects with gross margin of 58% and 31%, respectively. However, the Company did not have revenue from the municipal construction segment in fiscal 2016.

 

We started our technological consulting service business in 2015. This segment is characterized by lower overhead costs and higher profit margin because the primary costs are labor costs. Gross profit for consulting services decreased by $1.0 million for the year ended December 31, 2016 as compared to fiscal 2015, which was consistent with the decrease in revenue in fiscal 2016. The gross margin was 38% for the year ended December 31, 2016 as compared to 79% for the year ended December 31, 2015. The gross margin decrease was due to the increased salary and commissions paid to technical consulting personnel involved in the projects.

 

Selling expenses.  

 

Selling expenses increased by approximately $0.1 million for the year ended December 31, 2016. As a percentage of sales, our selling expenses were 5% and 8% of total revenues for the years ended December 31, 2016 and 2015, respectively. The decrease in selling expenses as percentage of revenue was primarily attributable to two factors: (1) lower commission expense in fiscal 2016 due to the fact that the Company started to sell products internationally to wholesalers instead of using our own sales forces, therefore the Company incurred less commission paid to sales team and (2) more customers picked up the products from our factory directly, which resulted in reduction in our shipping and handling cost.

 

General and administrative expenses.  

 

Our general and administrative expenses increased by approximately $1.3 million or 49%, to approximately $3.9 million for the year ended December 31, 2016 from approximately $2.6 million for the year ended December 31, 2015. As a percentage of revenues, general and administrative expenses were 12% and 15% of our total revenues for the years ended December 31, 2016 and 2015, respectively. The significant increase in general and administrative expenses was mainly due to $0.8 million higher bad debt expense incurred in fiscal 2016, together with other general increase in the salary and office expenses.

 

For accounts receivable aged under six months, the Company typically considered collectible and will not be provided with any allowance; accounts receivable aged from 7 to 9 months will be reserved at 5% of the outstanding balance; accounts receivable aged from 10 to 12 months will be reserved at 20%; and, accounts receivable aged over 1 year will be reserved at 100%. Below is the aging schedule of accounts receivable as of December 31, 2016 and 2015.

 

   December 31, 2016   December 31, 2015 
Accounts Receivable Age:        
Less than 3 months  $9,003,044   $4,120,097 
From 4 to 6 months   2,596,716    2,578,060 
From 7 to 9 months   2,212,867    1,714,150 
From 10 to 12 months   1,430,461    983,549 
Over 1 year   705,128    33,028 
Bad debt reserved   (741,187)   (314,544)
Accounts Receivable, net  $15,207,029   $9,116,558 

  

The Company assessed that the bad debt reserve of $741,187 was adequate as of December 31, 2016 based on specific customers’ facts and circumstances, especially the subsequent collection information. As of May 31, 2017, the amount of the subsequent collection of the outstanding receivable as of December 31, 2016 is as follows:

 

   December 31, 2016   Subsequent collection up-to May 30, 2017   % of
collection
 
AR less than 3 months  $9,003,044   $3,576,161    40%
AR aged from 4 to 6 months   2,596,716    689,675    27%
AR aged from 7 to 9 months   2,212,867    1,407,779    64%
AR aged from 10 to 12 months   1,430,461    1,107,580    77%
AR over 1 year   705,128    262,215    37%
Bad debt reserved   (741,187)   -      
AR net  $15,207,029   $7,043,410    44%

 

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The increase of accounts receivable aged over 1 year is the primary reason for the increase of bad debt reserve as of December 31, 2016 as compared to December 31, 2015. The increase of accounts receivable aged over 1 year was mainly due to the increase of the accounts receivable balance from sales of machinery and equipment, the aging of which is normally longer than that of construction materials sales. The customers with potential collection issues were not the same for both balance sheet dates and none of those customers are related parties. The Company believes that its current accounts receivable bad debt reserve is adequate based on its ongoing assessment.

 

Based on the assessment of customers’ credit and ongoing relationship, our payment terms typically range from 90 days to 1 year. Days sales outstanding for the years ended December 31, 2016 and 2015 were 137 and 148 days, respectively. Our days sales outstanding were consistent for both year 2016 and 2015.

 

The Company does not believe it has a material collection risk under its business model, nor does it believe that macroeconomic issues will have a negative impact on its collectability. The Company’s business has continued to grow and demands for its equipment and its environmental friendly technology has been increasing. Thus, it does not believe the collection issues will impact its liquidity adversely. 

 

In addition, a significant increase of $511,631 in the allowance for doubtful accounts related to advances to suppliers balance as of December 31, 2016 was mainly related to non-performance of two suppliers, which resulted in the increase of $432,188 in the allowance for doubtful accounts. The remaining $79,443 increase in allowance for doubtful accounts was determined based on the management’s assessment of utilization status at the reporting date. These suppliers were engaged in two separate projects of the Company and their delay in the delivery of products was due to their own financial condition. There is no known material factor negatively impacting our ability to utilize our advances to other suppliers. At each reporting date, the Company generally determines the adequacy of allowance for doubtful accounts by evaluating all available information, and then records a specific allowance for those advances based on the specific facts and circumstances. As of May 31, 2017, $1,053,733 or approximately 43.5% out of total $2,424,559 advances to suppliers as of December 31, 2016 have been subsequently utilized through the receipt of raw materials or construction materials.

 

Research and development expenses.  

 

Our research and development expenses were approximately $0.5 million for both years ended December 31, 2016 and 2015.

 

Interest expense, net.  

 

Our interest expense (net) increased by approximately $0.4 million, to approximately $1.4 million for the year ended December 31, 2016, from approximately $1.0 million for the year ended December 31, 2015. The Company capitalized $469,086 interest in fiscal 2015 on construction projects, but did not capitalize any interest in fiscal 2016 because the related projects were fully completed prior to fiscal 2016.

 

Income before income taxes  

 

Our income before income taxes was approximately $6.5 million for the year ended December 31, 2016, an increase of approximately $3.8 million as compared to approximately $2.7 million for the year ended December 31, 2015. The increase was primarily attributable to increased sales and gross margin, offset by the increased selling expense and general and administrative expense as discussed above.

 

Provision for income taxes

 

For both 2016 and 2015, Beijing REIT was recognized as a High-Tech Enterprise by the Chinese government and subject to a favorable income tax rate of 15%. In addition, since the products manufactured by REIT Changjiang qualify as eco-friendly construction materials, 10% of its revenue can be exempt from income tax. Nanjing Dingxuan primarily provides technological services to customers and based on the local regulation, its taxable income was assessed at 10% of its revenue. For fiscal year 2016, REIT Changjiang did not receive such exemption for the year ended December 31, 2016. The following table reconciles the impact of the favorable tax rate for the years ended December 31, 2016 and 2015.

 

   For the year ended December 31, 2016 
   Beijing REIT   REIT Changjiang   Nanjing Dingxuan   Total 
Income before income tax  $1,587,887   $4,433,782   $167,008   $6,188,677 
Income tax at statutory rate of 25%   396,971    1,108,446    41,752    1,547,169 
Income tax at favorable rates   238,183    1,108,446    4,237    1,350,866 
Tax saving from favorable rates   158,788    -    37,515    196,303 
Consolidated income before tax                  6,455,436 
Effect of favorable income tax rate                  3.0%
Effective income tax rate                  30.2%

 

   For the year ended December 31, 2015 
   Beijing REIT   REIT Changjiang   Nanjing Dingxuan   Total 
Income before income tax  $179,435   $1,139,017   $1,059,296   $2,377,748 
Income tax at statutory rate of 25%   44,859    284,754    264,824    594,437 
Income tax at favorable rates   26,915    170,852    27,192    224,959 
Tax saving from favorable rates   17,944    113,902    237,632    369,478 
Consolidated income before tax                  2,651,375 
Effect of favorable income tax rate                  13,9%
Effective income tax rate                  11.2%

 

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For fiscal year 2016, due to the fact that REIT Changjiang did not receive tax exemption, the favorable tax rate benefit was reduced to 3.9% for the year ended December 31, 2016.

 

Our provision for income taxes was approximately $2.0 million for the year ended December 31, 2016, an increase of approximately $1.7 from approximately $0.3 million for the year ended December 31, 2015. The increase in income tax provision was a result of increased taxable income for the year ended December 31, 2016. The effective tax rates were 30.2% and 11.2% for the years ended December 31, 2016 and 2015, respectively. The increase in effective tax rate is mainly due to the decreased benefit arising from favorable tax rates.

 

Since the products manufactured by REIT Changjiang qualify as eco-friendly construction materials, 10% of its revenue was exempted from income tax for fiscal 2015. This favorable income tax policy expired on December 31, 2015. Beginning on January 1, 2016, REIT Changjiang is subject to 25% income tax rate as a result of local government’s tax policy adjustment. Nanjing Dingxuan primarily provides technological services to customers, based on local tax regulation, its taxable income was assessed at 10% of its revenue for both fiscal 2015 and 2016.

 

Liquidity and Capital Resources

 

We are a holding company incorporated in the British Virgin Islands. REIT Holdings, our wholly owned subsidiary established in Hong Kong, owns Beijing REIT and REIT Ecological, which Beijing REIT in turn owns our assets through its subsidiaries in China, India and the United States. We may need dividends and other distributions in equity from our subsidiaries, including the China Operating Companies to satisfy our liquidity requirements. Current Chinese regulations permit our China Operating Companies 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 China Operating Companies 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 China Operating companies may also allocate a portion of their after-tax profits based on Chinese 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 subsidiaries (which generate revenues), to meet our obligations to date.

 

As of December 31, 2016 and 2015, we had outstanding loans of approximately $16.4 million and $18.0 million from various banks in China, respectively. To secure these debts, we have pledged our land use rights, projects under construction and real property located in Changjiang County, Hainan Province. Our assets outside of China are not used as collateral.

