Future FinTech Group Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019 unless noted. The company is shifting from fruit-juice operations to blockchain-based e-commerce and financial technology. On February 27, 2020, it sold HeDeTang HK and its subsidiaries, principally the legacy fruit business, and reported them as discontinued operations.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 or comparison |
|---|---|---|
| Revenue | $199,951 | $160,175; up 25% |
| Gross profit / margin | $199,438 / approximately 100% | $30,614 / 19.4% |
| Operating loss | $5.94 million | $0.99 million |
| Continuing-operations loss | $6.48 million | $1.07 million |
| Net income (including disposal gain) | $117.21 million | Net loss of $1.68 million |
| Operating cash flow | $(1.35) million | $0.29 million provided |
| Cash and cash equivalents | $235,358 on the balance sheet and cash-flow statement | $539,316 at December 31, 2019 |
| Working capital | $(4.45) million | Management compares with $(93.94) million at March 31, 2019 |
| Total assets / liabilities | $22.69 million / $7.62 million | $115.98 million / $204.06 million at December 31, 2019 |
Membership revenue rose to about $199,000 from $22,000, while sales of goods fell to about $1,000 from $138,000. The filing attributes the goods-sales decline partly to COVID-19-related office closures and stopped shipments. General and administrative expense increased to $1.92 million, including $1.19 million of stock compensation; a $4.20 million bad-debt provision, mainly on receivables from the sold HeDeTang business, was the largest operating expense. Net other expense was $546,467, including currency-exchange losses associated with the sale.
The reported $123.69 million gain on disposal drove net income and earnings per share; it should not be read as recurring operating profit. The company received sale consideration of approximately $85,714. It reported HeDeTang HK assets of $106.85 million and liabilities of $231.21 million at disposal. Diluted earnings per share were $3.46 overall, while diluted loss per share from continuing operations was $0.20.
Short-term bank loans were $1.06 million; total liabilities were $7.62 million. The filing also describes a secured convertible note with principal originally issued at $1.07 million, due March 26, 2020, with portions exchanged for shares. The precise remaining note balance at quarter-end is not clearly stated in the provided filing text. Financing cash flow was $619,000, including $503,270 in note proceeds and $85,714 from the disposal. The cash-flow statement reports ending cash of $235,358, but MD&A separately states cash was $6,868 at March 31; the filing text does not reconcile these values.
Material changes and business developments
- The disposal substantially reduced reported assets and liabilities and changed the company’s business mix. Equity moved from a deficit of $88.08 million at year-end to positive $15.07 million at March 31, largely reflecting disposal accounting and currency-translation effects.
- The company’s remaining stated focus includes Chain Cloud Mall (CCM), a blockchain-based shopping platform; NONOGIRL, a cross-border e-commerce platform in trial operation since March and expected to launch formally in Q3 2020; a blockchain application incubator; and digital payments and financial technology.
- On March 11, the board approved plans to sell certain operations and close others; the filing classified the related results as discontinued operations.
- Common shares outstanding increased from 33.81 million at December 31 to 38.14 million at March 31. This included 3.75 million shares issued under a three-year consulting agreement valued at $3 million; 1.5 million were released immediately and the remaining shares were subject to later release conditions.
Outlook, risks, contingencies, and unusual items
- Liquidity and going concern: The company reported operating losses and negative operating cash flow, expects it may continue to incur losses and cash outflows, and says it may seek additional equity or debt financing. It cautions that financing may not be available on acceptable terms. Management stated it believed resources would be adequate through the COVID-19 outbreak, while also identifying uncertainty around capital access.
- COVID-19: Offices in China were closed from late January until late March, disrupting records preparation, operations, suppliers, shipping, customers, and marketing. Management warned that prolonged disruption or a broader downturn could materially harm revenue, liquidity, and access to capital.
- Internal controls and reporting: Management concluded disclosure controls were not effective because of a material weakness: insufficient accounting personnel with appropriate U.S. GAAP and SEC-reporting experience. The company engaged an outside consultant to assist with financial reporting. COVID-19-related access to books and records delayed the filing; the company relied on SEC relief for additional filing time.
- Legal matters: The filing lists numerous outstanding judgments, enforcement actions, and disputes primarily involving subsidiaries included in the HeDeTang sale, and generally states creditors of those transferred subsidiaries have no recourse to the current company. It also describes a Zhongkun construction claim for which the filing says the company remains liable, so the scope of retained exposure warrants review. The Andrew Chien case was closed after dismissal was affirmed and further rehearing was denied.
- Subsequent events: After quarter-end, the company exchanged additional portions of the convertible note for shares and registered a Shanghai subsidiary with $30 million stated registered capital; that operation had not started as of the filing.
Key facts investors should verify
- Reconcile the conflicting March 31 cash figures: $235,358 in the balance sheet and cash-flow statement versus $6,868 in MD&A.
- Confirm the convertible note’s remaining principal, accrued interest, maturity status, security, and any subsequent conversions or share issuances.
- Assess the disposal gain’s accounting, the liabilities and legal exposures retained after the HeDeTang sale, and the apparent exception regarding the Zhongkun claim.
- Evaluate liquidity, financing needs, and the company’s ability to fund operations given negative working capital, negative operating cash flow, and going-concern disclosures.
- Track CCM membership growth and economics, the Q3 2020 NONOGIRL launch plan, COVID-19 effects, and progress remediating the material weakness in internal controls.