Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in rule 405 of the Securities Act. Yes ☐
No ☒
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
No ☒
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s
knowledge, in definitive proxy statement or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes ☐ No ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared
or issued its audit report. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ☐
No ☒
The number of shares of Common Stock outstanding as of April 12, 2021 was 65,286,192.
This Annual Report on Form 10-K for the
fiscal year ended December 31, 2020 (“Annual Report”) of Future Fintech Group, Inc. (together with our direct or indirect
subsidiaries, “we,” “us,” “our”, “the Company” or “Future FinTech”)
includes forward-looking statements regarding, among other things, Future FinTech’s plans, strategies and prospects,
both business and financial. Although Future FinTech believes that its plans, intentions and expectations reflected in or suggested
by these forward-looking statements are reasonable, Future FinTech cannot assure you that we will achieve or realize these plans,
intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions including,
without limitation, the factors described under “Risk Factors” from time to time in Future FinTech’s filings
with the SEC. Many of the forward-looking statements contained in this presentation may be identified by the use of forward-looking
words such as “believe”, “expect”, “anticipate”, “should”, “planned”,
“will”, “may”, “intend”, “estimated”, “aim”, “on track”,
“target”, “opportunity”, “tentative”, “positioning”, “designed”, “create”,
“predict”, “project”, “seek”, “would”, “could”, “continue”,
“ongoing”, “upside”, “increases” and “potential”, among others. Important factors
that could cause actual results to differ materially from the forward-looking statements we make in this presentation are set forth
in other reports or documents that we file from time to time with the SEC, and include, but are not limited to:
Any or all of our forward-looking statements
in this report may turn out to be inaccurate. They can be affected by inaccurate assumptions we might make or by known or unknown
risks or uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially
as a result of various factors, including, without limitation, the risks outlined under “Item 1A. Risk Factors” in
this Annual Report. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained
in this filing will in fact occur. You should not place undue reliance on these forward-looking statements.
We undertake no obligation to update forward-looking
statements to reflect subsequent events, changed circumstances or the occurrence of unanticipated events except as required by
law.
PART I
ITEM 1 – BUSINESS
Overview
Future FinTech is a holding company incorporated
under the laws of the State of Florida. The Company historically engaged in the production and sale of fruit juice concentrates
(including fruit purees and fruit juices), fruit beverages (including fruit juice beverages and fruit cider beverages) in the PRC.
Due to drastically increased production costs and tightened environmental laws in China, the Company had transformed its business
from fruit juice manufacturing and distribution to a real-name blockchain based e-commerce platform that integrates blockchain
and internet technology. The main business of the Company includes an online shopping platform, Chain Cloud Mall (“CCM”),
which is based on blockchain technology; a cross-border e-commerce platform (“NONOGIRL”); a blockchain-based application
incubator; and technical service and support for real name and blockchain based assets and their operating entities;
and the application and development of blockchain-based e-commerce technology and financial technology. The Company is also expanding
into financial services.
Chain Cloud Mall adopts a “multi-vendor
hosted stores + platform self-hosted stores” model. The platform supports various marketing methods, including point rewards programs,
coupons, live webcasts, game interaction, and social media sharing. Besides the blockchain-powered features, CCM is also fully equipped
with the same functions and services that other Chinese leading traditional e-commerce platforms provide.
Based on blockchain technology, CCM is
established to transform the relationship between companies and consumers from traditional selling and buying relationships to
a value-sharing relationship. The platform will fairly distribute the benefit of the entire mall to users who engaged in the promotion,
development, and consumption based on their contributions to the platform. The members of CCM are not only consumers and entrepreneurs
but also participants, promoters and beneficiaries. The CCM shared shopping mall platform is designed to be a block-chain based
shopping mall for merchants and goods, not the exchange of digital currencies, and it currently only accepts payment from credit
cards, Alipay and WeChat.
Chain Cloud Mall is an enterprise and customer
interactive and comprehensive shopping and sales service platform. It is an open network promotion system with a blockchain based
anti-counterfeit system including referral point and discount points issuance and settlement. The new business model creates a
completely new source of data traffic for enterprises on our platform.
Merchants on the Chain Cloud Mall
issue their own blockchain points and anti-counterfeiting QR codes. Every product comes with unique anti-counterfeiting QR codes
on the label. Customers collect the points issued by the merchants by scanning products with their mobile phones on the anti-counterfeiting
QR code. These QR codes are generated by blockchain system of Chain Cloud Mall and provided to merchants. The successful collection
of the merchant points confirms that the authentication of product from such enterprise. The Chain Cloud Mall records and provides
Chain Cloud Mall points to its members upon a successful new member and/or product referral, which can be used as credit when making
purchases on CCM. It incentivizes its members to promote the platform and share the products with their social contacts, which
in turn increases the sales through Chain Cloud Mall and helps the Company generate greater value.
NONOGIRL started its trial operation in
March 2020 and formally launched in July 2020. It is a cross-border e-commerce platform, which aims to build a new s2b2c (supplier
to business and consumer) outsourcing sales platform dominated by social media influencers. It is aimed at the growing female consumer
market, with the ability to broadcast, short video, and all forms communication through the platform. It can also create a sale
oriented sharing ecosystem with other major social media used by customers, etc.
The Company currently has three direct
wholly-owned subsidiaries: DigiPay FinTech Limited (“DigiPay”), a company incorporated under the laws of the British
Virgin Islands, Future FinTech (Hong Kong) Limited, a company incorporated under the laws of Hong Kong, and GlobalKey Shared Mall
Limited, a company incorporated under the laws of Cayman Islands (“GlobalKey Shared Mall”).
SkyPeople Foods Holding Limited (“SkyPeople
BVI”), a company organized under the laws of the British Virgin Islands, held 100% of the equity interest of HeDeTang Holdings
(HK) Ltd. (“HeDeTang HK”), a company organized under the laws of the Hong Kong Special Administrative Region of the
People’s Republic of China (“Hong Kong”), and HeDeTang HK holds 73.42% of the equity interest of SkyPeople Juice
Group Co., Ltd., (“SkyPeople (China)”), a company incorporated under the laws of the PRC. SkyPeople (China) has eleven
subsidiaries in the PRC, which are mainly involved in the production and sales of fruit juice concentrates, fruit juice beverages
and other fruit-related products in the PRC and overseas markets. On February 27, 2020, SkyPeople BVI completed the transfer of
its ownership of HeDeTang HK to New Continent International Co., Ltd. (the “Buyer”), an unrelated third party and a
company incorporated in the British Virgin Islands for a total price of RMB 0.6 million (approximately $85,714), pursuant to a
Share Transfer Agreement entered into by the Seller and the Buyer on September 18, 2019 and approved at the special shareholders
meeting of the Company on February 26, 2020. SkyPeople BVI had no operational assets or business after the transfer and the Company
dissolved SkyPeople BVI on July 27, 2020.
Future FinTech (HongKong) Limited (“FinTech
HK”) holds 100% of the equity interests of Future Commercial Management Co., Ltd. (formerly known as China Agricultural Silkroad
Finance Lease Ltd.), Future Digital Tech (Xi’an) Co., Ltd. (“Digital Tech Xi’an”) , GuangChengJi (Shanghai)
Industrial Co., Ltd, Future Commercial Management (Beijing) Co., Ltd. and Future Commercial Group Co., Ltd. Digital Tech Xi’an
holds 100% of the equity interest of Chain Future Digital Tech (Beijing) Co., Ltd. Future Commercial Group Co., Ltd. and Future
Commercial Management Co., Ltd. holds 90% and 10% of the equity interests of Globalkey Supply Chain Co,. Ltd. respectively. DigiPay
FinTech Limited holds 60% equity interest of DCON DigiPay Limited, a company incorporated in Japan.
GlobalKey Shared Mall holds 100% equity
interests of Chain Cloud Mall Network and Technology (Tianjin) Co., Limited (“CCM Network”) and QR (HK) Limited. CCM
Network holds 80% equity interest of Chain Cloud Mall Logistics Center (Shaanxi) Co., Limited (“CCM Logistics”) and
90% equity interest of HeDeTang Farm Products Trading Market (Mei County) Co., Ltd. (“HeDeTang Farm”) CCM Logistics
owns the remaining 10% equity interest of HeDeTang Farm and 100% equity interest of GlobalKey Supply Chain Limited. On July 24,
2020, the Company’s Board of Directors decided to close the business operation of CCM Logistics and HeDeTang Farm.
On November 12, 2020, CCM Network entered
into an Equity Transfer Agreement with Xi’an Yishengkang Information Technology, Ltd. (“Xi’an Yishengkang”),
an unrelated third party, pursuant to which CCM Network agreed to sell 90% of total issued and outstanding capital stock of HeDeTang
Farm that it owned to Xi’an Yishengkang for RMB9,000 (approximately $1,324). On the same date, CCM Logistics entered
into an Equity Transfer Agreement with an individual and unrelated third party, Liyuan Ying, pursuant to which CCM Logistics agreed
to sell 10% of total issued and outstanding capital stock of HeDeTang Farm that it owned to Liyuan Ying for RMB1,000 (approximately
$147).
On July 31, 2019, CCM Network, Chain Cloud Mall E-commerce
(Tianjin) Co., Ltd., a limited liability company incorporated under the laws of the China (the “E-commerce Tianjin”), and
Mr. Zeyao Xue and Mr. Kai Xu, citizens of China and shareholders of E-commerce Tianjin, entered into the following agreements, or collectively,
the “Variable Interest Entity Agreements” or “VIE Agreements,” pursuant to which CCM Network has contractual rights
to control and operate the business of E-commerce Tianjin (the “VIE”). Mr. Zeyao Xue is a major shareholder of the Company
and the son of Mr. Yongke Xue, our Chairman of the Board. Mr. Kai Xu was the Chief Operating Officer of the Company and currently is the Deputy
General Manager of FT Commercial Group Ltd. , a wholly owned subsidiary of the Company.
Pursuant to Chinese law and regulations,
a foreign owned enterprise cannot apply for and hold a license for operation of certain e-commerce businesses. CCM Network is an
indirectly wholly foreign owned enterprise of the Company (“WOFE”). In order to comply with Chinese law and regulations,
CCM Network agreed to provide E-commerce Tianjin an Exclusive Operation and Use Rights Authorization to operate and use the Chain
Cloud Mall System owned by CCM Network.
The following is a summary of the currently
effective contractual arrangements relating to E-commerce Tianjin.
Contractual Arrangements with Our Consolidated
Affiliated Entity and Its Respective Shareholders
Our contractual arrangements with our VIE
and their respective shareholders allow us to (i) exercise effective control over our VIE, (ii) receive substantially all of the
economic benefits of our VIE, and (iii) have an exclusive option to purchase all or part of the equity interests in our VIE when
and to the extent permitted by PRC law.
As a result of the contractual arrangements
with our VIE, we are regarded as the primary beneficiary of our VIE, and we treat them and their subsidiaries as our consolidated
affiliated entities under U.S. GAAP. We have consolidated the financial results of our VIE in our consolidated financial statements
in accordance with U.S. GAAP.
Agreements that Allow us to Receive Economic Benefits from
our VIE
Exclusive Technology Consulting and
Service Agreement.
Pursuant to the Exclusive Technology Consulting
and Service Agreement, CCM Network agreed to act as the exclusive consultant of E-commerce Tianjin and provide technology consulting
and services to E-commerce Tianjin. In exchange, E-commerce Tianjin agreed to pay CCM Network a technology consulting and service
fee, the amount of which is to be equivalent to the amount of net profit before tax of E-commerce Tianjin, payable on a quarterly
basis after making up losses of previous years (if necessary) and deducting necessary costs, expenses and taxes related to the
business operations of E-commerce Tianjin. Without the prior written consent of CCM Network, E-commerce Tianjin may not accept
the same or similar technology consulting and services provided by any third party during the term of the agreement. All the benefits
and interests generated from the agreement, including but not limited to intellectual property rights, know-how and trade secrets,
will be CCM Network’s sole and exclusive property. This agreement has a term of 10 years and may be extended unilaterally
by CCM Network with CCM Network’s written confirmation prior to the expiration date. E-commerce Tianjin cannot terminate
the agreement early unless CCM Network commits fraud, gross negligence or illegal acts, or becomes bankrupt or winds up.
Agreements that Provide us with Effective Control over our
VIE
Exclusive Purchase Option Agreement.
Pursuant to the Exclusive Purchase Option
Agreement, Mr. Zeyao Xue and Mr. Kai Xu granted to CCM Network and any party designated by CCM Network the exclusive right to purchase,
at any time during the term of this agreement, all or part of the equity interests in E-commerce Tianjin, or the “Equity
Interests,” at a purchase price equal to the registered capital paid by Mr. Zeyao Xue and Mr. Kai Xu for the Equity Interests,
or, in the event that applicable law requires an appraisal of the Equity Interests, the lowest price permitted under applicable
law. Pursuant to powers of attorney executed by Mr. Zeyao Xue and Mr. Kai Xu, they irrevocably authorized any person appointed
by CCM Network to exercise all shareholder rights, including but not limited to voting on their behalf on all matters requiring
approval of E-commerce Tianjin’s shareholder, disposing of all or part of the shareholder’s equity interest in E-commerce
Tianjin, and electing, appointing or removing directors and executive officers. The person designated by CCM Network is entitled
to dispose of dividends and profits on the equity interest without reliance on any oral or written instructions of Mr. Zeyao Xue
and Mr. Kai Xu. The powers of attorney will remain in force for so long as Mr. Zeyao Xue and Mr. Kai Xu remain the shareholders
of E-commerce Tianjin. Mr. Zeyao Xue and Mr. Kai Xu have waived all the rights which have been authorized to CCM Network’s
designated person under the powers of attorney.
Equity Pledge Agreement.
Pursuant to the Equity Pledge Agreements,
Mr. Zeyao Xue and Mr. Kai Xu pledged all of the Equity Interests to CCM Network to secure the full and complete performance of
the obligations and liabilities on the part of E-commerce Tianjin and them under this and the above contractual arrangements. If
E-commerce Tianjin, Mr. Zeyao Xue, or Mr. Kai Xu breaches their contractual obligations under these agreements, then CCM Network,
as pledgee, will have the right to dispose of the pledged equity interests. Mr. Zeyao Xue and Mr. Kai Xu agree that, during the
term of the Equity Pledge Agreements, they will not dispose of the pledged equity interests or create or allow any encumbrance
on the pledged equity interests, and they also agree that CCM Network’s rights relating to the equity pledge should not be
interfered with or impaired by the legal actions of the shareholders of E-commerce Tianjin, their successors or designees. During
the term of the equity pledge, CCM Network has the right to receive all of the dividends and profits distributed on the pledged
equity. The Equity Pledge Agreements will terminate on the second anniversary of the date when E-commerce Tianjin, Mr. Zeyao Xue
and Mr. Kai Xu have completed all their obligations under the contractual agreements described above.
Agreements that Provide us with the Option to Purchase the
Equity Interests in and Assets of our VIE
See Exclusive Purchase Option Agreement
above
Spousal Consent Letters. The
spouse of Mr. Kai Xu (Mr. Zeyao Xue is not married), the shareholder of E-commerce Tianjin has signed a spousal consent letter
agreeing that the equity interests in E-commerce Tianjin held by and registered under the name of such shareholder will be disposed
pursuant to the contractual agreements with CCM Network. The spouse of such shareholder agreed not to assert any rights over the
equity interest in E-commerce Tianjin held by such shareholder.
Impact of COVID-19 on our Business
In December 2019, a novel strain of coronavirus
was reported to have surfaced in Wuhan, China, the pandemic quickly spread to many provinces, autonomous regions, and cities all
over the China and other parts of the world. COVID-19 has materially and adversely affected our business, especially during the
first six months of 2020. In early 2020, Chinese government took emergency measures to combat the spread of the virus, including
quarantines, travel restrictions, and the temporary closure of office buildings and facilities in China.
Substantially all of our revenues are generated
in China. In response to the evolving dynamics related to the COVID-19 outbreak, the Company is following the guidelines of local
authorities as it prioritizes the health and safety of its employees, contractors, suppliers and business partners. Our offices
in China was closed and all of the Company’s employees worked from home from Chinese New Year at the end of January 2020
until late March 2020. Other businesses in China started reopening around the end of the first quarter as well, and more and more
businesses, transportation, logistic and marketing activities have gradually resumed since then. Our offices currently are in normal
operation. However, quarantines, travel restrictions, and the temporary closure of office buildings have negatively impacted our
business during the outbreak. Our suppliers have negatively been affected, and could continue to be negatively affected in their
ability to supply and ship products to our customers by any further outbreak or resurgence of COVID-19 in China. Our customers
that are negatively impacted by the outbreak of COVID-19 may reduce their budgets to purchase products and services from us, which
may materially adversely impact our revenue. The business operations of the third parties’ stores on our platform have been
and could continue to be negatively impacted by any further outbreak or resurgence of COVID-19, which may negatively impact their
operations and business, which may in turn adversely affect the business of our platform as a whole as well as our financial condition
and operating results. The outbreak has had and might continue to have disruption to our supply chain, logistics providers, or
customers if there is a resurgence of COVID-19 in China, which could materially adversely impact our business and results of operations,
including causing our suppliers to cease manufacturing products for a period of time or materially delay delivery to us and customers,
which may also lead to loss of customers, as well as reputational, competitive and business harm to us. The Company’s promotion
strategy for our e-commerce platforms mainly relied on the training of members and distributors through meetings and conferences.
Due to the outbreak of COVID-19, the Chinese government put a restriction on large gatherings and these restrictions made the promotion
strategy for CCM Shopping Mall and NONOGIRL difficult to implement, which have caused the decrease in the sales and enrollment
of new members. Some of our customers, contractors, suppliers and other business partners are small and medium-sized enterprises
(SMEs), which may not have strong cash flows or be well capitalized, and may be vulnerable to an epidemic outbreak and slowing
macroeconomic conditions. If the SMEs that we work with cannot weather the COVID-19 and the resulting economic impact, or cannot
resume business as usual after a prolonged outbreak, our revenues and business operations may be materially and adversely impacted.
The global economy
has also been materially negatively affected by the COVID-19 and there is continued uncertainty about the duration and intensity
of its impacts. The Chinese and global growth forecast is extremely uncertain, which would seriously affect customer spending in
our shopping mall.
While the potential
economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, a widespread pandemic may result
in significant disruption of global financial markets, reducing our ability to access capital, which could negatively affect our
liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business
and the value of the Company’s Common Stock.
Further, as we
do not have access to a revolving credit facility, there can be no assurance that we would be able to secure commercial debt financing
in the future in the event that we require additional capital. We currently believe that our financial resources will be adequate
to see us through the outbreak. However, in the event that we do need to raise capital in the future, outbreak-related instability
in the securities markets could adversely affect our ability to raise additional capital.
Consequently, our results of operations
have been materially adversely affected. Any future impact to our results will depend on, to a large extent, future developments
and new information that may emerge regarding the duration and severity of the COVID-19 and the actions taken by government authorities
and other entities to contain the COVID-19 or treat its impact, almost all of which are beyond our control.
Company Strategy and Principal Products and Services
Our core business historically has been
in the production and sale of fruit juice concentrates (including fruit purees and fruit juices), fruit beverages (including fruit
juice beverages and fruit cider beverages) in the PRC and internationally. Due to drastically increased production cost and tightened
environmental laws in China, the Company has transformed its main business from fruit juice manufacturing and distribution to a
real-name blockchain e-commerce platform that integrates blockchain and internet technology in fiscal year 2019. The e-commerce
platform contributed 93.7% and 96.4% to the total revenue for fiscal 2020 and 2019 respectively.
On February 27, 2020, the Company completed
the transfer of its ownership of HeDeTang HK to New Continent International Co., Ltd. (the “Buyer”), a company incorporated
in the British Virgin Islands, pursuant to a Share Transfer Agreement (the “Agreement”) entered on September 18, 2019.
Pursuant to the terms of the Agreement, the Buyer purchased 100% ownership of HeDeTang HK. (the “Sale Transaction”)
Following the completion of the Sale Transaction,
the main business operations of the Company are focused on our real-name and membership-based blockchain shared shopping mall platform
and cross-border e-commerce platform NONO Girl which was formally launched in July 2020.
As the Company sold its juice related segment,
the financial position and operating results of HeDeTang HK have been classified as discontinued operations within the accompanying
consolidated financial statements of the Company.
The main business of the Company includes an online
shopping platform, Chain Cloud Mall (“CCM”), which is based on blockchain technology; a cross-border e-commerce platform (“NONOGIRL”);
a blockchain-based application incubator; and technical service and support for real name and blockchain based assets and their operating
entities ; and the application and development of blockchain-based e-commerce technology and financial technology. The Company is also
expanding into financial services business.
