Future FinTech Group Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. The company primarily operated fruit-juice and fruit-product businesses in China while pursuing a transition toward e-commerce, blockchain and financial-technology activities, many still developmental. Financial results are unaudited and presented in U.S. dollars.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $0.79 million | $2.78 million | $1.35 million | $5.74 million |
| Gross profit | $0.17 million | $1.29 million | $0.24 million | $1.83 million |
| Operating loss | $3.48 million | $2.10 million | $6.26 million | $4.61 million |
| Net loss, consolidated | $3.89 million | $2.86 million | $7.13 million | $5.29 million |
| Net loss attributable to Future FinTech, including discontinued operations | $3.45 million | $2.54 million | $6.24 million | $5.19 million |
| Operating cash flow | Not separately presented | Not separately presented | $(5.21) million | $0.09 million |
Gross margin was approximately 22% in Q2 2018, versus 47% in Q2 2017; first-half margin was approximately 17%, versus 32%. These percentages are calculated from the statements’ revenue and gross-profit figures; the filing’s MD&A gross-margin tables contain inconsistent figures.
At June 30, 2018, cash was $0.39 million, down from $4.59 million at year-end 2017. Current assets were $55.95 million against current liabilities of $114.04 million, or negative working capital of approximately $58.08 million. Total liabilities were $153.31 million and equity was $25.93 million. Reported borrowings included $6.05 million of short-term bank loans and $21.98 million of long-term debt; capital-lease obligations were $17.29 million. Accrued expenses were unusually large at $100.19 million. Other receivables included an approximately $31.81 million deposit for a proposed kiwi-orchard purchase.
First-half investing cash outflow was $1,902, while financing provided $0.16 million. Cash declined by $4.19 million overall, with exchange-rate effects adding $0.86 million.
Material changes versus the prior comparable period
- Revenue fell 72% in Q2 and 76% in the first half. Fruit-beverage sales, the largest product category, declined 83% in Q2 and 78% in the first half, primarily amid weaker in-store demand and competition from online grocery delivery. First-half pear-juice revenue also dropped sharply.
- First-half gross profit fell about 87%, while operating losses widened. Lower production volumes increased fixed cost per unit and reduced margins across several product lines.
- Operating cash flow shifted from a small inflow to a $5.21 million outflow, and cash fell 91% from December 31, 2017.
- Common shares issued and outstanding rose from 5.37 million at December 31, 2017 to 26.07 million at June 30, 2018. Issuances included shares for creditor-rights acquisitions, a share purchase and the DCON digital-assets transaction.
Outlook, commentary, risks and unusual items
- Management said projected operating cash flows, anticipated receipts, cash on hand and trade credit should cover operating requirements for at least 12 months, excluding possible production-capacity expansion. This assertion warrants attention given the low cash balance, negative working capital and operating cash burn.
- The company was transitioning toward blockchain-related platforms, online sales, supply-chain services and financial technology. It anticipated completing planned spin-offs by year-end 2018 and described future revenue opportunities, but provided no quantified revenue or earnings guidance.
- Several capital projects were delayed, suspended or impaired because of insufficient cash, environmental requirements or market conditions. The company also expected to complete the kiwi-orchard purchase process by year-end 2018, subject to valuation, approvals and a definitive agreement.
- The company recorded $6.0 million of expense and liability in Q2 2018 related to Cinda Shaanxi Branch enforcement proceedings over supplier financing guarantees. Other material debt and lease disputes remained unresolved; court actions included pledged assets, appeals and repayment claims. Huludao Wonder also had a disputed bank loan, and management expected repayment after asset sales.
- Customer concentration was high: the five largest customers represented approximately 100% of first-half 2018 sales. The filing also disclosed supplier concentration.
- Disclosure controls were deemed ineffective, and management reported a material weakness in internal controls due to insufficient accounting staff with U.S. GAAP and SEC-reporting experience.
- Huludao Wonder remained a discontinued operation. The company reported prior substantial asset impairments and continued to wind down the operation.
Important facts for investors to verify
- Reconcile material differences between the financial statements and MD&A operating-expense figures: the statements report Q2 operating expenses of $3.65 million and first-half expenses of $6.49 million, while MD&A tables report $2.72 million and $5.56 million, respectively. The filing text does not explain the differences.
- Confirm reported gross margins against the underlying revenue and gross-profit figures; some MD&A margin tables appear inconsistent.
- Assess the collectability and recoverability of the $31.81 million orchard-purchase deposit and the timing and terms of the proposed transaction.
- Review liquidity, the composition and due dates of accrued expenses, debt and lease obligations, and management’s 12-month funding assessment.
- Track outcomes of material litigation and enforcement proceedings, including the $6.0 million Q2 accrual and claims involving Cinda, banks and pledged assets.
- Confirm the share count: the balance sheet reports 26,071,083 shares at June 30, while the cover page reports 26,017,083 shares outstanding at August 16, 2018.
- Monitor progress on the control-deficiency remediation plan and on the proposed spin-offs and developmental technology businesses.