 

Further, as of May 2017, two loans governing part of the current debts incurred by Beijing REIT and REIT Changjiang have restrictions on their abilities to pay dividends, and any future financing arrangements may impose such restrictions as well, for example, lenders may impose future restrictions by requiring full repayment of the debt owed by us before we can pay dividends or make other payments. We cannot assure you that our other China Operating Companies will generate sufficient earnings and cash flows in the near future to pay dividends or otherwise distribute sufficient funds to enable us to meet our obligations, pay interest and expenses or declare dividends.

 

As of December 31, 2016 and 2015, we had cash and cash equivalents of approximately $1.6 million and $0.5 million, and restricted cash of approximately $0.2 million and $0.2 million, respectively, which was all maintained in banks accounts in China.

 

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.

 

As of December 31, 2016 and 2015, our current assets were approximately $21.1 million and $15.5 million, and our current liabilities were approximately $28.1 million and $22.3 million.

 

 Under applicable Chinese regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside at least 10% of its after-tax profit based on Chinese accounting standards each year to its general reserves until the accumulative amount of such reserves reaches 50% of its registered capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation. 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.”

 

 49 

 

Further, as of May 2017, two loans governing part of the current debts incurred by Beijing REIT and REIT Changjiang have restrictions on their abilities to pay dividends, and although instruments governing the current debts incurred by our other China Operating Companies do not have restrictions on their abilities to pay dividends or make other payments to us and we do not foresee any changes based on the terms of existing debt agreements, the lender may impose such restriction in the future. As a result, our ability to distribute dividends largely depends on earnings from our other China Operating Companies and their ability to pay dividends out of their earnings. We cannot assure you that our other China Operating Companies will generate sufficient earnings and cash flows in the near future to pay dividends or otherwise distribute sufficient funds to enable us to meet our obligations, pay interest and expenses or declare dividends 

 

We have historically funded our working capital needs from operations, advance payments from customers, bank borrowings, capital contribution 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 notes 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 accounts receivable collections.

 

Based on our current operating plan, we believe that our existing resources, including cash generated from operations, proceeds from the existing shareholders’ contributions, bank loans, bank notes payable, and advances from suppliers will be sufficient to meet our working capital requirement for our current operations over the next twelve months. We expect to be able to refinance our short-term loans based on past experience and our good credit history. We do not believe failure to refinance our short term loans from certain banks will have a significant negative impact on our normal business operations, and we are not dependent upon this offering to meet our liquidity needs for the next 12 months. In addition, our related parties including our major shareholders and affiliated companies are willing to provide us financial support. However, we may have negative cash flow in the future. If this occurs, the failure to refinance our short-term loans could potentially affect our capital expenditure and expansion of business.

 

During fiscal 2016, we repaid approximately $8.7 million of bank loans upon maturity. We also borrowed approximately $8.3 million under new bank loans from various banks in China. Lack of sufficient financial support from local banks or our related parties could potentially affect our capital expenditure and expansion of business. Our failure to refinance any bank loan may have a significant negative impact on our normal business operations.

 

On August 2, 2016, ReTo issued a total of 17,830,000 common shares at $0.25 per share to all of the Company’s original shareholders or former shareholders of Beijing REIT. The parties involved included the Company’s original shareholders, their family members and individual or companies who hold shares for them. Since the shares were issued to the original shareholders of Beijing REIT, the transaction is considered as a part of the reorganization. The Company believes it is appropriate to reflect these share issuances as nominal stock issuance on a retroactive basis similar to stock split pursuant to ASC 260. The Company has retroactively adjusted all shares and per share data for all the periods presented. Among total proceeds of $4,457,500 from the share issuance, the Company paid $3,466,260 (approximately RMB 24 million) to the original shareholders of Beijing REIT to buy back their equity interests in Beijing REIT as part of reorganization. The extra $0.9 million was contributed by the original shareholders to the holding company to pay for the various professional expenses of its planned initial public offering and was treated as capital contribution by the original shareholders.

 

In September 2016, the Company issued 800,000 shares of the Company’s common stock to settle a loan payable to an unrelated third party in the amount of RMB21,240,000 (approximately $3.2 million). The shares were valued at $4 per share because it was considered the fair value of the Company’s share that the investor was willing to convert the loan to.

 

In addition, in December 2016, the Company issued 900,000 common shares to an unrelated investor, at a price of $4 per share for a total of $3,600,000. As of December 31, 2016, the Company has not received the funds from the investor. The shares issued are held in escrow. The Company did not record the value of the stocks issued because the transaction was considered incomplete. These shares are excluded from the number of the outstanding shares as well as from the calculation of the weighted average shares outstanding.  As of date of this prospectus, this transaction has not closed yet.

 

Years ended December 31, 2016 and 2015

 

The following table sets forth summary of our cash flows for the periods indicated:

 

(All amounts in thousands of U.S. dollars)

 

   December 31, 2016   December 31, 2015 
Net cash provided by operating activities  $3,938   $1,858 
Net cash used in investing activities   (9,301)   (5,163)
Net cash provided by financing activities   6,653    1,721 
Effect of exchange rate changes on cash and cash equivalents   (228)   85 
Net increase in cash and cash equivalents   1,062    (1,499)
Cash and cash equivalents, beginning of period   533    2,032 
Cash and cash equivalents, end of period  $1,595   $533 

 

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Operating Activities

 

Net cash provided by operating activities was approximately $3.9 million for the year ended December 31, 2016, compared to cash provided by operating activities of approximately $1.9 million for year ended December 31, 2015. The increase in net cash provided by operating activities was primarily attributable to the following factors:

 

  The increase of net income of $2.15 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015.

 

  The increase of non-cash adjustment on bad debt provision of $0.8 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015 due to more bad debt provision was provide in fiscal 2016.

 

 

Advances from customers increased by approximately $3 million for fiscal 2016 as compared to fiscal 2015 which is consistent with the fact that the Company had more customers than fiscal 2015 and the Company requested more customer deposits for the working capital purpose.

 

 

Tax payable increased by approximately $1.6 million for the fiscal 2016 as compared with fiscal 2015 due to higher tax provision made for the year ended December 31, 2016.

 

And offset by the following factors:

 

  Accounts receivable increased by $6 million when comparing fiscal 2016 to the same period of 2015, due to the increased sales in 2016 and consistent payment terms when comparing to 2015.

 

  Advances to suppliers increase by approximately $1.1 million for fiscal 2016 as compared to fiscal 2015. The Company had $1.8 million prepayment for the construction materials as of December 31, 2016 for the future production, while the Company only had $0.1 million prepayment on construction material as of December 31, 2015.

 

Investing Activities

 

Net cash used in investing activities was approximately $9.3 million for the year ended December 31, 2016, compared to $5.2 million of cash used in investing activities for fiscal 2015. During the year ended December 31 2016, the Company paid $9.4 million on the construction in progress (“CIP”) projects to build a new factory facility for the Company’s subsidiary REIT Xinyi. For the same period of 2015, cash flow used in investing activities included a $2.7 million investment on the CIP project. In addition, the Company spent approximately $1.7 million in purchasing the land use right for REIT Xinyi for the year ended December 31, 2016.

 

Financing Activities

 

Net cash provided by financing activities was approximately $6.7 million for the year ended December 31, 2016, including proceeds from bank loans of $8.3 million, repayment of bank loans of $8.7 million, aggregated proceeds from share issuances of $4.5 million, payments made to original shareholders of Beijing REIT of $3.5 million, proceeds from investor loan of $3.2 million, and capital contribution from minority shareholder of $2.2 million. For the year ended December 31, 2015, cash provided by financing activities amounted to $1.7 million, primarily including proceeds from bank loans of $5.6 million, repayment of bank loans of $7.9 million and capital contribution from minority shareholders of $2.9 million.

 

In 2017, we expect to use capital expenditures primarily to build a manufacturing facility for REIT Xinyi. The Company formed REIT Xinyi in 2015 together with a 30% non-controlling interest shareholder Xinyi Transportation Investment Co., Ltd. (“Xinyi Transportation”), and plans to construct a new manufacturing plant to produce concrete cutting machines and eco-friendly construction materials for road paving and building construction use. The capital expenditure primarily relates to (i) $8.0 million to build the new factory facility in Xinyi; and (ii) investments of approximately $3.0 million in the new production lines and equipment. As of December 31, 2016, the remaining capital commitment was approximately $7.8 million for the related construction.

 

Our primary source of cash is currently cash generated from the sales of our products, bank borrowings and proceeds from related party loans. In the coming years, we will be looking to other sources, such as raising capital by issuing shares of stock, to meet our cash needs. We face uncertainties in regards to the size and timing of capital raises, however, we are confident that we can continue to meet operational needs by utilizing cash flows generated from our operating activities and bank borrowings, as necessary.

 

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Loan Facilities

 

As of December 31, 2016, the details of all our bank loans and bank acceptance notes payable are as follows:

 

(All amounts in U.S. dollars)

 

No.     Type   Contracting Party   Expiration Date   Amount     Effective Interest rate
1     Short-term Bank Loan   China Merchants Bank   June, 2017   $ 2,880,000     prevailing interest rate for one-year loan, plus 20 basis points
2     Short-term Bank Loan   Beijing Bank   February, 2017   $ 2,854,666     prevailing interest rate plus 71 basis points for $73,440 and 4.785% and 5.655% for $1,341,226 and $1,440,000, respectively
3     Long-term Bank Loan   Industrial and Commercial Bank of China   September, 2019   $ 9,920,860     prevailing interest rate for a 6-year loan, plus 29 basis points
4     Long-term Bank Loan   Changjiang Agriculture Credit Union   December, 2018   $ 720,000     8%
5     Bank acceptance notes payable   Beijing Bank   June, 2017   $ 720,000     5.6%

 

Although we currently do not have any material unused sources of liquidity, giving effect to the foregoing bank loans and other financing activities, including the discounting of bills/notes receivable, we should be able to sustain our operations at our current levels using the profits generated from operations through at least the next twelve months. We will consider additional borrowing based on our working capital needs and capital expenditure requirements. There is no seasonality of our borrowing activities.