On July 13, 2020, the Company entered into a
Share Exchange Agreement with Joy Rich Enterprises Limited (“Joy Rich”) to acquire 90% of the issued and outstanding shares
of Nice Talent Asset Management Limited (“NTAM”), a Hong Kong-based asset management company, from Joy Rich. NTAM is licensed
under the Securities and Futures Commission of Hong Kong (“SFC”) to carry out regulated activities in Type 4: Advising on
Securities and Type 9: Asset Management. The transaction was expected to close before the end of 2020. However,
the closing process was impacted by both the Covid-19 global pandemic and slow regulatory approval from Hong Kong regulatory agencies.
Consequently, there had been delayed progress as to the closing of the acquisition. The closing date as stipulated in the Agreement was
no later than December 31, 2020, but since July 2020 there have been changes in NTAM’s business performance as well as the price
of the Company’s common stock. On April 9, 2021, the parties entered into the First Amendment (the “Amendment”)
to the Share Exchange Agreements. Pursuant to the Amendment, the parties agree to amend the purchase price and certain earn-out terms
as follows: (i) the aggregate purchase price for Nice Shares shall be HK$144,000,000 (the “Purchase Price”) and it shall
be paid in the shares of common stock of the Company (the “Company Shares”); (ii) 60% of the Purchase Price or HK$86,400,000
shall be paid in the shares of common stock of the Company based on 95% of the closing price of the Company’s common stock listed
on Nasdaq Stock Exchange on the date prior to the date of the Amendment and the foreign exchange rate between HK$ and US$ shall be 7.7:1;
(iii) 20% of Purchase Price shall be paid in the shares of common stock of the Company if Nice achieves an Earnings Before Interest and
Taxes (the “EBIT”) of HK$14,000,000 (the “2021 EBIT Goal”), as evidenced in its 2021 audited financial statements
for fiscal year ended December 31, 2021 audited by the auditor of the Company (the “2021 Earn-Out Shares”); (iv) the final
20% of Purchase Price shall be paid in the shares of common stock of the Company if Nice achieves an EBIT of HK$20,000,000 (the “2022
EBIT Goal”), as evidenced in its 2022 audited financial statements for fiscal year ended December 31, 2022 audited by the auditor
of the Company (the “2022 Earn-Out Shares”); (v) if Nice does not achieve the EBIT Goal for a given year, the shortfall between
EBIT Goal and the actual EBIT for that year shall be the EBIT Shortfall (the “EBIT Shortfall”) and the amount of an EBIT
Shortfall Fee that equals to 10 (ten) times of the EBIT Shortfall amount (the “EBIT Shortfall Fee”) shall be paid in cash
by the Seller to the Buyer even though such year’s Earn-Out Shares shall still be issued in full to the Seller.
On February 26, 2021, Future FinTech Group
Inc. (the “Company”) and Future Supply Chain Co., Ltd., a wholly owned subsidiary of the Company and a company incorporated
under the laws of China entered into a Share Exchange Agreement (the “Agreement”) with Sichuan Longma Electronic
Technology Co. Ltd., a company incorporated under the laws of China (“Seller”) and Sichuan Ticode Supply Chain Management
Co., Ltd., a company incorporated under the laws of China (“Ticode”). Pursuant to the Agreement, the Company, through the Buyer will acquire 60% of the equity interest of Ticode from
the Seller in exchange for 7,789,882 shares of common stock of the Company. Ticode
provides financial services for the supply chain industry. Ticode’s business includes procurement agent services, sales agent
services, inventory pledged loan services, and supply chain financing intermediary services. Ticode’s supply chain related services
cover electronic components, technology services to supply chain data management for the electronics industry, and supply chain
management for various electronic components and materials, metal materials and raw plastic materials.
On March 18, 2021, the Company filed Articles of Amendment (the “Amendment”)
with the Secretary of State for the State of Florida to amend its Second Amended and Restated Articles of Incorporation to increase the
amount of authorized shares of its common stock, par value $0.001 per share, from 60,000,000 to 300,000,000. The Amendment was approved
by the Company’s Board of Directors (the “Board”) on February 12, 2021 and by shareholders holding a majority of the
Company’s issued and outstanding capital stock on February 12, 2021. The Amendment does not affect the rights of the Company’s
shareholders and was effective immediately upon filing
Chain Cloud Mall (CCM)
The Company has transformed its business
from fruit juice manufacturing and distribution to a real-name and membership-based blockchain e-commerce platform that integrates
blockchain and internet technology.
The trial operation of CCM started on December
26, 2018. On January 22, 2019, the Company formally launched Chain Cloud Mall, the real-name and membership-based blockchain shared
shopping mall platform that integrates blockchain and internet technology and distinguishes itself by utilizing the automatic value
distribution system of blockchain and sharing the value of the platform to all the participants in the system.
On June 1, 2019, CCM v2.0 was launched.
Compared to the 1.0 version, CCM v2.0 has a wider variety of product categories, easier user interface, more transparent information,
more stable operations, a higher security level, and faster logistics.
On May 1, 2020, CCM v3.0 was launched.
The latest CCM v3.0 creates a new value cycle system of online shopping mall with the real-name blockchain system with following
characteristics:
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1.
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Blockchain anti-counterfeiting
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2.
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Blockchain points settlement leads to secondary data traffic
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3.
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Points promotion system
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4.
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Member community system to build a high value community
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The blockchain technology enables CCM to
record every event or transaction on a distributed ledger and makes the whole process traceable. It also enables the CCM to record
and provide CCM points to its members upon a successful new member and/or product referral, which can be used as credit when making
purchases on CCM. It incentivizes its members to promote the platform and share the products with their social contacts, which
in turn increases the sales through CCM.
Based on blockchain technology, CCM is
established to transform the relationship between companies and consumers from a traditional selling and buying relationship to
a value-sharing relationship. The platform fairly distributes the benefits of the entire mall to users who engage in promotion,
development, and consumption based on their contributions to the platform. The members of CCM are not only consumers and entrepreneurs
but also participants, promoters and beneficiaries.
CCM has attracted a growing base of users,
including members and non-members. These users are actively purchasing products on the platform. Members are the key participants
on CCM and drivers of its growth. Our members typically pay to gain access to a dedicated app that provides access to a curated
selection of products, exclusive membership benefits, and features, including discounted prices and point rewards. Members can
refer others to become members and are rewarded for doing so. Members can also promote products on various social platforms and
are rewarded if those users purchase our products.
Currently, there are three kinds of membership
programs with different membership Fees. The members are required to log onto CCM app or web portal in order to download some of
their rewarding points each day. The member could download all his/her rewarding points if he/she logs onto the app or web portal
for at least 200 days within the membership valid period which is 365 days. Members must renew their membership before expiration
to continue earning points and enjoy the discounts. A non-member user can purchase products from the platform but does not enjoy
the above-mentioned benefits.
Membership benefits are as follows:
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1)
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Receive a merchandise gift package
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2)
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Exclusive discounts for merchandise sold on the CCM Web and App
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3)
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Receive CCM-Points upon a successful new member and product referral
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CCM-Points can be used as coupons for the member’s future
purchases on our app and website.
CCM had approximately 6,687 and 6,401 users
as of December 31, 2020 and December 31, 2019, respectively.
We currently generate revenues primarily
from fixed membership fees and selling products on our platform to users, including both members and non-members. Membership revenue
is recognized when a member registers and makes his/her first order on CCM app or web portal.
For the year ended December 31, 2020, approximately
$0.34 million was recognized for fixed membership fees revenue from 5,362 members and approximately $9,159 for merchandise sales
revenue from orders on the Company’s own sales platform, which in total account for 2.47% of our total revenue.
Competition and our Competitive Advantages
The e-commerce industry in China is intensely
competitive. Our competitors include all major e-commerce companies in China, and other internet companies that engage in social
e-commerce businesses.
We anticipate that the e-commerce industry
will continually evolve and will continue to experience rapid technological change, evolving industry standards, shifting customer
requirements, and frequent innovation. We must continually innovate to remain competitive.
We compete primarily on the basis of the
following factors: (i) our ability to attract and retain a large number of members and other users and establish strong community
bonding and maintain member loyalty through interaction effectively and reward programs; (ii) our shared shopping platform that
enables users to buy products easily; (iii) strong fulfillment capabilities, including logistics and online payment, (iv) advanced
technology infrastructure, and (v) reliable and flexible supply chain and strong manufacturing partner network.
We have a unique real-name and membership–based
blockchain e-commerce shopping platform that integrates blockchain, internet technology and distinguishes itself by utilizing the
automatic value distribution system of the blockchain and sharing the value of the platform to all the participants in the system.
In addition to providing value and convenience to our members, we reward them for referring new members and promoting our products
and helping to generate transactions. Based on blockchain technology, CCM is established to transform the relationship between
companies and consumers from traditional selling and buying relationship to a value-sharing relationship. The platform will fairly
distribute the benefit of the entire mall to users who engage in promotion, development, and consumption based on their contributions
to the platform.
Our latest CCM v3.0 creates a new value cycle system of online
shopping mall with the real-name blockchain system with following characteristics:
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1.
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Blockchain anti-counterfeiting
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Using
real-name blockchain technology to carry out anti-counterfeiting for products produced by the enterprises. The essence of anti-counterfeiting
is to determine the person responsible for the product. Using real-name blockchain system, it provides the assurance to our customers
to the authentication of the products they purchase and solve the problem of counterfeiting products in online shopping mall.
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Blockchain points settlement leads to secondary data traffic
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Blockchain points are also discount
coupons for merchants, guiding customers to the platform of the merchants, and provide them discounts when purchasing. This process
is called secondary data traffic. It is important to maintain old customers. Blockchain anti-counterfeiting technology through
scanning of QR codes by the customers helps companies identify such customers and allows them to systematically maintain contacts
with such customers.
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3.
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Points promotion system
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Points promotion
system brings secondary data traffic comes with volume and high turnover ratio. All such sales are directed to the merchants’
stores when customers possess and use merchants’ coupons. With a high level of user stickiness, customers are likely to purchase
products again and collect more blockchain points.
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4.
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Member community system to build a high value community
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Anti-counterfeiting technology
plus the Company’s secondary data traffic platform have created great value for the merchants that have stores on our platform.
By gathering all loyal customers to a merchant’s store, it can build a community of people with the common interest. Through
the community, the merchant can form a self-organizing system with customer groups to maximize the interests of such merchant.
We believe that our management team, which
includes Yongke Xue, our Chairman of Board of Directors, Shanchun Huang, Chief Executive Officer, Ming Yi, our Chief Financial
Officer, Yang Liu, our Chief Operation Officer and Weicheng Pan, our Chief Strategy Officer, and a seasoned team of senior managers
with significant experience in the areas of operations, marketing, technology and finance.
Industry and Principal Markets
E-commerce Industry and Social E-commerce Platforms in China
According to a PR Newswire report, the total
transaction volume of China’s e-commerce market reached $1.87 trillion in 2020, and the market is expected to grow by 70 percent by
2024. In 2020, China has become the world’s largest mobile e-commerce market, with a total transaction volume of $1.18 trillion,
three times that of the United States, the second largest mobile e-commerce market. The e-commerce market is expected to reach $3.17
trillion by 2024.
Blockchain Technology and Digital Economy
Development
In 2016, the China State Council included
blockchain technology as a new technology and started the promotion and development of blockchain technology and applications.
Since then, the central and local governments have issued relevant supervision and support policies to support blockchain technology
and industry development to enable commercialization. In April 2020, the Chinese Ministry of Industry and Information Technology
(“MITT”) announced that it will strongly support technological innovation and industrial applications such as blockchain
technology. Blockchain technology is now widely used by Chinese leading financial organizations and institutions. In early 2020,
Alibaba announced its integration of a full-link traceability blockchain system into its importation e-commerce platform, Kaola.
2020 is a year of China-ASEAN digital economic
cooperation. Leading high-quality development with a credible digital economy is becoming a new highlight in the development of
cooperation between China and ASEAN countries. In the field of digital economy, China and ASEAN countries have a good foundation
and environment of cooperation. We believe it is a good time to create application demonstration projects through the construction
of digital infrastructure, support for 5G networks, the advancement of artificial intelligence, the initiation of innovative applications
of blockchain and other emerging technologies.
At present, ASEAN countries hope to keep
up with the development of the digital economy in order to start the digitalization of border markets, e-commerce, cross-border
settlement, smart logistics, supply chain finance and traditional industries as soon as possible. As a basic and systematic technology
and facility, the application of blockchain is expected to become an important force for future industrial revolution.
Marketing and Sales
For our CCM shared shopping mall, we incentivize
our members to recommend and market products through their own social networks and communities. Customers tend to find recommendations
by influencers, including friends and families, who customers tend to deem trustworthy. Members who promote products are rewarded
if other users purchase our products based on that promotion.
Government Regulations
Regulations Relating to E-Commerce
In January 2014, the former State of Administration
of Industry and Commerce (which has been merged into State Administration for Market Regulation or SAMR) adopted the Administrative
Measures for Online Trading, or the Online Trading Measures, which took effect in March 2014. Under the Online Trading Measures,
e-commerce platform operators are required to examine, register and archive the identity information of the merchants applying
for access to their platforms as sellers, and verify and update such information regularly. The Online Trading Measures also provide
that e-commerce platform operators must make publicly available (i) the link to or the information contained in the business licenses
of the merchants, in the case of business entities, or (ii) a label confirming the verified identity of the merchants, in the case
of individuals. A consumer is entitled to return the commodities within seven days after receipt of the commodities without giving
a reason, except for the following commodities: customized commodities, fresh and perishable commodities, audio-visual products
downloaded online or unpackaged by consumers and computer software and other digital commodities, and newspapers and journals that
have been delivered. E-commerce platform operators must, within seven days upon receipt of the returned commodities, provide full
refunds to consumers. In addition, operators are prohibited from setting forth provisions in contracts or other terms that are
not fair or reasonable to consumers such as those excluding or restraining consumers’ rights, relieving or exempting operators’
responsibilities, and increasing the consumers’ responsibilities, or conducting transactions in a forcible manner taking
advantage of contractual terms or technical means.
In March 2016, the State Administration
of Taxation, or the SAT, the Ministry of Finance, or the MOF, and the General Administration of Customs jointly issued the Circular
on Tax Policy for Cross-Border E-Commerce Retail Imports, which took effect in April 2016. Pursuant to this circular, goods imported
through the cross-border e-commerce retail are subject to tariff, import value-added tax, and consumption tax based on the types
of goods. Individuals purchasing any goods imported through cross-border e-commerce retail are taxpayers, and e-commerce companies,
companies operating e-commerce transaction platforms or logistic companies are required to withhold the taxes.
On August 31, 2018, the Standing Committee
of the National People’s Congress promulgated the E-Commerce Law, which became effective on January 1, 2019. The E-Commerce
Law sets forth a series of requirements on e-commerce platform operators. According to the E-Commerce Law, e-commerce platform
operators shall verify and register platform merchants, and cooperate with the market regulatory administrative department and
tax administrative department to conduct industry and commerce registrations and tax registrations for merchants. The e-commerce
platform operators shall also prepare a contingency plan for cybersecurity events and take technological measures and other measures
to prevent online illegal and criminal activities. The E-Commerce Law also expressly requires platform operators to take necessary
actions to ensure fair dealing on their platforms to safeguard the legitimate rights and interests of consumers, including to prepare
platform service agreements and transaction information record-keeping and transaction rules, to prominently display such documents
on the platform’s website, and to keep such information for no fewer than three years following the completion of a transaction.
To legally handle intellectual property infringement disputes, upon receipt of the notice specifying preliminary evidence for alleged
infringement, the platform operators are required to take necessary measures in a timely manner, such as deleting, blocking and
disconnecting the hyperlinks, terminating transactions and services, and forwarding notices to merchants on its platform. If an
e-commerce platform operator fails to take necessary measures when it knows or should have known that a merchant on the platform
infringes any third-party intellectual property rights, products or services provided by a merchant on its platform do not meet
the requirements regarding personal or property safety, or any merchant otherwise impairs the lawful rights and interests of consumers,
the e-commerce platform operator will be held jointly liable with the merchants on its platform.
Moreover, the E-Commerce Law imposes a
requirement on operators of e-commerce platforms to assist in tax collection with respect to income generated by sellers from transactions
conducted on e-commerce platforms, including among others, submitting to the tax authority information on the identities of sellers
on e-commerce platforms and other information relating to tax payment. Failure to comply with the requirement may result in operators
of e-commerce platform being subject to fines and, in severe circumstances, suspension of business operations of e-commerce platforms.
If the merchants on our platform were deemed to be selling our products on consignment basis, the PRC tax authorities may require
our members to make tax registration and request our assistance in these efforts, pursuant to the new E-Commerce Law, and the merchants
may be subject to more stringent tax compliance requirements. See “Risk Factors— Failure to comply with the relatively
new E-Commerce Law may have a material adverse impact on our business, financial conditions and results of operations.”
According to the EIT Law, the VAT Law and other applicable regulations, sellers that conduct transactions on e-commerce platforms
are generally subject to enterprise income tax at a rate of 25%, and value-added tax at a rate of 13% or 9% for services or products
sold on the e-commerce platforms. Certain sellers that are deemed as small taxpayers under PRC law are subject to reduced value-added
tax at a rate of 3%.
Value-Added Telecommunication Business Operating Licenses
The PRC Telecommunications Regulations,
or the Telecom Regulations, which were issued by the State Council in 2000 and were most recently amended in February 2016 are
the primary governing law on telecommunication services. The Telecom Regulations set out the general framework for the provision
of telecommunication services by PRC entities. Under the Telecom Regulations, telecommunications service providers are required
to procure operating licenses prior to their commencement of operations. The Telecom Regulations draw a distinction between “basic
telecommunications services” and “value-added telecommunications services.” A “Catalog of Telecommunications
Business” was issued as an attachment to the Telecom Regulations to categorize telecommunications services as basic or value-added.
In December 2015, MIIT released the Catalog of Telecommunication Business (2015 Revision), or the 2015 Telecom Catalog, implemented
in March 2016. Under the 2015 Telecom Catalog, both the online data processing and transaction processing business (i.e., operating
e-commerce business) and information service business, continue to be categorized as value-added telecommunication services.
In March 2009, MIIT issued the Administrative
Measures for Telecommunications Business Operating Permit, or the Telecom Permit Measures, which was implemented in 2009 and most
recently amended in 2017. Pursuant to the Telecom Permit Measures, the operation scope of the value-added telecommunication business
operating license, or VATS license, shall detail the permitted activities of the enterprise to which it is granted. An approved
telecommunication services operator shall conduct its business in accordance with the specifications recorded on its VATS License.
The VATS Licenses can be further categorized based on the specific business operations permitted to be carried out under such licenses,
including among others, the VATS Licenses for internet information services, or the ICP License, and the VATS License for electronic
data interchange business, or the EDI License. In addition, a VATS License holder is required to obtain approval from the original
permit-issuing authority prior to any change to its shareholders, business scope or other information recorded on such license.
In February 2015, the State Council issued the Decisions on Cancelling and Adjusting a Batch of Administrative Approval Items,
which, among other things, replaced the pre-registration approval requirement for telecommunications businesses with a post-registration
approval requirement.
In September 2000, the State Council promulgated
the Administrative Measures on Internet Information Services, or the Internet Measures, most recently amended in January 2011.
Under the Internet Measures, “internet information services” refer to the provision of information through the internet
to online users, and are divided into “commercial internet information services” and “non-commercial internet
information services”. Commercial internet information services operators shall obtain an ICP License, from the relevant
government authorities within China. Chain Cloud Mall E-commerce (Tianjin) Co., Ltd., our VIE, holds our VATS License for our Value-Added
Telecommunication businesses.
Regulations Relating to Internet Information Security and
Privacy Protection
Internet information in China is regulated
from a national security standpoint. The National People’s Congress, or the NPC, enacted the Decisions on Preserving Internet
Security in December 2000 and amended in August 2009, which subject violators to potential criminal punishment in China for any
attempt to: (i) gain improper entry into a computer or system of strategic importance; (ii) disseminate politically disruptive
information; (iii) leak state secrets; (iv) spread false commercial information; or (v) infringe intellectual property rights.
The Ministry of Public Security of the PRC, or the MPS, promulgated the Administrative Measures for the Computer Information Network
and Internet Security Protection in December 1998 and amended in January 2011, which prohibits use of the internet in ways which,
among other things, result in a leak of state secrets or a spread of socially destabilizing content. If an internet information
service provider violates these measures, the MPS and its local branches may issue a warning, confiscate the illegal gains, impose
fines, and, in severe cases, advise competent authority to revoke its operating license or shut down its websites.
Under the Several Provisions on Regulating
the Market Order of Internet Information Services, issued by the MIIT in December 2011 and implemented in March 2012, an internet
information service provider may not collect any user personal information or provide any such information to third parties without
the consent of the user. An internet information service provider must expressly inform the users of the method, content and purpose
of the collection and processing of such user personal information and may only collect such information necessary for the provision
of its services. An internet information service provider is also required to properly maintain the user’s personal information,
and in case of any leak or likely leak of the user’s personal information, the internet information service provider must
take immediate remedial measures and, in severe circumstances, immediately report to the telecommunications authority. Moreover,
pursuant to the Ninth Amendment to the Criminal Law issued by Standing Committee of the National People’s Congress (the “SCNPC”)
in August 2015 and implemented in November 2015, any internet service provider that fails to fulfill the obligations related to
internet information security administration as required by applicable laws and refuses to rectify such failure upon orders, shall
be subject to criminal penalty for the result of (i) any dissemination of illegal information in large scale; (ii) any severe effect
due to the leakage of the client’s information; (iii) any serious loss of criminal evidence; or (iv) other severe situation.
