Future FinTech Group Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Amounts are in U.S. dollars unless stated otherwise. The company’s operations were principally in China. Its established business was fruit-juice and fruit-product production and sales; its planned fintech, e-commerce and blockchain businesses remained under development and had not generated significant revenue.
Financial results and position
| Metric | Third quarter 2018 | Third quarter 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $0.309 million | $4.444 million | $1.659 million | $10.179 million |
| Gross profit (loss) | $(0.151) million | $(0.076) million | $0.084 million | $1.751 million |
| Operating loss | $(17.711) million | $(8.958) million | $(23.967) million | $(13.569) million |
| Net loss | $(18.101) million | $(6.258) million | $(25.227) million | $(11.551) million |
| Net loss attributable to Future FinTech | $(17.591) million | $(9.229) million | $(23.783) million | $(14.318) million |
- Revenue fell 93% in the quarter and 84% for the nine-month period. Nine-month gross margin declined to about 5% from 17%.
- Quarterly selling expense was $14.982 million, principally reflecting a $14.932 million bad-debt expense on receivables. The allowance for doubtful accounts was $14.742 million at September 30, 2018.
- Cash and cash equivalents were $0.324 million, down from $4.587 million at December 31, 2017. Current assets of $41.208 million were below current liabilities of $112.080 million, a working-capital deficit of approximately $70.9 million.
- The cash-flow statement reports nine-month operating cash use of $1.730 million, investing cash use of $1,902 and no financing cash flow. Cash declined by $4.263 million, including a $2.531 million adverse exchange-rate effect.
- Reported debt and lease obligations included $5.815 million in short-term bank loans, $21.136 million in long-term debt and $16.634 million in capital-lease obligations. Total liabilities were $149.850 million. Parent-company stockholders’ equity was negative $13.250 million, while total equity was $7.442 million, including non-controlling interests.
Material changes and unusual items
- Fruit-beverage sales, the largest product category, dropped sharply amid competition and a shift toward online grocery delivery. Production declines increased fixed cost per unit; the company reported negative quarterly gross margin overall.
- The company recorded $5.8 million of expense and liability in the third quarter related to a disputed supplier-financing guarantee proceeding. Separately, a court ruling upheld a Cinda equipment-financing judgment of approximately RMB 85.0 million, or $12.35 million, plus related costs.
- Huludao Wonder’s approximately $5.8 million bank loan remained subject to litigation; a July 2018 verdict directed transfer of pledged assets toward repayment. The company said the subsidiary planned to seek bankruptcy after board approval.
- Management disclosed corrections to prior disclosures of the bad-debt allowance and orchard lease assets. It said the errors did not affect the financial statements and prior statements were not restated.
- The company issued substantial equity in 2018 for acquisitions, creditor-rights purchases and services. Shares issued and outstanding were 26.071 million at September 30; the filing reported 31.017 million outstanding at November 15.
Outlook, risks and controls
- The filing states there is substantial doubt about the company’s ability to continue as a going concern, citing limited cash, insufficient established revenue to cover costs, losses and dependence on executing its new strategy or obtaining financing. The filing says the new businesses had not generated significant revenue and financial statements contain no adjustments for a possible failure to continue as a going concern.
- Management expected the blockchain-based shared shopping mall platform to begin operating in December 2018 and anticipated completing proposed spin-offs in the second quarter of 2019. These are forward-looking expectations, not reported outcomes.
- Several capital projects were suspended or delayed because of insufficient cash, environmental requirements or unreceived government support; the filing describes prior impairments on major projects. The company expected to complete the kiwi-orchard purchase process in the third quarter of 2019, subject to valuation, approvals and a definitive agreement.
- The filing identifies risks from operating losses, lack of financing, customer and market competition, volatile fruit costs, seasonality, PRC regulation and currency controls, unresolved litigation, and uncertain blockchain and cryptocurrency regulation. It also reports that IB-LIVE sales targets had not been met and the parties were renegotiating terms.
- Management concluded disclosure controls were ineffective and reported a material weakness in internal control over financial reporting, citing insufficient accounting personnel with U.S. GAAP and SEC-reporting expertise.
Most important facts for investors to verify
- Whether the company can fund operations and address its approximately $70.9 million working-capital deficit; verify any subsequent financing, cash flows or creditor actions.
- The collectability of receivables and the basis and adequacy of the $14.932 million bad-debt charge and related allowance.
- The status and potential cash or asset consequences of the bank, Cinda and other legal proceedings, including pledged assets and Huludao’s planned bankruptcy.
- Progress, launch timing, funding requirements and actual revenue generation for the shopping mall, blockchain and other new-business initiatives.
- Reconcile filing inconsistencies: the cash-flow statement reports operating cash use of $1.730 million, while MD&A cites $2.3 million; the segment reconciliation’s third-quarter loss before tax of $5.512 million does not match the consolidated statement’s $18.101 million net loss or the reported consolidated operating expenses.