 

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Statutory Reserves

 

Under Chinese regulations, all of our subsidiaries in China may pay dividends only out of their accumulated profits, if any, determined in accordance with accounting principles generally accepted in China (“China GAAP”). In addition, these companies are required to set aside at least 10% of their after-tax net profits each year, if any, to fund the statutory reserves until the balance of the reserves reaches 50% of their registered capital. The statutory reserves are not distributable in the form of cash dividends to the Company and can be used to make up cumulative prior year losses.

 

Restrictions on net assets also include the conversion of local currency into foreign currencies, tax withholding obligations on dividend distributions, the need to obtain SAFE approval for loans to a non-Chinese consolidated entity. As of May 2017, we have certain debt agreements that are secured with collateral on our land use right, projects under construction and real properties, and among those debt agreements, two of them have restrictions on our abilities to pay dividends. To the extent we wish to transfer pledged property, we are able to do so subject to the obligation that we settle the loan obligation.

 

The following table provides the amount of our statutory reserves, the amount of restricted net assets, consolidated net assets, and the amount of restricted net assets as a percentage of consolidated net assets, as of December 31, 2016 and 2015.

 

(All amounts in thousands of U.S. dollars)  December 31,
2016
   December 31,
2015
 
Statutory Reserves  $1,034   $350 
Total Restricted Net Assets  $1,034   $350 
Consolidated Net Assets  $28,303   $19,090 
Restricted Net Assets as Percentage of Consolidated Net Assets (%)   3.7%   1.8%

 

Total restricted net assets accounted for approximately 3.7% and 1.8% of our consolidated net assets as of December 31, 2016 and 2015, respectively. As our subsidiaries in China usually set aside only 10% of after-tax net profits each year to fund the statutory reserves and are not required to fund the statutory reserves when they incur losses, we believe the potential impact of such restricted net assets on our liquidity is limited.

 

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Capital Expenditures

 

We had capital expenditures of approximately $9.3 million and $5.2 million for the years ended December 31, 2016 and 2015, respectively for purchases of equipment and conducting our construction in progress (“CIP”) projects construction in connection with our business activities.

 

In 2017, our capital expenditures are expected to be approximately $11.0 million, which consists of (i) $8.0 million to build a new factory facility in Xinyi, (ii) investments of approximately $3.0 million in the new production lines and equipment for REIT Xinyi. Total planned capital investment for the whole project is RMB 800 million (approximately $115.2 million). The construction of the project is expected to be fully completed by May 2019.

 

We expect that our capital expenditures will increase in the future as our business continues to develop and expand. We have used cash generated from our subsidiaries’ operations to fund our capital commitments in the past and anticipate using such funds and proceeds received from our initial public offering to fund capital expenditure commitments in the future.

 

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 subsidiary Beijing REIT and REIT U.S. lease office spaces under operating leases. Operating lease expense amounted to $196,330 and $264,696 for the years ended December 31, 2016 and 2015.

 

The following table summarizes our contractual obligations, which are comprised entirely of operating lease obligations, as of December 31, 2016, and the effect these obligations are expected to have on our liquidity and cash flows in future periods:

 

Year ending December 31,    
2017  $88,936 
2018   45,044 
2019   10,535 
2020   10,535 
2021   10,535 
Thereafter   5,268 
Total  $170,853 

 

Off-balance Sheet Commitments and 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.

 

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Critical Accounting 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 original invoiced amount less an estimated allowance for uncollectible accounts. The Company usually 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 relationship, our 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.

 

Based on the assessment of customers’ credit and ongoing relationship, our payment terms typically range from 90 days to 1 year. Days sales outstanding for the years ended December 31, 2016 and 2015 were 137 and 148 days, respectively. Our days sales outstanding were consistent for both year 2016 and 2015

 

Revenue Recognition

 

The Company currently generates its revenues from the following main sources:

 

Revenue from machinery and equipment sales

 

The Company provides installation service in connection with product sales. The Company evaluates them as a single arrangement and determines whether the arrangement contains more than one unit of accounting in accordance with the standard ASC 605, “Multiple-Deliverable Revenue Arrangement”. An arrangement is separated, if (1) the delivered element(s) has (have) value to the customer on a stand-alone basis and (2) if the arrangement includes a general right of return relative to the delivered element(s), delivery or performance of the undelivered element(s) is (are) considered probable and substantially in the control of the Company. If both criteria are fulfilled, the appropriate revenue recognition convention is then applied to each separate unit of accounting. Generally, the total arrangement consideration is allocated to the separate units of accounting based on their relative fair values. Reliable fair values are sales prices for the component when it is regularly sold on a stand-alone basis, third-party prices for similar components or, under certain circumstances, cost plus, an adequate business specific profit margin related to the relevant element. If the criteria are not met, revenue is deferred until such criteria are met or until the period in which the last undelivered element is delivered. The amount allocable to the delivered elements is limited to the amount that is not contingent upon delivery of additional elements or meeting other specified performance conditions.

 

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The Company considers the installation and product sales as single delivered element based on the fact that there are no other third parties who can provide installation service for the equipment the Company sells in the market and the delivered machinery and equipment have little to no value to the customers without the installation service. In addition, the Company does not provide any installation service to its customers without product sales. Thus there is no reliable fair value for the installation service on a stand-alone basis. Accordingly, the revenue is recognized when the product is delivered and installation is completed since the criteria for multiple-deliverable revenue arrangements in ASC 605 are not met.

 

The Company allows customers to retain approximately 5-20% of the agreed purchase or installation price as a warranty deposit for one year after the Company delivers products and provides services. The Company considers this one year term as a warranty period for the Company’s products sold and services rendered. Revenue was recognized when the product is delivered and installation is completed and security retention was recorded in account receivable on our balance sheets. Historically, the Company has not experienced significant customer complaints on products sold or services provided. No customers have claimed damages for any loss incurred due to quality problems. Therefore, no separate warranty provisions were provided as of December 31, 2016 and 2015 based on historical experience.

 

Revenue from construction materials sales

 

Revenue from sales of construction materials is recognized, net of estimated provisions for sales allowances, when the products are shipped and title is transferred. Revenue is recognized when all four of the following criteria are met: (i) persuasive evidence that an arrangement exists (sales agreements and customer purchase orders are used to determine the existence of an arrangement); (ii) delivery of goods has occurred and risks and benefits of ownership have been transferred, which is when the goods are received by the customer at its designated location in accordance with the sales terms; (iii) the sales price is both fixed and determinable, and (iv) collectability is reasonably assured. Historically, sales returns have been minimal.

 

Revenue from municipal construction projects

 

The Company previously had one fixed-priced construction contract. Revenue for this construction contract was recognized on the percentage-of-completion method, measured by the percentage of costs incurred to date to estimated total costs for the contract. Contract costs included all direct material, labor costs, equipment and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. General and administrative costs were charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. There were no changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements may result in revisions to costs and income. The project commenced in 2014 and was completed in 2015. For the year ended December 31, 2014, the Company entered into one fixed price construction contract and 62.7% was considered as completed and therefore recognized as revenue, based on the costs incurred and estimated total cost to complete the construction project. For the year ended December 31, 2015, the Company recognized the remaining 37.3% of the revenue of $1,249,699 from the contract when the project was completed. There was no revenue recognized from similar construction contracts for the year ended December 31, 2016. The Company does not anticipate it will be taking on such long-term construction jobs going forward.

 

The asset account - “costs and estimated earnings in excess of billings on uncompleted contracts” represents revenues recognized in excess of amounts billed. The liability account - “billings in excess of costs and estimated earnings on uncompleted contracts” represents billings in excess of revenues recognized. As of December 31, 2015, $178,066 of billings in excess of costs and estimated earning on uncompleted contracts were included in the consolidated balance sheets.

 

Revenue from claims and unapproved change orders is recorded only to the extent that contract costs relating to the claim have been incurred and the amounts have been received or awarded. For the years ended December 31, 2016 and 2015, no revenue has been recognized from claims or unapproved change orders.

 

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Revenue from technological consulting and other services

 

Revenues from technological consulting and other services are recognized when services are rendered and contract amounts are earned.

 

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.

 

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 statute of limitations for the Company’s U.S. federal income tax returns and certain state income tax returns subject to examination by tax authorities for three years from the date of filing. As of December 31, 2016, the tax years ended December 31, 2011 through December 31, 2016 for the Company’s PRC subsidiaries remain open for statutory examination by PRC tax authorities.

 

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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

Interest Rate Risk

 

Our main interest rate exposure relates to bank borrowings. We manage our interest rate exposure with a focus on reducing our overall cost of debt and exposure to changes in interest rates. As of December 31, 2016, we had $16.4 million in outstanding debt borrowings, with an effective interest rate of 4.4% to 8%. As of December 31, 2015, we had $18.0 million in outstanding debt borrowings, with an effective interest rate of 6.9% to 7.2%.

 

As of December 31, 2016, if interest rates increased/decreased by 1%, with all other variables having remained constant, and assuming the amount of bank borrowings outstanding at the end of the year was outstanding for the entire year, profit attributable to equity owners of our Company would have been RMB 1,088,073 ($163,755) lower/higher, respectively, mainly as a result of higher/lower interest expenses incurred on the outstanding debt borrowings.

 

As of December 31, 2015, if interest rates increased/decreased by 1%, with all other variables having remained constant, and assuming the amount of bank borrowings outstanding at the end of the year was outstanding for the entire year, profit attributable to equity owners of our Company would have been RMB 1,081,692 ($162,795) lower/higher, respectively, mainly as a result of higher/lower interest expenses incurred on the outstanding debt borrowings 

 

Foreign Exchange Risk

 

Our functional currency is the RMB, and our financial statements are presented in U.S. dollars. China’s currency has gradually depreciated against most foreign currencies over the last few years. In 2016, the average exchange rate for US$ against Chinese RMB has changed significantly from US$1.00 for RMB 6.2288 in fiscal 2015 to US$1.00 for RMB 6.6441 in fiscal 2016. The change in the value of RMB relative to the U.S. dollar may affect our financial results reported in the U.S. dollar terms without giving effect to any underlying change in our business or results of operation. If using the average exchange rate of fiscal 2015, our revenue, cost of goods sold and total expenses, including selling expenses, general administrative expenses and research and development expenses, for the year ended December 31, 2016 would increase by approximately $2.1 million, $1.2 million and $0.3 million, respectively.