Any individual or entity that (i) sells or provides personal information to others in a way violating the applicable law, or (ii)
steals or illegally obtains any personal information, shall be subject to criminal penalty in severe situation. In addition, the
Interpretations of the Supreme People’s Court and the Supreme People’s Procuratorate of the PRC on Several Issues Concerning
the Application of Law in Handling Criminal Cases of Infringing Personal Information, issued in May 2017 and implemented in June
2017, clarified certain standards for the conviction and sentencing of the criminals in relation to personal information infringement.
In November 2016, the SCNPC promulgated
the Cyber Security Law of the PRC, or the Cyber Security Law, which became effective on June 1, 2017. The Cyber Security Law requires
that a network operator, which includes, among other things, internet information services providers, take technical measures and
other necessary measures in accordance with applicable laws and regulations and the compulsory requirements of the national and
industrial standards to safeguard the safe and stable operation of its networks. We are subject to such requirements as we are
operating websites and mobile applications and providing certain internet services mainly through our mobile applications. The
Cyber Security Law further requires internet information service providers to formulate contingency plans for network security
incidents, report to the competent departments immediately upon the occurrence of any incident endangering cyber security and take
corresponding remedial measures.
Internet information service providers
are also required to maintain the integrity, confidentiality and availability of network data. The Cyber Security Law reaffirms
the basic principles and requirements specified in other existing laws and regulations on personal data protection, such as the
requirements on the collection, use, processing, storage and disclosure of personal data, and internet information service providers
being required to take technical and other necessary measures to ensure the security of the personal information they have collected
and prevent the personal information from being divulged, damaged or lost. Any violation of the Cyber Security Law may subject
the internet information service provider to warnings, fines, confiscation of illegal gains, revocation of licenses, cancellation
of filings, shutdown of websites or criminal liabilities.
Furthermore, MIIT’s Rules on Protection
of Personal Information of Telecommunications and Internet Users promulgated in July 2013, effective September 2013, contain detailed
requirements on the use and collection of personal information as well as security measures required to be taken by telecommunications
business operators and internet information service providers.
Regulations Relating to Pyramid Selling in the PRC
The Regulations on Prohibition of Pyramid
Selling, that were promulgated by the State Council in August 2005 and became effective in November 2005, prohibit pyramid selling
activities. According to the Regulations on Prohibition of Pyramid Selling, the following activities taken by organizers or operators
are considered as “pyramid selling”: (i) taking in new members and compensating each member by giving material awards
or other financial benefits, based upon the number of new members directly or indirectly introduced by such member on a rolling
basis, so as to gain illegal benefits; or (ii) requesting a sum of money as entry fee or as a condition to membership for new members,
either directly or through purchasing commodities, so as to gain illegal benefits; or (iii) requesting members to introduce additional
members to establish a multi-level relationship and compensating each member based on the level of sales generated by the additional
members introduced by such member, so as to gain illegal benefits. The PRC laws and regulations have not defined “illegal
benefit” and the determination of gaining “illegal benefit” is to a large extent subject to discretionary view
of the competent authorities in the PRC. Any individual or entity engaging in organization of pyramid selling may be subject to
confiscation of illegal gains and fines ranging from RMB0.5 million to RMB2.0 million (US$0.3 million), and criminal liabilities
if a crime is committed. On March 23, 2016, the former State of Administration of Industry and Commerce (which has been merged
into SAMR) promulgated the Risk Warning for New Types of Pyramid Selling, which provides that if an activity satisfies the three
features stated above at the same time, it will be identified as pyramid selling, regardless of whether any illegal benefit is
obtained. We believe we do not request a sum of money as entry fee through purchasing commodities, our membership package,
which individuals are required purchase to become a member of our platform, include a set of selected products or services
and access to our app containing membership benefits and features. Also, we grant to our members upon a successful new member referral
to blockchain points, which are not redeemable for cash and can only be used as coupons for future purchases on our platform. We
also avoid establishing multi-level relationship of members, we grant members incentives only for products sold directly via the
links that such member shares through his/her social network, and not for products sold via links shared by any other member that
was originally invited by such member. In addition, since we have provided products of value and services to our members as consideration
for purchasing our membership package, and the products on our platform are offered at market prices, we believe our current business
practices do not constitute as gaining “illegal benefits.” We believe that our current business model is not in violation
of applicable PRC laws and regulations, including the Regulations on the Prohibition of Pyramid Selling. See “Risk Factors—If
our business model were found to be in violation of applicable laws and regulations, our business financial condition and results
of operations would be materially and adversely affected.”
Regulations Relating to Intellectual Property in the PRC
Trademark
The PRC Trademark Law and its implementation
rules protect registered trademarks. The PRC Trademark Office of State Administration of Industry and Commerce is responsible for
the registration and administration of trademarks throughout the PRC. The Trademark Law has adopted a “first-to-file”
principle with respect to trademark registration. Registered trademarks are granted a valid term of ten years, which can be renewed
each time for another ten years commencing from the day after the expiry date of the last period of validity if the required renewal
formalities have been completed. Pursuant to the PRC Trademark Law, counterfeit or unauthorized production of the label of another
person’s registered trademark, or sale of any label that is counterfeited or produced without authorization will be deemed
as an infringement to the exclusive right to use a registered trademark. The infringing party will be ordered to stop the infringement
immediately, a fine may be imposed, and the counterfeit goods will be confiscated. The infringing party may also be held liable
for the right holder’s damages, which will be equal to the gains obtained by the infringing party or the losses suffered
by the right holder as a result of the infringement, including reasonable expenses incurred by the right holder for stopping the
infringement.
Domain Name
The MIIT promulgated the Measures on Administration
of Internet Domain Names, or the Domain Name Measures, on August 24, 2017, which took effect on November 1, 2017. The MIIT is the
major regulatory body responsible for the administration of PRC internet domain names, under supervision of which the China Internet
Network Information Center, or CNNIC, is responsible for the daily administration of “.cn” domain names and Chinese
domain names. CNNIC adopts a “first-to-file” principle with respect to the registration of domain names. Applicants
for registration of domain names must provide the true, accurate and complete information of their identities to domain name registration
service institutions. The applicants will become the holder of such domain names upon the completion of the registration procedure.
Copyright
The PRC Copyright Law, or the Copyright
Law, which took effect on June 1, 1991 and was amended in 2001 and 2010, provides that Chinese citizens, legal persons, or other
organizations shall, whether published or not, own copyright in their copyrightable works, which include, among other things, works
of literature, art, natural science, social science, engineering technology and computer software. Copyright owners enjoy certain
legal rights, including the right of publication, right of authorship and right of reproduction. The Copyright Law extends copyright
protection to Internet activities, products disseminated over the Internet and software products. In addition, the Copyright Law
provides for a voluntary registration system administered by the China Copyright Protection Center, or the CPCC. According to the
Copyright Law, an infringer of copyrights shall be subject to various civil liabilities, which include ceasing infringement activities,
apologizing to the copyright owners and compensating the loss of copyright owner. Infringers of copyright may also be subject to
fines and/or administrative or criminal liabilities in severe situations.
Pursuant to the Computer Software Copyright
Protection Regulations promulgated by the State Council on December 20, 2001 and amended on January 30, 2013, Chinese citizens,
legal persons and other organizations shall enjoy copyright on software they develop, regardless of whether the software is released
publicly. Software copyright commences from the date on which the development of the software is completed. The protection period
for software copyright of a legal person or other organizations shall be 50 years, concluding on December 31 of the 50th year after
the software’s initial release. The software copyright owner may go through the registration formalities with a software
registration authority recognized by the State Council’s copyright administrative department. The software copyright owner
may authorize others to exercise that copyright, and is entitled to receive remuneration.
Intellectual Property
The Company previously had 10 trademarks in China,
including Hedetang, SkyPeople, Qianmeiduo, VCFruits King, ZhenGuoShu, ZhenMiHouTao, ZhenSangshen, ZhenShiLiu, Quangou, FullMart. All these
trademarks are owned by the subsidiaries of HeDeTang HK and were transferred with HeDeTang HK to New Continent International Co., Ltd.
on February 27, 2020.
The Company currently
has 30 registered Internet Domain names, including hedejiachuan.com intervalue.vip, intervalue.net.cn, intervalue.com.cn, intervalue.cc,
intervalue.ltd, intervalue.top, ftex.ltd, ftex.net.cn, ftex.vip, ftex.top, ftex.cc, dcon.top, dconpay.com, dconio.com, digipay.ink, digipay.vip
globalkey.vip, globalkey.shop, globalkey.store, digipay.net.cn, digipay.ltd, globalkey.net.cn, globalkey.cc, globalkey.top, ftft.top,
ftftex.com, ftft.com, ftftbank.com, mftftpay.com, inuteam.com. All these Domain names are owned by the subsidiaries of the Company.
The Company owns
copyright for the software for its blockchain based e-commerce platform application, including: (i) a
blockchain credit points discount settlement system; (ii) a blockchain credit points circulation monitoring system; (iii) a legal
currency and credit points synchronization settlement system; (iv) a blockchain credit points flow system; (v) an agent automatic
profit distribution system (vi) an agent automatic tax deduction and accounting system; (vii) a manufacturer automatic accounting
system; (viii) an e-commerce and blockchain anti-counterfeiting linkage system; (ix) a blockchain discount and promotion automatic
balance system; (x) a blockchain real-name authentication and legal responsibility system.
We believe that our continued success and
competitive status depend largely on our proprietary technology and ability to innovate. We have taken measures to protect the
confidentiality of our proprietary technologies and intellectual property. We rely on a combination of know-how, copyrights for
our software and trade secret laws, as well as confidentiality agreements to protect our proprietary rights. We will take the necessary
action to seek remuneration if we believe our intellectual property rights have been infringed upon.
Human
Capital Resources
We understand that our success depends on our ability to attract,
train and retain our employees. We strive to attract, recruit, and retain employees through
competitive compensation and benefit programs, learning and development opportunities that support career growth and advancement
opportunities, and employee engagement initiatives that foster a strong Company culture. In addition to cash compensation, we offer
customary benefits in accordance with local regulatory requirements as well as performance-based stock awards to our employees.
We also recognize the importance of keeping our employees safe. In response to the
COVID-19 pandemic, we implemented changes that we determined were in the best interest of our employees and have followed local
government orders to prevent the spread of COVID-19
Employees
As of December 31, 2020, we had 31 full-time employees
and 1 part-time employee, all of whom are located in the PRC except for two officers are mainly located in the United States. None of
our employees are covered by a collective bargaining agreement as of the date of this Report. We consider our relationships with our employees
to be good.
ITEM 1A – RISK FACTORS
Our business and an investment in our
securities are subject to a variety of risks. The following risk factors describe the most significant events, facts or circumstances
that could have a material adverse effect upon our business, financial condition, results of operations, ability to implement our
business plan and the market price for our securities. Additional risks and uncertainties that presently are not considered material
or are not known to us, and therefore are not mentioned herein, may impair our business operations. Many of these events are
outside of our control. If any of these risks actually occurs, our business, financial condition or results of operations may be
materially adversely affected. In such case, the trading price of our common stock could decline and investors in our common stock
could lose all or part of their investment.
Risks Related to Our Business
An occurrence of an uncontrollable
event such as the COVID-19 pandemic may negatively affect our operations and financial results.
In recent years, there have been outbreaks
of epidemics in various countries, including China. Recently, there was an outbreak of a novel strain of coronavirus (COVID-19)
in China, which has spread rapidly to many parts of the world, including the U.S. In March 2020, the World Health Organization
declared COVID-19 a pandemic. The COVID-19 pandemic has resulted in, among other things, quarantines, travel restrictions, and
the temporary closure of office buildings and facilities in China and in the U.S.
Substantially all of our revenues are generated
in China. Consequently, our results of operations have been and may continue to be adversely affected, to the extent that COVID-19
harms the Chinese and global economy. Any potential impact to our results will depend on, to a large extent, future developments
and new information that may emerge regarding the duration and severity of COVID-19 and the actions taken by government authorities
and other entities to contain COVID-19 or treat its impact, almost all of which are beyond our control. Potential impacts include,
but are not limited to, the following:
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temporary closure of offices, travel restrictions or suspension of transportation of products to our customers; and our suppliers have been negatively affected, and could continue to be negatively affected, on their ability to fulfill our demands if there is any resurgence of COVID-19;
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our customers that are negatively impacted by the outbreak of COVID-19 may reduce their budgets to purchase our products and services, which may materially adversely impact our revenue;
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We may have to provide significant sales incentives to our customers in response to the COVID-19 outbreak, which may in turn materially adversely affect our financial condition and operating results;
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The business operations of our customers, third party stores on our platform and suppliers have been and could continue to be negatively impacted by the outbreak, which may result in loss of customers or disruption of our services, which may in turn materially adversely affect our financial condition and operating results;
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any disruption of our supply chain, logistics
providers or customers could adversely impact our business and results of operations, including causing our suppliers to cease
manufacturing products for a period of time or materially delay delivery to customers, which may also lead to loss of customers,
as well as reputational, competitive and business harm to us;
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The Company’s promotion strategy for our e-commerce platform
mainly relied on the training of members and distributors through meetings and conferences. Due to the outbreak of COVID-19, the
Chinese government put a restriction on large gatherings and these restrictions has made and may continue to make the promotion
strategy for CCM Shopping Mall and NONOGIRL difficult to implement, which have caused and may continue to cause the decrease in
the sales of goods and new members’ enrollment.
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many of our customers, distributors, suppliers and other partners are individuals and small and medium-sized enterprises (SMEs), which may not have strong cash flows or be well capitalized, and may be vulnerable to an epidemic outbreak and slowing macroeconomic conditions. If the SMEs that we work with cannot weather COVID-19 and the resulting economic impact, or cannot resume business as usual after a prolonged outbreak, our revenues and business operations may be materially and adversely impacted;
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The global stock markets may experience,
significant decline from the COVID-19 outbreak, which could materially adversely affect our stock price.
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Because of the uncertainty surrounding
the COVID-19 outbreak, the future impact related to the outbreak and potential resurgence as well as the local and global response
cannot be reasonably estimated at this time.
The global economy
has also been materially negatively affected by the COVID-19 and there is continued severe uncertainty about the duration and intensity
of its impacts. The Chinese and global growth forecast is extremely uncertain, which would seriously affect the consumer spending
in shopping malls.
While the potential
economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, a widespread pandemic could result
in significant disruption of global financial markets, reducing our ability to access capital, which could negatively affect our
liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business
and the value of our common stock.
Further, as we
do not have access to a revolving credit facility, there can be no assurance that we would be able to secure commercial debt financing
in the future in the event that we require additional capital. We currently believe that our financial resources will be adequate
to see us through the outbreak. However, in the event that we do need to raise capital in the future, outbreak-related instability
in the securities markets could adversely affect our ability to raise additional capital.
In general, our business could be adversely
affected by the epidemics, including, but not limited to, COVID-19, avian influenza, severe acute respiratory syndrome (SARS),
the influenza A virus, the Ebola virus, or other outbreaks. In response to an epidemic or other outbreaks, governments and other
organizations may adopt regulations and policies that could lead to severe disruption to our daily operations, including temporary
closure of our offices and other facilities. These severe conditions may cause us and/or our partners to make internal adjustments,
including but not limited to, temporarily closing down business, limiting business hours, and setting restrictions on travel and/or
visits with clients and partners for a prolonged period of time. Various impacts arising from severe conditions may cause business
disruption, resulting in material, adverse effects to our financial condition and results of operations.
Economic conditions have had and
may continue to have an adverse effect on consumer spending on our products.
The worldwide economy remains volatile
and may have entered in global recession. The adverse effect of a sustained international economic downturn, including sustained
periods of decreased consumer spending, high unemployment levels, declining consumer or business confidence and continued volatility
and disruption in the credit and capital markets, would likely result in reduced demand for our products and service as consumers
may forego certain purchases. To the extent an international economic downturn develops, we could experience a reduction in sales
volume. If we are unable to reduce our operating costs and expenses proportionately, many of which are fixed, our results of operations
would be adversely affected.
We may not be able to effectively
control and manage our growth, and a failure to do so could adversely affect our operations and financial condition.
If our newly developed blockchain based
e-commerce business and markets experience significant growth, we will need to expand our business to maintain our competitive
position. We may face challenges in managing and financing expansion of our business, facilities and product offerings, including
challenges relating to integration of acquired businesses and increased demands on our management team, employees and facilities.
Failure to effectively deal with increased demands on us could interrupt or adversely affect our operations and cause production,
service and transportation backlogs, longer new products or services development time frames and administrative inefficiencies.
Other challenges involved with expansion, acquisitions and operation include:
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unanticipated costs;
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the diversion of management’s attention from other business concerns;
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potential adverse effects on existing business relationships with suppliers and customers;
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obtaining sufficient working capital to support expansion;
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expanding our product offerings and maintaining the high quality of our products and services;
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continuing to fill customers’ orders on time; maintaining adequate control of our expenses and accounting systems;
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successfully integrating any future acquisitions; and
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anticipating and adapting to changing conditions in the blockchain and/or ecommerce online shopping industries and financial technology, whether from changes in government regulations, mergers and acquisitions, technological developments or other economic, competitive or market dynamics.
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Even if we obtain benefits of expansion
in the form of increased sales, there may be delay between the time when the expenses associated with an expansion or acquisition
are incurred and the time when we recognize such benefits, which could negatively affect our earnings.
We may engage in future acquisitions
involving significant expenditures of cash, the incurrence of debt or the issuance of stock, all of which could have a materially
adverse effect on our operating results.
As part of our business strategy, we review
acquisition and strategic investment prospects that we believe would complement our current product offerings, augment our market
coverage, enhance our technological capabilities or otherwise offer growth opportunities. From time to time, we review investments
in new businesses and we expect to make investments in, and to acquire, businesses, products or technologies in the future. We
are in the process to acquire an asset management company in Hong Kong and a supply chain financial service company in China and
plan to complete these transactions during the first half of this year. In the event of any future acquisitions, we may expend
significant cash, incur substantial debt and/or issue equity securities and dilute the percentage ownership of current shareholders,
all of which could have a material adverse effect on our operating results and the price of our stock. We cannot guarantee that
we will be able to successfully integrate any businesses, products, technologies or personnel that we may acquire in the future,
and our failure to do so could have a material adverse effect on our business, operating results and financial condition.
If we fail to maintain membership
loyalty or sustain membership growth, or fail to maintain member relationships effectively and retain existing members, our business
and operating results may be materially and adversely affected.
We are a membership-based value sharing
e-commerce platform and therefore membership loyalty and growth are essential to our business. The growth of our business depends
on our ability to maintain and increase the number of members on our platform and improve the level of their engagement. Individuals
can become our members mainly by purchasing our membership at a fixed price. Our failure to anticipate needs of and provide value-added
services to our members, among other things, could also diminish membership loyalty and reduce activity of members on our platform,
which could cause our revenue and operating income to decline and negatively impact our profitability. If our existing and new
business opportunities and incentives, products, services and other initiatives do not generate sufficient enthusiasm and economic
incentive to retain our existing members or attract new members on a sustained basis, our operating results could be adversely
affected. As a result, in order to maintain our business growth in the future, we need to increase our retention of existing members
and continue to successfully attract additional members.
We may not be able to prevent others
from unauthorized use of our intellectual property, which could harm our business and competitive position.
Our success depends, in part, on our ability
to protect our proprietary technologies. The process of seeking intellectual property protection can be lengthy and expensive and
we cannot guarantee that our existing or future intellectual property rights will be fully protected or bring us the commercial
advantages. We also cannot guarantee that our current or potential competitors do not have, and will not obtain, intellectual property
rights that will prevent, limit or interfere with our ability to use our technology or sell our products and services in the PRC
or other countries.
The implementation and enforcement of PRC
intellectual property laws historically have not been vigorous or consistent. Accordingly, intellectual property rights and confidentiality
protections in the PRC are not as effective as those in the United States and other countries. We may need to resort to litigation
to enforce or defend our rights or to determine the enforceability, scope and validity of our proprietary rights or those of others.
Such litigation will require significant expenditures of cash and management efforts and could harm our business, financial condition
and results of operations. An adverse determination in any such litigation will impair our intellectual property rights and may
harm our business, competitive position, business prospects and reputation.
The blockchain related products and
services that we are developing have the potential to be used in ways we do not intend, including for criminal or other illegal
activities.
