Future FinTech Group Inc. (then SkyPeople Fruit Juice, Inc.) — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; financial statements are unaudited. The company’s filing name was SkyPeople Fruit Juice, Inc.; it reported that it expected to change its name to Future FinTech Group Inc. in Q2 2017. Its operations were principally fruit-juice and fruit-product businesses in China.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Revenue | $2.96 million | $5.44 million; down 46% |
| Gross profit / margin | $0.53 million / 18% | $0.04 million / about 1% |
| Operating expenses | $3.05 million | $1.54 million |
| Operating loss | $2.52 million | $1.50 million |
| Net loss attributable to company shareholders | $2.65 million; basic loss per share $0.64 | $1.07 million; basic loss per share $0.30 |
| Cash flow from operations | $(0.64) million | $0.40 million provided |
| Cash and cash equivalents | $2.46 million | $1.14 million at December 31, 2016 |
| Working capital | $23.72 million | Management compared this with $50.98 million at March 31, 2016 |
| Total assets / liabilities | $262.91 million / $94.57 million | $261.66 million / $91.47 million at December 31, 2016 |
| Short-term bank loans / capital lease obligations | $29.52 million / $16.59 million | $29.36 million / $14.49 million at December 31, 2016 |
Gross-margin improvement reflected higher margins in beverages, kiwifruit products, and pear juice, but it did not offset the operating-expense increase. General and administrative expense rose to $2.86 million, primarily from amortization of land-use rights; selling expense fell to $0.19 million. Other income was $0.14 million, versus $0.44 million, as prior-year subsidy and interest income declined. Q1 2017 included a $48,685 loss from discontinued operations.
Material changes and operating developments
- Apple-related revenue fell 81% to $1.02 million, reflecting lower sales volumes and weak export demand. The company said its Yingkou and Huludao facilities did not operate apple-concentrate production in Q1 2017.
- Fruit-beverage revenue rose to $0.82 million from $2,000, with management citing increased marketing and sales volume. Beverages represented 28% of revenue, compared with none in Q1 2016; concentrates represented 72%.
- Huludao Wonder was being wound down following persistent losses; it recorded a $2.4 million equipment impairment in 2016. The company intended to transfer equipment to another subsidiary and sell land and facilities when circumstances were favorable.
- The company terminated a proposed 51% share sale to NSR after required approvals and payment were not obtained; ownership was transferred back to the company on March 15, 2017.
- In March, subsidiaries agreed to establish an agricultural commodity trading venture with a partner, with total proposed registered capital of RMB 50 million. It was not yet registered as of the filing.
- After quarter-end, the company sold 862,097 shares at $3.10 each for gross proceeds of $2.67 million and issued accompanying warrants, exercisable at $5.20 per share. It also reported plans to acquire an affiliated e-commerce company holding certain Chinese online-financial-service licenses; the transaction remained subject to registration.
Liquidity, outlook, risks, and contingencies
- Management expected cash on hand, operating cash flows, anticipated receipts, and trade credit to cover projected operating needs for at least 12 months, excluding possible expansion spending. Operating activities used cash in Q1, while financing provided $1.98 million. Investing activities used $0.11 million.
- Significant balances include a $29 million deposit for a proposed kiwi-orchard purchase, still subject to valuation, approvals, and a definitive agreement; and $57.17 million of advances and other current assets, mainly orchard lease prepayments. Management expected the orchard purchase process to finish in Q3 2017.
- Management projected completion of major Yidu and Mei County project facilities in Q2 2017 and the Yidu distribution center in Q4 2017. Construction at the Suizhong project was suspended. These were plans, not guaranteed outcomes; the filing cautioned that quarterly results may not predict full-year results.
- Two significant legal matters remained unresolved: a supplier-guarantee dispute involving approximately $6.1 million, pending a court decision; and a lender’s suit over a matured RMB 40 million loan (reported as approximately $6.35 million), plus interest, against the Huludao subsidiary. The court froze certain pledged property from transfer. The company disputed the interest and had not reached an agreement with the lender.
- Huludao also had a reported $5.80 million outstanding bank loan, with interest disputed and payment stopped during 2016. The filing text does not clearly reconcile this amount with the separate RMB 40 million loan litigation.
- Disclosure controls and internal control over financial reporting were deemed ineffective due to a material weakness: insufficient accounting personnel with U.S. GAAP and SEC-reporting expertise. Management described remediation steps, including hiring an assistant and plans for additional qualified staff and consultants.
- The business is seasonal and exposed to weather, volatile fruit prices, and export-market demand. Two suppliers accounted for 74% of purchases in Q1 2017. Management reported no off-balance-sheet arrangements. The filing did not provide formal earnings or revenue guidance.
Most important facts for investors to verify
- Whether the company’s low cash balance and negative operating cash flow remain consistent with management’s 12-month liquidity assessment.
- Recoverability and use of the large orchard deposit and prepaid lease balances, including progress on approvals, valuation, and project completion.
- Outcomes and potential financial exposure from the supplier-guarantee case and Huludao loan litigation, including the relationship between the disclosed loan amounts.
- Progress in remediating the material weakness in financial reporting controls and any subsequent changes in control effectiveness.
- Execution and economics of the post-quarter equity and warrant financing, planned name change, and proposed affiliated e-commerce acquisition.