 

Currently, our assets, liabilities, revenues and costs are denominated in RMB and in U.S. dollars, our exposure to foreign exchange risk will primarily relate to those financial assets denominated in U.S. dollars. Any significant revaluation of RMB against U.S. dollar may materially affect our earnings and financial position, and the value of, and any dividends payable on, our common shares in U.S. dollars in the future. See “Risk Factors — Risks Related to Doing Business in China — Fluctuations in exchange rates could adversely affect our business and the value of our securities.”

 

Credit Risk

 

As of December 31, 2016, we had cash and cash equivalents of $1.6 million. Our cash and cash equivalents are invested primarily in savings and deposit accounts with original maturities of three months or less. Savings and deposit accounts generate a small amount of interest income.

 

Inflation Risk

 

Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material effect on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross profit and selling, general and administrative expenses as a percentage of net sales if the selling prices of our products do not increase with these increased costs.

 

Commodity Risk

 

As a developer and manufacturer of construction materials and equipment, our Company is exposed to the risk of an increase in the price of raw materials. We historically have been able to pass on price increases to customers by virtue of pricing terms that vary with changes in raw material prices such as steel and cement, but we have not entered into any contract to hedge any specific commodity risk. Moreover, our Company does not purchase or trade on commodity instruments or positions; instead, it purchases commodities for use.

 

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CORPORATE HISTORY AND STRUCTURE

 

Our Corporate Structure

 

Overview and History

 

We are a manufacturer and distributor of eco-friendly construction materials (aggregates, bricks, pavers and tiles), made from mining waste (iron tailings) and fly-ash, as well as equipment used for the production of these eco-friendly construction materials. In addition, we offer total solutions in sponge city construction, including project consulting, design and installation. We mainly conduct our operations in China through our wholly-owned subsidiary, Beijing REIT and its subsidiaries in China. We incorporated ReTo Eco-Solutions on August 7, 2015 in the British Virgin Islands as a holding company to develop business opportunities in China. ReTo Eco-Solutions owns all of the outstanding capital stock of REIT Holdings, our wholly owned Hong Kong subsidiary.

 

Ownership and Purpose

 

RETO Eco-Solutions, Inc. – ReTo Eco-Solutions is our British Virgin Islands holding company.

 

REIT Holdings (China) Limited – REIT Holdings is our wholly-owned Hong Kong subsidiary.

 

Beijing REIT Technology Development Co., Ltd. – Beijing REIT is an operating company in China and a wholly- owned subsidiary of REIT Holdings. Its business scope includes research and development and solutions for solid waste (construction waste, fly-ash and mining waste) disposal and reuse.

 

Xinyi REIT Ecological Technology Co., Ltd. – REIT Ecological is a wholly-owned subsidiary of REIT Holdings, its business scope will include research and development and solutions for solid wastes.

  

REIT Technology Development (America), Inc. – REIT US is a company incorporated in the United States and a wholly-owned subsidiary of Beijing REIT. Its business scope includes customer relationship management with the Company’s North American customers, marketing in North America and maintaining relationships with the Company’s partners, such as AGS.

 

Beijing REIT Ecological Engineering and Technology Co., Ltd. – REIT Technology is an operating company in China and a wholly-owned subsidiary of Beijing REIT. Its business scope includes the development and construction of municipal eco-friendly sponge city projects.

 

Gu-an REIT Machinery Manufacturing Co., Ltd. – Gu’an REIT is an operating company in China and a wholly owned subsidiary of Beijing REIT. Its business scope includes the development, manufacture and distribution of specialized equipment to manufacture construction materials.

 

Langfang Ruirong Mechanical and Electrical Equipment Co., Ltd. – Ruirong is an operating company in China and a wholly-owned subsidiary of Beijing REIT. Its business scope includes manufacturing assembly parts used in specialized equipment to manufacture construction materials.

 

REIT Mingsheng Environment Protection Construction Materials (Changjiang) Co., Ltd. – REIT Changjiang is an operating company in China and a subsidiary of Beijing REIT that is owned 84.32% by Beijing REIT and 15.68% by VBI. Its business scope includes hauling and processing construction and mining waste, with which it produces eco-friendly building products (aggregates, bricks, pavers and tiles) for environmental-friendly uses,

 

Nanjing Dingxuan Environment Protection Technology Development Co., Ltd. – Dingxuan is an operating company in China and a wholly owned-subsidiary of Beijing REIT. Its business scope includes technical support and consulting services for environmental protection projects.

 

Hainan REIT Construction Project Co., Ltd. – REIT Construction is an operating company in China and wholly owned subsidiary of REIT Changjiang. Its business scope includes the development and construction of municipal eco-friendly sponge city projects.

 

REIT Xinyi New Material Co., Ltd. - REIT Xinyi is an operating company in China and a 70% owned subsidiary of Beijing REIT. Its business scope will include the manufacture of specialized equipment to produce recycled building products (aggregate, bricks, pavers and tiles) for eco-friendly building.

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REIT Q GREEN Machines Private Limited – REIT India is an operating company in India and a 51% owned subsidiary of Beijing REIT. We expect to expand our business in the Indian market through this joint venture with Q Green. Its business scope will include the manufacture of specialized equipment to produce recycled building products (aggregate and bricks) for eco-friendly building.

 

Corporate Organizational Chart

 

 

Corporate History

 

Beijing REIT was established on May 12, 1999 under the laws of China with registered capital of RMB 24 million (approximately $3.5 million) and additional paid-in capital of RMB 100 million (approximately $15.4 million) contributed by four individual shareholders. Since its formation in 1999, Beijing REIT has established several other wholly-owned subsidiaries:

 

Gu’an REIT incorporated on May 12, 2008;

 

REIT Technology incorporated on April 24, 2014;

 

Ruirong incorporated on May 12, 2014;

 

Dingxuan incorporated on October 17, 2014; and

 

REIT US incorporated on February 27, 2014.

 

REIT Changjiang was incorporated in Hainan Province, China, on November 22, 2011 with the original registered capital of RMB 100 million (approximately $16 million). Its original shareholders Hainan Wenchang, which owned 40% and Zhongrong, which owned 60%. On July 16, 2013, as result of a capital transfer, Zhongrong increased its equity ownership to 79.5% and Hainan Wenchang’s equity ownership was decreased to 20.5%. Zhongrong was owned by the same four individual shareholders of Beijing REIT by trust.

 

On February 2, 2015, Hainan Wenchang transfered its 20.5% equity ownership to Beijing REIT. On April 20, 2015, Beijing REIT and Zhongrong signed a joint venture agreement with VBI, to turn REIT Changjiang into a joint venture business. In connection with this joint venture agreement, on June 18, 2015, VBI contributed an additional RMB 18.6 million (approximately $2.8 million) to increase the registered capital of REIT Changjiang from RMB 100 million to RMB 118.6 million. On January 10, 2016, Zhongrong signed an equity transfer agreement with Beijing REIT, pursuant to which the shareholders of Zhongrong agreed to transfer all of its equity interests in REIT Changjiang to Beijing REIT. As a result of the above reorganizations, Beijing REIT now holds an 84.32% equity interest in REIT Changjiang and VBI holds the remaining 15.68% interest. Zhongrong and Beijing REIT are considered under common control since they are owned by the same four individual shareholders. The above-mentioned transactions were considered a reorganization.

 

On June 1, 2015, REIT Construction was incorporated as a wholly-owned subsidiary of REIT Changjiang.

 

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On July 14, 2015, Beijing REIT established a new subsidiary, REIT Xinyi. Beijing REIT owns a 70% equity interest in REIT Xinyi, and a minority shareholder Xinyi Transportation owns the remaining 30%. In February 2016, Beijing REIT established a joint venture, REIT India, together with an Indian company Q Green. The total registered capital of REIT India is approximately $100,000, and Beijing REIT owns a 51% interest.

 

On August 7, 2015, ReTo Eco-Solutions issued 10,000 common shares at $0.001 per share to its incorporator with cash proceeds of $10.

 

On February 7, 2016, Beijing REIT and its individual original shareholders entered into an equity transfer agreement, pursuant to which these shareholders agreed to transfer all of their ownership interests in Beijing REIT with a carrying value of RMB 24 million (or $3,466,260) to REIT Holdings (the “Transfer”). After this equity transfer, Beijing REIT became a Wholly Foreign-Owned Enterprise (“WOFE”) and amended the registration with the State Administration for Industry and Commerce (“SAIC”) on March 21, 2016. As part of this equity transfer, the Company issued a total of 17,830,000 of its common shares at $0.25 per share to all of the Company’s original shareholders or former shareholders in Beijing REIT. Among total proceeds of $4,457,500 from the share issuance, the Company paid $3,466,260 (approximately RMB 24 million) to the original shareholders of Beijing REIT as the consideration for the transfer of their equity interests in Beijing REIT. Since these shares were issued to the original shareholders of Beijing REIT, the transaction is considered as a part of the reorganization.

  

In September 30, 2016 Liu Kejia, Tech Sources International Enterprises Limited, Hengfang Li, ReTo Eco-Solutions and REIT Changjiang entered into a Convertible Debt Investment Agreement. Pursuant to the Convertible Debt Investment Agreement a loan from Liu Kejia in the amount of RMB 21,240,000 (approximately $3,273,000) was converted into 800,000 common shares of ReTo Eco-Solutions. The shares were issued to satisfy a loan, which was used to improve REIT Chanjiang’s construction materials manufacturing plant.

 

Further, in December 2016 ReTo Eco-Solutions sold Good Venture Industrial Limited 900,000 common shares for RMB 23,400,000 (approximately $3,600,000). As of December 31, 2016, the Company has not received the funds from the investor. The shares issued are held in escrow. As of date of this report, this transaction has not closed.

