Future FinTech Group Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unless otherwise noted, amounts are in U.S. dollars. The company is a Florida holding company with businesses in asset management, supply-chain financing and trading, money transfers, and other activities, with substantial operations in China and Hong Kong.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $3.81 million | $7.42 million | $7.20 million | $10.88 million |
| Gross profit | $1.26 million | $1.38 million | $2.47 million | $3.16 million |
| Gross margin | 33.1% | 18.5% | 34.3% | 29.1% |
| Operating loss | $0.34 million | $2.84 million | $2.97 million | $5.52 million |
| Net loss | $1.54 million | $2.34 million | $3.79 million | $5.04 million |
| Continuing-operations loss per share, basic | $0.11 | $0.16 | $0.26 | $0.35 |
At June 30, cash and cash equivalents were $33.33 million and restricted cash was $3.46 million, for combined cash and restricted cash of $36.79 million. Current assets were $71.20 million and current liabilities $29.41 million; reported working capital was $41.79 million, down from $46.48 million at year-end 2022. Total liabilities were $30.00 million and equity was $60.93 million.
For the first half, operating activities used $6.01 million of cash, investing activities provided $14.64 million, financing activities provided no cash, and foreign-exchange effects reduced cash by $1.69 million. Investing inflows included $14.77 million of loan repayments. Cash and restricted cash increased $7.05 million from year-end.
Notes payable totaled $3.46 million, due between July and December 2023; the filing reported no default. Lease liabilities totaled $0.88 million. Current liabilities also included $7.39 million of deferred consideration for the Nice Talent acquisition, which the company says remains unpaid and is to be settled in shares.
Changes versus the prior comparable period
- Q2 revenue fell 48.7% year over year and first-half revenue fell 33.8%. Management attributed most of the decline to supply-chain trading, where the company increasingly acted as an agent and recorded fees rather than the full value of goods. First-half supply-chain financing and trading revenue fell to $0.48 million from $3.65 million.
- Asset-management revenue declined 10.9% in Q2 and 10.3% in the first half; management cited clients’ greater caution toward investments. Asset management generated $6.42 million, about 89% of first-half revenue.
- Gross margin improved, primarily because agent-based supply-chain activity carries lower recognized revenue and costs than principal trading. Gross profit nevertheless declined in both comparison periods.
- Operating expenses fell to $1.60 million in Q2 and $5.44 million in the first half. The first-half comparison benefited from a $1.17 million recovery/write-back of previously recognized doubtful debts and the absence of the prior-year $0.70 million investment impairment. The filing states $1.19 million of bad-debt recovery in Q2.
- Net losses narrowed versus 2022, but the company continued to incur operating losses and negative operating cash flow. The first-half discontinued-operations gain of $0.11 million related to the dissolution of QR (HK) Limited.
Outlook, risks and unusual items
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing first-half continuing-operations losses of $3.89 million and operating cash outflow of $6.01 million. Continued viability depends on executing its business strategy and eventually achieving profitable operations; the company says it has raised funds through securities issuances and convertible notes.
- SEC settlement: On July 3, 2023, the company agreed, without admitting or denying the findings, to a $1.65 million civil penalty in installments. It paid the initial $150,000 on July 7; the remaining $1.50 million was scheduled in four installments. The settlement also requires an independent consultant to review accounting and financial-reporting controls and the company to implement recommendations.
- Controls: Management concluded disclosure controls were not effective at June 30 because of a material weakness: insufficient accounting personnel with appropriate U.S. GAAP and SEC-reporting expertise. The company reported engaging outside accounting and internal-control consultants and planning additional training.
- Litigation: Former placement agent FT Global seeks approximately $7 million in damages and attorneys’ fees. The company is defending the case and filed a motion for summary judgment; the filing does not report a resolution.
- Concentration and credit exposure: One customer represented 79.62% of first-half revenue. Three debtors represented 85.69% of accounts receivable, and $1.42 million of receivables were more than 90 days outstanding. Four vendors together represented 63.20% of first-half purchases.
- Regulatory and structural risks: The company relies on a VIE structure for certain China operations and warns that PRC rules and their interpretation could affect the structure, operations, or ability to raise capital. It also cites broader China and Hong Kong regulatory, currency, and operating risks.
- Business development: The company said it expected to close its proposed acquisition of Alpha HK and Alpha SZ in September 2023, subject to applicable steps; the SFC had approved the transaction. The filing provides no earnings or financial guidance.
Important facts for investors to verify
- Progress on the going-concern plan and the company’s ability to fund operations while operating cash flow remains negative.
- Collection of overdue receivables, recovery of supplier advances, and repayment of remaining loan balances; assess the concentration of customers and counterparties.
- Whether gross-margin gains from agent-based trading can be sustained while revenue remains lower, and whether asset-management revenue stabilizes.
- Payment of the remaining SEC penalty and completion of the independent controls review and required remediation.
- Status and potential exposure of the FT Global litigation, and the settlement of the unpaid Nice Talent share consideration.
- Closing and subsequent performance of the proposed Alpha acquisition, along with any required PRC regulatory filings or approvals.