Blockchain-related products and services,
in particular cryptocurrencies, have the potential to be used for financial crimes or other illegal activities. Because the blockchain
platform that we are developing is novel, there are uncertainties regarding any legal and regulatory requirements for preventing
blockchain-related products and services from being put to such uses, and there are uncertainties regarding the liabilities and
risks to the Company if we are unable to prevent such uses. Even if we comply with all laws and regulations regarding financial
and blockchain related products and services, we have no ability to ensure that our customers, partners or others to whom we license
or sell our products and services comply with all laws and regulations applicable to them and their transactions.
The Shared Shopping Mall employs security
measures common to blockchain technologies, such a multiple identity authentication and multi-signature requirements. The security
measures to be employed by our blockchain projects are subject to further improvement and development. There is no guarantee that
the security measures that we currently use or any that we may develop in the future will be effective.
Any negative publicity we receive regarding
any allegations of unlawful uses of our blockchain platform could damage our reputation. More generally, any negative publicity
regarding unlawful uses of blockchain technology in the marketplace could reduce the demand for our products and services. The
occurrence of any of the foregoing could have a material adverse effect on our financial results and business.
The regulatory regime governing blockchain
technologies, cryptocurrencies, digital assets, and offerings of digital assets is uncertain, and new regulations or policies may
materially adversely affect the development and the value of such cryptocurrencies and assets.
Regulation of digital assets, cryptocurrencies,
blockchain technologies, and the blockchain platform we are developing is currently undeveloped and likely to rapidly evolve as
government agencies take greater interest in them. Regulation also varies significantly among international, federal, state and
local jurisdictions and is subject to significant uncertainty. Various legislative and executive bodies in the United States and
in other countries may in the future adopt laws, regulations, or guidance, or take other actions, which may severely impact the
permissibility of tokens generally and the technology behind them or the means of transaction or in transferring them. Failure
by our subsidiaries to comply with any laws, rules and regulations, some of which may not exist yet or are subject to interpretation
and may be subject to change, could result in a variety of adverse consequences, including civil penalties and fines.
Intellectual property infringement
claims may adversely impact our results of operations.
As we develop and introduce new products
and services, we may be increasingly subject to claims of infringement of another party’s intellectual property. If a claim
for infringement is brought against us, such claim may require us to modify our products or services, cease selling certain products
or engage in litigation to determine the validity and scope of such claims. Any of these events may harm our business and results
of operations.
Our business and operations may be
subject to disruption from work stoppages, terrorism or natural disasters.
Our operations may be subject to disruption
for a variety of reasons, including work stoppages, acts of war, terrorism, pandemics, fire, earthquake, flooding or other natural
disasters and events beyond our control. If a major incident were to occur in any of the regions where our facilities or offices
are located, our facilities or offices or those of critical suppliers and customers could be damaged or destroyed. Such a disruption
could result in a reduction in available products, the temporary or permanent loss of critical data, suspension of operations,
delays in shipment of products and disruption of business generally, which would adversely affect our revenue and results of operations.
Our success depends substantially
on the continued retention of certain key personnel and our ability to hire and retain qualified personnel in the future to support
our growth.
If one or more of our senior executives
or other key personnel are unable or unwilling to continue in their present positions, our business may be disrupted and our financial
condition and results of operations may be materially and adversely affected. While we depend on the abilities and participation
of our current management team generally, we rely particularly upon Mr. Yongke Xue, our Chairman of the Company’s Board of
Directors (the “Board”); Mr. Shanchun Huang, our chief executive officer (“CEO”); Mr. Ming Yi, our chief
financial officer (“CFO”) and Mr. Yang Liu, our chief operating officer. The loss of the services of Messrs. Yongke
Xue, Shanchun Huang, Ming Yi or Yang Liu for any reason could significantly adversely impact our business and results of operations.
Competition for senior management and senior technology personnel in the PRC is intense and the pool of qualified candidates is
very limited. Accordingly, we cannot guarantee that the services of our senior executives and other key personnel will continue
to be available to us, or that we will be able to find a suitable replacement for them if they were to leave.
Our e-commerce business depends on
the continued use of the Internet and the adequacy of the Internet infrastructure.
Our e-commerce business depends upon the widespread use of the
Internet and e-commerce. Factors which could reduce the widespread use of the Internet for e-commerce include, without limitation,
actual or perceived lack of security of information or privacy protection, cyberattacks or other disruptions or damage to the Internet
or to users’ computers, whatever the cause, could reduce customer satisfaction with our platforms and services and harm our
business.
Our business depends on our website,
app, network infrastructure and transaction-processing systems.
Our e-commerce business is completely dependent
on our infrastructure. Any system interruption that results in the unavailability of our website, app or reduced performance of
our transaction systems could reduce our ability to conduct our business. We use internally and externally developed systems for
our website, app and our transaction processing systems. We expect to experience system interruptions due to software failure.
We may also experience temporary capacity constraints due to sharply increased traffic during sales or other promotions and during
the holiday shopping season. Capacity constraints can cause system disruptions, slower response times, delayed page presentation,
degradation in levels of customer service and other problems. We may also experience difficulties with our infrastructure upgrades.
Any future difficulties with our transaction processing systems or difficulties upgrading, expanding or integrating aspects of
our systems may cause system disruptions, slower response times, and degradation in levels of customer service, additional expense,
impaired quality and speed of order fulfilment or other problems.
If the location where all of our computer
and communications hardware is located is compromised, our business, prospects, financial condition and results of operations could
be harmed. If we suffer an interruption or degradation of services at the location for any reason, our business could be harmed.
Our success, and in particular, our ability to successfully receive and fulfil orders and provide high-quality customer service,
largely depends on the efficient and uninterrupted operation of our computer and communications systems. These limitations could
have an adverse effect on our sales. Our disaster recovery plan may be inadequate, and we do not carry business interruption insurance
to compensate us for the losses that could occur. Despite our implementation of network security measures, our servers are vulnerable
to computer viruses, physical or electronic break-ins and similar disruptions, the occurrence of any of which could lead to interruptions,
delays, loss of critical data or the inability to accept and fulfil customer orders. The occurrence of any of the foregoing risks
could harm our business.
We may be subject to product liability
claims if our customers are harmed by the products sold on our internet platform.
We sell products manufactured by third
parties, some of which may be defectively designed or manufactured, of inferior quality or counterfeit. Sales and distributions
of products on our internet platform could expose us to product liability claims relating to personal injury and may require product
recalls or other actions. Third parties that have suffered such injury may bring claims or legal proceedings against us as the
retailer of the products or as the marketplace service provider. Although we would have legal recourse against the manufacturers,
suppliers or third-party merchants of such products under PRC law, attempting to enforce our rights against the manufacturers,
suppliers or third-party merchants may be expensive, time-consuming and ultimately futile. Defective, inferior or counterfeit products
or negative publicity as to personal injury caused by products sold on our platform may adversely affect consumer perceptions of
our company or the products we sell, which could harm our reputation and brand image. In addition, we do not currently maintain
any product liability insurance or third-party liability insurance coverage for the products offered through third-party merchants.
As a result, any material product liability claim or litigation could have a material and adverse effect on our business, financial
condition and results of operations. Even unsuccessful claims could result in the expenditure of funds and managerial efforts in
defending them and could have a negative impact on our reputation.
Our platform requires frequent updates
on pricing from our vendors. If these updates are inaccurate or do not occur, there could be a negative influence on our business.
We update the prices of products listed
on our site frequently from our vendors. If we are unable to obtain, or are not provided updated pricing information from our vendors,
or if we fail to act on information from our vendors, then it could require us to remedy the pricing difference to complete the
transaction, or source the product from an alternative vendor at their price, which could materially adversely affect our financial
results.
We are subject to cyber security
risks and may incur increasing costs in an effort to minimize those risks and to respond to cyber incidents.
Our e-commerce business is entirely dependent
on the secure operation of our website and systems as well as the operation of the Internet generally. Our business involves the
storage and transmission of users’ proprietary information, and security breaches could expose us to a risk of loss or misuse
of this information, litigation, and potential liability. A number of large Internet companies have suffered security breaches,
some of which have involved intentional attacks. From time to time, we and many other Internet businesses also may be subject to
a denial of service attacks wherein attackers attempt to block customers’ access to our Website. If we are unable to avert
a denial of service attack for any significant period, we could sustain substantial revenue loss from lost sales and customer dissatisfaction.
We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyberattacks.
Cyberattacks may target us, our customers,
our suppliers, banks, payment processors, e-commerce in general or the communication infrastructure on which we depend. If an actual
or perceived attack or breach of our security occurs, customer and/or supplier perception of the effectiveness of our security
measures could be harmed and we could lose customers, suppliers or both. Actual or anticipated attacks and risks may cause us to
incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees, and engage
third party experts and consultants. A person who is able to circumvent our security measures might be able to misappropriate our
or our users’ proprietary information, cause interruption in our operations, damage our computers or those of our users,
or otherwise damage our reputation and business. Any compromise of our security could result in a violation of applicable privacy
and other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence in our security measures,
which could harm our business.
Failure to comply with the relatively
new E-Commerce Law may have a material adverse impact on our business, financial conditions and results of operations.
As the e-commerce industry is still evolving
in China, new laws and regulations may be adopted from time to time to address new issues that arise from time to time. For example,
in August 2018, the Standing Committee of the National People’s Congress promulgated the E-Commerce Law, which became effective
on January 1, 2019. The E-Commerce Law generally provides that e-commerce operators must obtain administrative licenses if
business activities conducted by the e-commerce operators are subject to administrative licensing requirements under applicable
laws and regulations. In addition, the E-Commerce Law imposes a number of obligations on e-commerce platform operators, including
the obligations: (i) to verify and register platform merchants, (ii) to ensure platform cybersecurity, including, but
not limited to, data privacy, (iii) to ensure fair dealing and the legitimate rights and interests of consumers on the platform,
(iv) to publicize transaction information preservation and transaction rules, and (v) to protect intellectual properties.
See “Item 1. Overview—Government Regulations—Regulations Relating to E-Commerce” for further details.
As the E-Commerce Law is relatively new, no detailed interpretation and implementation rules have been promulgated, and it remains
uncertain how the E-Commerce Law will be interpreted and implemented. We cannot assure you that our current business operations
satisfy the obligations provided under the E-Commerce Law in all respects. If the PRC governmental authorities determine that we
are not in compliance with all the requirements proposed under the E-Commerce Law, we may be subject to fines and/or other sanctions.
The E-Commerce Law also imposes a requirement
on operators of e-commerce platforms, such as our company, to assist in tax collection with respect to income generated by sellers
from transactions conducted on e-commerce platforms, including, among others, submitting to the tax authority information on the
identities of sellers on e-commerce platforms and other information relating to tax payment. Failure to comply with the requirement
may result in operators of e-commerce platforms being subject to fines and, in severe circumstances, suspension of business operations
of e-commerce platforms. Substantial uncertainties exist regarding the interpretation and implementation of the E-Commerce Law.
We encourage and incentivize merchants to promote the products on our platform. If the merchants were deemed to be selling our
products on consignment basis, the PRC tax authorities may require them to make tax registration and request our assistance in
these efforts, pursuant to the E-Commerce Law, and the merchants on our platform may be subject to more stringent tax compliance
requirements. The PRC government may adopt additional requirements from time to time, and we may be requested by tax authorities
to provide further assistance in the enforcement of tax regulations, such as disclosure of transaction records and bank account
information of the merchants, and withholding taxes for such merchants. If any of these were to occur, we may lose our existing
stores or fail to attract new stores on our platform and the level of activity may be reduced on our platform. We may also incur
increased costs and expenses as a result. The tightened tax enforcement by PRC tax authorities in the e-commerce industry, such
as imposition of reporting or withholding obligations on operators of e-commerce platforms with respect to tax payable of merchants
on e-commerce platforms, may have a material and adverse effect on our business, financial condition and results of operations.
If our business model were found to be in violation of
applicable laws and regulations, our business, financial condition and results of operations would be materially and adversely
affected.
In August 2005, the State Council promulgated
the Regulations on the Prohibition of Pyramid Selling, which prohibits individuals and entities in China from engaging in pyramid
selling. See “Item 1. Overview—Government Regulations—Regulations Relating to Pyramid Selling in the PRC.”
We believe that our current business model that provides rewards to members who introduce new members and customers to us is not
in violation of applicable PRC laws and regulations, including the Regulations on the Prohibition of Pyramid Selling. However,
there is no assurance that the relevant government authorities will find our business model not in violation of any applicable
regulations, given the uncertainties in the interpretation and application of existing PRC laws, regulations and policies relating
to our current business model, including, but not limited to, regulations regulating pyramid selling. Moreover, new laws, regulations
or policies may also be promulgated in the future, and there is no assurance that our current business model will be in full compliance
with the new laws, regulations or policies. If our business model were to be found in violation in the future, we will have to
make adjustment to our business model or cease certain of our business operations, and the relevant governmental authorities may
confiscate any illegal gains and impose a fine, which would have a material and adverse impact on our business, financial condition
and results of operations.
The relative lack of public company
experience of our management team may put us at a competitive disadvantage.
Our management team lacks significant public
company experience, which could impair our ability to comply with legal and regulatory requirements such as, but not limited to,
those imposed by the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”). Our senior management does not have significant
experience managing a publicly traded company. Such responsibilities include complying with federal securities laws and making
required disclosures on a timely basis. Our senior management may be unable to implement programs and policies in an effective
and timely manner or that adequately respond to the increased legal, regulatory and reporting requirements associated with being
a publicly traded company. Our failure to comply with all applicable requirements could lead to the imposition of fines and penalties,
distract our management from attending to the management and growth of our business, result in a loss of investor confidence in
our financial reports and have an adverse effect on our business and stock price.
As a public
company, we are obligated to maintain effective internal controls over financial reporting. Our internal controls may be determined
not to be effective, which may adversely affect investor confidence in us and, as a result, decrease the value of our Common Stock.
The PRC has not adopted management and
financial reporting concepts and practices similar to those in the United States. We may have difficulty in hiring and retaining
a sufficient number of qualified financial and accounting employees who are familiar with US GAAP and reporting requirements to
work in the PRC. As a result of these factors, we may experience difficulty in establishing and maintaining accounting and financial
controls, collecting financial data, budgeting, managing our funds and preparing financial statements, books of account and corporate
records and instituting business practices that meet investors’ expectations in the United States.
Rules adopted by the SEC, or the Commission,
pursuant to Sarbanes-Oxley Section 404 require annual assessment of our internal controls over financial reporting. The standards
that must be met for management to assess the internal controls over financial reporting as effective are relatively new and complex,
and they require significant documentation, testing and possible remediation to meet the detailed standards. This assessment will
need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting.
During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial
reporting as we have done previously and this year, we will be unable to assert that our internal controls are effective. If we
continue to be unable to conclude that our internal control over financial reporting is effective, we could lose investor confidence
in the accuracy and completeness of our financial reports, which could harm our business and cause the price of our stock to decline.
We may need additional capital to
fund our future operations and, if it is not available when needed, we may need to reduce our planned development and marketing
efforts, which may reduce our sales revenue.
We believe that our existing working capital
and cash available from operations will enable us to meet our working capital requirements for at least the next twelve months.
However, if cash from future operations is insufficient, or if cash is used for acquisitions or other currently unanticipated uses,
we may need additional capital. The development and marketing of new products and services and the expansion of our business and
associated support personnel require a significant commitment of resources. In addition, if the markets for our products and services
develop more slowly than anticipated, or if we fail to establish significant market share and achieve sufficient net revenues,
we may continue to consume significant amounts of capital. As a result, we could be required to raise additional capital. To the
extent that we raise additional capital through the sale of equity or convertible debt securities or other methods, the issuance
of such securities could result in dilution of the shares held by existing shareholders. If additional funds are raised through
the issuance of debt securities, such securities may provide the holders certain rights, preferences, and privileges senior to
those of common shareholders, and the terms of such debt could impose restrictions on our operations. We cannot guarantee that
additional capital, if required, will be available on acceptable terms, or at all. If we are unable to obtain sufficient amounts
of additional capital, we may be required to reduce the scope of our planned business development and marketing efforts, which
could harm our business, financial condition and operating results.
If our costs and demands upon management
increase disproportionately to the growth of our business and revenue as a result of complying with the laws and regulations affecting
public companies, our operating results could be harmed.
As a public company, we do and will continue
to incur significant legal, accounting, investor relations and other expenses, including costs associated with public company reporting
requirements. We also have incurred and will incur costs associated with current corporate governance requirements, including requirements
under Section 404 and other provisions of Sarbanes-Oxley, as well as rules implemented by the SEC and the stock exchange on
which our common stock is traded. The expenses incurred by public companies for reporting and corporate governance purposes have
increased dramatically over the past several years. These rules and regulations have increased our legal and financial compliance
costs substantially and make some activities more time consuming and costly. If our costs and demands upon management increase
disproportionately to the growth of our business and revenue, our operating results could be harmed.
There are inherent uncertainties
involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with generally accepted
accounting principles in the United States, or U.S. GAAP. Any changes in estimates, judgments and assumptions could have a material
adverse effect on our business, financial condition and operating results.
The preparation of financial statements
in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) involves making estimates, judgments
and assumptions that affect reported amounts of assets (including intangible assets), liabilities and related reserves, revenue,
expenses and income. Estimates, judgments and assumptions are inherently subject to change in the future, and any such changes
could result in corresponding changes to the amounts of assets, liabilities, revenue, expenses and income. Any such changes could
have a material adverse effect on our business, financial condition and operating results.
We will
no longer have any equity participation in HeDeTang HK or in the fruit juice industry.
After the Sale Transaction closed on February
27, 2020, we have no ongoing equity participation in the fruit juice business in China. We ceased to participate in HeDeTang HK’s
future earnings or growth, if any, and will not participate in any potential future sale of HeDeTang HK even if there is significant
growth of fruit juice business in China in the future. It is possible that New Continent could sell some or all of its equity in
HeDeTang HK following the Sale Transaction at a valuation higher than that being paid in the Sale Transaction and New Continent
could realize significant returns on its equity investment in HeDeTang.
We may be exposed to litigation related
to the Sale Transaction on February 27, 2020 from the holders of our common stock.
Transactions such as the Sale Transaction
are often subject to lawsuits by stockholders. Particularly because the holders of our common stock will not receive any consideration
from the Sale Transaction, it is possible that they may sue the Company or the Board of Directors. Such lawsuits could result in
substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.
We may have exposure to greater than
anticipated tax liabilities.
We are subject
to enterprise income tax, value-added tax, and other taxes in each province and city in China where we have operations. Our tax
structure is subject to review by various local tax authorities. The determination of our provision for income tax and other tax
liabilities requires significant judgment. In the ordinary course of our business, there are many transactions and calculations
where the ultimate tax determination is uncertain. Although we believe our estimates are reasonable, the ultimate decisions by
the relevant tax authorities may differ from the amounts recorded in our financial statements and may materially affect our financial
results in the period or periods for which such determination is made.
We are subject to the risk of increased
income taxes, which could harm our business, financial condition and operating results.
We base our tax position upon the anticipated nature and conduct
of our business and upon our understanding of the tax laws of the various countries in which we have assets or conduct activities.
However, our tax position is subject to review and possible challenge by tax authorities and to possible changes in law, which
may have retroactive effect. We currently operate through three direct wholly-owned subsidiaries: DigiPay FinTech Limited, Future
FinTech (Hong Kong) Limited, and GlobalKey Shared Mall Limited, and their subsidiaries and VIE in Hong Kong, BVI, Japan, Cayman
Islands and China, and we maintain our e-commerce operations in China. Any of these jurisdictions could assert tax claims against
us. We cannot determine in advance the extent to which some jurisdictions may require us to pay taxes or make payments in lieu
of taxes. If we become subject to additional taxes in any jurisdiction, such tax treatment could materially and adversely affect
our business, financial condition and operating results.
Increases in income tax rates, changes
in income tax laws or disagreements with tax authorities could adversely affect our business, financial condition or results of
operations.
We are subject
to income taxes in the United States and in certain foreign jurisdictions in which we operate. Increases in income tax rates or
other changes in income tax laws that apply to our business could reduce our after-tax income from such jurisdiction and could
adversely affect our business, financial condition or results of operations. Our operations outside the United States generate
a significant portion of our income. In addition, the United States and many of the other countries in which our products are distributed
or sold, including countries in which we have significant operations, have recently made or are actively considering changes to
existing tax laws. For example, the Tax Cuts and Jobs Act (the “TCJ Act”) was signed into law in the United States.
The changes in the TCJ Act are broad and complex and we are continuing to examine the impact the TCJ Act may have on our business
and financial results. Additional changes in the U.S. tax regime or in how U.S. multinational corporations are taxed on foreign
earnings, including changes in how existing tax laws are interpreted or enforced, could adversely affect our business, financial
condition or results of operations.
We are also subject
to regular reviews, examinations and audits by the IRS and other taxing authorities with respect to income and non-income based
taxes both within and outside the United States. Economic and political pressures to increase tax revenues in jurisdictions in
which we operate, or the adoption of new or reformed tax legislation or regulation, may make resolving tax disputes more difficult
and the final resolution of tax audits and any related litigation could differ from our historical provisions and accruals, resulting
in an adverse impact on our business, financial condition or results of operations. In addition, in connection with the Organization
for Economic Co-operation and Development Base Erosion and Profit Shifting project, companies are required to disclose more information
to tax authorities on operations around the world, which may lead to greater audit scrutiny of profits earned in various countries.
