Is Jia Yueting still worth believing?

Figure: Figure worm

Source: 21tech

Author: Poplar

Editor: Zhang Weixian

On July 22, 2021, FF successfully landed on the NASDAQ through a reverse merger with special acquisition company PSAC. But subsequently, FF's third-quarter financial report and 2021 annual report were not submitted within the specified time.

As for the postponement of the earnings report, the reason given by FF is that the company's board of directors has set up a special committee composed of independent directors to review the allegations including the short selling report issued by J Capital against FF on October 7, 2021.

Nasdaq Markets has repeatedly sent letters to FF and proposed that if FF cannot file its Q3 financial report and 2021 annual report on or before May 6, 2022, the company will face delisting.

On May 6, FF submitted its Q3 financial report as scheduled, but did not submit its 2021 annual report. FF said that on May 4, the NASDAQ market has agreed to extend the submission of annual reports to May 16, 2022, and if it is still unable to submit at that time, FF will still face the risk of delisting.

It is a matter of priority for listed companies to submit financial reports on a regular basis, but for FF, this matter seems to have become very difficult. At the beginning, the road to FF listing was full of twists and turns, but after the real listing and financing, many people in the outside world believed that FF had overcome the biggest difficulties, and Jia Yueting would also usher in a real opportunity to turn around.

However, after half a year, FF's cars have not yet been mass-produced, but what is waiting for is a series of internal investigations and delisting warning letters.

For ordinary companies, the market tends to give a certain amount of room for trial and error, but for Jia Yueting and FF, the patience of the market is close to the limit, and the more these matters that have nothing to do with the actual business, the narrower the road ahead will only make their already narrower road.

It cost $400 million in half a year

According to the 2021 Q3 financial report, FF has not generated any revenue since its inception, with a net loss of $304 million in the reporting period and a net loss of $33.34 million for the same period in 2020.

The sharp increase in net loss was due to the significant increase in FF's expenses in all aspects. Total operating expenses for the reporting period, for example, increased to $186 million from $17.55 million in the year-ago quarter, including losses on research and development, sales and marketing, general and administrative, property and equipment disposal.

In addition to operating expenses, changes in fair value and expenses related to the settlement of related parties in trust were also major variables in the expansion of net loss. During the Reporting Period, FF's loss due to changes in fair value measurement was $22.75 million, and the expense for settling related amounts in trust was $94.73 million.

As of September 30, 2021, FF's total assets were approximately $1,023 million, including approximately $666 million in cash and cash equivalents. Compared with only $1.12 million in cash on the account at the end of 2020, the current FF is relatively generous in terms of funds, which is also an important reason why it went public (financing) as soon as possible.

Since its inception, FF's cumulative loss has reached $2.823 billion. Through the business merger with PSAC and PIPE financing, FF's total income is $990 million, more than $80 million of transaction costs are removed and $140 million is used to pay off some debt, and FF's remaining net income is about $767 million, which will provide financial support for FF's continued operations.

However, the earnings report also pointed out that FF is expected to generate revenue from the FF 91 model launched in the third quarter of this year, but before it can generate sufficient revenue from product sales, FF still needs to fund the ongoing operation through various financings, including equipment leasing, construction financing of the Hanford manufacturing plant in California, guarantee syndicated debt financing, convertible notes, working capital loans and stock issuance.

According to data disclosed by FF, as of March 31, 2022, FF's cash balance was $276 million, including $97 million in notes and planned repayments with accrued interest. This means that in the six months from October 2021 to March 2022, FF has spent more than $400 million in cash, which shows the speed of burning money.

During this period, FF's business has also made some progress. According to FF, in the fourth quarter of 2021, the Hanford manufacturing plant has obtained the license for pre-production of the special area, and the infrastructure work in other production areas has been basically completed; in the first quarter of 2022, FF's first FF 91 quasi-production vehicle has been completed, and FF has also obtained a sales license from California, which can be used for online sales in the United States; in addition, FF has also signed a lease agreement at the flagship store in Beverly Hills, California.

