Future Fintech Group Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2017. The company, formerly SkyPeople Fruit Juice, Inc., changed its name in June 2017. Its principal business remained producing and selling fruit juice concentrates, beverages and related fruit products, primarily in China.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $2.78 million | $10.23 million | $5.74 million | $15.67 million |
| Gross profit (margin) | $1.29 million (47%) | $3.21 million (31%) | $1.83 million (32%) | $3.25 million (21%) |
| Operating income (loss) | ($2.10 million) | $1.45 million | ($4.61 million) | ($45,091) |
| Net income (loss), including discontinued operations | ($2.86 million) | $134,882 | ($5.29 million) | ($918,733) |
| Net income (loss) attributable to Future Fintech, including discontinued operations | ($2.54 million) | $384,811 | ($5.19 million) | ($681,269) |
| Operating cash flow | Not separately presented | Not separately presented | $86,477 | $6.56 million |
Q2 basic and diluted loss per share were $0.50. Six-month basic loss per share was $1.14; diluted loss per share was $1.12. Although gross margin improved overall, lower sales and substantially higher general and administrative costs resulted in operating losses. G&A rose to $3.08 million in Q2 and $5.93 million for the six months, largely due to orchard lease amortization ($1.5 million and $2.0 million, respectively).
Liquidity, balance sheet and financing
- At June 30, 2017, cash was $4.42 million; current assets were $98.81 million and current liabilities were $76.74 million, for working capital of approximately $22.07 million.
- Total assets were $262.29 million and total liabilities were $93.63 million. Short-term bank loans were $30.07 million; capital lease obligations were $16.89 million.
- Six-month cash increased by $3.27 million. Financing provided $4.96 million, investing used $1.19 million, and operating activities provided only $86,477.
- A registered direct offering in April raised gross proceeds of $2.67 million from 862,097 shares at $3.10 per share, before fees. Purchasers also received warrants to buy one share per share purchased at an initial $5.20 exercise price. Shares outstanding increased to 5,173,187 by June 30, from 4,061,090 at year-end 2016.
- Management said projected operating cash flows, expected receipts, cash on hand and trade credit should cover operating needs for at least 12 months, excluding potential spending on production-capacity expansions.
Material changes and management commentary
- Revenue fell 73% year over year in Q2 and 63% in the first half. Q2 beverage sales, the largest category, declined 54%; first-half beverage sales declined 39%. Management cited heavy competition and lower sales volume.
- First-half apple-related sales fell 85%, reflecting reduced international demand, lower export prices and competition. Apple juice volume fell to approximately 1,620 tons from 6,015 tons. The company did not operate its Yingkou and Huludao apple-juice facilities during the period and bought third-party supply to meet demand.
- Huludao Wonder was classified as a discontinued operation under a wind-down plan; it recorded a $96,708 loss in the first half. The company intends to transfer equipment to another subsidiary and sell land and facilities when circumstances are favorable.
- The company reported a $29 million deposit for a proposed kiwi orchard purchase. Valuation and definitive terms remained incomplete, with government and board approvals required; the company expected completion in Q4 2017. It also reported substantial prepaid long-term orchard lease fees.
- Construction and development projects faced delays as the company adapted to tighter environmental regulations and upgraded software. Management stated plans to complete certain Yidu and Mei County facilities in late 2017 or 2018; schedules could change. Suizhong project construction was suspended.
- Management described the business as seasonal and exposed to weather, volatile fruit prices, competition and changing demand. Fruit juice concentrate production is concentrated in seasonal harvest periods.
Risks, contingencies and unusual items
- A supplier-financing dispute is pending in court: China Cinda seeks approximately RMB 39.6 million (about $6.1 million) under alleged company guarantees. The company disputes the agreements’ validity; a verdict was pending.
- Huludao Wonder faces a lender lawsuit over a matured RMB 40 million loan (about $5.8 million), plus interest. The company disputes the interest rate, had not repaid the loan, and reported that pledged land and property were temporarily frozen against transfer. No settlement had been reached.
- The filing disclosed a material weakness in internal control over financial reporting, citing insufficient accounting personnel with appropriate U.S. GAAP and SEC-reporting expertise. Management said remediation efforts were underway; disclosure controls were deemed ineffective at June 30.
- Supplier concentration was notable: two suppliers represented 59% and 11% of purchases in the first half. Other receivables included the approximately $29 million orchard-purchase deposit, while supplier advances and other current assets totaled $56.84 million.
- Other unusual items included $342,124 of subsidy income in the first half and the acquisition/consolidation of Heying from April 2017, with reported acquired net assets of $2,212.
Most important facts for investors to verify
- Whether the company can reverse the sharp revenue decline and generate sustainable operating cash flow.
- Recoverability and terms of the $29 million orchard deposit, and the nature, timing and value of the large orchard prepayments.
- Current status and potential financial exposure from the Cinda guarantee proceedings and Huludao bank-loan litigation.
- Progress on environmental approvals, construction schedules and spending for Yidu, Mei County and other projects.
- Remediation of the disclosed material weakness and improvement in financial-reporting controls.
- Potential dilution from the April offering warrants and other equity awards, alongside the company’s ongoing financing needs.