Future FinTech Group Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Financial statements are unaudited and presented in U.S. dollars unless stated otherwise. The company’s legacy business produces and sells fruit-related products in China; it is transitioning toward a blockchain-based e-commerce platform, Chain Cloud Mall (CCM). CCM v1.0 launched January 22, 2019. CCM v2.0 launched June 1, 2019, after the reporting period.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Revenue | $196,329 | $562,146 | Down 65%; fruit-related product revenue fell 96% to $22,000. New CCM membership and platform goods sales contributed $22,000 and $138,000, respectively. |
| Gross profit / margin | $53,255 / 27% | $62,586 / 28% | Gross profit fell; fruit-related margin declined to 9% from 20%. CCM membership margin was reported at 90% and goods-sales margin at 12%. |
| Operating expenses | $1.564 million | $2.843 million | Lower mainly due to reduced depreciation and amortization; expenses remained very high relative to revenue. |
| Operating loss | $1.511 million | $2.781 million | Improved year over year. |
| Net loss before non-controlling interests | $1.679 million | $3.233 million from continuing operations | Income tax provision was zero in both periods. |
| Net loss attributable to Future FinTech shareholders | $1.329 million | $2.792 million | Basic and diluted loss per share were $0.04, versus $0.42. |
| Operating cash flow | Provided $287,485 | Used $487,226 | Q1 2019 included a $4.706 million reduction in other receivables, partly offset by a $3.952 million decrease in accrued expenses. |
| Cash and cash equivalents | $514,498 at March 31 | $253,804 at December 31, 2018 | Cash flow statement also reports a $1.048 million favorable exchange-rate effect. |
Balance sheet, debt and liquidity
- Total assets were $67.27 million and total liabilities were $146.94 million at March 31, 2019. Total equity was negative $79.67 million.
- Current assets of $19.97 million compared with current liabilities of $113.91 million, implying negative working capital of approximately $93.94 million. Cash was only $0.51 million.
- Reported short-term bank loans were $6.51 million and long-term debt was $33.04 million. Accrued expenses were $95.18 million; the filing text does not provide a clear breakdown of this large balance in the supplied material.
- Other receivables were $19.07 million, including a substantial deposit related to a proposed orchard purchase; the purchase price had not been settled and completion was expected in 2020. Intangible assets increased to $30.36 million from $21.45 million.
Material changes, outlook and risks
- Management attributed the revenue decline principally to the business transition and reduced fruit-product orders. It said the new platform businesses were growing, but reported Q1 GAAP revenue remained small.
- The company reported trial-period proceeds of approximately $1.239 million from membership fees and merchandise sales through August 31, 2019, including approximately $311,101 in Q1. These are described as proceeds and should not be treated as GAAP revenue without reconciliation. The company reported 5,977 members and 6,086 orders through August 31.
- The filing states that continued operation depends on executing the new strategy and eventually achieving profitable operations. It provides no quantified revenue, earnings or cash-flow guidance and cautions that interim results are not necessarily indicative of full-year results.
- Significant legal and enforcement matters include disputed or overdue bank and financing obligations, court-ordered enforcement against assets, and Cinda-related judgments. The filing describes a June 2019 judgment requiring a subsidiary to pay approximately RMB 41.6 million plus penalty (about $6.07 million), after the quarter-end.
- The company’s China e-commerce business uses a variable-interest-entity structure to address foreign-ownership restrictions. The disclosed VIE agreements were entered into after quarter-end, on July 31, 2019; the structure carries legal and regulatory uncertainty.
- The filing reports no off-balance-sheet arrangements and says disclosure controls and procedures were effective as of March 31, 2019. It also marks “No” for having filed all required reports in the preceding 12 months and “No” for submitting all required Interactive Data Files.
- Subsequent events include a September 2019 agreement to sell a subsidiary group for an initial stated price of RMB 600,000, subject to valuation and approvals. The supplied filing text also contains a litigation update dated November 27, 2019, later than the September 30 signature date; its timing and inclusion should be checked.
Important facts for investors to verify
- Reconcile reported Q1 platform proceeds and member/order statistics to recognized revenue, cash receipts, refunds, points or rewards obligations, and deferred revenue.
- Obtain detail on the $95.18 million accrued-expense balance, debt maturities, defaults, collateral, and the status and accounting for material litigation and enforcement claims.
- Assess near-term liquidity and going-concern funding needs given $0.51 million cash, approximately $93.94 million negative working capital, and negative equity.
- Verify the collectability and classification of the $19.07 million other-receivables balance and the recoverability of the orchard deposit and intangible assets.
- Review the VIE agreements, related-party relationships, required PRC licenses, and the implications of the July 2019 arrangements and the post-quarter subsidiary sale.
- Check filing compliance and apparent presentation inconsistencies, including the “No” filing-status indicators, the impairment line shown as negative $22,753 versus $387,836 in the cash-flow reconciliation, and the litigation update dated after the report’s signature date.