Business Overview and History
Future FinTech Group Inc. (NASDAQ:FTFT) is a comprehensive financial and digital technology service provider that has undergone a remarkable transformation over the years. Founded in 2005 as a fruit juice concentrate manufacturer in China, the company has since pivoted its business model to focus on various fintech-related services, showcasing its resilience and adaptability in the face of changing market dynamics.
Future FinTech's journey began in the early 2000s when it was primarily engaged in the production and sale of fruit juice concentrates, including fruit purees and fruit juices, as well as fruit beverages such as fruit juice beverages and fruit cider beverages in China. However, the company faced increasing production costs and tightened environmental regulations in the country, prompting it to undergo a strategic shift in its operations.
In early 2022, the company established Future Trading Chengdu Co., Ltd. to provide bulk commodities supply chain financing services and trading. This move marked a significant step in the company's transition towards financial technology-related services. In the same year, Future FinTech and its wholly-owned subsidiary Future Fintech Hong Kong Limited jointly acquired 100% equity interest of KAZAN S.A., a company incorporated in the Republic of Paraguay, with the intention of developing bitcoin and other cryptocurrency mining and related service businesses in Paraguay. However, this venture did not materialize as planned, and KAZAN S.A. was dissolved in December 2023.
A significant milestone in the company's expansion came in September 2022 when FTFT UK Limited, a wholly-owned subsidiary of Future FinTech, completed the acquisition of 100% of the issued and outstanding shares of Khyber Money Exchange Ltd., a money transfer company regulated by the UK Financial Conduct Authority. As part of the closing, the company renamed Khyber Money Exchange Ltd. to FTFT Finance UK Limited.
Further expanding its portfolio, in November 2023, Future FinTech Hong Kong Limited, the company's wholly-owned subsidiary, completed the acquisition of 100% equity interest of Alpha International Securities Hong Kong Limited, a company holding Type 1, Type 2, and Type 4 financial licenses issued by the Hong Kong Securities and Futures Commission. Simultaneously, the company acquired 100% equity interest of Alpha Information Service Shenzhen Co., Ltd., which provides technical support services to Alpha International Securities Hong Kong Limited. These acquired entities were renamed FTFT International Securities and Futures Limited and FTFT Information Services Shenzhen Co. Ltd., respectively.
It's worth noting that Future FinTech's business and operations are principally conducted by its subsidiaries in China and Hong Kong. In January 2023, the company took a significant corporate action by filing Articles of Amendment to amend its Second Amended and Restated Articles of Incorporation, authorizing and approving a 1-for-5 reverse stock split of the company's authorized shares of common stock from 300 million shares to 60 million shares.
The company operates in three main segments: supply chain financing service and trading business, asset management service, and others. The company's main business includes supply chain financing services and trading in China, asset management business in Hong Kong, and cross-border money transfer service in the UK. The company has also expanded into brokerage and investment banking business in Hong Kong and cryptocurrency mining farm in the US.
It's important to note that the company had contractual arrangements with a Variable Interest Entity (VIE), E-Commerce Tianjin in China, which generated minimal revenue and business since 2021 due to the negative impact of COVID-19. The company started the process to close it down in November 2023 and completed deregistration and dissolution of the VIE in March 2024.
Financial Performance and Ratios
Over the past few years, Future FinTech's financial performance has been mixed, reflecting the challenges it has faced during its business transformation. In the fiscal year ended December 31, 2023, the company reported revenue of $34.87 million, a decrease from the $23.88 million reported in the previous year. This decline was primarily driven by a slowdown in the company's supply chain financing and trading business, as the real estate, infrastructure, and overall economy in China experienced a downturn.
The company's gross profit margin for the fiscal year 2023 stood at 14.00%, a decrease from the 22.58% reported in the prior year. This compression in margins was largely due to higher supply chain financing and trading costs during the year.
Future FinTech's net income for the fiscal year 2023 was a loss of $33.65 million, compared to a loss of $13.63 million in the previous year. The significant increase in net losses was primarily attributable to higher operating expenses, including increased professional service fees, internal control training costs, and bad debt provisions.
The company's annual operating cash flow for the fiscal year 2023 was negative $17.23 million, while the annual free cash flow stood at negative $17.46 million, indicating significant cash outflows from operations and investments.
Liquidity
The company's liquidity position remained relatively strong, with a current ratio of 2.68 as of September 30, 2024, indicating its ability to meet its short-term obligations. The company's quick ratio also stood at 2.68, suggesting a strong ability to cover its current liabilities with its most liquid assets.
Future FinTech's debt-to-equity ratio stood at 0.062 as of September 30, 2024, suggesting a conservative capital structure and a low level of financial leverage.
The company's cash and cash equivalents decreased from $29.66 million at the beginning of the fiscal year 2023 to $6.52 million as of September 30, 2024, reflecting the company's significant cash outflows from operating and investing activities. It's worth noting that the company does not have access to a revolving credit facility.