Risks Related to Doing Business in the
PRC
We face the risk that changes in
the policies of the PRC government could have a significant impact upon the business we may be able to conduct in the PRC and the
profitability of such business.
We conduct substantially all of our operations
and generate most of our revenue in the PRC. Accordingly, economic, political and legal developments in the PRC will significantly
affect our business, financial condition, results of operations and prospects. The PRC economy is in transition from a planned
economy to a market oriented economy subject to plans adopted by the government that set national economic development goals. Policies
of the PRC government can have significant effects on economic conditions in the PRC. While we believe that the PRC will continue
to strengthen its economic and trading relationships with foreign countries and that business development in the PRC will continue
to follow market forces, we cannot guarantee that this will be the case. Our interests may be adversely affected by changes in
policies by the PRC government, including:
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changes in laws, regulations or their interpretation;
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confiscatory taxation;
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restrictions on currency conversion, imports or sources of supplies;
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expropriation or nationalization of private enterprises; and
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the allocation of resources.
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Although the PRC government has been pursuing
economic reform policies for more than three decades, the PRC government continues to exercise significant control over economic
growth in the PRC through the allocation of resources, controlling payments of foreign currency, setting monetary policy and imposing
policies that impact particular industries in different ways. We cannot guarantee that the PRC government will continue to pursue
policies favoring a market oriented economy or that existing policies will not be significantly altered, especially in the event
of a change in leadership, social or political disruption, or other circumstances affecting political, economic and social life
in the PRC.
If we become subject to additional
scrutiny, criticism and negative publicity involving U.S.-listed China-based companies, we may have to expend significant resources
to investigate and resolve the matter which could harm our business operations, this offering and our reputation and could result
in a loss of your investment in our shares, especially if such matter cannot be addressed and resolved favorably.
Recently, U.S. public companies that have substantially
all of their operations in China have been the subject of intense scrutiny, criticism and negative publicity by investors, financial
commentators and regulatory agencies. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting
irregularities, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of
adherence thereto and, in some cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly
traded stock of many U.S.-listed China-based companies has decreased in value and, in some cases, has become virtually worthless. Many
of these companies have been subject to shareholder lawsuits and SEC enforcement actions and have conducted internal and external investigations
into the allegations. 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. The Company has provided responsive
documents and information requested in the subpoena. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity
will have on us and our business. If we become the subject of any unfavorable allegations, whether such allegations are proven to be
true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company. This situation
may be a major distraction to our management. If such allegations are not proven to be groundless, our business operations will be severely
hindered and your investment in our shares could be rendered worthless.
If the PRC government
deems that the contractual arrangements in relation to our consolidated variable interest entities do not comply with PRC regulatory
restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations
change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.
Foreign ownership of internet-based businesses,
including value-added telecommunications services, is subject to restrictions under current PRC laws and regulations. To comply
with PRC laws and regulations, we conduct our e-commerce operations in China through a series of contractual arrangements entered
into among WFOE, our VIE and the shareholders of our VIE. As a result of these contractual arrangements, we exert control over
our VIE and consolidate its operating results in our financial statements under U.S. GAAP. For a detailed description of these
contractual arrangements, see “Overview - Contractual Arrangements with Our Consolidated Affiliated Entity and
Its Respective Shareholders.”
In the opinion of our PRC counsel, our
current ownership structure, the ownership structure of our PRC subsidiary and our consolidated VIE, and the contractual arrangements
among WFOE, our VIE and the shareholders of our VIE are common practices for the companies listed on stock exchanges in the U.S.
engaging in the businesses restricted in China and these contractual arrangements are valid and binding in accordance with their
terms and applicable PRC laws and regulations currently in effect. However, our Chinese counsel has also advised us that there
are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations and there
can be no assurance that the PRC government will ultimately take a view that is consistent with the opinion of our PRC counsel.
If the PRC government finds that our contractual
arrangements do not comply with its restrictions on foreign investment in the e-commerce business, the relevant PRC regulatory
authorities, including the China Securities Regulatory Commission (CSRC) may require us to discontinue
or place restrictions or onerous conditions on our operations and it may also imposing fines, confiscating the income from
the WFOE or our VIE. The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct
our business. In addition, it is unclear what impact the PRC government actions would have on us and on our ability to consolidate
the financial results of our VIE in our consolidated financial statements, if the PRC government authorities were to find our VIE
structure and contractual arrangements to be in violation of PRC laws and regulations. If the imposition of any of these government
actions causes us to lose our right to direct the activities of our VIE or our right to receive substantially all of the economic
benefits and residual returns from our VIE and we are not able to restructure our ownership structure and operations in a satisfactory
manner, we would no longer be able to consolidate the financial results of our VIE in our consolidated financial statements. Either
of these results, or any other significant penalties that might be imposed on us in this event, would have a material adverse effect
on our financial condition and results of operations.
Any failure by our consolidated VIE
or their shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect
on our business.
If our consolidated VIE or its shareholders
fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend
additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC laws, including seeking
specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective under PRC laws. For
example, if the shareholders of our VIE were to refuse to transfer their equity interest in the VIE to us or our designee if we
exercise the purchase option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us,
then we may have to take legal action to compel them to perform their contractual obligations.
All the agreements under our contractual
arrangements are governed by PRC laws. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes
would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as well established as in some other
jurisdictions, such as in the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce
these contractual arrangements. Meanwhile, there are some regulations unfavorable to VIEs. However, despite there are very few
precedents and little formal guidance as to how contractual arrangements in the context of a consolidated variable interest entity
should be interpreted or enforced under PRC laws and there remain significant uncertainties regarding the ultimate outcome of such
legal proceedings should legal action become necessary. Currently, almost all of the Chinese companies listed on overseas stock
exchanges that are in the internet-based business such as e-commerce or online-gaming have adopted a VIE structure. If the losing
parties fail to carry out the court judgement or arbitration awards within a prescribed time limit, the prevailing parties may
only enforce them in PRC courts, which would require additional expenses and delay. In the event that we are unable to enforce
these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual
arrangements, we may not be able to exert effective control over our consolidated variable interest entities, and our ability to
conduct our business may be negatively affected.
The shareholders of our consolidated
VIE may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.
The shareholders of our VIE and their interests
in our VIE may differ from their interests of our Company as a whole. These shareholders may breach, or cause our consolidated
variable interest entities to breach, the existing contractual arrangements we have with them and our consolidated variable interest
entities, which would have a material adverse effect on our ability to effectively control our consolidated variable interest entities
and receive economic benefits from them. For example, the shareholders may be able to cause our agreements with E-Commerce Tianjin
to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements
to us on a timely basis. We cannot assure you that when conflicts of interest arise, any or all of these shareholders will act
in the best interests of our company or such conflicts will be resolved in our favor.
Currently, we do not have any arrangements
to address potential conflicts of interest between these shareholders and our company, except that we could exercise our purchase
option under the exclusive option agreements with these shareholders to request them to transfer all of their equity interests
in E-Commerce Tianjin to a PRC entity or individual designated by us, to the extent permitted by PRC laws. If we cannot resolve
any conflict of interest or dispute between us and the shareholders of our VIE, we would have to rely on legal proceedings, which
could result in the disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.
PRC laws and regulations governing
our current business operations are sometimes vague and uncertain and any changes in such laws and regulations may harm our business.
There are substantial uncertainties regarding
the interpretation and application of PRC laws and regulations including, but not limited to, the laws and regulations governing
our business and the enforcement and performance of our arrangements with customers in certain circumstances. We are considered
foreign persons or foreign funded enterprises under PRC laws and, as a result, we are required to comply with PRC laws and regulations
related to foreign persons and foreign funded enterprises. These laws and regulations are sometimes vague and may be subject to
future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly
enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance. New laws and regulations that affect
existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation of
existing or new PRC laws or regulations may have on our business.
We could be restricted from paying
dividends to shareholders due to PRC laws and other contractual requirements.
We are a holding company incorporated in
the State of Florida and do not have any assets or conduct any business operations other than our investments in our subsidiaries
and affiliates. As a result of our holding company structure, we rely entirely on dividend payments from our subsidiaries in China.
PRC accounting standards and regulations currently permit payment of dividends only out of accumulated profits, a portion of which
is required to be set aside for certain reserve funds. Furthermore, if our subsidiaries and VIE in China incur debt on its own
in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments. Although we
do not intend to pay dividends in the future, our inability to receive all of the profit from our China subsidiaries’ operations
may provide an additional obstacle to our ability to pay dividends if we so decide in the future.
Governmental control of currency
conversion may affect the value of shareholder investments.
The PRC government imposes controls on
the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of the PRC. RMB is currently
not a freely convertible currency. Shortages in the availability of foreign currency may restrict our ability to remit sufficient
foreign currency to satisfy foreign currency obligations. Under existing PRC foreign exchange regulations, payments of current
account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign
currencies without prior approval by complying with certain procedural requirements. Approval from appropriate governmental authorities,
however, is required where RMB is to be converted into foreign currency and remitted out of the PRC to pay capital expenses such
as the repayment of bank loans denominated in foreign currencies. In addition, the PRC government could restrict access to foreign
currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient
foreign currency to satisfy our currency demands, we may not be able to pay certain of our expenses as they come due.
The fluctuation of the RMB may harm
shareholder investments.
The value of the RMB against the U.S. dollar
and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions.
Any significant revaluation of the RMB may materially and adversely affect our cash flows, revenue and financial condition. For
example, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into RMB for our operations,
appreciation of the RMB against the U.S. dollar would diminish the value of the proceeds of the offering and could harm our business,
financial condition and results of operations. Conversely, if we decide to convert our RMB into U.S. dollars for business purposes
and the U.S. dollar appreciates against the RMB, the U.S. dollar equivalent of the RMB we convert would be reduced. In addition,
the depreciation of significant U.S. dollar denominated assets could result in a charge to our income statement and a reduction
in the value of these assets.
PRC regulations relating to offshore
investment activities by PRC residents may limit our PRC subsidiary’s ability to increase its registered capital or distribute
profits to us or otherwise expose us or our PRC resident beneficial owners to liability and penalties under PRC law.
The State Administration of Foreign Exchange
or SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip
Investment through Special Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register
with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose
of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the
offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such
PRC citizens or residents, name, and operation term), increases or decreases in investment amount, transfers or exchanges of shares,
or mergers or divisions. SAFE Circular 37 is issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration
for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75. SAFE
promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment
in February 2015, which took effect on June 1, 2015. This notice has amended SAFE Circular 37 requiring PRC residents or entities
to register with qualified banks rather than SAFE or its local branch in connection with their establishment or control of an offshore
entity established for the purpose of overseas investment or financing.
If our shareholders who are PRC residents
or entities do not complete their registration as required, our PRC subsidiary may be prohibited from distributing its profits
and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to contribute
additional capital to our PRC subsidiary.
The failure or inability of the relevant
shareholders to comply with the registration procedures set forth in these regulations may subject us to fines and legal sanctions,
such as restrictions on our cross-border investment activities, on the ability of our wholly foreign-owned subsidiaries in China
to distribute dividends and the proceeds from any reduction in capital, share transfer or liquidation to us. Moreover, failure
to comply with the various foreign exchange registration requirements described above could result in liability under PRC law for
circumventing applicable foreign exchange restrictions. As a result, our business operations and our ability to distribute profits
to you could be materially and adversely affected.
Any failure to comply with PRC regulations
regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines
and other legal or administrative sanctions.
In February 2012, SAFE promulgated the
Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan
of Overseas Publicly-Listed Company, replacing earlier rules promulgated in March 2007. Pursuant to these rules, PRC citizens and
non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan
of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified
agent, which could be the PRC subsidiary of such overseas listed company, and complete certain other procedures. In addition, an
overseas entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and
the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who have
resided in the PRC for a continuous period of not less than one year will be subject to these regulations. Failure to complete
the SAFE registrations may subject them to fines and legal sanctions and may also limit our ability to contribute additional capital
into our PRC subsidiary and limit our PRC subsidiary’s ability to distribute dividends to us. We also face regulatory uncertainties
that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC
law.
Regulatory bodies of the United States
may be limited in their ability to conduct investigations or inspections of our operations in China.
From time to time, the Company may receive
requests from certain U.S. agencies to investigate or inspect the Company’s operations, or to otherwise provide information.
While the Company will be compliant with these requests from these regulators, there is no guarantee that such requests will be
honored by those entities who provide services to us or with whom we associate, especially as those entities are located in China.
Furthermore, an on-site inspection of our facilities by any of these regulators may be limited or entirely prohibited. Such inspections,
though permitted by the Company and its affiliates, are subject to the unpredictability of the Chinese enforcers, and may therefore
be impossible to facilitate.
Because our principal assets are
located outside of the United States, it may be difficult for investors to use U.S. securities laws to enforce their rights against
us, our officers and some of our directors in the United States or to enforce judgments of United States courts against us or them
in the PRC.
Most of our present officers and directors
reside outside of the United States. In addition, all of our subsidiaries and assets are located outside of the United States.
Therefore, it may be difficult for investors in the United States to enforce their legal rights based on the civil liability provisions
of the U.S. securities laws against us in the courts of either the United States or the PRC and, even if civil judgments are obtained
in courts of the United States, to enforce such judgments in the PRC courts. Further, it is unclear if extradition treaties now
in effect between the United States and the PRC would permit effective enforcement against us or our officers and directors of
criminal penalties under the U.S. Federal securities laws or otherwise.
Risks Related to Our Common Stock
We are authorized to issue blank
check preferred stock, which may be issued without shareholder approval and which may adversely affect the rights of holders of
our Common Stock.
We are authorized to issue 10,000,000 shares
of preferred stock. The Board is authorized under our articles of incorporation, as amended, to provide for the issuance of shares
of preferred stock by resolution and by filing a certificate of designations under Florida law, to fix the designation, powers,
preferences and rights of the shares of each such series of preferred stock and the qualifications, limitations or restrictions
thereof without any further vote or action by the shareholders. As of December 31, 2020, there were no shares of preferred stock
issued and outstanding. Any shares of preferred stock that are issued are likely to have priority over our Common Stock with respect
to dividend or liquidation rights. In the event of issuance, the preferred stock could be utilized under certain circumstances
as a method of discouraging, delaying or preventing a change in control, which could have the effect of discouraging bids to acquire
us and thereby prevent shareholders from receiving the maximum value for their shares. We have no present intention to issue any
shares of preferred stock in order to discourage or delay a change of control or for any other reason. However, there can be no
assurance that preferred stock will not be issued at some time in the future.
Zeyao Xue has control over key decision making as a result
of his control of a substantial amount of our voting stock.
Mr. Zeyao Xue, the son of our Chairman of the Board
of Directors, indirectly and directly beneficially owns 13,012,622 shares, or approximately 19.93%, of our outstanding common stock as
of April 12, 2021. Mr. Zeyao Xue’s beneficial ownership of 19.93% of Future FinTech’s issued and outstanding common stock
will likely give him the ability to control the outcome of matters submitted to shareholders for approval, including but not limited to
the election of directors and any merger, consolidation, or sale of all or substantially all of the Company’s assets. This concentrated
control could delay, defer, or prevent a change of control, merger, consolidation, or sale of all or substantially all of the Company’s
assets that other shareholders support, or conversely this concentrated control could result in the consummation of such a transaction
that other shareholders do not support. This concentrated control could also discourage a potential investor from acquiring the common
stock of the Company due to the limited voting power of such shares. As a shareholder, even a controlling shareholder, Mr. Zeyao Xue is
entitled to vote his shares, and shares over which he has voting control, in his own interests, which may not always be in the interests
of our shareholders generally.
Anti-takeover provisions in our charter documents and
under Florida law could discourage, delay or prevent a change in control of our Company and may affect the trading price of our
Common Stock.
As a Florida corporation, we are subject
to certain provisions of the Florida Business Corporation Act that have anti-takeover
effects and may inhibit a non-negotiated merger or other business combination. Our Articles of Incorporation and Bylaws also contain
other provisions which could have anti-takeover effects. These provisions include, without limitation, the authority of our Board
of Directors to issue additional shares of preferred stock and to fix the relative rights and preferences of the preferred stock
without the need for any shareholder vote or approval, as discussed above, and advance notice procedures to be complied with by
our shareholders in order to make shareholder proposals or nominate directors, such as:
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authorize the issuance of “blank check” preferred stock that could be issued by the Board to thwart a takeover attempt;
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require that directors only be removed from office upon a majority shareholder vote;
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provide that vacancies on the board of directors, including newly created directorships, may be filled only by a majority vote of directors then in office;
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limit who may call special meetings of shareholders; and
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For more information regarding these and
other provisions, see the exhibit titled “Description of Our Securities — Anti-Takeover Effects of Certain Provisions
of Florida Law.”
In recent years, our Common Stock has been in danger of
being delisted from the NASDAQ Stock Market (“NASDAQ”).
On February 28, 2019, the Company received
a letter from NASDAQ notifying the Company that, because the closing bid price for the Company’s common stock listed on NASDAQ
was below $1.00 for 30 consecutive trading days, the Company no longer met the minimum bid price requirement for continued listing
on NASDAQ under NASDAQ Marketplace Rule 5550(a)(2). On May 7, 2019, the Company received a written notification from the NASDAQ
Stock Market Listing Qualifications Staff indicating that the Company has regained compliance with the $1.00 minimum closing bid
price requirement and that the matter is now closed.
On April 17, 2019, the Company received
a notification letter from NASDAQ stating the Company was not in compliance with NASDAQ Listing Rule 5250(c)(1), due to its failure
to timely file its Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 10-K”). On May 21,
2019, the Company received a notification letter from NASDAQ stating the Company was not in compliance with NASDAQ Listing Rule
5250(c)(1), due to its failure to timely file its Quarterly Report on Form 10-Q for the quarter ended March 31, 2019. On August
20, 2019, the Company received a notification letter from the NASDAQ stating the Company was not in compliance with NASDAQ Listing
Rule 5250(c)(1), due to its failure to timely file its Quarterly Report on Form 10-Q for the quarter ended June 30, 2019.
On October 16, 2019, the Company
received a letter from the NASDAQ notifying the Company that it has regained compliance with NASDAQ’s periodic filing requirements
for continued listing on the Nasdaq Capital Market. The letter noted that as a result of the September 3, 2019 filing
of the Form 10-K for the year ended on December 31, 2018 and the September 30, 2019 filing of the Forms 10-Q for the
periods ended March 31, and June 30, 2019 with the Securities and Exchange Commission, the Company has regained
compliance with Listing Rule 5250(c)(1) and the matter is now closed.
On September 4, 2019, the Company
received written notice from the NASDAQ stating that the Company did not meet the requirement of maintaining a minimum of $2,500,000 in
stockholders’ equity for continued listing on the NASDAQ Capital Market, as set forth in NASDAQ Listing Rule 5550(b)(1),
the Company also does not meet the alternative of market value of listed securities of $35 million under NASDAQ Listing
Rule 5550(b)(2) or net income from continuing operations of $500,000 in the most recently completed fiscal year or in
two of the last three most recently completed fiscal years under NASDAQ Listing Rule 5550(b)(3), and the Company is no longer in
compliance with the NASDAQ Listing Rules. On March 18, 2020, the Company received written notice form NASDAQ stating that the Company
complies with the Listing Rule 5550(b)(1).
On November 4, 2019, the Company received
a letter from the Nasdaq notifying the Company that, because the closing bid price for the Company’s common stock
listed on Nasdaq was below $1.00 for 30 consecutive trading days, the Company no longer meets the minimum bid price requirement
for continued listing on Nasdaq under Nasdaq Marketplace Rule 5550(a)(2), which requires a minimum bid price of $1.00
per share. On April 14, 2020, the Company received a written notification from the Nasdaq indicating that the Company has regained
compliance with the $1.00 minimum closing bid price requirement and that the matter is now closed.
ITEM 1B – UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2 – PROPERTIES
Our principal executive office is located at Americas Tower, 1177 Avenue
of The Americas, Suite 5100, New York, NY 10036 and we lease such office for a term of one year from December 1, 2020. We also lease offices
at Room 2103, 21st Floor, SK Tower 6A, Jianguomenwai Avenue, Chaoyang District, Beijing, China for a term from September 1, 2020 to August
31, 2022, and 23/F, China Development Bank Tower, No. 2 Gaoxin 1st Road, Hi-Tech Industrial Zone, Xi’an, Shaanxi Province, China.
We believe that our current offices are adequate to meet our needs.
ITEM 3 – LEGAL PROCEEDINGS
Legal case with FT Global Capital, Inc.
