Future FinTech Group Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; filed May 18, 2018. The unaudited consolidated statements are prepared under U.S. GAAP. The company’s principal operations include fruit products and beverages in China, alongside supply-chain, e-commerce and developing blockchain and financial-technology activities.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 or prior balance-sheet date |
|---|---|---|
| Revenue | $562,146 | $2,958,834 |
| Gross profit / margin | $62,586 / about 11% | $534,614 / about 18% |
| Operating expenses | $2,843,328 | $3,050,208 |
| Operating loss | $2,780,742 | $2,515,594 |
| Interest expense | $445,594 | $30,796 |
| Net loss attributable to Future FinTech shareholders | $2,791,926; basic loss per share $0.42 | $2,649,908; basic loss per share $0.64 |
| Cash used in operating activities | $487,226 | $644,391, per cash-flow statement |
| Cash and cash equivalents | $3,531,302 | $4,586,757 at December 31, 2017 |
| Current assets / current liabilities | $61.12 million / $118.04 million | $61.99 million / $117.97 million at December 31, 2017 |
| Total liabilities / total equity | $159.36 million / $33.21 million | $157.73 million / $32.95 million at December 31, 2017 |
| Debt and capital leases | $6.36 million short-term bank loans; $23.12 million long-term debt; $18.20 million capital-lease obligations | $6.12 million; $22.25 million; $17.51 million, respectively, at December 31, 2017 |
Working capital was negative $56.92 million at March 31, 2018. Cash decreased by $1.06 million during the quarter; investing activities used $1,978 and financing activities provided no cash. Accrued expenses were $99.91 million, and the filing’s balance sheet does not provide a clear breakdown of that amount. Management said projected operating cash flows, receipts, cash on hand and trade credit should cover operating needs for at least 12 months, excluding potential expansion spending.
Changes versus the prior-year quarter
- Revenue fell 81%, principally reflecting lower sales across juice concentrates and beverages. Beverage revenue declined 60%; apple-related and pear concentrate sales also fell sharply. Management cited reduced customer demand, intense competition and a shift by consumers toward online grocery delivery.
- Gross margin declined to about 11% from 18%. Management attributed weaker segment margins mainly to lower production and higher fixed costs per unit; the company also purchased apple concentrate from third parties to meet demand.
- Operating expenses decreased about 7%, but the operating loss widened as the gross-profit decline outweighed those savings. General and administrative expense benefited from lower depreciation following prior-year asset impairments.
- Interest expense rose substantially, which management attributed mainly to penalty interest on overdue bank loans. The company reported a $3.23 million loss from continuing operations before tax, compared with $2.37 million in Q1 2017.
- Sales were highly concentrated: one customer represented more than 87% of Q1 2018 sales, and the five largest customers accounted for approximately 100%, versus no customer above 10% in Q1 2017.
Outlook, risks and unusual items
- Strategy and outlook: The company anticipated completing planned spin-offs in Q3 2018 and described an intended focus on online product sales, supply-chain and trading activities, blockchain software and DCON digital-asset services. It gave no quantified financial guidance. Some projects were delayed or suspended because of cash constraints, environmental requirements or lack of forecast cash flows. Management said it expected to complete the Mei County trading-center investment in Q3 2018 and expected the kiwi-orchard purchase process to proceed in 2018.
- Liquidity and borrowing risk: Negative working capital, limited cash and multiple overdue loans and enforcement actions create significant liquidity and refinancing risks. Management described banks’ early collection actions as disrupting its plans, while stating that discussions with lenders were ongoing.
- Litigation and contingencies: The company recorded approximately $6.0 million of expense and liability in Q1 2018 for Cinda-related guarantee enforcement proceedings. In March 2018, a court ruled against subsidiaries in a separate Cinda equipment-lease case, ordering payment of approximately RMB 84.97 million plus fees and expenses; the company appealed. Other loan and supplier disputes, pledged or seized assets, and unsuccessful asset auctions are also described. The filing does not establish the final amounts or outcomes of these matters.
- Assets and operating changes: The company reported $36.75 million of other receivables, mainly a $31.81 million deposit for a kiwi orchard purchase that remained subject to valuation, approvals and a definitive agreement. Deposits totaled $68.91 million, mainly including prepaid orchard leases. Huludao Wonder remained a discontinued operation, with a $49,571 quarterly loss and a $6.12 million bank loan outstanding; the lender had sued over principal and interest.
- Equity transactions: In February, the company issued 600,000 shares under an agreement to acquire a 60% interest in DCON digital assets for total consideration of 1.2 million shares valued at $9.6 million; the remaining 600,000 shares were issued May 3, 2018. On April 6, it issued 7,111,599 shares related to creditor-rights transfers and 11,362,159 shares under a share purchase agreement. Common shares outstanding were 26,071,083 as of May 16, 2018.
- Controls: Management concluded disclosure controls and procedures were effective as of March 31, 2018 and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the cash-flow comparison: the cash-flow statement reports Q1 2017 operating cash use of $644,391, while MD&A cites $477,793.
- Review the composition, timing and settlement terms of the $99.91 million accrued-expense balance and the company’s negative working capital.
- Track cash availability, overdue loans, lender negotiations, litigation appeals and potential enforcement against pledged assets.
- Confirm the status and recoverability of orchard deposits, lease deposits, delayed projects and the discontinued Huludao assets and loan.
- Assess the impact of customer concentration, declining sales and margins, and the substantial share issuances after quarter-end on future liquidity and dilution.