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Future FinTech: Bleak Future For This Penny Stock Which Has Surged On Bitcoin Hype

The Veneer

During the tech bubble of the late 90s and early 2000s, companies would magically be worth millions more once they attached a “.com” to the end of their name. Echoes of this phenomenon can be seen today as tired businesses attempt to associate themselves with the latest trend, and one of the particularly hot trends of today is anything involving bitcoin and blockchain.

This is the backdrop as Future FinTech (FTFT) surged nearly 600% in two days from $1.67 at the close on Jan 6th 2021 to a high of $11.29 on Jan 8th, a dramatic reversal of fortune for a company that was flirting with being delisted from the NASDAQ exchange less than a year ago due to a sub-$1.00 stock price.

The start of this surge which has left FTFT’s market cap +$400M higher was the announcement that FTFT has made a $1M investment in unknown Dominican Republic based Blocknance, a company that appears to own Bitcoin ATMs in the Dominican Republic and South America.

While little is known about Blocknance’s business, employees, or founders, they do have a really sweet video showcasing bikini clad models, yachts, and private jets, which channels a Fyre Festival like excitement. Fyre Festival was an infamously fraudulent music festival where flamboyant social media hype advertised a tropical paradise, but the actual event was a complete disaster. Blocknance’s video has 6 likes on Facebook and is a must watch in my opinion (sound on).

Source

And since this news, FTFT has continued to keep the blockchain oriented excitement front and center with vague press releases that, in my opinion, seem to be nothing but hot air and empty attempts to suggest FTFT is doing something with blockchain.

FTFT’s stock surged +30% on February 12th after one such press release which I will focus on further into this article, but first we should peel back FTFT’s novel blockchain veneer and examine their generic history in citrus farming, failed ventures, and capital destruction.

Reality – Kiwis and the blockchain of sheep farming

FTFT was initially incorporated as Cyber Public Relations in 1998. It never had much of a business at the time and was largely a dormant shell company. Our interest in the shell begins in 2008 when a reverse merger was completed with China based Pacific Industry Holding Co. (Anyone unfamiliar with the unsavory history of Chinese reverse mergers should consult Wikipedia.) The company was subsequently renamed as SkyPeople Fruit Juice.

From there on, FTFT was exclusively in the business of selling fruit and fruit juice. Their investor presentation from 2017 highlights their strategically located facilities as “uniquely suited for highly acidic apple planting”.

Source

The name change to Future FinTech came in 2017 as we’re told the company started:

initiatives include a kiwi trading center, commodities trading and e-commerce platforms in order to optimize capital flow, create partnering collaborations and capitalize on emerging high tech.

Source

While the market for kiwi trading has sadly failed to take off, the transition was enough to send FTFT’s stock price up 200% in late 2017 on speculation that, (and this might sound familiar), the company had moved into the bitcoin business…

In one of the most speculative stock moves around the bitcoin mania, the tiny stock of a former fruit juice company briefly soared more than 200 percent Tuesday. […] Traders on Twitter were quick to link the company to blockchain technology and the bitcoin craze, since Future FinTech announced in June it had changed its name from “SkyPeople Fruit Juice” to focus on financial technology.

Source

Anyone that bought into the bitcoin hype was sorely disappointed as FTFT gave up every penny of their hype inspired gains over the next few months.

Source: Compiled by author

Perhaps FTFT was ahead of the times and the market simply wasn’t ready for the disruptive forces that FTFT was ready to unleash in the form of introducing blockchain technology to… sheep farming:

Source

While it appears that blockchain based sheep farming has also been abandoned, the remaining blockchain oriented projects that FTFT is involved in appear to be an ongoing disarray.

Are you a crypto-currency company or not?

What today’s FTFT is left with is a confusing group of businesses that are somehow vaguely supposed to be related to blockchain and bitcoin. In 2018, FTFT launched DCON DigiPay, a “digital payment system” and also launches a “blockchain-based shared shopping mall”. From the start, the SEC had several questions with respect to FTFT’s new digital currency business. After some initial prodding, FTFT discloses that their block-chain based digital shopping mall (i.e. a website) did not actually accept or support digital currencies:

(2/7/19) SEC: “Please disclose whether your Shared Shopping Mall platform will provide for other digital currencies, in addition to mBTC and Bitcoin, to be exchanged on that platform and, if so, describe all such other digital currencies, their respective characteristics, and whether you believe such platform will be required to be registered as a national securities exchange, an alternative trading system or broker-dealer under the Securities Exchange Act of 1934.” (Source)

(4/2/19) FTFT: “The Shared Shopping Mall platform currently does not support or accept any digital currency payments or exchanges, including mBTC and Bitcoin. In the future, we might consider accepting mBTC or Bitcoin as the payment method on the Shared Shopping Mall.” (Source)

(8/24/20) FTFT: “The Shared Shopping Mall platform, Chain Cloud Mall (CCM) was officially launched in January 2019 and it does not provide, support or accept any digital currency payments or exchanges, including mBTC or Bitcoin.” (Source)

Again in Nov 2020, the SEC is pressing FTFT to explain what “DCON” is supposed to be and is again explicitly seeking clarification on if they conduct a digital payment system via DCON. And again FTFT answers in the negative and even discloses that this business has no meaningful revenues.

