Future FinTech Group Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The company is transitioning from blockchain e-commerce toward coal and aluminum supply-chain financing and trading, and asset management. Its China e-commerce operations rely in part on a contractual VIE structure.
Financial performance and position
| Metric | Q3 2021 | Nine months 2021 |
|---|---|---|
| Revenue | $11.75 million | $12.50 million |
| Gross profit / margin | $0.98 million / 8.37% | $0.44 million / 3.51% |
| Operating loss | $6.86 million | $9.74 million |
| Loss from continuing operations | $6.63 million | $9.05 million |
| Net loss | $10.49 million | $11.69 million |
| Basic loss per share | $0.16 | $0.18 |
Q3 revenue was primarily from coal and aluminum trading/financing ($9.64 million) and asset management ($2.10 million). Coal and aluminum revenue had a 3.07% Q3 gross margin and a negative 2.38% margin for the nine-month period; asset management margin was 32.69%. Reported gross margin fell sharply from 69.17% in Q3 2020 and 93.41% in the first nine months of 2020, when higher-margin membership revenue was more significant.
Q3 net loss included a $3.68 million loss on disposal of discontinued operations. Nine-month net loss compares with $113.61 million net income in 2020, which included a $119.58 million gain on disposal of discontinued operations; the periods are therefore not directly comparable.
At September 30, cash and cash equivalents were $52.97 million, working capital was $73.14 million, and current assets and current liabilities were $76.57 million and $3.44 million, respectively. Nine-month operating cash flow from continuing operations was negative $19.81 million; investing cash flow was negative $6.71 million; financing cash flow was positive $68.27 million, mainly reflecting stock issuance. Common-stock proceeds were $69.43 million. The company reported $0.19 million of loan payables, no convertible notes outstanding, and $7.01 million of deferred liabilities for acquisition consideration payable in shares.
Changes, transactions, and management commentary
- Revenue rose from $43,450 in Q3 2020 and $355,700 in the first nine months of 2020, reflecting new supply-chain trading and asset-management activity, not comparable growth in the prior core business.
- The company acquired 90% of Nice Talent Asset Management Limited in August 2021. It recorded $16.73 million of goodwill; $11.22 million of the $17.95 million purchase price was paid in shares, with the remaining $7.01 million due in shares after specified audited reports. Nice Talent contributed $686,391 in Q3 sales.
- The company changed its CCM shopping mall from a membership model to a sales-agent model and suspended its NONOGIRL cross-border platform in June 2021. Management cited difficulty recruiting members amid COVID-related restrictions on gatherings.
- Management stated that losses and negative operating cash flows may continue while it implements its business plan. It said the ability to continue as a going concern depends on executing the strategy and eventually achieving profitability; the filing states that these conditions raise substantial doubt about going concern.
- No numerical financial guidance is provided. The company had agreed to acquire UK money-transfer business Khyber Money Exchange, but the filing says formal closing awaited FCA approval.
Risks, contingencies, and unusual items
- Financing and dilution: cash increased substantially through equity issuance. Shares outstanding rose from 50.05 million at year-end 2020 to 70.07 million at September 30, 2021. Q3 included $5.49 million of immediately vested stock compensation.
- Credit exposure: accounts receivable were $9.44 million, with 88.28% concentrated in one debtor. Loan receivables were $6.31 million, including a $6 million third-party loan at 10% annual interest, due January 2022.
- Legal claim: former placement agent FT Global seeks approximately $7 million in damages and fees. A November 10, 2021 court order dismissed certain claims but allowed contract, good-faith, and attorney-fee claims to proceed into discovery; the company says it will defend the case.
- Controls: management concluded disclosure controls were ineffective due to a material weakness involving insufficient personnel with U.S. GAAP and SEC reporting expertise. The company engaged an outside consultant to assist with remediation.
- China and VIE risks: the company disclosed uncertainty around PRC regulation and enforcement, including oversight of overseas-listed companies and VIE structures. Authorities could challenge the structure, potentially materially affecting operations or share value.
- The filing reports no off-balance-sheet arrangements. It also identifies COVID-related supply-chain, customer, marketing, and liquidity risks.
Important facts for investors to verify
- Whether operating cash burn, collections, and liquidity remain sustainable, especially given the concentrated receivables and third-party loans.
- Whether coal and aluminum trading can produce positive, repeatable gross margins; nine-month trading gross profit was negative.
- The terms, audited results, share settlement, and goodwill recoverability associated with the Nice Talent acquisition; also verify the status of the Khyber transaction and FCA approval.
- Potential dilution from equity compensation, acquisition consideration, and future capital raising.
- Developments in the FT Global litigation, the material weakness remediation, and regulatory risks affecting China operations and the VIE structure.