LAS VEGAS -- Four years ago, a retail investor surnamed Li invested in Chinese juice maker-turned-blockchain innovator Future Fintech, reassured by its status as a U.S.-listed company.
"It is a Nasdaq-listed company," said Li. "In the minds of many of us that means the company is successful and trustworthy."
Now, however, its future on the exchange is in doubt after the Xi'an-based company repeatedly failed to file its accounts on time. In the coming months regulators will decide whether to delist the Chinese company or to accept its timetable for compliance.
While any company's failure to file accounts would be punishable by authorities, Future Fintech's transgressions highlight growing concern over the information and regulatory gap facing investors in U.S.-listed foreign companies -- Chinese in particular.
U.S. lawmakers last month proposed a bill that would force the delisting of foreign companies who do not open up their books to US regulators' scrutiny -- something Beijing has blocked in the case of Chinese companies.
In a report to Congress in 2018, the U.S. China Economic and Security Review Commission highlighted the risks presented by differing regulations. "Chinese laws governing the protection of state secrets and national security prohibit Chinese firms from sharing their audit work reports with foreign regulators," the commission said. "This leaves U.S. investors exposed to potentially exploitative and fraudulent activities by Chinese firms listed in the United States," it added.
Those concerns have increased as the number of Chinese companies seeking financing on U.S. markets has multiplied in recent years. Chinese companies listed in the U.S. held a combined market capitalization of $1.2 trillion as of Feb. 25, according to the U.S.-China Economic and Security Review Commission, up from $960 billion in 2017 and $1.1 trillion as of last October, despite the recent economic slowdown and trade tensions that have led several Chinese companies to postpone their initial public offerings in the U.S.
Peter Halesworth, a former Nomura banker and founder of China-focused asset management firm Heng Ren Investment, pointed out the practical difficulties facing regulators that can arise when Chinese companies list in the U.S.
"It's unclear if the SEC has the jurisdiction since they won't be able to do any due diligence as the business operation is in China. And China's regulator probably has no jurisdiction either since the company is listed in the U.S.," he said.
Future Fintech is one of the many Chinese companies that came to the U.S. to list early in the millennium.
The company was founded in 1998 as SkyPeople Fruit Juice. As its original name suggests, the company produces fruit drinks and concentrates, mostly kiwi juices, in China.
The company listed on Nasdaq in 2004 under the SkyPeople name, but by 2016 its share price had plummeted from over $80 to around $2 dollars, following five years in which net income fell by over 30% annually. The company swung to a loss in 2016.
That same year, it received half a dozen warning letters from Nasdaq for failing to meet the exchange's filing requirements. It was on the verge of being delisted in 2016 after it was 11 months late reporting its 2015 earnings.
Still trading as SkyPeople, the company's shares plunged to below $1 in 2016 before the company carried out a reverse stock split -- reducing the number of the available shares. The move boosted its share price, but only temporarily.
The following year, the company switched gears.
In June 2017, SkyPeople officially became Future Fintech and started describing itself as a "fruit juice and financial technology" company that "engages in the research and development of digital asset systems based on blockchain technology and also operates an incubator for application projects using blockchain technology," according to the company's website and filings.
The U.S. Securities and Exchange Commission approved the listing name change. SEC declined to comment when contacted by the Nikkei Asian Review.
Yan Zhi joined Future Fintech in 2018 after Nova Realm, the blockchain startup he founded, was acquired by SkyPeople Fruit Juice co-founder Xue Yongke. Xue personally acquired 60% of the equity interest of Nova Realm in 2017 and then gifted 5% of that to Future Fintech in January 2018.
"We were looking for someone to invest in our company, and Mr. Xue was looking for a way to improve his traditional juice business, so we just clicked," Yan said during an interview with the Nikkei Asian Review in May. "Nova Realm is the first-ever blockchain community that requires users registering with real names and thus delivers trustworthy asset-based financial services. And now we are integrating the real-name blockchain technology to Future Fintech."
He added that the company is "using blockchain technology to revolutionize society."