In January 2021, FT Global Capital, Inc. (“FT Global”),
a former placement agent of the Company filed a lawsuit against the Company in the Superior Court of Fulton County, Georgia. FT
Global served the complaint upon the Company in January 2021. In the complaint, FT Global alleges claims, most of which attempt
to hold the Company liable under legal theories that relate back to an alleged breach of an exclusive placement agent agreement between
FT Global and the Company in July 2020 which had a term of three months. FT Global claims that the Company failed to compensate
FT Global for securities purchase transactions between December 2020 and April 2021, pursuant to the terms of the expired exclusive placement
agent agreement. Allegedly, the exclusive placement agent agreement required the Company to pay FT Global for capital received during
the term of the agreement and for the 12-month period following the termination of the agreement involving any investors that FT Global
introduced and/or wall-crossed to the Company. However, the Company believes the securities purchase transactions at issue did not
involve the one investor which FT Global introduced or wall-crossed to the Company during the term of the agreement. FT Global claims
approximately $7,000,000 in damages and attorneys’ fees.
The Company timely removed the case to the United
States District Court for the Northern District of Georgia (the (“Court) on February 9, 2021 based on diversity of jurisdiction.
On March 9, 2021, the Company filed a motion to dismiss based on FT Global’s failure to state a claim which is pending before the
Court. On March 23, 2021, FT Global filed its response to the Company’s motion to dismiss. FT Global argues that the Court
should deny the Company’s motion to dismiss. However, if the Court is inclined to grant the Company’s motion to dismiss,
FT Global requested that the Court permit it to file an amended complaint. On April 8, 2021, the parties filed a Joint Preliminary
Report and Discovery Plan. On April 12, 2021, the Court approved the Joint Preliminary Report and Discovery Plan and issued a Scheduling
Order placing this case on a six-month discovery tract. The Company will continue to vigorously defend the action against FT Global.
Certain former subsidiaries of the Company were involved in litigations
as described in Note 17 “Commitments and Contingencies” to our consolidated financial statements, and these former subsidiaries
have been transferred along with HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
FUTURE FINTECH GROUP INC.
CONSOLIDATED BALANCE SHEETS
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December 31,
2020
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December 31,
2019
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ASSETS
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CURRENT ASSETS
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Cash and cash equivalents
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$
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9,788,041
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$
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190,867
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Accounts receivable, net
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-
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4,954
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Inventories
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-
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3,594
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Advances to suppliers and other current assets
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258,830
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1,598,555
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Loan receivables
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5,355,944
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-
|
|
Other receivables, net
|
|
|
81,972
|
|
|
|
7,489
|
|
Assets related to discontinued operations
|
|
|
35,082
|
|
|
|
98,528,958
|
|
TOTAL CURRENT ASSETS
|
|
$
|
15,519,869
|
|
|
$
|
100,334,417
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
16,728
|
|
|
$
|
17,855
|
|
Right of Use Assets
|
|
|
291,379
|
|
|
|
-
|
|
Intangible assets
|
|
|
41,214
|
|
|
|
40,853
|
|
Amount due from related parties
|
|
|
62,522
|
|
|
|
3,337,445
|
|
Long-term investments
|
|
|
-
|
|
|
|
12,250,000
|
|
TOTAL ASSETS
|
|
$
|
15,931,712
|
|
|
$
|
115,980,570
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
250,364
|
|
|
$
|
248,894
|
|
Accrued expenses and other payables
|
|
|
2,300,412
|
|
|
|
1,129,893
|
|
Advances from customers
|
|
|
28,962
|
|
|
|
534,089
|
|
Convertible note payables
|
|
|
1,163,146
|
|
|
|
957,990
|
|
Loan payables
|
|
|
394,848
|
|
|
|
-
|
|
Lease liability-current
|
|
|
180,803
|
|
|
|
-
|
|
Liabilities related to discontinued operations
|
|
|
865,568
|
|
|
|
200,334,853
|
|
TOTAL CURRENT LIABILITIES
|
|
$
|
5,184,103
|
|
|
$
|
203,205,719
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Lease liability-non-current
|
|
|
110,575
|
|
|
|
-
|
|
Amount Due to Related Party
|
|
$
|
1,905,893
|
|
|
$
|
852,057
|
|
TOTAL NON-CURRENT LIABILITIES
|
|
|
2,016,468
|
|
|
|
852,057
|
|
TOTAL LIABILITIES
|
|
$
|
7,200,571
|
|
|
$
|
204,057,776
|
|
Commitments and contingencies (Note 17)
|
|
|
|
|
|
|
|
|
STOCKHOLDER’S EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future FinTech Group, Inc, Stockholders’ equity
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 300,000,000 shares authorized; 50,053,606 shares and 33,810,416 shares issued and outstanding as of December 31, 2020 and 2019 respectively
|
|
$
|
50,053
|
|
|
$
|
33,810
|
|
Additional paid-in capital
|
|
|
133,510,862
|
|
|
|
107,852,827
|
|
Accumulated deficits
|
|
|
(124,384,301
|
)
|
|
|
(213,314,612
|
)
|
Accumulated other comprehensive income (loss)
|
|
|
(398,014
|
)
|
|
|
12,989,408
|
|
Total Future FinTech Group, Inc. stockholders’ equity (deficit)
|
|
|
8,778,600
|
|
|
|
(92,438,567
|
)
|
Non-controlling interests
|
|
|
(47,459
|
)
|
|
|
4,361,361
|
|
Total stockholders’ equity (deficit)
|
|
|
8,731,141
|
|
|
|
(88,077,206
|
)
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
15,931,712
|
|
|
$
|
115,980,570
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
FUTURE FINTECH GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
|
|
For the Year Ended
|
|
|
|
2020
|
|
|
2019
|
|
Revenue
|
|
$
|
370,657
|
|
|
$
|
941,117
|
|
Cost of goods sold
|
|
|
35,286
|
|
|
|
491,128
|
|
Gross profit
|
|
|
335,371
|
|
|
|
449,989
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
4,257,533
|
|
|
|
1,730,448
|
|
Stock compensation expense
|
|
|
5,940,000
|
|
|
|
702,000
|
|
Selling expenses
|
|
|
39,685
|
|
|
|
441,879
|
|
Bad debt provision
|
|
|
3,356,725
|
|
|
|
5,158,818
|
|
Impairment loss on intangible assets
|
|
|
1,759,059
|
|
|
|
-
|
|
Total operating expenses
|
|
|
15,353,002
|
|
|
|
8,033,145
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(15,017,631
|
)
|
|
|
(7,583,156
|
)
|
|
|
|
|
|
|
|
|
|
Other (expenses) income
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
218,028
|
|
|
|
3,902
|
|
Interest expenses
|
|
|
(372,169
|
)
|
|
|
(523,558
|
)
|
Loss on debt settlement and conversion
|
|
|
(2,599,303
|
)
|
|
|
-
|
|
Impairment loss on equity investment
|
|
|
(12,250,000
|
)
|
|
|
(2,751,099
|
)
|
Other income(expenses), net
|
|
|
1,134
|
|
|
|
(255,810
|
)
|
Total other income (expenses), net
|
|
|
(15,002,310
|
)
|
|
|
(3,526,565
|
)
|
|
|
|
|
|
|
|
|
|
Loss from Continuing Operations before Income Tax
|
|
|
(30,019,941
|
)
|
|
|
(11,109,721
|
)
|
Income tax provision
|
|
|
-
|
|
|
|
-
|
|
Loss from Continuing Operations
|
|
|
(30,019,941
|
)
|
|
|
(11,109,721
|
)
|
|
|
|
|
|
|
|
|
|
Discontinued Operations (Note 16)
|
|
|
|
|
|
|
|
|
Gain on disposal of discontinued operations
|
|
|
119,428,164
|
|
|
|
-
|
|
Income (loss) from discontinued operations
|
|
|
(477,912
|
)
|
|
|
(15,964,524
|
)
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
88,930,311
|
|
|
$
|
(27,074,245
|
)
|
Less: Net Loss attributable to non-controlling interests
|
|
|
|
|
|
|
1,845,313
|
|
Net income(loss) from discontinued operations attributable to Future
Fintech Group,Inc.
|
|
|
88,930,311
|
|
|
|
(25,228,932
|
)
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Income (loss) from continued operations
|
|
$
|
(30,019,941
|
)
|
|
$
|
(11,109,721
|
)
|
Foreign currency translation – continued operations
|
|
|
(7,443,394
|
)
|
|
|
21,950,957
|
|
Comprehensive income (loss) - continued operation
|
|
|
(37,463,335
|
)
|
|
|
10,841,236
|
|
Income (loss) from discontinued operations
|
|
$
|
118,950,252
|
|
|
$
|
(15,964,524
|
)
|
Foreign currency translation - discontinued operation
|
|
|
(5,944,028
|
)
|
|
|
-
|
|
Comprehensive (loss) income - discontinued operation
|
|
|
113,006,224
|
|
|
|
(15,964,524
|
)
|
Comprehensive Income (Loss)
|
|
$
|
75,542,889
|
|
|
$
|
(5,123,288
|
)
|
Less: Net loss attributable to non-controlling interests
|
|
|
-
|
|
|
|
1,845,313
|
|
COMPREHENSIVE LOSS ATTRIBUTABLE TO FUTURE FINTECH GROUP INC. STOCKHOLDERS
|
|
$
|
75,542,889
|
|
|
|
(3,277,975
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share from continued operation
|
|
$
|
(0.79
|
)
|
|
$
|
(0.35
|
)
|
Basic earnings (loss) per share from discontinued operation
|
|
|
3.13
|
|
|
|
(0.45
|
)
|
|
|
$
|
2.34
|
|
|
$
|
(0.80
|
)
|
Diluted Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
$
|
(0.79
|
)
|
|
$
|
(0.35
|
)
|
Diluted earnings (loss) per share from discontinued operation
|
|
|
2.76
|
|
|
|
(0.45
|
)
|
|
|
$
|
1.97
|
|
|
$
|
(0.80
|
)
|
Weighted average number of shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
38,057,065
|
|
|
|
31,996,279
|
|
Diluted
|
|
|
43,147,644
|
|
|
|
31,996,279
|
|
The accompanying notes are an integral part of
these consolidated financial statements.
FUTURE FINTECH GROUP INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
Accumulative
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Non-
|
|
|
|
|
|
|
Common Stock
|
|
|
paid-in
|
|
|
Accumulated
|
|
|
comprehensive
|
|
|
controlling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
Deficits
|
|
|
income
|
|
|
interests
|
|
|
Total
|
|
Balance at December 31, 2018
|
|
|
31,017,083
|
|
|
$
|
31,017
|
|
|
$
|
105,737,256
|
|
|
$
|
(188,085,680
|
)
|
|
$
|
(8,961,549
|
)
|
|
$
|
4,601,121
|
|
|
$
|
(86,677,835
|
)
|
Share based compensation
|
|
|
1,300,000
|
|
|
|
1,300
|
|
|
|
702,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
703,300
|
|
Issuance of common stock for conversion of debts
|
|
|
1,493,333
|
|
|
|
1,493
|
|
|
|
1,413,571
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,415,064
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(25,228,931
|
)
|
|
|
-
|
|
|
|
(1,845,313
|
)
|
|
|
(27,074,245
|
)
|
Foreign currency translation on continuing operation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,950,957
|
|
|
|
1,605,554
|
|
|
|
23,556,511
|
|
Balance at December 31, 2019
|
|
|
33,810,416
|
|
|
$
|
33,810
|
|
|
$
|
107,852,827
|
|
|
$
|
(213,314,612
|
)
|
|
$
|
12,989,408
|
|
|
$
|
4,361,361
|
|
|
$
|
(88,077,206
|
)
|
Share based payment
|
|
|
3,750,000
|
|
|
|
3,750
|
|
|
|
1,187,250
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,191,000
|
|
Share-based payments-omnibus equity plan
|
|
|
3,000,000
|
|
|
|
3,000
|
|
|
|
5,937,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,940,000
|
|
Issuance of common stock for conversion of debts
|
|
|
3,834,530
|
|
|
|
3,835
|
|
|
|
8,576,706
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,580,541
|
|
Issuance of common stocks and Warrants, net of issuance costs
|
|
|
5,658,660
|
|
|
|
5,658
|
|
|
|
10,250,651
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,256,309
|
|
Net loss from continued operation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(30,019,941
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(30,019,941
|
)
|
Net loss from discontinued operation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(477,912
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(477,912
|
)
|
Disposition of Discontinued operation
|
|
|
|
|
|
|
|
|
|
|
(293,572
|
)
|
|
|
119,428,164
|
|
|
|
(5,944,028
|
)
|
|
|
(4,408,821
|
)
|
|
|
108,781,743
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,443,394
|
)
|
|
|
|
|
|
|
(7,443,394
|
)
|
Balance at December 31, 2020
|
|
|
50,053,606
|
|
|
$
|
50,053
|
|
|
$
|
133,510,862
|
|
|
$
|
(124,384,301
|
)
|
|
$
|
(398,014
|
)
|
|
$
|
(47,459
|
)
|
|
$
|
8,731,141
|
|
The accompanying notes are an integral part of
these consolidated financial statements.
FUTURE FINTECH GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For the Year Ended
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
88,930,311
|
|
|
$
|
(27,074,245
|
)
|
Net income from discontinued operation
|
|
|
118,950,252
|
|
|
|
(15,964,525
|
)
|
Net loss from continuing operations
|
|
|
(30,019,941
|
)
|
|
|
(11,109,721
|
)
|
Adjustments to reconcile net income to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
5,217
|
|
|
|
2,886
|
|
Amortization
|
|
|
130,125
|
|
|
|
414
|
|
Bad debt provision
|
|
|
3,356,725
|
|
|
|
5,158,818
|
|
Impairment of intangible assets
|
|
|
1,759,059
|
|
|
|
-
|
|
Impairment of long term investment
|
|
|
12,250,000
|
|
|
|
2,751,099
|
|
Inventory write-off
|
|
|
3,594
|
|
|
|
-
|
|
Share based compensation
|
|
|
7,131,000
|
|
|
|
703,300
|
|
Loss on debt settlement and conversion
|
|
|
2,599,304
|
|
|
|
-
|
|
Interest expenses related to convertible note
|
|
|
99,858
|
|
|
|
523,551
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
4,478
|
|
|
|
(4,954
|
)
|
Inventory
|
|
|
-
|
|
|
|
(3,594
|
)
|
Other receivable
|
|
|
(208,507
|
)
|
|
|
(51,093
|
)
|
Advances to suppliers and other current assets
|
|
|
(177,258
|
)
|
|
|
(2,594,474
|
)
|
Operating lease assets and liabilities
|
|
|
(15,244
|
)
|
|
|
-
|
|
Accounts payable
|
|
|
1,470
|
|
|
|
205,798
|
|
Due to related parties
|
|
|
276,297
|
|
|
|
-
|
|
Accrued expenses
|
|
|
1,170,519
|
|
|
|
(1,786,182
|
)
|
Advances from customers
|
|
|
(416,543
|
)
|
|
|
303,782
|
|
Net Cash Used In Operating Activities – Discontinued Operations
|
|
|
(224,762
|
)
|
|
|
(4,240,466
|
)
|
Net Cash Used In Operating Activities – Continued Operations
|
|
|
(2,049,848
|
)
|
|
|
(5,900,368
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
(2,984
|
)
|
|
|
(5,006
|
)
|
Advance of short-term loan investment
|
|
|
(5,355,944
|
)
|
|
|
-
|
|
Purchase of intangible assets
|
|
|
-
|
|
|
|
(43,003
|
)
|
Net Cash Used in Investing Activities from Discontinued Operations
|
|
|
84,847
|
|
|
|
|
|
Net Cash Used in Investing Activities from Continuing Operations
|
|
|
(5,358,928
|
)
|
|
|
(48,009
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of common stock, net of issuance costs
|
|
|
10,256,309
|
|
|
|
-
|
|
Proceeds from amounts due from related parties, net
|
|
|
476,015
|
|
|
|
852,057
|
|
Proceeds from loan payable
|
|
|
694,639
|
|
|
|
-
|
|
Repayment of loans payable
|
|
|
(335,624
|
)
|
|
|
-
|
|
Proceeds from Secured Convertible Promissory Note
|
|
|
6,086,535
|
|
|
|
2,373,054
|
|
Net cash (used in) provided by financing activities
|
|
|
17,177,874
|
|
|
|
3,225,111
|
|
|
|
|
|
|
|
|
|
|
Effect of change in exchange rate
|
|
|
(29,024
|
)
|
|
|
7,483,307
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
9,600,159
|
|
|
|
519,575
|
|
Cash and cash equivalents, beginning of year
|
|
|
190,867
|
|
|
|
19,741
|
|
Cash and cash equivalents, end of year
|
|
|
9,791,026
|
|
|
|
539,316
|
|
Less: Cash and cash equivalents from the discontinued operations, end of year
|
|
|
(2,985
|
)
|
|
|
(348,449
|
)
|
Cash and cash equivalents, from the continuing operations end of year
|
|
$
|
9,788,041
|
|
|
$
|
190,867
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY DISCLOSURE OF SIGNIFICANT NON-CASH TRANSACTION
|
|
|
|
|
|
|
|
|
Issuance of common stocks for conversion of debts
|
|
$
|
700,236
|
|
|
$
|
1,120,000
|
|
Debt settlement by issuance of common stock
|
|
|
5,281,000
|
|
|
|
-
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
FUTURE FINTECH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2020 AND
2019
1. CORPORATE INFORMATION
Future FinTech is a holding company incorporated
under the laws of the State of Florida. The main business of the Company includes an online shopping platform, Chain Cloud Mall
(CCM, website: http://gksharedmall.com/), which is based on blockchain technology; and other application and development of blockchain-based
e-commerce technology and financial technology. Prior to 2019, the Company engaged in the production and sales of fruit juice concentrates,
fruit juice beverages and other fruit-related products in the People’s Republic of China (“PRC”, or “China”),
and overseas markets. Due to the drastically increased production cost and tightened environmental law in China, the Company has
transformed its business from fruit juice manufacturing and distribution to a real-name blockchain e-commerce platform that integrates
blockchain and internet technology from the end of 2018.
On July 22, 2020, the Company established
Future Commercial Management (Beijing) Co., Ltd. Its scope of business includes management and consulting services.
The Company’s activities are principally conducted
by subsidiaries and VIE operating in the PRC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of preparation and principle of
consolidation
These consolidated financial statements
(“financial statements”) have been prepared in conformity with accounting principles generally accepted in the United
States of America, or US GAAP.
The Company’s functional currency
of subsidiaries and VIEs in China is the Chinese Renminbi (RMB). Other subsidiaries outside of China use U.S. Dollar as the functional
currency; however, the accompanying consolidated financial statements have been translated and presented in USD.
According to USGAAP Accounting Standard
Codification (“ASC”) 810-10-15-8, for legal entities other than limited partnerships, the usual condition for a controlling
financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity,
directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward
consolidation. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement
with other stockholders, or by court decree.
The consolidated financial statements include
the accounts of the Company and its subsidiaries. Our contractual arrangements with our VIE and their respective shareholders allow
us to (i) exercise effective control over our VIE, (ii) receive substantially all of the economic benefits of our VIE, and (iii)
have an exclusive option to purchase all or part of the equity interests in our VIE when and to the extent permitted by PRC law.
As a result of our direct ownership in
our wholly foreign-owned enterprise (“WFOE”) and the contractual arrangements with our VIE, we are regarded as the
primary beneficiary of our VIE, and we treat it and its subsidiaries as our consolidated affiliated entities under U.S. GAAP.
Certain amounts of prior years were reclassified
to conform with current year presentation.
Discontinued
Operations
On February 27, 2020, SkyPeople BVI (the
“Seller”) completed the transfer of its ownership of HeDeTang HK to New Continent International Co., Ltd. (the “Buyer”),
an unrelated third party and a company incorporated in the British Virgin Islands for a total price of RMB 0.6 million (approximately
$85,714), pursuant to a Share Transfer Agreement entered into by the Seller and the Buyer on September 18, 2019 and approved at
the special shareholders meeting of the Company on February 26, 2020. As the Company believed that no continued cash flow would
be generated by the sold component, in accordance with ASC 205-20, the Company presented the operating results from Hedetang as
discontinued operations within the accompanying consolidated financial statements.
In addition, The Company’s Huludao
Wonder operation, a subsidiary which produces concentrated apple juice, suffered continued operating losses since 2014 and its
cash flow was minimal for these three years. In December 2016, the Company established a winding-down plan to close this operation.
Based on the restructuring plan and in accordance with ASC 205-20, the Company presented the operating results from Huludao Wonder
as a discontinued operation.
On March 11, 2020, the Company’s Board of
Directors passed a resolution to sell the operation of Globalkey Supply Chain limited and Zhonglian Hengxin Assets Management Co., Ltd
(“Zhonglian Hengxin”) and close the operation of Digital Online Marketing Limited, Future Digital Fintech (Xi’an) Co.,
Ltd., SkyPeople Foods Holding Ltd. and Chain Future Digital Tech (Beijing) Co., Ltd.
