Future FinTech Group Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; filed November 20, 2017. Future FinTech, formerly SkyPeople Fruit Juice, produces and sells fruit concentrates and beverages, and other fruit products, primarily in China. It also describes wholesale and online trading activities.
Financial performance and liquidity
| Metric | Q3 2017 | Nine months 2017 | Comparable 2016 period |
|---|---|---|---|
| Revenue | $4.44 million | $10.18 million | $10.59 million; $26.26 million |
| Gross profit (loss) | $(0.08) million | $1.75 million | $3.07 million; $6.32 million |
| Gross margin | (2)% | 17% | 29%; 24% |
| Operating expenses | $8.88 million | $15.32 million | $2.12 million; $5.42 million |
| Net loss attributable to Future FinTech, including discontinued operations | $(9.27) million | $(14.46) million | $(0.42) million; $(1.10) million |
- Basic loss per share was $1.90 for Q3 and $3.04 for the nine months, compared with $0.28 for each comparable 2016 period.
- Nine-month operating cash flow was $1.46 million, versus $34.11 million in 2016. Investing activities used $0.19 million; financing activities provided $6.41 million. Foreign-exchange effects reduced cash by $4.28 million.
- Cash and cash equivalents were $4.55 million at September 30, 2017, up from $1.14 million at year-end 2016. Working capital was $15.18 million.
- Total current assets were $98.58 million and current liabilities $83.40 million. Current liabilities included $30.84 million of short-term bank loans; non-current capital-lease obligations were $17.30 million. Total liabilities were $100.70 million.
- Management said projected operating cash flows, anticipated receipts, cash on hand and trade credit should meet operating needs for at least 12 months, excluding possible production-expansion spending.
Changes and management commentary
- Nine-month revenue fell 61%; Q3 revenue fell 58%. Across the nine months, sales declined in all major categories: apple products 78%, pear juice 83%, beverages 31%, and kiwi products 10%.
- Management cited weaker demand and competition, falling export demand and prices for apple concentrate, lower beverage volume and selling prices, and higher raw-material costs. Beverage sales made up 69% of nine-month revenue, versus 38% in 2016.
- Nine-month gross margin declined to 17% from 24%. Q3 gross margin was negative, with beverages also recording a gross loss, which management attributed to lower production, fixed-cost absorption and price competition.
- General and administrative expense rose to $14.59 million from $2.70 million for the nine months. The company attributed the increase principally to $6.7 million of legal-proceeding expenses recorded in Q3 and orchard-lease amortization of $4.5 million for the nine months. Nine-month other income was $2.28 million, including $0.92 million of subsidies.
- Operations are seasonal. The company said weaker apple-concentrate economics led its Yingkou and Huludao facilities to cease production of that product; Huludao is being wound down and is reported as discontinued operations.
Risks, contingencies and notable items
- The company recorded a $6.0 million liability and expense in Q3 for supplier-related guarantee enforcement proceedings; settlement discussions continued. It also recorded liabilities for court judgments of approximately $55,000, $588,000 and $269,000.
- Huludao Wonder had an outstanding bank loan reported at approximately $5.8 million, plus disputed interest. The lender sued, and the company said it expected repayment after asset sales. The court had temporarily frozen pledged land and property from transfer.
- A roughly $30 million deposit for a proposed kiwi-orchard purchase remained in other receivables. The valuation was incomplete and government approval and a definitive agreement were still required. The filing gives differing expected completion dates: Q4 2017 in MD&A and Q2 2018 in the notes.
- Construction and investment projects faced delays, including from tighter environmental requirements; the Suizhong project was suspended. Fruit prices are volatile, and the business is exposed to seasonal supply, competition and export-market conditions.
- Management reported ineffective disclosure controls and a material weakness in internal control over financial reporting, citing insufficient accounting personnel with appropriate U.S. GAAP and SEC-reporting expertise. Remediation efforts were underway.
- Subsequent to quarter-end, the company disclosed proposed creditor-rights acquisitions for approximately $27.3 million, partly payable in shares, and a proposed $16.4 million share sale to a major shareholder. Both depended on shareholder approval, including an increase in authorized common shares. These were proposed transactions, not completed quarter-end results.
- The company had no formal financial guidance in the supplied filing text. Its stated liquidity expectation is management’s outlook, not a guarantee.
Important facts for investors to verify
- Whether the $6.0 million guarantee matter and other judgments will settle, and the amount and timing of payments.
- The status, recoverability and current expected timing of the $30 million orchard-purchase deposit, given the conflicting completion dates.
- Cash conversion and asset quality: a significant portion of current assets is in other receivables and supplier advances, while cash was $4.55 million.
- Progress in remediating the disclosed material weakness and improving U.S. GAAP and SEC-reporting controls.
- Shareholder approval and final terms of the proposed acquisitions, share issuance, financing and authorized-share increase, including potential dilution.
- Operating recovery and margins amid lower revenue, competition, seasonal production, project delays and weaker concentrate markets.