Yan declined to comment, however, on how exactly blockchain technology will benefit the company's fruit juice business and improve its earnings, saying there are many initiatives that he cannot yet disclose because of the delayed reports.
Future Fintech's shares briefly soared after it announced its shift to blockchain, which came amid the bitcoin boom of 2017. The company's financial performance, however, has been lackluster. It lost $102.5 million in 2017, 20 times the $5.3 million loss it reported in 2016.
In the last earnings report it filed, the company reported a loss of $25.2 million for the nine months through September 2018, compared to the $11.6 million loss it reported for the same period in 2017.
Yan said the company's new blockchain-centered initiatives, such as an e-commerce platform Chain Cloud Mall, have yet to impact earnings and will help improve the performance in the long run. The company announced the second version of Chain Cloud Mall in June but without giving any details on the performance of the platform since its launch in January.
Some are questioning the company's strategy.
"A kiwi juice company and now they are doing blockchain? Saying I'm a bit skeptical is an understatement," said one U.S. microcap stock investor who attended an investment conference in Las Vegas this May where Future Fintech pitched its recent transformation to potential investors. "Just look at their financials. I don't think blockchain is magical enough to change that overnight."
Another conference attendee, Connor Haley, managing partner at microcap stock investment firm Alta Fox, also had questions. During a presentation by Yan he asked, "How are you going to tackle the downward EBITDA trend with those new, exciting initiatives you just mentioned?"
The company's investor relations team fielded the question, saying it was not able to offer any financial information due to the delayed filings.
By that time, Future Fintech had already delayed reporting its 2018 results twice. The company said the delay was due to switching auditors and that it would release the results by the end of May, but it has yet to do so. Now it has also delayed its first-quarter results.
When contacted by the Nikkei Asian Review in June, Future Fintech said the delay was because it had not yet secured a new auditor.
The company received another notice from Nasdaq on May 28 ordering it to submit a plan by mid-June for filing its delayed results. If the plan is accepted, the company will have 180 days to file the results. If not, it will be delisted.
The company said its plan is currently under review by the stock exchange. Nasdaq did not respond to requests for comment.
Back in its home country, Future Fintech was drawing criticism even before the shift to fintech.
In an attempt to raise more capital, the company conducted a roadshow in China in 2015, in which it said it would delist from Nasdaq and relist on the Shanghai exchange by 2017, according to multiple Chinese media reports.
Dozens of retail investors participated in the roadshow in Shanghai and purchased over 130 million yuan ($19 million) worth of "pre-IPO shares," according to those reports.
Li purchased over 500,000 yuan of the stocks during the roadshow. He was not aware of the company's declining profits or the warnings from Nasdaq. As the company still had not delisted from the U.S. by late 2017, Li started doing more research.
Li and other investors who purchased shares at the roadshow attempted to file a lawsuit against the company in 2018, but the suit was dismissed by local authorities because the company is not listed in China, according to Li and Chinese media reports.
In a separate development, founders Xue Yongke and Xue Hongke have been blacklisted by Chinese authorities for not making debt repayments since 2016, meaning they are not able to borrow from banks, fly first class or stay in luxury hotels, among other restrictions, according to the publicly available List of Dishonest Judgment Debtors published by China's Supreme Court.
A Chinese local court, moreover, has sealed several SkyPeople FruitJuice factories as the property was used as collateral for a loan the company took out in 2015, court filings show.
Future Fintech has disclosed this last matter in its SEC filing, but not the trouble with Chinese investors or its founders' blacklisting. As the lawsuit did not go to court, it is unclear whether the company would have been obliged to do so.
Neither of those developments was widely reported in U.S. media.
A lack of easily accessible information, Heng Ren Investment's Halesworth said, can be a problem for retail shareholders who do not have the time or expertise to dig deeply into foreign companies they invest in.
"It's always the mom and pop investors who buy in some Chinese company stocks they don't really know about, and they are the ones getting hurt in the end."
Alex Fang in New York contributed to this report.