Quarterly Performance and Outlook
In the most recent quarter ended September 30, 2024, Future FinTech reported revenue of $5.18 million, a significant decrease of 78.20% from the $23.74 million reported in the same period of the previous year. This decline was primarily driven by a drop in revenue from the company's supply chain financing and trading business, as the demand for sand, steel, and coal decreased during the quarter due to the economic slowdown in China.
The company's gross profit margin for the third quarter of 2024 improved to 29.25%, compared to 5.95% in the same period of the previous year. This improvement was mainly due to higher profit margins from the company's supply chain financing and trading business, as well as an increase in revenue from its other business segments, including debt recovery consulting services and U.S. dollar bond services.
However, Future FinTech's net loss from continuing operations increased to $4.88 million in the third quarter of 2024, compared to a net loss of $2.39 million in the same period of the previous year. This increase in net losses was primarily attributed to higher operating expenses, including a significant increase in bad debt provisions.
Segment Performance
Supply Chain Financing and Trading Segment: During the nine months ended September 30, 2024, this segment generated $935,310 in revenue, representing 6.4% of the company's total revenue. Gross profit for this segment was $142,880, with a gross margin of 15.3%. The decrease in revenue compared to the prior year period was primarily due to decreased demand for sand, steel, and coal in China as the overall economy slowed.
Asset Management Segment: For the nine months ended September 30, 2024, this segment generated $11.88 million in revenue, accounting for 82.0% of the company's total revenue. Gross profit for this segment was $3.94 million, with a gross margin of 33.1%. The increase in revenue compared to the prior year period was driven by the company's efforts to hire more experienced account managers to boost its asset management services.
Other Segment: During the nine months ended September 30, 2024, this segment generated $1.69 million in revenue, representing 11.6% of total revenue. Gross profit for the other segment was $981,110, with a gross margin of 58.0%. The increase in revenue and profitability was primarily due to the addition of new revenue streams like debt recovery consulting and U.S. dollar bond services.
Risks and Challenges
Future FinTech faces several risks and challenges as it navigates the evolving fintech landscape. One of the primary concerns is the company's heavy reliance on its supply chain financing and trading business, which has been impacted by the economic slowdown in China. The company's ability to diversify its revenue streams and reduce its dependence on this segment will be crucial to its long-term success.
Additionally, the company's recent acquisitions, such as NTAM and Khyber Money Exchange Ltd., bring integration risks and the need to effectively manage these new business units. Failure to seamlessly integrate these acquisitions could negatively impact the company's financial performance and synergies.
The fintech industry is also highly competitive, with numerous players offering similar services. Future FinTech's ability to differentiate its offerings and maintain a competitive edge will be essential to its growth.
Furthermore, the company's operations in China and Hong Kong expose it to regulatory risks, as the region has seen increased scrutiny and tighter controls on various industries, including fintech. Future FinTech must closely monitor and adapt to these evolving regulatory environments to ensure compliance and continuity of its business.
The company also faces potential risks related to ongoing legal issues. In January 2021, FT Global Capital, Inc. (FT Global), a former placement agent of the company, filed a lawsuit against Future FinTech in the Superior Court of Fulton County, Georgia. FT Global alleged claims related to an alleged breach of an exclusive placement agent agreement between FT Global and the company in July 2020. On April 11, 2024, the jury returned a verdict in favor of FT Global, and the Court entered a judgment awarding FT Global $8.88 million. On April 16, 2024, the Court issued an amended judgment, awarding FT Global $10.60 million, which includes $7.90 million in damages, $1.72 million in prejudgment interest, and $980,000 in attorneys' fees. The company filed a post-trial motion challenging the judgment on May 9, 2024, which remains pending.
The ongoing COVID-19 pandemic and potential new variants continue to pose risks to the company's operations. The quarantines, travel restrictions, and temporary closures of office buildings in China have materially negatively impacted the company's business. Any new variant and outbreak of COVID-19 might disrupt the company's supply chain, logistics providers, customers, or marketing activities, which could materially adversely impact the business and results of operations.
Lastly, there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, which may affect the company's business operations in China.
Conclusion
Future FinTech Group Inc. (NASDAQ:FTFT) has demonstrated its resilience and adaptability by successfully navigating a significant business transformation. The company's pivot from its traditional fruit juice manufacturing operations to a comprehensive fintech service provider has opened up new avenues for growth and diversification.
However, the company faces several challenges, including the economic slowdown in China, integration risks from recent acquisitions, and the need to maintain a competitive edge in the highly competitive fintech industry. The ongoing legal issues and potential regulatory risks in its operating regions add further complexities to its business landscape.
As Future FinTech continues to execute its strategic plan, investors will closely monitor the company's ability to capitalize on emerging opportunities, diversify its revenue streams, and effectively manage the risks inherent in its evolving business model. The company's success will largely depend on its ability to navigate these challenges while leveraging its strengths in asset management, supply chain financing, and other financial services to drive sustainable growth and profitability in the long term.