On May 7, 2020, Future Business Management Co.,
Ltd. completed the transfer of its ownership of Zhonglian Hengxin Assets Management Co., Ltd to individual third party. On July 24,
2020, the Company’s Board of Directors passed a resolution to sell the operation of Hedetang Farm Products Trading Markets
(Mei County) Co., Ltd. and close the operation of Chain Cloud Mall Logistics Center (Shaanxi) Co., Ltd. As a result, Skypeople Foods
Holdings Limited Company was deregistered on July 27, 2020; Digital online marketing Limited company was deregistered on July 28,
2020; On October 31, 2020, Chain Cloud Mall Network and Technology (Tianjin) Co., Limited and Chain Cloud Mall Logistics Center
(Shanxi) Co., Ltd. completed the transfer of its ownership of Hedetang Farm Products Trading Markets (Mei county) Co., Ltd to third
parties.
Based on the disposal plan and in accordance with ASC 205-20, the Company
presented the operating results from these operations as a discontinued operation.
Segment Information Reclassification
Historically, the Company operated in five
segments: concentrated apple juice and apple aroma, concentrated kiwifruit juice and kiwifruit puree, concentrated pear juice,
fruit juice beverages, and others.
As the Company classified the juice related
operation into discontinued operation in the beginning of year 2019, and in accordance with the Company’s new business strategy,
the Company classified business segment into CCM Shopping Mall Membership, sales of goods and others.
Use of Estimates
The Company’s consolidated financial
statements have been prepared in accordance with US GAAP and this requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and reported amounts of revenue and expenses during the reporting period. The significant areas requiring
the use of management estimates include, but not limited to, the allowance for doubtful accounts receivable, estimated useful life
and residual value of property, plant and equipment, impairment of long-lived assets provision for staff benefit, recognition and
measurement of deferred income taxes and valuation allowance for deferred tax assets. Although these estimates are based on management’s
knowledge of current events and actions management may undertake in the future, actual results may ultimately differ from those
estimates and such differences may be material to our consolidated financial statements.
Going Concern
The Company’s financial statements
are prepared assuming that the Company will continue as a going concern.
The Company incurred operating losses and had negative
operating cash flows and may continue to incur operating losses and generate negative cash flows as the Company implements its future
business plan. These factors raise substantial doubts about the Company’s ability to continue as a going concern. The Company has
raised funds through issuance of convertible bonds and common stock.
The ability of the Company to continue
as a going concern is dependent upon its ability to successfully execute its new business strategy and eventually attain profitable
operations. The accompanying financial statements do not include any adjustments that may be necessary if the Company is unable
to continue as a going concern.
Impairment of Long-Lived Assets
In accordance with the ASC
360-10, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets, such as property, plant and equipment
and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable, or it is reasonably possible that these assets could become impaired
as a result of technological or other industrial changes. The determination of recoverability of assets to be held and used is
made by comparing the carrying amount of an asset to future undiscounted cash flows to be generated by the assets.
If such assets are considered to be impaired,
the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.
Fair Value of Financial Instruments
The Company has adopted FASB ASC Topic
on Fair Value Measurements and Disclosures (“ASC 820”), which defines fair value, establishes a framework for measuring
fair value in GAAP, and expands disclosures about fair value measurements. ASC 820 establishes a three-level valuation hierarchy
of valuation techniques based on observable and unobservable input, which may be used to measure fair value and include the following:
Level 1 - Quoted prices in active markets
for identical assets or liabilities.
Level 2 - Input other than Level 1 that
is observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets
that are not active; or other input that is observable or can be corroborated by observable market data for substantially the full
term of the assets or liabilities.
Level 3 - Unobservable input that is supported
by little or no market activity and that is significant to the fair value of the assets or liabilities.
Our cash and cash equivalents and restricted
cash are classified within level 1 of the fair value hierarchy because they are value using quoted market price.
Earnings (Loss) Per Share
Under ASC 260-10, Earnings Per Share,
basic EPS excludes dilution for Common Stock equivalents and is calculated by dividing net income (loss) available to common stockholders
by the weighted-average number of Common Stock outstanding for the period.
Diluted EPS is calculated by using the
treasury stock method, assuming conversion of all potentially dilutive securities, such as stock options and warrants. Under this
method, (i) exercise of options and warrants is assumed at the beginning of the period and shares of Common Stock are assumed to
be issued, (ii) the proceeds from exercise are assumed to be used to purchase Common Stock at the average market price during the
period, and (iii) the incremental shares (the difference between the number of shares assumed issued and the number of shares assumed
purchased) are included in the denominator of the diluted EPS computation. The numerators and denominators used in the computations
of basic and diluted EPS are presented in the following table.
For the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
Share
|
|
|
Pre-share
amount
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(30,019,941
|
)
|
|
|
38,057,065
|
|
|
$
|
(0.79
|
)
|
Income from discontinuing operations
|
|
$
|
118,950,252
|
|
|
|
38,057,065
|
|
|
$
|
3.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders from continuing operations
|
|
$
|
(30,019,941
|
)
|
|
|
38,057,065
|
|
|
$
|
(0.79
|
)
|
Income available to common stockholders from discontinuing operations
|
|
$
|
118,950,252
|
|
|
|
38,057,065
|
|
|
$
|
3.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
-
|
|
|
|
5,090,579
|
|
|
|
-
|
|
Diluted loss per share is calculated by taking net loss, divided by the diluted weighted average common shares outstanding. Diluted net loss per share equals basic net loss per share because the effect of securities convertible into common shares is anti-dilutive from continuing operations
|
|
$
|
(30,019,941
|
)
|
|
|
43,147,644
|
|
|
$
|
(0.79
|
)
|
Diluted Earnings per share is calculated by taking net loss, divided by the diluted weighted average common shares outstanding.
|
|
$
|
118,950,252
|
|
|
|
43,147,644
|
|
|
$
|
2.76
|
|
For the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
Share
|
|
|
Pre-share
amount
|
|
|
|
|
|
|
|
|
|
|
|
Income(Loss) from continuing operations
|
|
$
|
(11,109,721
|
)
|
|
|
31,996,279
|
|
|
$
|
(0.35
|
)
|
Income(Loss) from discontinuing operations
|
|
$
|
(15,964,524
|
)
|
|
|
31,996,279
|
|
|
$
|
(0.45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders from continuing operations
|
|
$
|
(11,109,721
|
)
|
|
|
31,996,279
|
|
|
$
|
(0.35
|
)
|
Loss available to common stockholders from discontinuing operations
|
|
$
|
(15,964,524
|
)
|
|
|
31,996,279
|
|
|
$
|
(0.45
|
)
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders from continuing operations
|
|
$
|
(11,109,721
|
)
|
|
|
31,996,279
|
|
|
$
|
(0.35
|
)
|
Loss available to common stockholders from discontinuing operations
|
|
$
|
(15,964,524
|
)
|
|
|
31,996,279
|
|
|
$
|
(0.45
|
)
|
Cash and Cash Equivalents
Cash and cash equivalents included cash
on hand and demand deposits placed with banks or other financial institutions, which are unrestricted as to withdrawal and use
and with an original maturity of three months or less.
Deposits in banks in the PRC are only insured
by the government up to RMB500,000, and are consequently exposed to risk of loss. The Company believes the probability of a bank
failure, causing loss to the Company, is remote.
Receivable and Allowances
Accounts receivable are recognized
and carried at the original invoice amounts less an allowance for any uncollectible amount. We have a policy of reserving for uncollectible
accounts based on our best estimate of the amount of probable credit losses in our existing accounts receivable. We extend credit
to our customers based on an evaluation of their financial condition and other factors. We generally do not require collateral
or other security to support accounts receivable. We perform ongoing credit evaluations of our customers and maintain an allowance
for potential bad debts if required.
Other receivables, and loan receivables are recognized
and carried at the initial amount when occurred less an allowance for any uncollectible amount. We have a policy of reserving for uncollectible
accounts based on our best estimate of the amount of probable impairment losses in our existing receivable.
We determine whether an allowance for doubtful
accounts is required by evaluating specific accounts where information indicates the customers may have an inability to meet financial
obligations. In these cases, we use assumptions and judgment, based on the best available facts and circumstances, to record a
specific allowance for those customers against amounts due to reduce the receivable to the amount expected to be collected. These
specific allowances are re-evaluated and adjusted as additional information is received. The amounts calculated are analyzed to
determine the total amount of the allowance. We may also record a general allowance as necessary.
Direct write-offs are taken in the period
when we have exhausted our efforts to collect overdue and unpaid receivable or otherwise evaluate other circumstances that indicate
that we should abandon such efforts.
The Company has assessed its accounts
receivable including credit term and corresponding all its accounts receivables in December 2020. Upon such credit terms, bad debt
expense was increased by $3.36 million and $5.16 million during the years ended December 31, 2020 and 2019, respectively. Accounts
receivables of $0 and $4,954 have been outstanding for over 90 days as of December 31, 2020 and December 31, 2019, respectively.
Inventories
Inventories consist of raw materials, packaging
materials (which include ingredients and supplies) and finished goods (which) include finished juice in the bottling, canning operations
and other. Inventories also consist of merchant gift package to be delivered with the new membership signed up in our e-commerce
platform. Inventories are valued at the lower of cost or net realizable value. We determine cost on the basis of the weighted
average method. The Company periodically reviews inventories for obsolescence and any inventories identified as obsolete are written
off.
Revenue Recognition
We apply the five steps defined under ASC
606: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the
transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue
when (or as) the entity satisfies a performance obligation. We assess its revenue arrangements against specific criteria in order
to determine if it is acting as principal or agent. Revenue arrangements with multiple performance obligations are divided into
separate distinct goods or services. We allocate the transaction price to each performance obligation based on the relative standalone
selling price of the goods or services provided. Revenue is recognized upon the transfer of control of promised goods or services
to a customer.
We do not make any significant judgment
in evaluating when control is transferred. Revenue is recorded net of value-added tax.
Revenue recognitions are as follows:
Sales of juice and other products (reported
in loss from discontinued operations in 2019):
We recognize revenue when the receipt of
merchandise is confirmed by the customers, which is the point that the title of the goods is transferred to the customer.
We recognize revenues when we satisfy a
performance obligation by transferring a promised good or service (that is, an asset) to a customer. An asset is transferred when
the customer obtains control of that asset. Customers have no contractual right to return products. Historically, the Company has
not had any returned products. Accordingly, no provision has been made for returnable goods. The Company is not required to rebate
or credit a portion of the original fee if it subsequently reduces the price of its product to its suppliers.
The Company does not make any significant
judgment in determination of the amount and timing of revenue from contracts with customers.
Online sales and Membership fee:
The Company recognizes the sale of goods
15 days after the products are shipped (after the 15 days return policy). The revenue from the membership fee is amortized over
the lifetime of the membership, which is one year. For the merchandise gift package, revenue is recognized when the receipt of
the gift package is confirmed by the members. Other revenues include revenues earned on net basis from sales of certain products
on our platform.
Property, Plant and Equipment
Property, plant and equipment are stated
at cost less accumulated depreciation and any impairment losses. Depreciation is computed using the straight-line method over the
useful lives of the assets. Major renewals and betterments are capitalized and depreciated; maintenance and repairs that do not
extend the life of the respective assets are expensed as incurred. Upon disposal of assets, the cost and related accumulated depreciation
are removed from the accounts and any gain or loss is included in the consolidated statements of income and comprehensive income.
Depreciation related to property, plant
and equipment used in production is reported in cost of sales, and includes amortized amounts related to capital leases. We estimated
that the residual value of the Company’s property and equipment ranges from 3% to 5%. Property, plant and equipment are depreciated
over their estimated useful lives as follows:
Machinery and equipment
|
|
5-10 years
|
Furniture and office equipment
|
|
3-5 years
|
Motor vehicles
|
|
5 years
|
Depreciation expense included in
general and administration expenses for the years ended December 31, 2020 and 2019 was $5,217 and $2,886 respectively. Depreciation
expense included in cost of sales for the year ended December 31, 2020 and 2019 was $0 and $0 and respectively.
Intangible Assets
Acquired intangible assets are recognized
based on their cost to the Company, which generally includes the transaction costs of the asset acquisition, and no gain or loss
is recognized unless the fair value of noncash assets given as consideration differs from the assets’ carrying amounts on
the Company’s book. These assets are amortized over their useful lives if the assets are deemed to have a finite life and
they are reviewed for impairment by testing for recoverability whenever events or changes in circumstances indicate that its carrying
amount may not be recoverable. The fair value of an intangible asset is the amount that would be determined if the entity used
the assumptions that market participants would use if they were pricing the intangible asset. The useful life of the Company’s
intangible assets is ten year, which is determined by using the time period that an intangible is estimated to contribute directly
or indirectly to a Company’s future cash flows.
Foreign Currency and Other Comprehensive
Income (Loss)
The financial statements of the Company’s
foreign subsidiaries are measured using the local currency as the functional currency; however, the reporting currency of the Company
is the USD. Assets and liabilities of the Company’s foreign subsidiaries have been translated into USD using the exchange
rate at the balance sheet dates, while equity accounts are translated using historical exchange rate. The exchange rate we used
to convert RMB to USD was 6.52 and 6.98 at the balance sheet dates of December 31, 2020 and December 31, 2019, respectively. The
average exchange rate for the period has been used to translate revenues and expenses. The average exchange rates we used to convert
RMB to USD were 6.90 and 6.90 for fiscal year 2020 and fiscal year 2019, respectively. Translation adjustments are reported separately
and accumulated in a separate component of equity (cumulative translation adjustment).
Income Taxes
We use the asset and liability method of
accounting for income taxes in accordance with ASC Topic 740, “Income Taxes.” Under this method, income tax expense
is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary
differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided
to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely
than not some portion or all of the deferred tax assets will not be realized.
ASC Topic 740-10-30 clarifies the accounting
for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold
and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken
in a tax return. ASC Topic 740-10-25 provides guidance on de-recognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. We have no material uncertain tax positions for any of the reporting periods presented.
Lease
After adoption of ASC 842 and
related standards, which introduced a lessee model that requires entities to recognize assets and liabilities for most leases,
but recognize expenses on their income statements in a manner similar to current accounting, thus operating lease right-of-use
assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. For
short-term leases with an initial lease term of 12 months or less and with purchase options we are reasonably certain will not
be exercised. As a lessee, the Company leases equipment, land and office building. Lease expense is recognized on a straight-line
basis over the lease term.
Convertible notes
The Company accounts for its convertible
notes at issuance by allocating the proceeds received from a convertible note among freestanding instruments according to ASC 470,
Debt, based upon their relative fair values. The fair value of debt and common stock is determined based on the closing price of
the common stock on the date of the transaction. Convertible notes are subsequently carried at amortized cost. Each convertible
note is analyzed for the existence of a beneficial conversion feature (“BCF”), defined as the fair value of the common
stock at the commitment date for the convertible note, less the effective conversion price. No BCF was recognized for the convertible
notes issued during 2020 and 2019.
Share-based compensation
The Company awards share options and other
equity-based instruments to its employees, directors and consultants (collectively “share-based payments”). Compensation
cost related to such awards is measured based on the fair value of the instrument on the grant date. The Company recognizes the
compensation cost over the period the employee is required to provide service in exchange for the award, which generally is the
vesting period. The amount of cost recognized is adjusted to reflect the expected forfeiture prior to vesting. When no future services
are required to be performed by the employee in exchange for an award of equity instruments, and if such award does not contain
a performance or market condition, the cost of the award is expensed on the grant date. The Company recognizes compensation cost
for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service
period for the entire award, provided that the cumulative amount of compensation cost recognized at any date at least equals the
portion of the grant-date value of such award that is vested at that date.
Variable interest entities
On July 31, 2019, CCM Tianjin, E-commerce
Tianjin, and Mr. Zeyao Xue and Mr. Kai Xu, citizens of China and shareholders of E-commerce Tianjin, entered into the following
agreements, or collectively, the “Variable Interest Entity Agreements” or “VIE Agreements,” pursuant to
which CCM Tianjin has contractual rights to control and operate the business of E-commerce Tianjin (the “VIE”). Therefore,
pursuant to ASC 810, E-Commerce Tianjin is included in the Company’s consolidated financial statements since then.
Pursuant to Chinese law and regulations, a foreign
owned enterprise cannot apply for and hold a license for operation of certain e-commerce businesses, the category of business which the
Company is expanding in China. CCM Tianjin is an indirectly wholly foreign owned enterprise of the Company. In order to comply with Chinese
law and regulations, CCM Tianjin agreed to provide E-commerce Tianjin an Exclusive Operation and Use Rights Authorization to operate and
use the Chain Cloud Mall System owned by CCM Tianjin.
E-commerce Tianjin was incorporated by Mr. Zeyao Xue
and Mr. Kai Xu solely for the purpose of holding the operation license of the Chain Cloud Mall System. Mr. Zeyao Xue is a major shareholder
of the Company and the son of Mr. Yongke Xue, our Chairman of the Board. Mr. Kai Xu was the Chief Operating Officer of the Company and
currently is the Deputy General Manager of FT Commercial Group Ltd., a wholly owned subsidiary of the Company.
The VIE Agreements are as follows:
1)
|
Exclusive Technology Consulting and Service Agreement by and between CCM Tianjin and E-commerce
Tianjin. Pursuant to the Exclusive Technology Consulting and Service Agreement, CCM Tianjin agreed to act as the exclusive
consultant of E-commerce Tianjin and provide technology consulting and services to E-commerce Tianjin. In exchange, E-commerce
Tianjin agreed to pay CCM Tianjin a technology consulting and service fee, the amount of which is to be equivalent to the
amount of net profit before tax of E-commerce Tianjin, payable on a quarterly basis after making up losses of previous years
(if necessary) and deducting necessary costs, expenses and taxes related to the business operations of E-commerce Tianjin.
Without the prior written consent of CCM Tianjin, E-commerce Tianjin may not accept the same or similar technology consulting
and services provided by any third party during the term of the agreement. All the benefits and interests generated from the
agreement, including but not limited to intellectual property rights, know-how and trade secrets, will be CCM Tianjin’s
sole and exclusive property. This agreement has a term of 10 years and may be extended unilaterally by CCM Tianjin with CCM
Tianjin’s written confirmation prior to the expiration date. E-commerce Tianjin cannot terminate the agreement early
unless CCM Tianjin commits fraud, gross negligence or illegal acts, or becomes bankrupt or winds up.
|
|
|
2)
|
Exclusive Purchase Option Agreement by and among CCM Tianjin, E-commerce Tianjin, Mr. Zeyao
Xue and Mr. Kai Xu. Pursuant to the Exclusive Purchase Option Agreement, Mr. Zeyao Xue and Mr. Kai Xu granted to CCM Tianjin
and any party designated by CCM Tianjin the exclusive right to purchase, at any time during the term of this agreement, all
or part of the equity interests in E-commerce Tianjin, or the “Equity Interests,” at a purchase price equal to
the registered capital paid by Mr. Zeyao Xue and Mr. Kai Xu for the Equity Interests, or, in the event that applicable law
requires an appraisal of the Equity Interests, the lowest price permitted under applicable law. Pursuant to powers of attorney
executed by Mr. Zeyao Xue and Mr. Kai Xu, they irrevocably authorized any person appointed by CCM Tianjin to exercise all
shareholder rights, including but not limited to voting on their behalf on all matters requiring approval of E-commerce Tianjin’s
shareholder, disposing of all or part of the shareholder’s equity interest in E-commerce Tianjin, and electing, appointing
or removing directors and executive officers. The person designated by CCM Tianjin is entitled to dispose of dividends and
profits on the equity interest without reliance on any oral or written instructions of Mr. Zeyao Xue and Mr. Kai Xu. The powers
of attorney will remain in force for so long as Mr. Zeyao Xue and Mr. Kai Xu remain the shareholders of E-commerce Tianjin.
Mr. Zeyao Xue and Mr. Kai Xu have waived all the rights which have been authorized to CCM Tianjin’s designated person
under the powers of attorney.
|
|
|
3)
|
Equity Pledge Agreements by and among CCM Tianjin, E-commerce Tianjin, Mr. Zeyao Xue and Mr.
