State Senate Republican leader Len Fasano raised questions Thursday about a $10 million incentive package the state has offered a financial technology company planning a global hub at UConn’s former West Hartford campus.
Seven Stars Cloud Group Inc. is set to receive a $10 million loan through Gov. Dannel P. Malloy’s First Five Plus program, which helps large businesses relocate, expand and create jobs in Connecticut.
But Fasano said he has concerns about the stability and revenue of the blockchain and artificial-intelligence company, which stands to see its loan forgiven if it meets certain job targets.
“Upon further investigation and analysis by staff and concerned taxpayers, I’m perplexed regarding DECD’s decision,” Fasano said, adding that he was seeking more information on the state Department of Economic and Community Development’s vetting of SSC, which he claims “does not earn any money and is less stable than originally reported.”
SSC, a New York-based company led by a Chinese billionaire, has said it plans to create 330 jobs over five years at the nearly 58-acre campus.
The UConn Board of Trustees approved the $5.2 million sale of the campus on July 6. The sale and purchase agreement is expected to be signed this week, with the closing expected in September, though SSC will later need West Hartford’s approvals for the proposed development.
Fasano said he was “cautiously optimistic” when he learned about SSC’s decision to build its North America technology and innovation headquarters in Greater Hartford.
He now says SSC seems to be “on borrowed time, something their auditors have emphasized and noted.”
“I am very concerned about the soundness of this deal, especially against the backdrop of DECD’s spotty record,” he said, referring to a recent audit that found the agency understated tax credits for several projects and provided inaccurate data about job creation.
“The fact of the matter is SSC does not make money, lacks capacity to invest seriously in innovation, has multiple unfavorable ratios and is burning through whatever cash it and its shareholders have at a rapid pace,” Fasano said.
Chairman and CEO Bruno Wu has said the campus will become a $283 million hub for the creation of new banking and financial services technology platforms based on artificial intelligence and blockchain, a secure, powerful digital ledger that tracks digital transactions and is the technology behind cryptocurrencies like Bitcoin.
Wu said he welcomes open conversation about his company’s plans and will respond to Fasano on Friday. He says Seven Stars Cloud is in the early stages of transitioning all of its legacy business — of which Wu was an investor — into next-generation fintech services. Even recent financial filings are not an accurate reflection of the company, he said, adding that SSC expects to see $35 million in net profit this year, before interest, taxes, depreciation, and amortization. “All of [Fasano’s] references in the letter are pertaining to the public financials of the past,” Wu said. “That’s SSC yesterday, versus SSC today and tomorrow.”
In SSC’s annual report in March, it said it was in the process of considerable changes, and noted that its future success was not guaranteed.
“It is uncertain whether these efforts will prove beneficial or whether we will be able to develop the necessary business models, infrastructure and systems to support the business,” the filing said. “This includes having or hiring the right talent to execute our business strategy.”
Fasano said this disclaimer was troubling, as was an auditor’s note that recurring losses from operations, along with liabilities and debt, “raise substantial doubt about its ability to continue” meeting its long-term obligations.
“Although the Company believes it has the ability to raise funds by issuing debt or equity instruments, additional financing may not be available to the Company on terms acceptable to the Company or at all or such resources may not be received in a timely manner,” the report said.
But DECD Commissioner Catherine Smith said Fasano has a “fundamental misunderstanding” of the proposed project and the state’s economic development efforts.
SSC is in a growth mode, and brought in $185.9 million in revenue in the first three months of the year, up from $33 million during the same period of 2017, according to its filings with the Securities and Exchange Commission.
“It is in the process of purchasing other companies and entering into new joint ventures as well,” Smith said. “It is not uncommon for a company to be making significant investments to drive future new revenue growth, and as such, to experience losses on an income statement as those investments are made.”
In March, SSC launched the OilCoin, a digital token based on the crude oil market, in the Greater China region. SSC plans to expand its Digital Oil Asset Index tokens to other regions, and launch three to four more digital commodity tokens, and at least one currency, this year.
In April, SSC announced that all of its future tokens will have their own exchange and trading platform on GT Dollar, a Singaporean-based e-commerce app.
And just this week, SSC entered into a licensing agreement with Fundamental Interactions, a New York-based company that provides enterprise market center technology.