 

On March 2, 2017, REIT Ecological was established in Xinyi as a wholly-owned subsidiary of REIT Holdings, with a registered capital of $30 million.

 

OUR BUSINESS

 

Overview

 

We are a manufacturer and distributor of eco-friendly construction materials (aggregates, bricks, pavers and tiles), made from mining waste (iron tailings) and fly-ash, as well as equipment used for the production of these eco-friendly construction materials. In addition, we provide consultation, design, project implementation and construction of urban ecological environments including those for the purpose of capturing, controlling and reusing rainwater, commonly called “sponge cities.” We also provide parts, engineering support, consulting, technical advice and service, and other project-related solutions for our manufacturing equipment and environmental protection projects.

 

We believe our products are eco-friendly, as they contain approximately 70% of reclaimed fly-ash and iron tailings in place of traditional cement. The use of reclaimed fly-ash and iron tailings assists in the protection of the environment by saving space in landfills and fly-ash ponds used for the disposal of these materials, and assisting in the remediation and reclamation of abandoned or closed mining sites. In addition, our eco-friendly construction materials consume less energy during manufacturing than other traditional building materials. We believe our eco-friendly construction materials, with their characteristics, including superior water permeability, and competitive prices, will be in greater demand than traditional materials as governments and others increase their focus on reducing the environmental impact of their activities.

 

Presently, our clients are located throughout mainland China, and internationally in Canada, the United States, Mongolia, the Middle East, India, North Africa and Brazil. We seek to establish long-term relationships with our clients by producing and delivering high-quality products and equipment and then providing technical support and consulting after equipment is delivered and projects are completed. We engage in marketing and sales through integrated marketing, services marketing and Internet marketing. We are actively pursuing additional markets for our products, equipment and projects, internationally in the Philippines, Laos, Morocco, Tunisia, Cuba, Kenya, Maldives, Argentina, Mexico and Malaysia and in additional provinces of China.

 

Beijing REIT was founded in 1999 by our Chief Executive Officer, Hengfang Li. Mr. Li has approximately 17 years of experience in the construction materials and construction materials manufacturing equipment industries. Our principal office is located in Beijing, China. As of June 30, 2017, we employed 221 people on a full-time basis. We have 24 employees in management, 32 employees in sales and marketing, 28 employees in research and development, 94 employees in manufacturing and installation and 43 employees in administration. Our employees are located in: Beijing (55 employees); Langfang City, Hebei Province (61 employees); Changjiang City, Hainan Province (74 employees); Haikou City, Hainan Province (1 employee); Xinyi City, Jiangsu Province (29 employees); and Nanjing City, Jiangsu Province (1 employee). We have two part-time employees.

 

We are able to provide a full spectrum of products and services, from producing eco-friendly construction materials and manufacturing equipment used to produce construction materials, to project installation. We utilize our research and development efforts to differentiate us from our competitors. For example, we released our first fully automatic block production line in 1999, and have made advances in our technology, such as intelligent automatic systems, which allows us to access our customers’ equipment remotely to troubleshoot problems. Some of our competitors do not have automatic production lines.

 

Due to China’s recent emphasis on environmental protection, we believe there is a unique opportunity to grow our Company, which we expect will be driven by demand for our eco-friendly construction materials, equipment used to produce these materials and project construction expertise. We believe our technological know-how, production capacity, reputation and services offered will enable us to seize this opportunity.

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We have received several industry awards and been asked to participate in several industry activities. Notable awards and activities include:

 

Beijing REIT’s fully automatic solid waste disposal production line became recommended equipment of Liaoning Provincial Wall Material Industry Association in 2007;

 

Beijing REIT’s brick production equipment was appraised as “China Famous Brand” by China Construction and Material Industrial Mechanic Standards Committee in 2007;

 

Beijing REIT’s concrete brick equipment was authenticated by the European Union CE (European conformity);

 

REIT Holdings became a member of the China Resource Reuse Association Wall Material Innovation Committee in 2010;

 

  Beijing REIT was recognized as a National High-Tech Enterprise and became a “Gazelle Enterprise” in Beijing Zhongguancun Technology Park;

 

Beijing REIT was recognized as a National High-Tech Enterprise in 2011;

 

Beijing REIT was awarded the “Most Valuable Brand Award” by China Building Materials and Mechanic Industry Association in 2011;

 

Beijing REIT was appraised as “AAAA Enterprise” by the Electric Mechanics Association in 2012;

 

Beijing REIT became a member of China Association of Urban Environmental Sanitation in 2013; and

 

ISO 9001:2000 Authentication (certification based upon quality and consistency).

 

In addition, our Chief Executive Officer, Hengfang Li, was named one of the “One Hundred Outstanding People of China” in 2005 by China Celebrity Association. Mr. Li was recognized as one of the “Influential People of Fly-Ash Industry” in 2006 by fenmeihui.org. Mr. Li was awarded as “Leader of Building Materials and Machinery Enterprises of the National 11th 5-Year Plan” in 2011 by China Building Material Machinery Association. In addition, Mr. Li and our chief technology officer, Mr. Zhizhong Hu were recognized as “Advanced People of National Reuse Technology” in 2011 by China Association of Circular Economy. We believe our industry awards, reflect widespread recognition of our stature and success in our industry as well as the quality of our service and products.

 

Industry and Market Background

 

Construction Market and Opportunity

 

China is the world’s largest construction market and its construction market is expected to continue to grow for the near future, despite economic growth slowing in China. Further, while China’s construction industry only grew around 2% in 2016, China is expected to maintain its position as the world’s largest construction market for the near future and its share of the global construction market is expected to reach 26% by 2025. This growth results in large part from the continued increased urbanization in China and its National New-type Urbanization Plan, which envisions 60% of China’s population living in cities by 2020. This urbanization trend is a key factor in the Chinese government’s emphasis on green building to conserve resources. Focusing on buildings is a key element of its national strategy. We believe our eco-friendly construction materials will be in greater demand than traditional materials as the Chinese construction market continues to grow and the Chinese government increases its focus on reducing the environmental impact of building activities.

 

The construction industries in emerging markets are expected to grow at faster rates than advanced economies. From 2016-2020, the construction industries in advanced economies are expected to grow at 2.2% per year while emerging markets are expected to record a 5.3% annual expansion rate during the same period. The construction markets in the Middle East and African regions are predicted to be the fastest growing in 2016-2020, overtaking the Asia-Africa region. Asia-Pacific’s share of the global construction industry, which includes China, is expected to continue to rise, reaching close to 49% in 2020, up from 40% in 2010. Currently, we have international customers for our equipment used to produce construction materials located in Asia, the Middle East, North Africa and North America and hope to expand our international presence.

 

Sponge Cities

 

Despite the recent slowing of the growth of China’s construction industry, we believe there is a significant market opportunity to expand our business due to, among other things, China’s recent environmental initiatives.

 

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In 2013, more than 230 cities in China were affected by flooding. Further, as of 2013 90% of older urban areas do not have basic flood plans. In fact, the drainage system in China wasn’t built for extreme weather conditions. Flooding is expected to increase in the future with cities growing larger and climate change causing more extreme weather. One solution is to retrofit existing drainage systems with larger pipes and more efficient systems. However, this is the most expensive and disruptive solution to the problem. To help combat this problem with a quicker, less expensive and less disruptive solution, Chinese scientists and politicians have proposed increased use of “sponge cities” or features of sponge cities. A sponge city is an urban environment where rain is captured, controlled and reused, rather than funneling the water away. In China, a “sponge city” refers to the “sustainable concept of city including flood control and water conservation,” according to the Opinions of the General Office of the State Council. The recycled water can be used for such purposes as refilling aquifers and for irrigation. In some instances, the recycled water can be used for drinking or flushing toilets when properly treated. Sponge cities will also help combat China’s water scarcity problem. About half of China’s 657 cities are considered water scarce or severely water scarce by UN measures.

 

In March 2016, China announced its 13th Five Year Plan (2016-2020), which, among other matters, attempts to plug gaps in China’s drinking water safety laws, including those relating to water protection and water conservation. China’s five-year plans are blueprints containing the country’s social, economic, and political goals. They encompass and intertwine with existing policies, regional plans, and strategic initiatives. A five-year plan signals the Chinese government’s vision for future reforms and communicates this to other parts of the bureaucracy, industry participants and Chinese citizens. It is a living document that will go through constant revision over the next five years. The 13th Five Year Plan highlighted water conservation as its first priority in the nation’s infrastructure network and emphasized water resource management, water ecology remediation and environmental water protection.

 

To implement portions of the 13th Five Year Plan (2016-2020), China’s Ministry of Housing and Urban Rural Development (MOHURD), and the Ministries of Finance and Water released the ‘Construction Guideline for Sponge City’ at the end of 2014. The program is partially funded by the Ministry of Finance. The initiative aims to maximize water retainment and minimize the effects of drought and flooding. It will utilize buildings, roads, green spaces and other ecosystems to absorb rainwater, increase reservoir permeability and control storm water run-off to be reused in urban settings.

 

As of 2016, the Chinese government had chosen 16 cities across the country to become pilot sponge cities. The government is expected to, over the next three years, allocate each sponge city between 400 to 600 million RMB (approximately $85 million to $128 million) to construct ponds, filtration pools and wetlands, as well as to build permeable roads and public spaces that enable stormwater to soak into the ground.

 

We have worked on several notable sponge city projects. Among them, we acted as one of the general contractors for the construction of a sponge-city project in Changjiang County, Hainan Province that was constructed using our eco-friendly construction materials. In addition, we acted as a one of the consultants for the construction of another sponge project in Haikou City, Hainan Province. We believe that we will continue to be involved in sponge city construction and that the demand for sponge city construction will continue to be strong. As such, we expect that sponge city construction will drive the demand for our eco-friendly construction materials and our equipment that is used to manufacture these materials.

