Future FinTech Group Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; this is an annual report, not a standalone fourth-quarter filing. The company filed the report on August 30, 2019, after receiving Nasdaq notices concerning late periodic reports.
Business context and strategy
Future FinTech reported fruit-juice manufacturing and sales alongside emerging fintech activities, but said it was shifting from juice production and distribution toward blockchain-enabled e-commerce. The CCM shopping platform began trial operations on December 26, 2018; versions 1.0 and 2.0 launched in January and June 2019, respectively, after the reporting period. CCM accepts conventional payment methods, not digital currencies. The company reported approximately 164 platform users at December 31, 2018, and 5,464 members and RMB 6.19 million (about $936,000) in membership and merchandise proceeds from launch through July 31, 2019.
DCON, a 60%-owned digital-payment venture, had generated no meaningful revenue from its blockchain technologies as of year-end. The company said it could not determine the value or cash value of certain acquired DCON digital assets; those assets were excluded from the 2018 consolidated financial statements.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $0.89 million | $10.46 million |
| Gross profit (loss) | $(0.09) million; (9.0%) margin | $1.73 million; 16.6% margin |
| Operating expenses | $190.43 million, including $178.30 million impairment loss | $100.82 million, including $89.69 million impairment loss |
| Operating loss | $(190.52) million | $(99.09) million |
| Net loss attributable to the company | $(170.00) million | $(102.58) million |
| Cash and cash equivalents at year-end | $0.25 million | $4.59 million |
| Net cash from operating activities | $(4.88) million | $23.66 million |
Revenue fell approximately 91.5%, reflecting sharply lower sales across the product lines amid heavy competition in China. Concentrated juice and beverages generated $479,000 and $157,000, respectively, while other products generated $253,000. The filing reports a 31.8% gross margin for beverages, up from 19.5% in 2017, but total gross profit turned negative.
At December 31, 2018, current assets were $24.16 million versus current liabilities of $117.17 million, leaving a $93.0 million working-capital deficit. Total liabilities were $149.62 million, against total assets of $62.95 million; total stockholders’ equity was negative $86.68 million. The balance sheet reports $5.83 million of short-term bank loans and $32.45 million of long-term loans. The filing also discusses substantial overdue and disputed bank and lease obligations.
Common shares outstanding increased from approximately 5.37 million at year-end 2017 to 31.02 million at year-end 2018, in part from shares issued for acquisitions, creditor-rights transfers, and employee awards. There were 32.32 million shares outstanding as of August 15, 2019.
Material changes and unusual items
- Impairment charges rose substantially, contributing to the larger operating and net losses. The filing describes write-downs involving stalled or underfunded projects, inactive facilities, distressed assets, and inventory; project-level figures are not consistently presented across the filing.
- Bad-debt expense increased to $20.13 million from $0.42 million. The filing attributes much of the increase to distressed debt assets for which ownership transfer had not been completed and which had produced no cash flow.
- Five largest customers represented 61.56% of 2018 sales, versus 12% in 2017. Two customers accounted for 40.96% and 10.17% of sales, respectively.
- The company reported $4.01 million of income from discontinued operations in 2018, primarily non-operating income related to the Huludao operation and asset disposition; discontinued operations had a $14.66 million loss in 2017.
- The company recorded a $5.8 million expense and liability in 2018 relating to proceedings over guarantees for supplier financing. Other significant disputes include bank defaults, Cinda lease claims, and a construction judgment of RMB 41.58 million plus penalties against a subsidiary.
Outlook, risks, and contingencies
The independent auditor’s report includes a going-concern explanatory paragraph: significant working-capital deficiency, recurring losses, and the need for additional funds raise substantial doubt about the company’s ability to continue as a going concern. Management’s plan depends on executing the new strategy and eventually achieving profitable operations; the filing gives no quantified financial guidance. Management said it believed available working capital and operating cash would meet requirements for at least 12 months, but the auditor highlighted the substantial doubt and the statements contain no adjustments for a possible failure to continue as a going concern.
Key risks include weak liquidity and negative equity; collection and valuation uncertainty for receivables and distressed assets; loan defaults, enforcement actions, and pledged assets; environmental rules that delayed or halted projects; competition and volatile fruit costs; customer concentration; and execution risk in the new e-commerce business. The company also flags PRC regulatory uncertainty, including e-commerce licensing, pyramid-selling rules applicable to membership incentives, cybersecurity and privacy, and restrictions on cryptocurrency and token financing. Its China e-commerce operations use contractual VIE arrangements, whose enforceability and regulatory treatment are risks. The filing also reports prior Nasdaq listing deficiencies, a late 2018 10-K and 2019 10-Q filings, and multiple auditor changes in 2019.
Management stated that it expected to complete investment in the Mei County trading center in 2019 and expected an orchard purchase to be completed in 2020; these are plans, not assured outcomes.
Important facts for investors to verify
- Reconcile the operating-cash-flow discussion: MD&A text at one point says cash provided was $4.9 million, while the audited cash-flow statement reports cash used of $4.88 million.
- Confirm the impairment amounts and project allocations. The filing gives a total 2018 impairment charge of $178.30 million, but project-level descriptions elsewhere differ or do not clearly reconcile.
- Verify reported EPS: the audited statements show basic loss per share from continuing operations of $8.04, while MD&A text cites $8.42.
- Reconcile debt and lease disclosures, including the balance-sheet presentation of lease liabilities with the note’s reported lease obligations and the status of defaults, court enforcement, and pledged assets.
- Assess the recoverability, collateral, and ownership status of distressed receivables and other assets, including the stated $20.13 million bad-debt expense and customer balances more than 90 days overdue.
- Track liquidity and financing needs, the outcome of material litigation, Nasdaq filing compliance, and whether CCM can attract and retain users while meeting PRC licensing and regulatory requirements.