Future FinTech Group Inc. — FY2020 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2020, and was filed April 15, 2021. Future FinTech shifted from fruit-juice production to blockchain-enabled e-commerce and related technology. Its continuing businesses include Chain Cloud Mall (CCM), cross-border platform NONOGIRL, and blockchain and financial-technology services. NONOGIRL formally launched in July 2020. The legacy juice business was sold in February 2020 and reported as discontinued operations; the company also disposed of or closed other businesses during 2020.
Key financial results
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue from continuing operations | $370,657 | $941,117 |
| Gross profit | $335,371 | $449,989 |
| Gross margin | About 90% | About 48% |
| Loss from operations | $15.02 million | $7.58 million |
| Loss from continuing operations | $30.02 million | $11.11 million |
| Net income (loss), including discontinued operations | $88.93 million | $(27.07) million |
| Operating cash flow | $(2.27) million | $(10.14) million |
| Investing cash flow | $(5.36) million | $(0.05) million |
| Financing cash flow | $17.18 million | $3.23 million |
Reported 2020 net income was driven by a $119.43 million gain on disposal of discontinued operations, not by continuing operating performance. Basic and diluted loss per share from continuing operations were both $0.79, compared with $0.35 in 2019.
Revenue mix and margins. CCM membership revenue was about $338,000, approximately 91% of continuing revenue; merchandise sales were about $9,000 and other revenue about $23,000. CCM membership gross margin was reported at 99%. The company attributed lower revenue primarily to fewer new member subscriptions and reduced e-commerce sales, with COVID-19 restrictions hampering its meeting- and conference-based promotion model.
Liquidity, debt and assets. At year-end, cash and cash equivalents were $9.79 million; working capital was approximately $10.34 million, calculated from reported current assets of $15.52 million and current liabilities of $5.18 million. Total liabilities were $7.20 million and total stockholders’ equity was $8.73 million. Reported obligations included $1.16 million of convertible notes, $0.39 million of loans payable, $1.91 million due to related parties and $0.29 million of lease liabilities. A $5.36 million loan receivable, bearing 10% annual interest and due June 27, 2021, was outstanding; its valuation was identified as a critical audit matter.
Material changes versus the prior year
- Continuing revenue fell 61%, from $0.94 million to $0.37 million. Gross profit declined, although gross margin increased as membership fees made up a greater share of revenue.
- Continuing-operations loss widened to $30.02 million from $11.11 million. The audited statements report $5.94 million of stock-compensation expense, $3.36 million of bad-debt provision, $1.76 million of intangible-asset impairment, $12.25 million of equity-investment impairment and $2.60 million of loss on debt settlement and conversion.
- Cash increased by $9.60 million, principally through financing: the company reported $10.26 million net proceeds from common-stock issuance and $6.09 million proceeds from secured convertible notes, among other financing items. Shares issued and outstanding rose from 33.81 million to 50.05 million during 2020.
- The company fully impaired its $12.25 million investment in InUnion Chain (INU), citing the investee’s cessation of operations. It also impaired CCM platform intangible assets.
- The February 2020 sale of the juice-related business and subsequent portfolio exits materially changed the balance sheet and produced the large disposal gain included in 2020 net income.
Outlook, risks and unusual items
- Going concern: The auditor issued an unqualified opinion but highlighted substantial doubt about the company’s ability to continue as a going concern, citing recurring operating losses and net capital deficiency. Management said continued viability depends on executing its new strategy and attaining profitable operations. The financial statements include no adjustments for a possible failure to continue as a going concern.
- COVID-19: Management said the pandemic materially adversely affected business, particularly in the first half of 2020, through office closures, supply and logistics disruption, reduced customer spending and restrictions on in-person promotion. Further impact was uncertain.
- Control weakness: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end because the company lacked sufficient personnel with U.S. GAAP and SEC-reporting expertise. It described hiring a more experienced CFO and engaging consultants as remediation steps.
- PRC and platform risks: The e-commerce business relies on a contractual VIE structure because foreign ownership restrictions apply to certain Chinese internet businesses. The company also identified regulatory uncertainty around e-commerce, blockchain, data privacy and its membership/referral model, including possible pyramid-selling concerns.
- Litigation and regulatory matters: FT Global Capital sued in January 2021 and claimed approximately $7 million in damages and attorneys’ fees; the company disputes the claim. The company also disclosed that it received an SEC Division of Enforcement subpoena in February 2020 concerning, among other matters, accounting procedures, management oversight and the HeDeTang sale; the filing does not state a resolution.
- Post-year-end financing and transactions: The company reported completed registered offerings with gross proceeds of $15.0 million in January 2021 and $11.9 million in February 2021, and an approximately $35 million offering in April 2021. It agreed to acquire 60% of Ticode for 7,789,882 shares. The amended proposed acquisition of 90% of Hong Kong asset manager Nice Talent has a HK$144 million share-based purchase price, with portions contingent on 2021 and 2022 EBIT targets. These are subsequent developments, not FY2020 results.
- Presentation inconsistencies: The MD&A narrative and tables do not consistently match the audited financial statements. For example, MD&A cites a $53.48 million continuing-operations loss and $1.41 loss per share, while the audited statements report $30.02 million and $0.79, respectively. MD&A also gives operating-expense and operating-cash-flow figures that differ from the audited statements. The audited statements are used for the metrics above; the filing text does not provide a clear reconciliation.
Most important facts for investors to verify
- Reconcile MD&A figures with the audited financial statements, especially continuing loss, EPS, operating expenses and operating cash flow.
- Review the disposal accounting and the reported $119.43 million gain, including the varying disposal-gain amounts described in the filing.
- Assess collectability, repayment timing and credit support for the $5.36 million loan receivable, and verify subsequent repayment or impairment information.
- Track operating cash burn, financing dependence, convertible obligations, dilution and the terms and use of proceeds from post-year-end offerings.
- Monitor progress toward remediating the material weakness and any developments in the going-concern assessment.
- Check the status and potential exposure from the FT Global lawsuit and SEC subpoena, and assess the enforceability and regulatory risks of the PRC VIE structure.
- Test whether the e-commerce platforms can grow active members, merchandise sales and recurring revenue beyond the reported 2020 base.