Smith defended the state’s assessment of the company, and it’s financial agreement, which is secured by a letter of credit from a U.S. chartered financial institution.
“This project is a win-win and will accelerate our efforts to create a technology and innovation hub that will attract similar companies and talent to the Hartford region and the state as a whole,” Smith said.
A New Name And Mission
SSC is the latest iteration of a more than 20-year-old media company.
It was originally founded in the 1990s as Gallery Rodeo international, then rebranded over the years as Sierra Rockies Corp., Alpha Nutraceuticals, Alpha Nutra Inc., China Broadband and finally You On Demand Holdings, which launched its legacy video on demand service in 2010, according to SEC filings.
It was renamed Wecast Network in 2016 and Seven Stars Cloud in 2017, to align with the brand of one of its top investors and incoming chairman and CEO, Wu, a 51-year-old Chinese media tycoon.
Wu has various brands under his and his wife’s Sun Seven Stars Investment Group, including Seven Stars Sun Media Group, Sun Enterprises Group, Sun Publishing Group, Sun Culture Foundation and Seven Stars Energy, according to SEC filings.
When Wu became leader of SSC in 2017, the company claimed 15 to 20 corporate customers worldwide in its various businesses, including video on demand, consumer electronics, smart handheld device design and supply chain management, according to the SEC.
In May, it announced its new corporate headquarters in New York City’s Financial District.
And in July, it announced its plan to build a technology hub in the Greater Hartford region.
Instability, Or Growing Pains?
Among Fasano’s concerns is a claim that SSC does not make any money, and that it’s “burning through” what little money it has.
The company is still building its blockchain business services, which is replacing a legacy media division, according to Wu.
SSC generated $144 million in revenue in 2017, and netted $7.15 million in profit. In 2016, when it was primarily a media company, SSC reported $35 million in revenue and a net loss of about $365,000.
The company has an accumulated deficit of $129.9 million as of March, up from $125.9 million at the end of 2017 and $115.7 million the year before. Wu says this money is not owed to anyone.
Fasano also said SSC lacks the capacity to invest seriously in innovation. Reached by phone Thursday, he said he was referring to the company’s ability to build a technology hub in West Hartford, but added that he thought the company had measly spending on research and development in 2017.
The company spent $406,000 on research and development last year, 2 percent of its $16.9 million operating budget, according to SEC filings. In the first three months of 2018, it spent another $46,000 on R&D.
SSC has taken several other steps in the past year to position itself as a next-generation technology company, including:
- Buying Delaware Board of Trade Holdings, a blockchain-based alternative trading system licensed by the SEC, in August 2017.
- Establishing a joint venture called Red Coin Chain, Ltd., with several Chinese cryptocurrency and fintech leaders, in August 2017. SSC is the majority owner of the partnership, which includes China’s Ant Financial, the former blockchain chief of e-commerce company Alibaba's, and the chairman of a Chinese blockchain-based company called Taiyi Enterprise Cloud.
- Establishing a joint venture called BBD Digital Capital Group Ltd., in October 2017, to focus on artificial intelligence-driven financial data services and transactional platforms for index, futures, and derivatives trading for global commodity and energy clients.
- Establishing a joint venture with with the The Centre for Digital Revolution in June, to be headed by Eric Van der Kleij, former leader of London Fintech hub Level39.
- Launching its first digital platform for commodities, called Digital Oil Asset Index tokens, in May in the Greater China Region.
- Entering into a licensing agreement on Tuesday with Fundamental Interactions, a New York-based company that provides enterprise market center technology.
Fasano said he was not aware of those acquisitions and projects and could not comment on them. He said he still wants to know that the state did its due diligence to ensure SSC can afford the $283 million project it’s promising.
“Where’s that money coming from?” he said. “If they’re bleeding at the gills, where’s the money coming from? How do you know they have the wherewithal to pull this off?”
Leigh Appleby, Malloy’s press secretary, also responded to Fasano’s criticisms, saying the senator was “throwing stones from the sidelines rather than offering any solutions whatsoever.”
“It’s equally sad that it appears to be so hard for him to welcome good news of the creation of hundreds of paying jobs and great use for a vacant UConn campus.”