 

Our Competitive Strengths

 

We believe the following competitive strengths differentiate us from our competitors and contribute to our ongoing success.

 

Eco-friendly products. Unlike many of our competitors, who still use traditional materials, we use reclaimed fly-ash and iron tailings in our construction materials production. In doing so, we help reduce environmental waste. In addition, our equipment used to produce construction materials can recycle disposed building materials (old bricks and concrete) to produce construction materials.

 

Effective operational management. The consistent quality of our products and manufacturing equipment is achievable only through effective management in all aspects of our operations, from purchasing to production and sales. In every step, we have fully trained, experienced and skilled employees that are working in concert to ensure the quality of our construction materials and manufacturing equipment. In addition, we have a trained management staff who have adopted our corporate culture and understand our business strategy.

 

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Focus on technology and research and development. We have developed key techniques and skills in the production of various types of construction materials manufacturing equipment. We own 39 patents (seven of which are owned jointly with Luoyang), including 13 design patents and 26 utility model patents. In addition we have 4 software copyrights. We were recognized as a National High-Tech Enterprise in 2011, which was issued by four authorized departments (Beijing Municipal Bureau of Finance, State Tax Bureau of Beijing, Beijing Municipal Bureau of Local Tax and Beijing Municipal Committee of Science and Technology). In order to obtain a High-Tech Enterprise certification, companies are required to own the proprietary IP rights of the core technology used in their products and services in China. We are committed to researching and developing new construction materials, and to the design and manufacturing of the equipment used to produce these materials.

  

Production Advantages. Our construction materials manufacturing plant is located in close proximity to raw material sources that are used in the manufacturing process. The plant is located in Changjiang County in Hainan Province and is less than 15 kilometers from an iron ore mine (iron tailings), less than 8 kilometers from a river sand mine and less than 2 kilometers from a granite mine. We use all of these materials in the manufacturing process. Accordingly, we have an abundant supply of raw materials and believe the cost of these raw materials is lower than the costs for the same materials paid by our competitors.

 

  We provide a full range of eco-friendly project solutions and are not limited to the manufacture of eco-friendly construction materials or manufacturing equipment. We are able to provide consultation, design and implementation of sponge-city projects for customers, in addition to manufacturing eco-friendly construction materials and equipment. This one-stop solution allows us to capture revenue from all stages of sponge-city projects. In addition, the ability to provide total solutions allows us to capture more types of customers, such as municipalities and governments in addition to businesses.

 

Experienced Management Team and Personnel with a Demonstrated Track Record. Our management team, led by our Chief Executive Officer Hengfang Li, has extensive industry experience and a demonstrated track record of managing costs, adapting to changing market conditions, and developing new products. In addition, Mr. Li has a vast network and understating of the market. Our workforce is highly skilled with specialized training, designed to address complex and individualized client issues.

 

Our Strategies

 

Our objective is to become the leading provider of eco-friendly construction materials and equipment. To achieve this goal, we are pursuing the following strategies:

 

Market Opportunity. China’s 13th Five Year Plan (2016-2020) promotes a cleaner and greener economy, with strong commitments to environmental management and protection, clean energy and emissions controls, ecological protection and security, and the development of green industries. This demonstrates a clear focus on charting a sustainable course for the economy in the long-term. The 13th Five Year Plan offers opportunities for the private sector to support China’s environmental goals of water resource management, water ecology remediation and environmental protection of water, such as through the construction of sponge cities and the use of eco-friendly construction materials. Presently, we are able to serve all facets of sponge city construction through our construction materials that are used in construction, our equipment that can produce the construction materials and our general contracting expertise.

 

Expand our remediation projects in mining regions. We believe there are thousands of former mining locations in China that need to remediated and reclaimed. Abandoned ore mines contain tailings and abandoned or closed mines are normally associated with environmental concerns such as contaminated water and soil. As part of the remediation and reclamation process we are able to assist mining companies with the disposal of tailings, and municipalities creating viable villages in former mining areas. For example, in 2015, we completed a sponge city project in Hainan Province where a village located in a former mining area was built with our eco-friendly construction materials made from iron tailings. We will continue to focus on using iron tailings in our eco-friendly construction materials and seek reclamation projects in former mining areas.

 

Continue to develop new products. We are committed to researching and developing new products for unique customer needs. We believe scientific and technological innovations will help our Company achieve its long-term strategic objectives. For example, as a result of collaboration with the Louisiana Institute of Technology, we have developed a special corrosion-resistant concrete product using high volume fly-ash, with the product passing a mid-stage test that involved over forty different fly-ash production formulas. The traditional formula of construction materials made from fly-ash contains approximately 40% fly-ash, whereas the formula we developed was tested by Alchemy Geopolymer Solutions, LLC (“AGS”) to contain 80% fly-ash in the product makeup. The use of fly-ash in our eco-friendly construction materials reduces our raw material consumption and lowers our costs because we can use fly-ash instead of more expensive cement in our production process.

 

We intend to increase our revenue and market share by expanding our business network internationally. In order to expand our international market, we plan to add four to five distributors in South America and the Middle East. We also plan to participate in targeted international marketing events, such as seminars, workshops, and trade shows, where we can meet potential customers, promote our products and deepen our network to further expand our sales.

 

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Pursue Strategic Acquisitions. We intend to continue to pursue expansion opportunities in existing and new markets, as well as in core and adjacent categories through strategic acquisitions. Specifically, we are seeking to acquire construction material or construction material manufacturing equipment companies in areas of China with more established economies. We believe the demand for eco-friendly construction materials and manufacturing equipment used to produce these materials are and will continue to be in greater demand in these established economies.

 

Our Products

 

Eco-Friendly Construction Materials

 

We produce eco-friendly construction materials (aggregates, bricks, pavers and tiles) through our subsidiary, REIT Mingsheng Environment Protection Construction Materials (Changjiang) Co., Ltd. (“REIT Changjiang”), which operates our plant in Changjiang County, Hainan Province. We refer to our construction materials as eco-friendly because we produce them from reclaimed fly-ash and iron mine tailings. When power plants use coal to generate electricity, fly-ash is the lightweight and powdery reside from the coal combustion process. Fly-ash is typically disposed of in landfills and ash ponds, although some may be released directly into the atmosphere. With ever-rising energy demand fueled by China’s economic growth, power plants are generating increasing amounts of fly-ash that consumes valuable landfill and ash pond space. Tailings are the materials left over after the process of separating the valuable fraction from the worthless fraction of an ore. Iron ore tailings generally consist or hard rock and sand. Waste rock and tailings constitute the largest (by volume) industrial solid waste generated in the mining process. By recycling fly-ash and iron tailings, we believe that our construction materials manufacturing process is a viable and environmentally friendly solution to disposal problems associated with these materials.

 

Traditional bricks in China consist primarily of clay, which is mixed with water and silt, pressed into a mold for shaping, then fired in a kiln, or furnace. We use reclaimed fly-ash and iron tailings primarily as a substitute for clay. Through vibration technology, with these raw materials inputted, the finished products can come out with different shape and types. Since the whole production is cured without fire, this process has the benefits of less space required for production and less pollution generated to the environment. We believe fly-ash and iron tailings reduce both the density and heat conductivity of our construction materials without sacrificing their durability and strength. Our construction materials’ density and strength meet or exceed China National standards. In addition, because we use fly-ash and iron tailings in the manufacturing process, we believe our construction materials are consistent with China’s recent environmental protection policies, such as energy conservation included in the 2016 China’s 13th Five Year Plan (2016-2020).

 

In addition to fly-ash and iron tailings, our construction materials contain river sand and granite. Our eco-friendly construction materials are produced on a fully automatic production line based upon German technology.

 

Samples of our eco-friendly construction materials include the following:

 

Ground works materials. Essential materials for sponge cities to assist in water absorption, flood control and water retention. These construction materials can be used for urban roads, pedestrian streets and sidewalks, city squares, landmarks, parking lots, and docks.

 

 

 

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Landscape retaining materials. These construction materials are mainly used for gardens, roads, bridges, city squares, retaining walls and slope construction.

 

 

 

Hydraulic engineering materials. Construction material for sponge city construction, they can be used for hydraulic ecological projects such as slope protection and river transformation.

 

 

 

Wall materials. These construction materials are used for insulation, decoration, and for building walls.

 

 

 

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Eco-friendly Construction Materials Manufacturing Equipment

 

We produce manufacturing equipment used to create eco-friendly construction materials. We have sold equipment to customers in China, South Asia, North America, the Middle East, North Africa and Southeast Asia. The equipment consists of large-scale fully automated production equipment with hydraulic integration. The equipment can be used to produce various types of eco-friendly construction materials that can be used for a variety of projects such as ground works, hydraulic engineering, landscape retention and wall projects.

 

 

Pictured –Fully Automatic Block Production Line

 

Samples of our equipment used to produce construction materials include the following:

 

REIT-Classic RT9A, RT9B, RT15A, RT15B

 

These are fully automated block production lines and can be universally used for the manufacture of bricks, tiles, pavers with and without face mix, curbstones, hollow blocks and similar construction materials.

 

Horizontal Pull Holes Device

 

Horizontal Pull Holes Device is used to produce interlocking bricks, water conservancy blocks and slope protection blocks.

 

REIT-I Concrete Block Splitter

 

Synchronized concrete block cutting machine with four blades. The blades are guided by ultra-wear resistant guide leads and driven by a large bore hydraulic drive, which lowers the operating pressure of the hydraulic unit and increases the splitting force.

 

REIT Foam Insert Device

 

This device is used to insert a foam plate into the mold and produce thermal insulation blocks.

 

Our Projects

 

In 2014, we entered into the field of urban ecological construction (sponge city construction) and established REIT Technology and REIT Construction for this purpose. We act as general contractor for the construction of sponge cities and are responsible for the planning, construction and design of such cities. We subcontract with architects and subcontractors in order to complete the projects. We also act as a consultant for sponge city construction and incorporated Dingxuan for this purpose.

