Future FinTech Group Inc. — Q1 2021 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2021. Future FinTech has shifted from fruit-juice manufacturing to blockchain-enabled e-commerce and related technology, including Chain Cloud Mall (CCM) and NONOGIRL. The company reports that its activities are principally conducted through subsidiaries and a PRC variable interest entity (VIE).
Key financial results
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Revenue | $6,613 | $199,951; down 96.7% |
| Gross profit / margin | $590 / 8.9% | $199,438 / approximately 99.7% |
| Operating expenses | $1.61 million | $6.06 million |
| Loss from continuing operations | $991,417 | $6.70 million loss |
| Net loss, including discontinued operations | $797,309 | $116.89 million net income, including a large disposal gain |
| Basic and diluted EPS | Continuing operations: $(0.02); discontinued operations: $0.01 | Continuing operations: $(0.20); discontinued operations: $3.73 basic and $3.65 diluted |
| Cash and cash equivalents | $42.12 million at March 31, 2021 | $9.79 million at December 31, 2020 |
| Operating cash flow | Cash used in continuing operations: $71,963; discontinued operations: $669,310 | Cash used in continuing operations: $699,205; discontinued operations: $1.56 million |
Gross margin fell sharply as high-margin membership revenue contracted. Q1 2021 revenue comprised $73 of CCM membership fees and $6,540 of goods sales, compared with $198,885 of membership fees and $1,066 of goods sales in Q1 2020. Management attributed the membership decline principally to COVID-19 restrictions that impeded in-person meetings and conferences used to recruit members.
Cash increased primarily from equity financing. The company reported $33.26 million of net financing cash flow, including $35.50 million from common-stock issuance, partially offset by debt repayments and net payments involving related parties. The cash-flow statement reports total cash at period end of $42.12 million, including $446 attributable to discontinued operations; the balance sheet reports continuing-operations cash of $42,117,677.
At March 31, 2021, total assets were $48.36 million and total liabilities were $3.96 million. Current assets were $47.87 million versus current liabilities of $3.06 million. The company had no convertible notes payable at quarter-end, compared with $1.16 million at December 31, 2020. Loan payables were $271,000; amounts due to related parties were $835,129. Lease liabilities totaled $245,442.
Changes, outlook, and risks
- Operating expenses declined from $6.06 million to $1.61 million, mainly because Q1 2020 included a $4.20 million doubtful-debt provision. General and administrative expenses decreased 13.4% to $1.60 million.
- Q1 2020 net income was dominated by a $123.69 million gain on disposal of HeDeTang HK. Q1 2021 included a $351,914 disposal loss relating to the deregistration of Chain Future Digital Tech (Beijing), partly offset by $546,022 of income from discontinued operations.
- The company disclosed substantial doubt about its ability to continue as a going concern, citing operating losses and negative operating cash flows. It depends on successfully executing its business strategy and attaining profitability; the filing provides no quantified guidance.
- COVID-19 restrictions, potential impacts on suppliers and customers, and limited access to financing could adversely affect operations. The company also cites uncertainty in PRC laws and regulation. Its VIE structure relies on contractual arrangements to consolidate and control a PRC e-commerce operation.
- FT Global Capital sued the company, alleging unpaid placement-agent fees and seeking approximately $7 million in damages and attorneys’ fees. The company disputes the claim; a motion to dismiss was pending and the case entered a six-month discovery track.
- Management concluded disclosure controls were not effective as of March 31, 2021, citing insufficient accounting personnel with appropriate U.S. GAAP and SEC-reporting expertise. The company engaged an outside consultant as a remediation measure.
- Subsequent events included an April registered offering of 5,737,706 shares for approximately $35 million gross, an amended Nice Talent acquisition agreement with HK$144 million of consideration in company shares and EBIT-based earn-outs, and the April acquisition of 60% of Ticode for 7,789,882 shares.
Investor verification priorities
- Assess whether the company can restore membership revenue and improve the economics of goods sales after the steep revenue and gross-margin decline.
- Reconcile the reported cash-flow amounts and working-capital disclosures with the financial statements; the MD&A states working capital of $44.81 million but compares it with March 31, 2020, not the December 31, 2020 balance-sheet date.
- Review cash runway, continuing operating cash use, reliance on equity financing, and the company’s stated going-concern uncertainty.
- Monitor dilution from Q1 and subsequent share issuances, acquisitions paid in shares, and outstanding warrants.
- Track the FT Global litigation, VIE-related regulatory exposure, and remediation of the disclosed material weakness in disclosure controls.