Future Fintech Group Inc. annual report, FY2021

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Future FinTech Group Inc. — FY2021 Form 10-K

Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a report limited to 2021 Q4. The company is a Florida holding company whose operations span China, Hong Kong and other markets.

Business context

Future FinTech continued its shift away from fruit products toward financial technology and services. In 2021, its principal reported businesses were coal and aluminum supply-chain financing and trading, and asset management. It also converted Chain Cloud Mall from a member-based model to an agent-based eCAAS platform, suspended NONOGIRL in June, and launched the FTFTX cryptocurrency market-data platform in December. It acquired 90% of Hong Kong asset manager NTAM in August. A planned UK money-transfer-company acquisition remained subject to FCA approval at year-end; the filing says FTFT UK received EMD-agent registration in March 2022.

Financial results and liquidity

  • Revenue: $25.05 million, up $24.68 million from $0.37 million in 2020. Supply-chain financing and trading contributed $19.73 million; asset-management services contributed $5.32 million. These were new revenue streams for the comparison period.
  • Gross profit and margin: Gross profit was $1.80 million on cost of goods sold of $23.25 million. The figures imply a gross margin of about 7.2%, versus 90.5% in 2020. The MD&A also gives 6.68% in a table, so the filing’s stated 2021 margin is inconsistent.
  • Operating results: Operating expenses were $15.01 million and operating loss was $13.21 million, compared with a $15.05 million operating loss in 2020. Continuing-operations loss was $11.82 million; net loss was $14.21 million, including a $2.39 million loss on disposal of discontinued operations. Basic loss per share from continuing operations was $0.17.
  • Cash flow: Continuing operations used $18.74 million of cash; investing activities used $11.18 million; financing activities provided $69.27 million, principally from common-stock issuance. Cash and cash equivalents ended the year at $50.27 million, up from $9.43 million.
  • Liquidity and debt: Working capital was positive $65.49 million, versus $8.69 million a year earlier. Year-end short-term loans were $1.02 million and long-term debt was $0.19 million; convertible notes were repaid during 2021. The company reported no off-balance-sheet arrangements.
  • Balance-sheet items to note: Accounts receivable was $9.10 million, with 87.22% concentrated in one debtor. A $6.00 million loan receivable was outstanding at year-end; the filing reports repayment by March 31, 2022. Goodwill was $15.58 million after a $0.78 million impairment charge. The NTAM acquisition also resulted in $7.12 million of deferred liabilities payable in shares, subject to completion of audited reports.

Material changes versus 2020

Revenue growth reflects the addition of supply-chain finance and NTAM rather than expansion of the prior e-commerce business. CCM membership revenue fell from approximately $338,000 to $86, and the company suspended NONOGIRL. Gross margin fell sharply as the lower-margin supply-chain and asset-management activities replaced high-margin membership revenue. The 2020 net profit of $88.93 million included a large gain from discontinued operations; it is not a comparable indicator of recurring profitability. The 2021 net loss also includes disposal losses, while 2021 financing substantially increased cash and shares outstanding.

Outlook, risks and unusual items

  • Outlook: Management describes a continuing transition into supply-chain finance, asset management, payments and other fintech activities, but provides no quantified revenue, earnings or cash-flow guidance. Management says existing resources should meet working-capital needs for at least 12 months.
  • Going concern: The auditor’s report highlights substantial doubt about the company’s ability to continue as a going concern, citing recurring operating losses and negative operating cash flow. Management’s plans depend on executing its new strategy and attaining profitability; the financial statements include no adjustments for a possible failure to continue as a going concern.
  • Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end due to insufficient accounting personnel with U.S. GAAP and SEC-reporting expertise. A consultant was engaged to assist with remediation.
  • China and corporate structure: The company relies on contractual VIE arrangements for its China e-commerce business, rather than direct ownership of the VIE. It warns that PRC regulatory or enforcement changes could impair those arrangements, operations, overseas listings or access to funds. Currency controls, cybersecurity rules and HFCA Act-related delisting risks are also discussed. The filing says its auditor was then subject to PCAOB inspections and was not on the PCAOB’s restricted list.
  • COVID-19 and execution: The company says the pandemic materially affected operations, suppliers, logistics and customer activity, and that restrictions on gatherings hindered customer recruitment. The company also faces commodity-price, receivable-collection, customer concentration, competition and asset-management risks.
  • Legal and regulatory matters: Former placement agent FT Global claims approximately $7 million in damages and fees. The court dismissed some claims but allowed contract-payment, good-faith and fee claims to proceed; the company says it intends to defend the case. The company also disclosed SEC Division of Enforcement subpoenas and said it had provided information and would continue to cooperate.
  • Listing and financing: The company raised approximately $69.43 million net from cash stock issuance in 2021, with shares outstanding increasing from 50.05 million to 70.07 million. A March 2022 Nasdaq notice cited a bid-price deficiency, with a compliance period extending to August 29, 2022.

Most important facts for investors to verify

  • Reconcile the stated gross-margin percentages: the MD&A table reports 6.68%, while the financial-statement amounts imply about 7.2%.
  • Assess whether new supply-chain and asset-management businesses can generate sustainable profit and cash flow, given the 2021 operating cash outflow and low gross margin.
  • Review receivable collectability and concentration, including the largest debtor’s 87.22% share, and confirm the reported repayment of the $6 million loan after year-end.
  • Evaluate the auditor’s going-concern warning against management’s liquidity plans, cash needs and ability to raise capital without further dilution.
  • Track remediation of the material weakness, the FT Global litigation and SEC inquiry, the Nasdaq bid-price status, and PRC regulatory risks affecting the VIE structure and cross-border operations.