 

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Changjiang County, Hainan Province Sponge City

 

We were the general contractor for a sponge city project where an entire village was relocated and constructed in a former mining area. The project took 16 months to complete resulting in revenue of approximately RMB 14 million ($2.2 million) for us. We made all construction materials out of recycled iron tailings. A total of 86 single-family homes were built with a total construction area of 9,400 square meters (101,000 square feet). An estimated 1,810,000 pieces of bricks were used for walls, 90,000 roof tiles, and 4,200 square meters (approximately 45,000 square feet) of ground was covered with our construction materials. The completed project has won recognitions at various government levels in Hainan Province, and has been designated as a demonstration or model project for promotion of sponge city construction.

 

 

 

 

Haikou City, Hainan Province Sponge City

 

We acted as a consultant for a sponge city project in Haikou City, Hainan Province. We also paved 50,000 square meters for this project. To assist with the nationwide efforts to promote pilot cities in sponge city construction, we will collaborate with international institutions in sponge city construction such as Jude Technology Corporation located in Germany. By gradually increasing our efforts, and expanding the scale in the planning, design and construction of sponge cities, we aim to become a key enterprise in sponge city construction.

 

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Our Customers

 

Our eco-friendly construction materials are only sold in China. Sales of construction materials accounted for $18.4 million and $7.9 million of our total revenues for the years ended December 31, 2016 and 2015, respectively. We have international customers located in Asia, India, the Middle East, North Africa and North America for our manufacturing equipment. The following is a summary of our total revenues by geographic market for each of the last three years for our manufacturing equipment used to produce construction materials.

 

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Region  2016   2015   2014   2013 
United States  $-   $4,437   $266,390   $35,893 
Canada   -    212,919    -    - 
Mongolia   -    -    -    93,521 
Middle East   34,925    20,210    16,627    5,774 
India   495,452    1,442,576    1,060,242    988,070 
Pakistan   168,132    -    -    - 
China   12,188,985    4,868,724    4,747,618    3,698,049 
North Africa   279,110    -    1,091,157    1,413,284 
Brazil   -    -    335    - 
Total  $13,166,604   $6,548,866   $7,182,369   $6,234,591 

 

For the years ended December 31, 2016 and 2015, no customer accounted for more than 10% of the Company’s total revenue. As of December 31, 2016, no account receivable accounted for more than 10% of the total outstanding accounts receivable balance. As of December 31, 2015, one account receivable accounted for 12% of the total outstanding accounts receivable balance.

 

Sales and Marketing

 

We are increasing our marketing and sales efforts, including a directed focus on online marketing. Online marketing allows us to efficiently educate prospective customers about the products and services we have to offer and assists us in expanding the reach of our market, both globally and internationally. In addition, we are expanding our presence in the markets we serve. In India, for example, in order to reduce costs, improve customer service quality and expand sales, we have established local assembly companies.

 

In order to expand our international market, we plan to add four to five distributors in South America and the Middle East. We also plan to participate in targeted international marketing events, such as seminars and workshops, and trade shows where we can meet customers, promote our products and deepen our network to further expand our sales.

 

Within our domestic markets, specifically Hainan, we have increased brand recognition by focusing on governmental projects and large-scale projects, such as sponge city construction. We also rely on industry associations (such as Hainan New Wall Construction Materials Association and Hainan Block Association), professional promotional meetings sponsored by provincial governments, and industry specific agencies, and research institutes.

 

The focus of our sales and marketing efforts is to continue to improve our techniques, product quality and customer service that have generated positive customer reviews. We have obtained new customers by word-of-mouth referrals and have found that satisfied customers are loyal customers. In addition, the introduction of new products, such as permeable floor tiles for sponge city construction and slope and damn protection blocks in water conservancy construction have helped open new markets. We believe that this approach has been crucial to winning and retaining clients and increasing our ability to withstand competition. In addition, we are currently researching mineral wool products and the feasibility of producing those products.

 

Competition

 

We face significant competition in both our manufacturing equipment and construction materials markets. We have both domestic and international competitors in our manufacturing equipment market. In the international market for our manufacturing equipment our main competition is German made manufacturing equipment. We believe our competitive strength against these competitors is the lower cost of our equipment that enjoy the same technical standards and high quality service. Our disadvantage is that the German-made equipment has a better aesthetic appearance as compared to the equipment we manufacture. Accordingly, we are attempting to improve the appearance of our equipment to compete with these competitors.

 

Our main competitors in the Chinese market for our manufacturing equipment are small Chinese companies located in Fujian Province. We believe our competitive strength against these competitors is the quality of our equipment while our competitive disadvantage is the higher cost of our equipment. There is an increased demand for fully automated construction materials production lines due to the increase of Chinese labor costs.

 

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We are positioned to take advantage of the increased demand for fully automated construction lines due to our current ability to manufacture such equipment.

 

In both the domestic and international markets we are increasing our research and development of technology for construction materials manufacturing equipment. In addition, we are researching a variety of construction materials that can be made with our manufacturing equipment. We believe that a continued focus on a broad array of products and product designs coupled with our engineering and manufacturing expertise will enable us to provide customers with differentiated product performance and customer support.

 

Our main competitors for our construction materials are small companies located in Hainan Province where our construction materials production facility is located. The largest of these competitors has the ability to produce construction materials with an output value of approximately 4,000,000 RMB (approximately $615,000), which is approximately 10% of our production capacity. In addition, we are the only construction material producer in Hainan Province that uses large automated equipment. Accordingly, this provides us with the advantage of winning large supply contracts in Hainan Province. In fact, a pilot sponge city project in Sanya, Hainan Province and port construction project in Sanya, Hainan Province have used us as their exclusive supplier for construction materials.

 

Seasonality

 

Our business is not affected by seasonality.

 

Research and Development

 

Soon after its 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; and

 

Urban ecological construction (sponge cities).

 

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.

 

Our research and development activities mainly focus on solid waste utilization and recycling, ecological environmental friendly construction materials, technology and equipment, thermal insulation products and related production equipment.

 

We accounted for the payments as research and development expenses in accordance with ASC 730-20 for the related periods. For the years ended December 31, 2016 and 2015, we spent $503,688 and $458,246, respectively, on research and development. We expect to increase our allocation of research and development funds in the future in an effort to enhance our core competence.

 

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 December 2015, we employed 32 professionals in research and technology development, including 10 senior engineers. 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 its core competence.

 

The Company entered into a contract with AGS to initiate a collaborative approach to produce dry-cast geopolymer concrete products including, dry-cast bricks, blocks, pavers, roof tiles and stone veneer. AGS grew out of the geopolymer research and development performed at Louisiana Tech University and it driven by a team of researchers in the University’s Trenchless Technology Center. AGS’s President, Erez Allouche is an Associate Professor of Civil Engineering at Louisiana Tech University. The Company believes the contract it entered into with AGS is not material and its business is not substantially dependent on the contract. Accordingly, the Company did not file the contract as an exhibit to the Amendment. Neither Louisiana Tech University nor any individual from the university own any equity interest in our Company.

 

As a result of collaboration with the Louisiana Institute of Technology, we have developed a special corrosion-resistant concrete product using a high volume of fly-ash, with the product passing a mid-stage test that involved over 40 fly-ash production formulas. The traditional formula of construction materials made from fly-ash contains approximately 40% fly-ash, whereas the formula we developed tested by AGS contains 80% fly-ash. We have begun setting up China’s first research and development base for technology collaboration in Yinchuan City, Ningxia Province, in the hope of rapidly promoting such technology in China. We have also collaborated with Louisiana Institute of Technology, Lanzhou University and China University of Mining and Technology to develop disposal techniques for fly ash and iron tailings.

 

In 2013 we focused our research and development policies on our full-automatic production lines, to enrich the types of eco-friendly construction materials we offer, and to try and improve our market share. In 2014, we focused our research and development policies on improving our technology skills to try and keep with the level of our international competitors of manufacturing equipment. In addition we focused on developing an effective wet-forming technology and vibration molding techniques. In 2015 and subsequent years, we focused and will focus our research and development polices on comprehensive treatment of solid waste for use in eco-friendly construction

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materials, recycling technologies, new eco-friendly construction materials, and heat preservation and energy conservation products.

 

Sample research and development projects from 2012 to 2016 include the following:

 

Year 2012

 

Pallet-free block molding machine

 

Automatic loading machine

 

Year 2013

 

Mobile unstacking car

 

Automatic block splitting assembly line

 

Year 2014

 

Vibrating wet molding machine

 

Hollow body molding machine

 

Year 2015

 

Block module RTQT15 molding machine

 

Pallet free stacking system

 

Year 2016

 

  Pallet turning device

 

  Quick clamping and shock proof balanced device

 

Sources of Raw Materials

 

Our primary raw materials are steel for our manufacturing equipment and iron tailings, fly-ash and cement for our construction materials. We purchase from a variety of suppliers and believe these raw materials are widely available.

 

We have efficient access to all of the raw materials necessary for the production of our manufacturing equipment and construction materials. We believe our relationships with the suppliers of these raw materials are strong. We do not expect the prices of such raw materials to vary greatly from their current prices, as there has traditionally been little price volatility for such materials.

 

For the years ended December 31, 2016 and 2015, the Company purchased approximately 41% and 39%, and 10% and 5%, of its raw materials from two primary suppliers – Changjiang Huasheng Tianya Cement Co., Ltd. and Liu Li, a natural person, respectively. If we are unable to purchase from these primary suppliers, we do not expect we would face difficulties in locating other suppliers at substantially the same prices.

