Future FinTech Group Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unless otherwise stated, amounts below are U.S. dollars. The filing was signed November 14, 2019.
Business context
The company is shifting from fruit-juice manufacturing and distribution toward a blockchain-based e-commerce business. Its Chain Cloud Mall (CCM) platform launched in January 2019, with version 2.0 introduced in June. Revenue now includes membership fees and product sales through CCM; traditional fruit-related sales contracted sharply. The company also operates related supply-chain and digital-payment activities.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $342,058 | $308,691 | $818,611 | $1,658,911 |
| Gross profit (loss) | $248,526 | ($151,202) | $437,445 | $84,068 |
| Operating expenses | $1,596,644 | $17,559,481 | $5,090,282 | $24,051,335 |
| Net loss | ($1,410,107) | ($18,100,773) | ($5,026,553) | ($25,227,141) |
| Net loss attributable to Future FinTech | ($1,084,237) | ($17,590,997), including discontinued operations | ($3,995,942) | ($23,830,898), including discontinued operations |
| Operating cash flow | Not provided for quarter | Not provided for quarter | ($7,323,346) | ($1,729,901) |
Q3 revenue grew 10.7%, despite fruit-related revenue falling from $302,000 to $16,000, as CCM membership fees contributed $205,000 and platform product sales $121,000. Nine-month revenue fell 50.6%, primarily because fruit-related sales declined 96.2% to $60,000. Nine-month gross margin was reported at 53.4%, compared with 5.0% in 2018; CCM membership carried a reported 90.0% margin. Losses narrowed substantially year over year, helped by lower expenses, including the absence of the prior-year $14.9 million bad-debt charge and lower depreciation and amortization following 2018 impairments.
Foreign-currency translation added $7.33 million to nine-month comprehensive income, turning the company’s $5.03 million net loss into $2.30 million comprehensive income before non-controlling interests. Q3 translation adjustment was a $5.40 million loss. These currency effects are not operating earnings.
Financial position and liquidity
- At September 30, cash and cash equivalents were $135,056, down from $253,804 at year-end 2018. Nine-month operating cash outflow was $7.32 million; financing provided approximately $1.00 million, while exchange-rate effects reduced cash by $5.43 million.
- Current assets were $20.31 million versus current liabilities of $108.93 million, resulting in negative working capital of approximately $88.62 million. Management reported improvement from negative $93.01 million at December 31, 2018, mainly due to lower accrued expenses.
- Total liabilities were $140.38 million, including $6.73 million of short-term bank loans and $31.45 million of long-term debt. Accrued expenses were $88.68 million.
- Total assets were $64.57 million and total equity was negative $75.81 million. Other receivables of $19.29 million and intangible assets of $27.95 million are significant balance-sheet items.
Management states that the company’s ability to continue as a going concern depends on executing its new strategy and eventually becoming profitable. The filing notes that the financial statements include no adjustments that might be needed if the company cannot continue as a going concern.
Material changes, outlook, risks and unusual items
- Business transition: CCM reported 6,071 users at September 30, versus approximately 164 at December 31, 2018. From platform trial launch through September 30, the company reported RMB 9.03 million of membership-fee and merchandise-sale proceeds, 6,071 members and 6,233 orders. These are platform proceeds and activity figures, not necessarily recognized revenue.
- Debt and dilution after quarter-end: In October and November 2019, the company exchanged partitioned portions of a March 2019 secured convertible note for shares. Disclosed exchanges covered principal amounts of $100,000, $300,000, $145,000 and $175,000 for 133,333, 400,000, 193,333 and 233,333 shares, respectively. A related forbearance agreement included a minimum $100,000 monthly balance reduction and potentially higher redemption amounts if cash redemptions were not paid promptly.
- Legal and enforcement matters: The filing describes multiple unpaid loans, lease and construction disputes, creditor enforcement actions and pledged or seized assets. Among the material disclosed matters are a court award of RMB 41.58 million plus penalty against a subsidiary in a construction dispute, and an upheld ruling involving approximately RMB 84.97 million in equipment lease fees plus related costs. The company also recorded a $5.80 million liability in 2018 for a disputed creditor claim. A former consultant’s U.S. lawsuit seeking approximately $257,000 plus interest and 2% of then-outstanding shares was on appeal.
- Related-party/VIE exposure: CCM’s China e-commerce operations use contractual VIE arrangements because of licensing restrictions. The VIE’s shareholders include the CEO’s son and the company’s COO. The company consolidates the VIE based on contractual control and economic-benefit rights.
- Other assets and contingencies: The company reported a roughly $30 million deposit paid in 2016 toward a proposed orchard purchase; valuation and purchase price remained unsettled, with completion expected in 2020. Management reported no off-balance-sheet arrangements. There is no specific earnings or revenue guidance in the provided filing text.
- Reporting clarity: The filing’s 2018 comparative figures are not fully consistent across sections. For example, the statements report Q3 2018 operating loss of $17.71 million, while the segment reconciliation presents a pre-tax loss of $5.51 million. The filing text does not clearly reconcile this difference.
Key facts investors should verify
- Whether CCM membership, user growth and order activity translate into recurring recognized revenue, sustainable margins and positive cash flow.
- The recoverability and timing of significant other receivables, including the orchard deposit, and the value and impairment risk of intangible assets.
- The status, amounts and collateral consequences of debt defaults, creditor enforcement proceedings, guarantees and material litigation.
- The remaining balance, redemption terms and potential dilution from the secured convertible note and related share exchanges.
- The company’s liquidity and ability to meet obligations given its very low cash balance, substantial negative working capital and negative equity.
- The inconsistent comparative operating results in the filing and the basis for the large translation adjustments affecting comprehensive income.