Future FinTech Group Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Figures below are in U.S. dollars unless noted; interim financial statements are unaudited.
Business context
Future FinTech has shifted from fruit-juice manufacturing to blockchain-enabled e-commerce and related technology. Its businesses include Chain Cloud Mall (CCM), cross-border platform NONOGIRL, and DCON. NONOGIRL formally launched in July 2020; the company reported 10,450 registered users at quarter-end. The fruit-juice businesses were sold in February 2020, and several other operations were classified as discontinued or being wound down.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $43,657 | $342,083 | $357,295 | $744,977 |
| Gross profit / margin | $30,141 / 69.0% | $264,918 / 77.5% | $333,907 / 93.5% | $422,035 / 56.7% |
| Operating loss | $(836,999) | $(899,776) | $(3,042,293) | $(2,920,864) |
| Loss from continuing operations | $(2,473,891) | $(922,856) | $(5,211,436) | $(3,055,691) |
| Net income (loss) | $(2,438,927) | $(1,402,080) | $114,230,428 | $(5,026,553) |
Nine-month net income included a $119.6 million gain on disposal of discontinued operations; it does not represent profitable continuing operations. Nine-month net income attributable to common shareholders was $114.3 million, or $3.09 basic and $3.04 diluted per share. Q3 loss attributable to common shareholders was $2.4 million, or $0.07 per share.
- Cash flow, nine months: $770,117 used in operations, $5.14 million used in investing (principally a loan receivable), and $7.18 million provided by financing. Cash increased by $426,609 to $957,676.
- Balance sheet at September 30: Total assets were $29.24 million, liabilities $9.28 million, and equity $19.95 million. Working capital was approximately $4.00 million, compared with a reported deficit of approximately $102 million at September 30, 2019.
- Cash was under $1 million. Current assets included $5.13 million of loan receivables, arising from an unsecured loan bearing 10% annual interest and due in June 2021; $99,027 of accrued interest had not been received by the report date.
- Reported obligations included $1.16 million of convertible notes, $862,000 of loans payable, and $1.52 million due to related parties. The filing also reports lease liabilities of about $305,000.
Material changes versus prior periods
- Q3 revenue fell 87.1% year over year; nine-month revenue fell 52.1%. Sales of goods declined sharply, while service fees were nearly flat over nine months. Management attributed the weakness to COVID-19 disruption and difficulty promoting the platforms.
- Nine-month gross margin increased to 93.5% from 56.7%, largely because service fees made up a larger share of the much lower revenue base. Gross profit dollars declined.
- Nine-month operating loss widened to $3.04 million from $2.92 million. General and administrative expense included $1.19 million of share-based consulting compensation; bad-debt provision was $247,097.
- Q3 included a $1.95 million loss on settling debt through issuance of 2,740,883 shares. Shares outstanding rose from 33.81 million at year-end 2019 to 41.96 million at September 30, 2020; 42.29 million were reported outstanding at November 13.
- Disposal of the former juice subsidiary substantially reduced reported assets and liabilities. The filing reports a $119.58 million nine-month disposal gain in the income statement and describes a $123.69 million gain on the HeDeTang HK sale in the notes.
Outlook, risks, contingencies, and unusual items
- Going concern: Management states operating losses and negative operating cash flows raise substantial doubt about the company’s ability to continue as a going concern. It may seek equity or debt financing but cannot assure financing will be available on acceptable terms. No quantitative revenue or earnings guidance is provided.
- COVID-19: Management says the outbreak materially adversely affected operations, particularly in the first half of 2020, through closures, restrictions on gatherings, shipping and supply disruptions, and reduced promotion. Further outbreaks and financing-market disruption remain risks; the company has no revolving credit facility.
- SEC investigation: The company received a Division of Enforcement subpoena in February 2020 concerning accounting procedures, management oversight, and the HeDeTang sale. It says it is cooperating, but cannot predict whether enforcement action will follow; potential consequences and defense costs could be material.
- Controls: Management concluded disclosure controls were ineffective because of a material weakness—insufficient accounting personnel with U.S. GAAP and SEC-reporting expertise. Consultants were engaged to assist remediation.
- Transactions: A proposed acquisition of 90% of Hong Kong asset manager Nice Talent Asset Management for approximately $6.97 million in company shares remained pending regulatory approval at the report date. A subsequent November 2 private placement raised $312,352. The filing also describes material related-party balances and a VIE structure subject to PRC legal and regulatory risks.
- Other risks include RMB conversion and remittance restrictions and pending litigation described in the filing. The company stated certain proceedings involved subsidiaries sold with HeDeTang HK and that creditors in those cases had no recourse to the current company.
Important facts for investors to verify
- Whether the large disposal gain is nonrecurring and how the continuing business performs apart from discontinued operations.
- Cash availability and collection of the $5.13 million unsecured loan receivable, including the overdue interest.
- Financing needs and progress against the stated going-concern doubt, given low cash and negative operating cash flow.
- Status and potential consequences of the SEC investigation, and progress in remediating the material weakness in controls.
- Actual user activity, revenue generation, and economics of CCM and NONOGIRL, as well as the regulatory status and terms of the proposed Nice Talent acquisition.
- Share-count changes, dilution from debt conversions and equity compensation, and the terms of related-party balances.