 

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Intellectual Property Rights

 

We rely on our technology patents to protect our domestic business interests. We have placed a high priority on the management of our intellectual property. Some products that are material to our operating results incorporate patented technology. Patented technology is critical to the continued success of our business. 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 currently hold thirty-nine patents (seven of which are owned jointly with Luoyang) and four software copyrights, as summarized below:

 

Proprietary Name   Patent No.   Patent Type   Application Date   Approval Date   Expiration Date   Authority
                         
RT mechanical transmission CNC system V12.0   Software copyright registration No. 0228987   Software copyright   N/A   8/11/2010   8/10/2060   National Copyright Administration of China
                         
MB software for concrete molding control V15.0   Software copyright registration No. 0229003   Software copyright   N/A   8/11/2010   8/10/2060   National Copyright Administration of China
                         
ZMV software for transport trolley control v6.0   Software copyright registration No. 0229000   Software copyright   N/A   8/11/2010   8/10/2060   National Copyright Administration of China
                         
CB software for machine automation control v4.0.   Software copyright registration No. 0229001   Software copyright   N/A   8/11/2010   8/10/2060   National Copyright Administration of China
                         
Pressure molding machine   ZL 2011 2 0251320.6   Utility Model   7/15/2011   3/14/2012   7/14/2021   China State Intellectual Property Office
                         
Mobile pallet trucks   ZL 2011 2 0251594.5   Utility Model   7/15/2011   3/14/2012   7/14/2021   China State Intellectual Property Office
                         
Offline palletizing system   ZL 2011 2 0251553.6   Utility Model   7/15/2011   3/14/2012   7/14/2021   China State Intellectual Property Office

 

Electric automatic low level palletizer   ZL 2012 2 0505448.5   Utility Model   9/28/2012   4/3/2013   9/27/2022   China State Intellectual Property Office
                         
Wet pneumatic clamp for concrete blocks   ZL 2012 2 0510468.1   Utility Model   9/29/2012   4/3/2013   9/28/2022   China State Intellectual Property Office
                         
Medium to large platform vibration system for block molding   ZL 2012 2 0505906.5   Utility Model   9/29/2012   4/3/2013   9/28/2022   China State Intellectual Property Office
                         
A composite pallet   ZL2014 2 0545245.8   Utility Model   9/22/2014   3/4/2015   9/21/2024   China State Intellectual Property Office
                         
Core vibration molding machine   ZL 2015 2 0016872.7   Utility Model   1/9/2015   7/15/2015   1/8/2025   China State Intellectual Property Office
                         
Thin-wall concrete hollow shell molding machine   ZL 2015 2 0016846.4   Utility Model   1/9/2015   7/15/2015   1/8/2025   China State Intellectual Property Office
                         
Thin-wall porous concrete molding machine   ZL 2015 2 0016267.X   Utility Model   1/9/2015   7/15/2015   1/8/2025   China State Intellectual Property Office
                         
High-density concrete molding machine   ZL 2015 2 0016672.1   Utility Model   1/9/2015   7/15/2015   1/8/2025   China State Intellectual Property Office
                         
Pallet-free block stacking system   ZL 2015 2 0678713.3   Utility Model   9/2/2015   1/20/2016   9/1/2025   China State Intellectual Property Office

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Rotary kiln car   ZL 2015 2 0678742.X   Utility Model   9/2/2015   1/20/2016   9/1/2025   China State Intellectual Property Office
                         
Wet concrete dosing unit   ZL 2015 2 0679482.8   Utility Model   9/2/2015   1/20/2016   9/1/2025   China State Intellectual Property Office
                         
Groove drawing device for blocks   ZL 2015 2 0679500.2   Utility Model   9/2/2015   1/20/2016   9/1/2025   China State Intellectual Property Office
                         
Block stacking clamp   ZL 2015 2 0679522.9   Utility Model   9/2/2015   1/20/2016   9/1/2025   China State Intellectual Property Office
                         
Insulation benzene board insertion device   ZL 2015 2 0680597.9   Utility Model   9/2/2015   1/20/2016   9/1/2025   China State Intellectual Property Office
                         
Self-locking block   ZL 2015 2 0678715.2   Utility Model   9/2/2015   1/20/2016   9/1/2025   China State Intellectual Property Office
                         
Two-way launch stacking clamp   ZL 2015 2 0679470.5   Utility Model   9/2/2015   1/20/2016   9/1/2025   China State Intellectual Property Office
                         
Vacuum vibration molding device   ZL 2015 2 0680665.1   Utility Model   9/2/2015   1/20/2016   9/1/2025   China State Intellectual Property Office

 

Online EPS polystyrene board insertion device for building block modeling machine

  ZL 2012 2 0510470.9   Utility Model   9/29/2012   4/3/2013   9/28/2022   China State Intellectual Property Office
                         
A rolling-over device for pallet   ZL 2016 2 1011757.1   Utility Model   8/30/2016   3/15/2017   8/29/2026   China State Intellectual Property Office
                         
A fast anti-vibration balanced clamping mechanism   ZL 2016 2 0998851.4   Utility Model   8/30/2016   3/15/2017   8/29/2026   China State Intellectual Property Office
                         
Block modeling machine (QTF15)   ZL 2016 3 0444048.1   Design Patent   8/30/2016   12/28/2016   8/29/2026   China State Intellectual Property Office
                         
A fast-locked die device for a block modeling machine   ZL 2016 2 1018626.6   Utility Model   8/30/2016   6/27/2017   8/29/2026   China State Intellectual Property Office
                         
A fully automatic pallet collect bin   ZL 2016 2 1009248.5   Utility Model   8/30/2016   4/19/2017   8/29/2026   China State Intellectual Property Office
                         
A board split device   ZL 2016 2 1009301.1   Utility Model   8/30/2016   4/19/2017   8/29/2026   China State Intellectual Property Office
                         

 

Floor tile

  ZL 2016 3 0541998.6   Design Patent   11/8/2016   3/29/2017   11/7/2026   China State Intellectual Property Office
                         

 

Floor tile

  ZL 2016 3 0647497.6   Design Patent   12/26/2016   4/26/2017   12/25/2026   China State Intellectual Property Office
                         

 

Floor tile

  ZL 2016 3 0647499.5   Design Patent   12/26/2016   5/10/2017   12/25/2026   China State Intellectual Property Office
                         

 

Floor tile

  ZL 2016 3 0647901.X   Design Patent   12/26/2016   4/26/2017   12/25/2026   China State Intellectual Property Office
                         

 

Floor tile

  ZL 2016 3 0542388.8   Design Patent   11/8/2016   3/29/2017   11/7/2026   China State Intellectual Property Office

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Slope protection block(1)

  ZL 2016 3 0542207.1   Design Patent   11/8/2016   5/24/2017   11/7/2026   China State Intellectual Property Office

 

Slope protection block(1)

  ZL 2016 3 0542295.5   Design Patent   11/8/2016   5/10/2017   11/7/2026   China State Intellectual Property Office

 

Slope protection block(1)

  ZL 2016 3 0542296.X   Design Patent   11/8/2016   5/10/2017   11/7/2026   China State Intellectual Property Office

 

Slope protection block(1)

  ZL 2016 3 0542514.X   Design Patent   11/8/2016   5/24/2017   11/7/2026   China State Intellectual Property Office

 

Slope protection block(1)

  ZL 2016 3 0595820.X   Design Patent   12/6/2016   5/24/2017   12/5/2026   China State Intellectual Property Office

 

Slope protection block(1)

  ZL 2016 3 0542294.0   Design Patent   11/8/2016   5/17/2017   11/7/2026   China State Intellectual Property Office

 

Slope protection block(1)

  ZL 2016 3 0542168.5   Design Patent   11/8/2016   5/24/2017   11/7/2026   China State Intellectual Property Office

 

(1) We own this patent jointly with Luoyang.

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.

 

Properties

 

Our headquarters is located at Room 1611, No.1 Building, No.208, Second Block, Lize Zhongyuan, Xinxing Industrial Area, Wangjing, Zhaoyang District, Beijing City, People's Republic of China. We have incorporated nine Chinese domestic operating companies, which are separate legal entities. Our facilities are used for manufacture, sales, marketing and administrative functions. We own twelve of the facilities, and the other nine facilities are leased. We believe our facilities are adequate for our current needs and we do not believe we will encounter any disputes of property rights or any difficulty in extending the terms of the leases by which we occupy our respective premises. A summary description of our facilities locations follows:

Office   Address   Term   Ownership Space
The company headquarters office   Room 1611, No.1 Building, No.208, Second Block, Lize Zhongyuan, Wangjing Xinxing Industrial Area, Chaoyang District, Beijing City   January 2017- January 2018    Leased 39 sq. m2
               
Office of Beijing REIT Technology Development Co., Ltd   X-701, X-702, X-704, No. 60, Anli Road, Chaoyang District, Beijing City   March 2011- August 2018   Leased 658 Sq. m2
               
Production shop of Gu’an REIT Machinery Manufacturing Co., Ltd   South Region of Gu’an Industrial Area   July 2008 – January 2055   Owned 26695.5 sq. m2.
               
Office of REIT Xinyi New Material Co., Ltd   No.2-3, Daqiao West Road, Xinyi Economic Development Zone, Xinyi City, Jiangsu Province   July 2015-July 2018   Leased 300 sq. m2
               
Production Shop and office of REIT Mingsheng Environment Protection Constructional Material (Changjiang) Co., Ltd (1)   No.1, Development First Road, Xunhuan Economic Industrial Area, Changjiang City, Hainan Province   December 2011 – May 2062   Owned 306000 sq. m2
               

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Office of Beijing Reit Ecological Engineering and Technology Co., Ltd    Room 3396, No.1 Building, No.5 Liufang Nanlijia, Zhaoyang District, Beijing City   April 2017- April 2018   Leased  10 sq. m2
               
Office of Nanjing Dingxuan Environment Protection Technology Development Co., Ltd   No.156, Zhuangqiang Jizheng, Gaochun District, Nanjing City   January 2016-  December 2017   Leased 58 sq. m2
               
Office of Hainan REIT Construction Project  Co., Ltd.   Room 901, No.7 Building, Heifeng Jiang’an, Weibeimen, Haikou City, Hainan Province   June 2017- November 2017   Leased 179.5 sq. m2
               
Production shop and office of Langfang  Ruirong Mechanical and Electrical Equipment Co., Ltd    Shengda Bridge West Road North, Guangming Weat Avenue