From the perspective of business progress, FF is moving towards mass production goals, but until the production line is really launched, there is still uncertainty about everything. FF management expects the Hanford manufacturing plant to begin production in the third quarter of 2022. As of March 31, 2022, FF had received 401 car bookings. It is important to note that a deposit has been paid for these bookings, but the deposit is fully refundable and non-binding.

Credibility crisis

Compared with the progress of the business, what is more headache for people who care about the development of FF is the problem within the company.

In February, the FF's Special Committee of Independent Directors gave preliminary findings after a period of investigation, acknowledging certain inconsistencies in the company's investor statements and certain weaknesses in the company's control and culture.

Specific conclusions disclosed at the time included:

1. Regarding the business merger between FF and PSAC in July 2021, the statements made by some company employees describing Jia Yueting's role in the company to certain investors were inaccurate, and Jia Yueting's participation in the management of the company after the merger was more important than that represented by some investors.

2. FF stated in its pre-merger statement that it had received more than 14,000 bookings for FF91 vehicles, which could be misleading, as only a few hundred of them had paid a deposit, while the rest (a total of 14,000) were unpaid.

3. Consistent with FF's previous public disclosure of major deficiencies found in its internal controls, FF's internal control over financial accounting and reporting requires upgrading of personnel and systems.

4. FF's corporate culture does not pay sufficient attention to compliance.

In the 2021Q3 financial report disclosed this time, some new investigation conclusions were added. This includes FF's failure to disclose Jia Yueting's role as an intermediary in certain properties subsequently leased to the Company; and its failure to investigate and determine the source of loans obtained from individuals and entities associated with the Company's employees in preparing disclosures of the Company's related party transactions.

Specifically, the Special Committee found that the Company's consolidated financial statements for 2020 were misclassified, resulting in underreporting of related party notes payable and overstatement of notes payable, overstatement of accrued interest and understatement of interest accrued by related parties, as well as overstatement of interest expense and understatement of interest expense of related parties.

Therefore, FF also acknowledges that there are material deficiencies in the Company's internal control over financial reporting, which may result in misstatements in all of FF's accounts or disclosures, and therefore, FF also made changes to the internal control system for financial reporting in 2021 and the first quarter of 2022, including the appointment of temporary CFOs and the hiring of related companies, including but not limited to the repair of financial reporting; the implementation of new accounting policies and IT systems; and the implementation of enhanced controls over related party transactions.

FF said that in 2022, it will continue to promote the rectification of internal controls in financial reporting, including the introduction of a series of other rectification measures, including but not limited to the continued employment of financial and accounting personnel; the design and implementation of controls to identify and handle certain unconventional, unusual and complex transactions.

In response to the results of other findings of the special committee, FF also made relevant rectifications this year, including a major change of board of directors. FF has appointed Susan Swenson, Independent Director of the Board, as Executive Chairman of the Board, and CEO Carsten Breitfield, Founder and Chief Product and User Ecosystem Officer Jia Yueting, will report directly to Susan Swenson.

Among them, for Jia Yueting, in addition to a 25% salary cut, it is a further reduction in power, canceling his executive officer position, and continuing to serve as the chief product and user ecosystem officer, his responsibilities are limited to product and mobile ecosystems, as well as Internet, artificial intelligence and advanced technology research and development.

In fact, as the founder of FF, jia Yueting's relationship with FF is difficult to completely separate. At present, although Jia Yueting is not the CEO of FF and his equity has also been transferred to the debt trust, Jia Yueting is still closely tied to FF.

This is a fact that is difficult to change, and it is still a hidden danger that FF may face. For example, the results of this special committee investigation show that Jia Yueting's voice in FF is still very large, and what is even more frightening is related party transactions.

It's hard not to think of leEco before. One of the core reasons for the overall collapse of the LeTV system is the intricate related party transactions. Although FF has begun to rectify the relevant financial problems, Jia Yueting, who has been trying to draw a clear line between FF and LeTV, will once again fall into a new credibility crisis and become a credibility crisis of the company, which is also an unknown for the future development of FF.

In March, FF disclosed that certain members of the company's management team and employees of the company had received a subpoena from the U.S. Securities and Exchange Commission (SEC) to investigate the findings of the company's special committee. FF said it is fully cooperating with the SEC investigation, while saying that the outcome of such an investigation is difficult to predict.