SEC: “Clarify the business of DCON. You describe it as a “technical service and support for real name and blockchain based assets,” however, your Form 10-Q for the period ended June 30, 2020 describes DCON as a “digital payment system.”

FTFT: “The Company originally acquired DCON as a digital payment system in January 2018 and has developed a mBTC and Bitcoin (NYSEARCA:BTC) exchange system so that mBTC can be used as a more practical payment method on blockchain platform for consumers. The mBTC and BTC exchange system has been built, however, the related business has not generated meaningful revenues and the Company has recently decided to implement a new business plan for DCON to use its technical capacity to provide services and support for blockchain based assets, their operating entities and other financial institutions. Although we still have mBTC exchange and payment system, it is not in active operation as a digital payment system now and our focus for DCON now is to provide technical services and support for blockchain based assets, their operating entities and other financial institutions.” (Source)

Yet here we find ourselves two months later in Jan of 2021 and FTFT is again pumping its DCON mBTC payment system… The same system which, by FTFT’s admissions after years of SEC prodding, wasn’t actually in use as a digital payment system and doesn’t have “meaningful revenues”:

Source

The latest press release and share price surge

Now that we have a better understanding of FTFT’s shifting operations, we can turn back to their recent press releases (that have sent the share price surging) and see if we can figure out what they are even saying.

From what I can gather, FTFT’s latest plans are to use a blockchain based technology to help prevent the sale of counterfeit products on their Chain Cloud Mall (CCM) platform. Yes, the same platform that was previously generating excitement for its prospects in the sheep farming industry. There is the further irony that FTFT should probably work on generating actual sales on their CCM platform, counterfeit or not, before worrying about counterfeits. In Q3 2020 they recorded $38,000 in revenues which can partially be attributed to CCM:

Source: 10-Q, page 24

Note the comments that “the Company charges RMB 1,000 (approximately $142) per year to the suppliers, who agree to adopt the QRO anti-counterfeiting code for their products, which they sell on CCM”. This is the hallowed blockchain technology.

Jan 7, 2021: Now we can look at the Jan. 7, 2021 press release where FTFT tells us they have received blockchain oriented software patents from China’s Copyright Protection Center. We’re told that:

The Company has been developing and improving an anti-counterfeiting and tracing system by using the blockchain technology for its blockchain based e-commerce platform Chain Cloud Mall (CCM). The system not only issues unique anti-counterfeiting QR codes to trace the products and ensure their authenticity, it also provides anti-counterfeiting points to consumers. After consumers are rewarded with such points, they can receive discounts and other benefits, and ultimately realize “no counterfeit in the CCM, value-added shopping experience, and more traffic and business for the stores in CCM.”

So it seems that FTFT received some patents for QR codes used on their “mall” that does a few thousand in quarterly revenues. Is this really something to get excited about? Note that there is no mention of this technology being related to cryptocurrencies or even adding a significant monetized income stream. It is simply related to combating counterfeits on a platform that barely does any sales.

Feb 12, 2021: About a month later, FTFT’s stock price was again sent surging off the back of another press release. This time, CCM has partnered with China’s “The Merchandise and Quality Week Magazine” and CCM’s chairman has been appointed to a one year role where he will apparently use FTFT’s blockchain QR code technology to fight counterfeits.

Based on the stock’s reaction, you might think that the use of blockchain based QR codes is some kind of technological breakthrough. Switzerland based startup Scantrust has been in this exact business since their launch in 2014 and has partnered with HP and SAP in their efforts. According to this article from 2019, Scantrust:

provides a copy-proof QR code solution which is used for supply chain track and trace and consumer engagement. Having launched in 2014, late last year the startup raised a $4.2 million Series A round.

Then there is the brand protection firm Noos Technologies which outright states that “Blockchain is not the answer to counterfeit” and that QR codes are “good for tracking but not good for protection”.

My conclusion is that there is no sexy cryptocurrency business here at all. Just a website with miniscule revenues and a generic/common place QR code technology. FTFT’s correlation with bitcoin excitement suggests that investors have seriously misunderstood just what this company does.

