Future FinTech Group Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; filed May 22, 2023. The company is a Florida holding company with businesses in asset management, supply-chain financing and trading, e-commerce, money transfer, and cryptocurrency-related activities. Financial results are unaudited.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Revenue | $3.39 million | $3.47 million, down 2.1% |
| Gross profit and margin | $1.21 million; 35.6% | $1.79 million; 51.6% |
| Operating loss | $2.63 million | $2.68 million |
| Net loss | $2.25 million; $2.18 million attributable to Future FinTech | $2.70 million; $2.52 million attributable to Future FinTech |
| Basic and diluted loss per share | $0.15 | $0.19 basic; $0.18 diluted |
| Operating cash flow | $(10.44) million | $(0.64) million |
Asset management generated $3.16 million of revenue, down 8.5%, and $1.06 million of gross profit. Supply-chain financing/trading contributed $0.11 million of revenue and $0.11 million of gross profit, versus no revenue in the prior-year quarter. Overall gross margin fell mainly because asset-management margins declined, which management attributed to higher salaries and staffing.
At March 31, cash and cash equivalents were $16.16 million and restricted cash was $3.64 million, for combined cash and restricted cash of $19.80 million. Total current assets were $65.19 million and current liabilities $20.36 million; working capital was approximately $44.83 million. Total assets were $85.06 million and total liabilities $21.04 million. Notes payable were $3.64 million, due in 2023, at a stated effective annual rate of 0.05%; operating lease liabilities totaled $0.98 million. The filing reports no debt default.
Cash and restricted cash decreased $9.94 million during the quarter. Operating cash use was driven principally by a $10.56 million increase in advances to suppliers and other current assets. Investing activities provided $0.16 million; financing activities provided no cash.
Material changes and developments
- Revenue declined modestly, but gross profit fell 32.5% and gross margin contracted 16 percentage points.
- Operating expenses decreased to $3.84 million from $4.46 million, including lower research and development and selling expenses and no investment impairment charge, compared with $0.25 million in Q1 2022. Net loss narrowed primarily due to lower operating expenses.
- Cash use from operations increased substantially year over year, while supplier advances and other current assets rose to $15.23 million from $4.67 million at year-end.
- The company began sand and steel supply-chain financing/trading in Q1 2023. A proposed acquisition of Alpha International Securities (Hong Kong) and its technical-services affiliate remained subject to Hong Kong SFC approval and had not closed.
- A 1-for-5 reverse stock split took effect February 1, 2023. The company reported 14,645,653 common shares outstanding at May 22, 2023.
Outlook, risks, contingencies, and unusual items
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing operating losses and negative operating cash flow. Continued viability depends on executing its strategy and eventually achieving profitable operations. The filing provides no quantified earnings or revenue guidance.
- Liquidity and collections: Management attributed the cash decline to increased supply-chain business prepayments. Loan receivables were $19.04 million at quarter-end. The notes report post-quarter repayments on several loans, including full repayment of certain loans and partial repayment of another by April 17, 2023; approximately $2.18 million remained due within three months on one loan. A $2.40 million consulting deposit was repaid on May 18, 2023 after the agreement was terminated.
- Concentration and credit exposure: One customer represented 84.78% of Q1 2023 revenue. The three largest accounts represented 70.26% of net accounts receivable; $1.14 million of receivables was over 90 days past due. One vendor represented 16.56% of purchases.
- Legal contingency: Former placement agent FT Global claims approximately $7.0 million in damages and attorneys’ fees. The company disputes the claims and filed a motion for summary judgment; the matter remained pending in the disclosed information.
- China and VIE risks: The company consolidates a China-based variable interest entity through contractual arrangements rather than equity ownership. It warns that PRC regulators could challenge the structure or impose requirements that adversely affect operations, securities offerings, or share value. The filing also describes regulatory, cross-border data, and geopolitical uncertainties.
- Internal controls: Management concluded disclosure controls were ineffective because of a material weakness involving insufficient accounting personnel with U.S. GAAP and SEC-reporting expertise. The company described use of an outside consultant and planned remediation steps.
- Other items: The remaining 40% of the Nice Talent acquisition consideration, approximately $7.39 million, was still unpaid in company shares. The filing also reports approximately $31.75 million of PRC subsidiary net assets subject to distribution restrictions.
Important facts for investors to verify
- Whether operating cash use and supplier prepayments can be reduced, and whether reported loan repayments and the consulting-deposit refund were received as disclosed.
- How concentrated revenue and receivables are among major customers, and the collectability and aging of overdue balances.
- Progress toward addressing the going-concern uncertainty and remediating the material weakness in internal controls.
- The status and potential exposure of the FT Global lawsuit, and the treatment and timing of the Nice Talent share consideration.
- Whether the proposed Alpha transaction receives SFC approval, and any developments affecting the company’s China VIE structure or regulatory compliance.