HARTFORD, CT — While he was “cautiously optimistic,” Senate Republican President Len Fasano has serious concerns about the state’s decision to give Seven Stars Cloud $10 million to bring its headquarters to the former University of Connecticut campus in West Hartford.
Fasano said he had his staff look into the financial health of the financial-technology company, which has offices in China and New York.
According to Securities and Exchange Commission filings, Seven Stars Cloud (SSC), which is headed by Bruno Wu, has a gross profit of $389,495 on roughly $186 million of revenue. Fasano said that’s “alarming.”
According to its annual report revenue for the first quarter of 2018 was $185.9 million as compared to $33.2 million for the same period in 2017, an increase of approximately $152.8 million, or 461 percent. The report said the increase was primarily due to expanded business in crude oil trading, which began in October 2017.
Fasano said the publicly traded company seems to be operating at a loss even with a 500 percent jump in revenue in the first quarter, which was the result of them playing the stock market in crude oil trading.
“Seven Stars Cloud’s net income loss over that same period of time was a shocking $4.2 million,” Fasano said. “The administration trying to spin this company’s growth in crude oil trading as a positive raises even more concerns and questions about their vetting of SSC.”
SSC has promised to create 330 jobs in the next five years on the 58-acre campus that it purchased from the University of Connecticut for $5.2 million.
In a statement issued on Sunday, Wu said the company is debt-free with a strong balance sheet, reflecting total assets of $140 million. He said the company plans to bring 30-40 companies to West Hartford, including companies owned by SSC’s parent company, Sun Seven Stars Investment Group, as well as companies born and incubated out of our Global Headquarters for Technology and Innovation.
Fasano said the Department of Economic and Community Development has a “spotty” record in approving these deals.
Department of Economic and Community Development Commissioner Catherine Smith defended the deal last week.
She said it’s not uncommon for a company to experience losses on an income statement in order to make significant investments to drive future new revenue growth.
“As we do in all loans, grants and other forms of financial assistance, DECD performed a thorough assessment of Seven Stars Cloud Group (SSC) before determining whether to provide financial assistance and subsequently what form and level of assistance would be appropriate,” Smith said. “As is typical, we constructed a financial agreement with the company that reflects the risks we saw in the project and its sponsor, as well as providing the proper level of assistance to incent the large investment and hundreds of jobs that were promised.”
She said Fasano’s letter represents a “fundamental misunderstanding” of the project and the department’s efforts.
“The Senator’s concerns about the state’s investment should be allayed by the fact that DECD is completely secured by a letter of credit from a U.S. chartered financial institution, which eliminates any risk associated with the DECD loan,” Smith said. “In other words, if SSC defaults on its commitments, we can cash the letter of credit and repay the state.”
This past April the legislature’s Auditors of Public Accounts pointed out that DECD is not going a great job with job creation numbers.
The auditors found the agency “likely overstated the number of jobs retained because certain companies received funding multiple times or under multiple programs.”
The agency told the auditors they would rewrite their annual report and correct the mistakes.
“Companies that received funding multiple times may have had a requirement to retain the same jobs each time they received funding,” the April report found. “DECD counted these jobs multiple times. In addition, if companies received funding under multiple programs, DECD likely counted the jobs retained under multiple programs. It is unclear how many jobs DECD may have overstated.”