Behind the scenes: Toxic dilution, SEC prosecuted lenders, curious consulting agreements, and an SEC subpoena

Toxic dilution and sweetheart loans

Dissecting FTFT’s financials and organization can be a bit of a challenge. Their organizational structure seems slightly complicated for a former fruit juice company, with an assortment of British Virgin Island, Hong Kong, and China based holding companies:

Source

But you can simplify the situation by looking at revenues, operating income, and shares outstanding:

These results speak for themselves – common shareholders have suffered a toxic amount of dilution over the years. A Debt Repayment Agreement executed in 2020 is emblematic of how certain individuals became enriched at shareholders expense. In July 2020 FTFT borrowed $4.96M from fourteen individuals. Immediately afterwards, on August 4th 2020, the debt was satisfied by issuing the investors 2.7M shares of stock at a value of $1.81 per share, a wonderful deal for these “investors” considering the stock closed at $2.52 on the same day.

FTFT effectively gifted these fortunate “investors” $1.95M (difference between $1.81 and $2.52 share price) at the expense of shareholders.

Source, page 13

Iliad convertible notes

Then there is the fact that FTFT has been funding its business via convertible secured notes issued to Iliad Research and Trading since March 2019. These notes have been routinely converted into FTFT shares at below market prices, regularly diluting investors and bringing new stock onto the market.

One such example would be the most recent convertible exchange from FTFT’s most recent 10-Q where Iliad exchanges $111k worth of notes on June 10th for stock at $0.75 cents a share as the stock closed the day at $1.10.

(Source, page 13)

This goes beyond being simply excessive dilution to common shareholders at unfavorable terms. The SEC filed a complaint against Iliad Research on 9/30/20 which alleges that Iliad’s regular business of exchanging convertible notes for newly issued shares makes them out to be an unregistered securities dealer. The complaint highlights Iliad as demanding “highly favorable terms” at “deep discounts from the prevailing market price”.

Defendants business model has been to buy convertible promissory notes – a type of security – from penny stock issuers, convert the notes into newly-issued shares of stock, and rapidly sell those shares into the public market at a profit. During 2015 through 2019, Defendants purchased more than 250 such notes from approximately 135 different microcap issuers. Defendants demanded and received highly favorable terms for these notes, including terms that gave Defendants deep discounts from the prevailing market price for the shares of counterparty microcap issuers.

Source

Curious consulting contracts

On January 25th, 2020, FTFT entered into a three year consulting agreement with Dragon Investment Holding Limited, a Malta based company that was tasked with helping FTFT find merger targets and assist with their growth strategy. In exchange, Dragon would receive $3M of compensation in the form of stock, a significant expense for a firm that has done only ~$400k in YTD revenues. According to Malta’s business registration database, Dragon was formed less than a month prior to this contract, on December 30th, 2019. What is even more curious is the strange coincidence that Dragon’s sole director has a remarkably similar address to FTFT’s CEO as shown on his employment agreement:

Source for Malta registration, Source for ShanChun Huang’s employment agreement.

What are investors to make of this apparent shared address?

SEC subpoena

If the lengthy list of questions from the SEC regarding FTFT’s business didn’t raise investors’ eyebrows, maybe the fact that the SEC subpoenaed FTFT on Feb 21, 2020 will:

On February 21, 2020, the Company received a subpoena from the SEC’s Division of Enforcement requiring us to produce documents and detailed information relating to, among other things, the Company’s accounting procedures, management oversight, and the sale of HeDeTang holdings (HK) Ltd. to New Continent International Co., Ltd. […] There can be no assurance that the SEC will not commence an enforcement action against us or members of our management, or as to the ultimate resolution of any enforcement action that the SEC may decide to bring. Under applicable law, the SEC has the ability to impose significant sanctions on companies and individuals who are found to have violated the provisions of applicable federal securities laws, including cease and desist orders, civil money penalties, and barring individuals from serving as directors or officers of public companies.

Source, page 16

FTFT explicitly states that they are cooperating with “the SEC’s investigation”, and as the above quote states, the investigation appears to include FTFT’s “accounting procedures, management oversight, and the sale of HeDeTang holdings Ltd”.

Readers might be wondering what the significance of HeDeTang holdings is. This subsidiary held the ownership stake in FTFT’s once touted Chinese produce business which was previously the cornerstone of FTFT’s multi-million dollar market cap. HeDeTang was sold to British Virgin Islands based New Continental International for a whopping $85,714 on Feb 27, 2020. (source, page 14). In my opinion, the ongoing interest shown by the SEC and the fact that they are conducting an investigation into FTFT suggests a very real risk that the company could receive a Wells notice.

Conclusion

As the saying goes, we’ve seen this movie before. FTFT’s 2017 blockchain/bitcoin foray saw the share price significantly spike, but ultimately give up all gains. I have no reason to think it will be different this time around, and while I find it almost impossible to perform a fundamental based valuation on FTFT, I personally expect their share price to trend back towards trading levels before the latest bitcoin spike, which would be ~$2.00 per share.

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