In addition, in December 2021 and March this year, FF also faced class actions and related derivative lawsuits for alleged violations of U.S. securities exchange laws.

The deal behind the investment

In the latest financial report, FF also disclosed some transaction details with partners.

The first is the ninth city of U.S. listed companies. In March 2019, FF signed a joint venture agreement with Ninth City to establish a joint venture company, and after several revisions of the joint venture agreement in June, July and September 2019, the final agreement was that the ninth city was obliged to provide a total capital contribution of US$600 million to the joint venture company, and pay it in three installments of US$200 million each.

For FF at that time, if the ninth city could pay this fund, it was tantamount to sending charcoal in the snow, but according to the joint venture agreement, each fund needed to meet certain conditions before the joint venture was paid, and the final result was that the joint venture company did not meet the conditions, and the ninth city did not pay.

However, in April 2019, the Ninth City paid an initial deposit of $5 million to FF through an interest-free loan, which was converted into about 2.99 million Class B shares of FF in November 2020 under the joint venture agreement. In July 2021, after the listing of FF, the Ninth City owned about 423,000 shares of FF.

Therefore, according to FF's financial report, as of September 30, 2021, neither FF nor Jiucheng has invested in the joint venture company and has not yet carried out business activities. According to the Ninth City's annual report, net income from FF shares in 2021 was $2.2 million. However, compared with the stock price of $5.32 at the end of 2021, the closing price of FF on May 6 was $2.37, which has been cut. Whether the Nine Cities can obtain net income is already in doubt.

Also auspicious. In December 2020, FF signed a non-binding Memorandum of Understanding with Zhejiang Geely Holding Group Co., Ltd. ("Geely Holdings"), a subscriber of PIPE Financing, to carry out strategic cooperation in a number of areas. In January 2021, FF signed a cooperation framework agreement and licensing agreement with Geely Holdings.

On September 7, 2021, FF paid a license fee of US$50 million to Liankong Technology Co., Ltd., a subsidiary of Geely Holdings, which is also a subscriber to PIPE financing, in accordance with the previously signed license agreement. This technology licensing fee was included in the R&D expenditure of Q3 by FF.

In addition to Geely, FF also has business dealings with another pipe financing investor. In July 2021, FF signed an agreement with big data company Palantir that Palantir's hosting platform would become FF's data-centric operating system.

Subsequently, Palantir invested $25 million in FF through PIPE financing to become a shareholder of the company. Under the agreement signed by the two parties, FF promised to pay Palantir a total of $47 million as a data hosting fee for the next 6 years. In the third quarter of 2021, FF has paid $3 million.

It can be seen from this that it is indeed not easy for FF to obtain cooperation and financing, and even needs to exchange investment through business commitment agreements.

At present, FF is already the closest stage to success, and whether FF91 can be successfully mass-produced in the third quarter will be the key measurement standard. If the real energy production, at least it proves that FF has taken a substantial step from PPT to build cars, but if mass production continues to be postponed, FF is afraid that it will continue to usher in the days of shortage of funds.

As of the close of the U.S. stock market on May 6, FF's share price closed at $2.37 per share, with a market capitalization of $769 million. This is down 83% from the closing price of $13.98 on the day of listing, but after the earnings report, FF's stock price rose more than 10% after hours to $2.62 per share.

One of the things that is of concern is that at 11:21 on May 7, Jia Yueting forwarded the Weibo of FFQ3 performance on his personal Weibo, saying: Through the submission of this 10-Q financial report document, we are one step closer to realizing our original vision. We are confident that the production of the FF 91 Futurist will be completed on time and with high quality.

Weibo now has an IP address function, and Jia Yueting's weibo above shows that it was "posted in Beijing". Many netizens asked: Has Jia Yueting returned to China? According to the reporter's understanding, Jia Yueting did not return to China. There is only one explanation for this, and the weibo was posted by the FF Beijing team on behalf of Jia Yueting. Weibo of many entrepreneurs and celebrities is run by a special person, which is also a common practice.

Editor: Lu Taoran