Future FinTech Group Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts are U.S. dollars unless stated otherwise. The filing is unaudited.
Business context
Future FinTech is transitioning from fruit-juice operations to blockchain-enabled e-commerce and financial technology. Its stated businesses include Chain Cloud Mall (CCM), the NONOGIRL cross-border e-commerce platform, a blockchain application incubator and digital payment system. NONOGIRL began trial operations in March 2020 and formally launched in July; CCM v3.0 launched in May. The company sold HeDeTang HK and its fruit-juice subsidiaries on February 27, 2020, and reports those operations as discontinued.
Financial performance and position
| Metric | Q2 2020 | Six months 2020 |
|---|---|---|
| Revenue | $113,687, down 55.8% from $257,018 | $313,638, down 24.8% from $417,193 |
| Gross profit / margin | $104,328 / 91.8% | $303,766 / 96.9% |
| Operating expenses | $631,706 | $6,766,855 |
| Loss from continuing operations | $537,341 | $7,019,519 |
| Net income (loss) | ($537,341) | $116,669,355 |
| Operating cash flow | Not presented by quarter | ($1,267,501) in cash flow statement |
Six-month net income primarily reflects a $123.69 million gain on disposal of discontinued operations, not profitable ongoing operations. The disposal gain arose when assets of $106.85 million and liabilities of $231.21 million were transferred; stated sale consideration was approximately $85,714. Revenue was concentrated in CCM membership fees: $303,000 for the six months, versus $131,000 a year earlier. Sales of goods fell to $3,000 from $286,000.
Six-month operating expenses included a $4.41 million bad-debt provision, mainly against receivables from the sold HeDeTang business, and $1.19 million of share-based consulting expense. General and administrative expense was $2.33 million; selling expense was $20,474. The six-month foreign-exchange-related other expense was $502,799.
At June 30, cash was $576,303; current assets were $976,859 and current liabilities were $6,999,082, implying negative working capital of approximately $6.02 million. Total assets were $23.31 million, liabilities $8.60 million and stockholders’ equity $14.71 million. Debt and borrowing balances included $844,805 of short-term bank loans, $2.25 million of loans payable and $1.60 million due to related parties. Cash increased by $36,987 from year-end 2019. The company had no revolving credit facility and reported no off-balance-sheet arrangements.
Common shares issued and outstanding were 38,494,063 at June 30 and 41,734,946 at August 12, 2020. The later count reflects, among other activity, shares issued after quarter-end to repay debt.
Changes versus comparable periods
Q2 revenue declined 55.8%, chiefly as sales of goods fell from $148,000 to $2,000; membership revenue was nearly flat at $105,000 versus $109,000. Six-month revenue declined 24.8%, as membership growth was more than offset by the sharp contraction in goods sales. Gross margin rose because membership revenue, which carries a higher margin, made up a larger share of a much smaller revenue base; gross profit dollars declined in Q2 but increased for the first half.
Continuing-operations losses widened for the first half, from $2.32 million to $7.02 million, principally because of bad-debt and stock-based compensation charges. Q2 continuing loss improved from $1.25 million to $537,341, alongside lower reported operating expenses. Cash was modestly higher than at December 31, 2019, while current assets and liabilities fell substantially following the discontinued-operations disposal.
Outlook, risks and unusual items
- Going concern: Management reports operating losses and negative operating cash flows and says continued operations depend on executing the new strategy and eventually becoming profitable. It may seek additional equity or debt financing; financing may not be available on acceptable terms.
- COVID-19: Office closures, travel and gathering restrictions, disrupted supply and shipping, and reduced ability to promote CCM adversely affected operations. Management cautions that the duration and severity of effects remain uncertain.
- SEC inquiry: The company received an SEC Enforcement Division subpoena in February 2020 concerning accounting procedures, management oversight and the HeDeTang sale. It says it is cooperating; the outcome and any enforcement action are uncertain.
- Controls: Management concluded disclosure controls were ineffective due to a material weakness: insufficient accounting personnel with U.S. GAAP and SEC-reporting expertise. Consultants were engaged as a remediation measure.
- Credit and financing exposure: A June loan agreement authorized lending up to $5 million to Shenzhen Tiantian Haodian at 10% annual interest, unsecured and without a guarantee. The filing reports $206,512 advanced by June 30 and a further $4.73 million transferred in July. Related-party balances and customer/supplier credit risks also warrant attention.
- Subsequent transactions: In August, the company issued 2,740,883 shares to settle $4.961 million of debt. A proposed acquisition of 90% of Hong Kong asset manager Nice Talent would use stock consideration of approximately HK$54 million, including earn-outs tied to 2020 and 2021 earnings. A 90-day standstill on a lender’s note increased its stated balance by 9% to $1,209,636.
- Other risks: The company relies on PRC operations and a VIE contractual structure; currency conversion and PRC legal and policy developments may affect it. The filing describes numerous legacy litigation matters, many associated with disposed subsidiaries, and states that creditors of those subsidiaries generally have no recourse to the current company; certain obligations and proceedings remain relevant.
The filing provides no numerical earnings or revenue guidance. Management describes CCM v3.0’s supplier fees, agent fees and transaction-related commissions, but gives no quantified forecast for their future contribution.
Important facts for investors to verify
- Reconcile cash flow figures: the cash flow statement reports six-month operating cash use of $1.27 million and investing cash use of $206,512, while MD&A states operating cash use of $1.41 million and no investing cash use.
- Check per-share disclosures: the financial statements report Q2 continuing-operations loss per share of $0.02, while MD&A states $0.20. The statements report six-month continuing loss per share of $0.20 basic and $0.19 diluted.
- Assess the collectability and terms of the unsecured Tiantian Haodian loan, particularly the post-quarter funding, and the credit quality of related-party receivables.
- Evaluate liquidity needs, financing access, debt repayment terms and potential dilution from stock settlements, consulting shares and the proposed Nice Talent acquisition.
- Monitor the SEC investigation, remediation of the material weakness, execution of the new platforms, and the extent to which recurring revenue can replace the discontinued fruit business.