Kai Xu. Pursuant to the Equity Pledge Agreements, Mr. Zeyao Xue and Mr. Kai Xu pledged all of the Equity Interests to CCM
Tianjin to secure the full and complete performance of the obligations and liabilities on the part of E-commerce Tianjin and
them under this and the above contractual arrangements. If E-commerce Tianjin, Mr. Zeyao Xue, or Mr. Kai Xu breaches their
contractual obligations under these agreements, then CCM Tianjin, as pledgee, will have the right to dispose of the pledged
equity interests. Mr. Zeyao Xue and Mr. Kai Xu agree that, during the term of the Equity Pledge Agreements, they will not
dispose of the pledged equity interests or create or allow any encumbrance on the pledged equity interests, and they also
agree that CCM Tianjin’s rights relating to the equity pledge should not be interfered with or impaired by the legal
actions of the shareholders of E-commerce Tianjin, their successors or designees. During the term of the equity pledge, CCM
Tianjin has the right to receive all of the dividends and profits distributed on the pledged equity. The Equity Pledge Agreements
will terminate on the second anniversary of the date when E-commerce Tianjin, Mr. Zeyao Xue and Mr. Kai Xu have completed
all their obligations under the contractual agreements described above.
|
|
|
4)
|
Exclusive Operation and Use Rights Authorization letter which authorizes
Chain Cloud Mall E-commerce (Tianjin) Co., Ltd, to exclusively operate and use the Chain Cloud Mall System and the authorization period
is the same as the term of the EXCLUSIVE THEHNOLOGY CONSULTING AND SERVICE AGREEMENT entered into by and between Chain Cloud Mall Network
and Technology (Tianjian) Co., Ltd. and Chain Cloud Mall E-commerce (Tianjin) Co., Ltd. dated July 31, 2019.
|
5)
|
GlobalKey Shared Mall Shopping Platform Software and System Transfer Agreement
by and between GlobalKey Supply Chain Co., Ltd. and Chain Cloud Mall Network and Technology (Tianjian) Co., Ltd., pursuant to which the
GlobalKey Shared Mall Shopping Platform Software and System was transferred from GlobalKey Supply China Co., Ltd. to CCM Network and that
both parties were wholly owned subsidiaries of the Company and transfer price is $0.
|
New Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13
(“ASU 2016-13”) “Financial Instruments - Credit Losses” (“ASC 326”): Measurement of Credit
Losses on Financial Instruments” which requires the measurement and recognition of expected credit losses for financial assets
held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires
the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary
impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit
losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition
of credit losses. In November 2019, the FASB issued ASU 2019-10 “Financial Instruments – Credit Losses (Topic 326),
Derivatives and Hedging (Topic 815), and Leases (Topic 842)” (“ASC 2019-10”), which defers the effective date
of ASU 2016-13 to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, for public
entities which meet the definition of a smaller reporting company. The Company will adopt ASU 2016-13 effective January 1, 2023.
Management is currently evaluating the effect of the adoption of ASU 2016-13 on the consolidated financial statements. The effect
will largely depend on the composition and credit quality of our investment portfolio and the economic conditions at the time of
adoption.
In August 2020, the FASB issued Accounting
Standards Update No. 2020-06 (ASU 2020-06) “Accounting for Convertible Instruments and Contracts in an Entity’s Own
Equity”, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity,
including convertible instruments and contracts on an entity’s own equity. For public business entities that are not smaller
reporting companies, ASU 2020-6 effective fiscal years beginning after December 15, 2021, and interim periods within those fiscal
years.
Management does not believe that any other
recently issued, but not yet effective accounting pronouncements, if adopted, would have a material impact on the accompanying
consolidated financial statements.
3. LOAN RECEIVABLES
As of December 31, 2020, the balance of loan receivables was $5.36
million, which was from Shenzhen Tiantian Haodian Technology Co., Ltd. (“Tiantian Haodian”). On June 28, 2020, Guangchengji,
a wholly owned subsidiary of Future FinTech (Hong Kong) Limited, entered into a “Loan Agreement” with Tiantian Haodian. Pursuant
to the Loan Agreement, Guangchengji has lent cash up to but not greater than RMB35 million (approximately $5.36 million) with Tiantian
Haodian at the annual interest rate of 10% from June 28, 2020 to June 27, 2021.
4. INTANGIBLE ASSETS
The intangible assets includes patent rights, software
and e-platform, of which $1.86 million was for the shared platform system of Chain Cloud Mall that completed its final development and
construction stage and became intangible assets in 2020, and it was fully impaired for the year ended of December 31, 2020.
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Cost
|
|
$
|
48,246
|
|
|
$
|
43,003
|
|
Less: Accumulated amortization
|
|
|
(7,032
|
)
|
|
|
(2,150
|
)
|
|
|
$
|
41,214
|
|
|
$
|
40,853
|
|
5. LEASES
The Company’s noncancelable operating leases
consist of leases for office space. The Company is the lessee under the terms of the operating leases. For the year ended December 31,
2020, the operating lease cost was $0.29 million.
The Company’s operating leases have remaining
lease terms that range from approximately one year to four years. As of December 31, 2020, the weighted average remaining lease term and
weighted average discount rate were 1.67 years and 6%, respectively.
Maturities of lease liabilities were as follows:
|
|
Operating
|
|
Year ending December 31,
|
|
Lease
|
|
2021
|
|
$
|
193,368
|
|
2022
|
|
|
112,798
|
|
Total
|
|
$
|
306,166
|
|
Less: amounts representing interest
|
|
$
|
14,787
|
|
Present Value of future minimum lease payments
|
|
|
291,379
|
|
Less: Current obligations
|
|
|
180,803
|
|
Long term obligations
|
|
$
|
110,576
|
|
6.
LOAN PAYABLES
As of December 31, 2020, loan payable were $0.39 million,
which consisted of the loan payable of $0.02 million to Shaanxi Entai Bio-Technology Co., Ltd., loan payable $0.01 million to Shenzhen
Wangjv Trading Co., Ltd., and loan payable of $0.36 million to seven individuals.
The loan from Shaanxi Entai Bio-Technology
Co., Ltd of $0.02 million was an interest free loan and there is not assets pledged for this loan.
On June 15, 2020, the Company entered into
a loan agreement with Shenzhen Wangjv Trading Co., Ltd. Pursuant to the loan agreement, the Company borrowed $0.23 million from
Shenzhen Wangjv Trading Co., Ltd. at the annual interest rate of 8% for the use of working capital for a year. On July 6, 2020,
the Company returned $0.22 million to Shenzhen Wangjv Trading Co., Ltd.
During the third quarter of 2020, the Company
entered into a series of interest free loan agreements with seven individuals, borrowing $0.36 million for working capital. The
repayment term is one year.
7. ACCRUED EXPENSES AND OTHER PAYABLES
The amount of accrued expenses and other
payables were consisted of the followings:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Acquisition of Intangibles
|
|
$
|
-
|
|
|
$
|
15,374
|
|
Legal fee and other professionals
|
|
|
457,276
|
|
|
|
360,132
|
|
Wages and employee reimbursement
|
|
|
290,079
|
|
|
|
412,824
|
|
Suppliers
|
|
|
1,379,971
|
|
|
|
195,655
|
|
Accruals
|
|
|
173,086
|
|
|
|
145,908
|
|
Total
|
|
$
|
2,300,412
|
|
|
$
|
1,129,893
|
|
8. CONVERTIBLE NOTES PAYABLE
Note Purchase Agreements
Convertible Promissory Note in March 2019
In March 2019, we enter a Securities Purchase Agreement
with Iliad Research and Trading, L.P., (the “Purchaser”), pursuant to which the Company sold and issued to the Purchaser a
Secured Convertible Promissory Note (the “Note”). From October 2019 to June 2020, there have been several redemption requests
and adjustments of the Note, for the details refer to Note 14. The Note has an interest rate of 8% per annum until full payment, and all
interest shall be calculated on a 360-day basis and payable in one instalment upon maturity at original conversional price of $3. The
Company has entered into a series of Exchange Agreements with the Purchaser in 2019 and 2020 and issued total 2,426,980 shares of common
stock as the repayment of principal, interest and redemption adjustment of the Note.
The Company recognized loss of $0.62 million of exchange
share payment for the Note during the year refer in Note 14.
Promissory Note in December 2019
In December 2019, we entered into a Note Purchase
Agreement (the “Purchase Agreement”) with Iliad Research and Trading, L.P. (the “Purchaser”), pursuant to which
the Company sold and issued to the Purchaser a Secured Promissory Note No share exchange as payment for that note. It was repaid by in
cash by the Company.
At December 31, 2020 and 2019, convertible debt consisted
of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Beginning
|
|
$
|
957,990
|
|
|
$
|
-
|
|
Addition
|
|
|
905,392
|
|
|
|
2,077,990
|
|
Conversion
|
|
|
(700,236
|
)
|
|
|
(1,120,000
|
)
|
Balance
|
|
$
|
1,163,146
|
|
|
$
|
957,990
|
|
9. RELATED PARTY TRANSACTION
As of December 31, 2020, the amount due to the related
parties was consisted of the followings:
Name
|
|
Amount
(US$)
|
|
|
Relationship
|
|
Note
|
Yongke Xue
|
|
$
|
496,123
|
|
|
Chairman of the Company
|
|
Loan payable
|
Wei Cheng Pan
|
|
|
375,485
|
|
|
Legal representative of Guangchengji CEO of the Company
|
|
Loan payable
|
Ming Yi
|
|
|
878
|
|
|
Chief Financial Officer of the Company
|
|
Accrued expenses
|
Zhi Yan
|
|
|
72,390
|
|
|
General Manager of a subsidiary of the Company
|
|
Accrued expenses
|
Jing chen
|
|
|
408
|
|
|
Vice president of the Company
|
|
Accrued expenses
|
Johnson Lau
|
|
|
12,500
|
|
|
Director of the Company
|
|
Other payables
|
Fuyou Li
|
|
|
4,425
|
|
|
Director of the Company
|
|
Other payables
|
Mingjie Zhao
|
|
|
11,458
|
|
|
Director of the Company
|
|
Other payables
|
InUnion Chain Ltd. (“INU”)
|
|
|
165,084
|
|
|
The Company is a 10% shareholder of INU
|
|
Service fee
|
Shenzhen TianShunDa Equity Investment Fund Management Co., Ltd. (“TianShunDa”)
|
|
|
337,170
|
|
|
Shaanxi Fu Chen holds 70% interest of TianShunDa
|
|
Other payables
|
Reits (Beijing) Technology Co., Ltd
|
|
|
335,186
|
|
|
Zhi Yan is the legal representative of this company
|
|
Acquisition of intangibles upon the full completion of the online platform pursuant to an agreement originally entered between parties before Zhi Yan was the general manager of our subsidiary.
|
Shaanxi Fuju Mining Co., Ltd
|
|
|
3,217
|
|
|
Shaanxi Fu Chen holds 80% interest of the company
|
|
Other payables
|
Shaanxi Fu Chen Venture Capital Management Co. Ltd. (“Shaanxi Fu Chen”)
|
|
|
91,569
|
|
|
Two outside shareholders of the Company are shareholders of Shaanxi Fu Chen
|
|
Other payables
|
Total
|
|
$
|
1,905,893
|
|
|
|
|
|
As of December 31, 2020, the amount due from
the related parties was consisted of the followings:
Name
|
|
Amount
(US$)
|
|
|
Relationship
|
|
Note
|
Wealth Index (Beijing) Fund Management Co.Ltd
|
|
$
|
12,136
|
|
|
The Company’s CEO is the legal representative of this Company
|
|
Interest free loan*
|
Shanchun Huang
|
|
|
4,491
|
|
|
Chief Executive Officer of the Company
|
|
Interest free loan*
|
Kai Xu
|
|
|
12,395
|
|
|
Deputy General Manager of a subsidiary of the Company
|
|
Interest free loan*
|
Zeyao Xue
|
|
|
33,305
|
|
|
Son of the Chairman of the Company and a major shareholder of the Company
|
|
Interest free loan*
|
Shaanxi Chunlv Ecological Agriculture Co. Ltd.
|
|
|
195
|
|
|
Shaanxi Fu Chen Venture Capital Management Co. Ltd. holds 80% interest of the company
|
|
Interest free loan*
|
Total
|
|
$
|
62,522
|
|
|
|
|
|
●
|
The interest free loans have been approved by the Company’s Audit Committee.
|
During
2020, the Company had the following transactions with related parties:
Name
|
|
Amount
(US$)
|
|
|
Relationship
|
|
Note
|
Shaanxi Fu Chen Venture Capital Management Co. Ltd.
|
|
$
|
296,015
|
|
|
The Company’s CEO is the legal representative of this Company
|
|
Service fee
|
Total
|
|
$
|
296,015
|
|
|
|
|
|
As of December
31, 2019, the amount due to the related parties was consisted of the followings:
Name
|
|
Amount
(US$)
|
|
|
Relationship
|
|
Note
|
Yongke Xue
|
|
$
|
36,915
|
|
|
Chairman of the Company
|
|
Loan payable
|
Shenzhen TianShunDa Equity
Investment Fund Management Co., Ltd.
|
|
|
315,358
|
|
|
Holds 26.36% of equity shares of SkyPeople China
|
|
Interest free loan*
|
InUnion Chain Ltd. (“INU”)
|
|
|
180,206
|
|
|
The Company is the 10% equity shareholder of INU
|
|
Accounts payable
|
Zhi Yan
|
|
|
5,734
|
|
|
Chief Technology Officer of the Company
|
|
Loan payable
|
Jing chen
|
|
|
231
|
|
|
Chief Financial Officer of the Company
|
|
Accrued expenses
|
Zeyao Xue
|
|
|
313,613
|
|
|
Son of the Chairman of the Company and a shareholder of the Company Chief Operating Officer of the Company
|
|
Loan payable
|
Total
|
|
$
|
852,057
|
|
|
|
|
|
As of December 31, 2019, the amount due from the related parties
was consisted of the followings:
Name
|
|
Amount
(US$)
|
|
|
Relationship
|
|
Note
|
Shaanxi Chunlv Ecological Agriculture Co. Ltd.
|
|
$
|
3,258,643
|
|
|
Holds 20.0% interest in CCM logistics
|
|
Interest free loan*
|
Quangoutong Commercial Holdings (Xi’an) Co., Ltd
|
|
|
22,935
|
|
|
Shaanxi Fullmart Convenient Chain Supermarket Co., Ltd. (“Fullmart”) holds 16.67% equity of its subsidiary. The subsidiary is 83.33% owned by Quangoutong
|
|
Service fee*
|
Shaanxi Quangou Convenient Island Co. Ltd.
|
|
|
23,817
|
|
|
Fullmart holds 33.33% its equity
|
|
Interest free loan*
|
|
|
|
|
|
|
|
|
|
Kai Xu
|
|
|
13,428
|
|
|
Shareholder of Chain Cloud Mall E-commerce (Tianjin) Co., Ltd.
|
|
Interest free loan*
|
|
|
|
|
|
|
|
|
|
Yongke Xue
|
|
|
15,754
|
|
|
Chairman of the Company
|
|
Interest free loan*
|
Zeyao Xue
|
|
|
2,867
|
|
|
Son of the chairman of the Company and a shareholder of the Company
|
|
Interest free loan*
|
Total
|
|
$
|
3,337,445
|
|
|
|
|
|
11. INCOME TAX
The Company is incorporated in the United
States of America and is subject to United States federal taxation. No provisions for income taxes have been made, as the Company
had no U.S. taxable income for the years ended December 31, 2020 and 2019. The effective income tax rate for the Company for both
of the years ended December 31, 2020 and 2019 were 0% and 0% respectively. Some of our subsidiaries generated income and we accrued
income tax according to the Chinese corporate income tax rate, but some had a loss and no tax provision was made.
The amount of unrecognized deferred tax
liabilities for temporary differences related to the dividend from foreign subsidiaries is not determined because such determination
is not practical.
The Company has not provided deferred taxes
on undistributed earnings attributable to its PRC subsidiaries as they are to be permanently reinvested.
The Company had no material adjustments
to its liabilities for unrecognized income tax benefits according to the provisions of ASC Topic 740, Income Taxes. Since
the Company intends to reinvest its earnings to further expand its businesses in mainland China, its PRC subsidiaries do not intend
to declare dividends to their immediate foreign holding companies in the foreseeable future. Accordingly, the Company has not recorded
any deferred taxes in relation to US tax on the cumulative amount of undistributed retained earnings since January 1, 2008.
Effective on January 1, 2008, the PRC Enterprise
Income Tax Law, EIT Law, and Implementing Rules imposed a unified enterprise income tax rate of 25% on all domestic-invested enterprises
and foreign-invested enterprises in the PRC, unless they qualify under certain limited exceptions. All of the Companies’
Chinese subsidiaries were subject to an enterprise income tax rate of 25%.
In assessing the reliability of deferred
tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible or are utilized. Based upon an assessment of the level of historical
taxable income and projections for future taxable income over the periods on which the deferred tax assets are deductible or can
be utilized, management believes it is not likely for the Company to realize all benefits of the deferred tax assets as of December
31, 2020 and December 31, 2019. Therefore, the Company provided for a valuation allowance against its deferred tax assets as of
December 31, 2020 and 2019, respectively.
12. LONG-TERM INVESTMENT
The Company recorded $2.75 million of impairment
loss in fiscal year 2019 related with the INU Digital Assets and 10% equity investment in InUnion Chain Limited that Digipay Finteh
Limited invested in June 2018. According to the understanding that INU is currently in a state of cessation of operation, the investment
has been unable to bring economic benefits to company. The company decided to write down the remaining carrying value $12.25 million
in 2020.
13. SHARE BASED COMPENSATION
On February 26, 2020, the Company’s
shareholders approved the 2019 Omnibus Equity Plan a Special Meeting of shareholder, which permits the grant of incentive stock
options (“ISOs”), nonqualified stock options (“NQSOs”), stock appreciation rights (“SARs”),
restricted stock, unrestricted stock and restricted stock units (“RSUs”) to its employees of up to 3,000,000 shares of
Common Stock. On December 28, 2020, the Compensation Committee of the Board of the Company granted 3,000,000 shares of the
Company’s unrestricted common stock to eight employees and one director of the Company, pursuant to our 2019 Omnibus Equity
Plan. As the closing price of the company stock was $1.98 on December 28, 2020, the Company recorded an expense of $5.94 million in
the fourth quarter of fiscal year 2020 under the 2019 Omnibus Equity Plan. The shares were issued accordingly to these employees in
December 2020.
On October 27, 2020, the Company’s
board of directors approved the 2020 Omnibus Equity Plan, which permits the grant of incentive stock options (“ISOs”),
nonqualified stock options (“NQSOs”), stock appreciation rights (“SARs”), restricted stock, unrestricted
stock and restricted stock units (“RSUs”) to its employees of up to 5,000,000 shares of Common Stock. The 2020 Omnibus
Equity Plan (the “2020 Plan”) was approved by the shareholders at the annual shareholders’
meeting on December 18, 2020. No share under 2020 Plan has been issued.
Consulting Service Agreement
On January 25, 2020, the Company entered into
a Consulting Service Agreement (the “Agreement”) with Dragon Investment Holding Limited (Malta) (the “Consultant”),
a company incorporated in Malta, pursuant to which Consultant will: (i) help the Company to locate new merger projects globally, develop
new merger strategy and provide the Company with at least five (5) merger and acquisition targets that have synergy with the Company’s
business and development plans and could clearly contribute to the Company’s strategic goals each year; (ii) help the Company to
map out new growth strategies in addition to its current business; (iii) work with the Company to explore new lines of business and associated
growth strategies; and (iv) conduct market research and evaluating variable projects and providing feasibility studies per Company’s
request from time to time. The term of the Agreement is three years. In consideration of the services to be provided by Consultant to
the Company, the Company agrees to pay the Consultant a three-year consulting fee totaling $3 million. The Company shall issue a total
of 3,750,000 restricted shares of the Company Common Stock (the “Consultant Shares”) at a price of $0.794 per share, (the
closing price of the Agreement date), as the payment for the above mentioned consultant fee to the Consultant. On February 23, 2020,
the Company issued the Consultant Shares pursuant to the Agreement, of which 1,500,000 shares were released to the Consultant immediately,
1,125,000 and 1,125,000 shares, respectively, will be held by the Company and released to the Consultant on January 25, 2021 and January
25, 2022 if this Agreement has not been terminated and there has been no breach of the Agreement by the Consultant at such time. If the
second and/or third release of the shares mentioned above does not occur, such shares shall be returned to the Company as treasury shares.
The shares contemplated in the Agreement were issued pursuant to the exemption from registration provided by Regulation S promulgated
under the Securities Act of 1933, as amended. For the twelve months ended December 31, 2020, the Company recorded stock related compensation
of $1.19 million, based on the stock closing price of $0.794 on the Agreement date, for the 1,500,000 shares which were released to the
Consultant immediately upon issuance. The Company will recognize stock related compensation of $1.79 million for the 2,250,000 shares
in the future when they are released to the Consultant pursuant to the Agreement. On January 25, 2021, 1,125,000 shares have been released
to the Consultant according to the agreement.
14. COMMON STOCK
Common stocks issued in connection with the convertible notes
On March 26, 2019, the Company entered into
a Securities Purchase Agreement (the “Purchase Agreement”) with the Iliad Research and Trading, L.P.
(“Iliad”), pursuant to which the Company sold and issued to Iliad a Secured Convertible Promissory Note (the
“Note”) in the principal amount of $1,070,000. From January to December 2020, the Company issued 933,647 shares of its
common stock to Iliad as repayment of the Note through a series of Exchange Agreements entered into with Iliad.
On January 6, 2020, the Company entered
into the Eighth Exchange Agreement with Iliad. Pursuant to the Eighth Exchange Agreement, the Company and Iliad agreed to partition
a new Secured Convertible Promissory Note in the original principal amount of $145,000 from a Secured Convertible Promissory Note
issued by the Company on March 26, 2019. The outstanding balance of the Note shall be reduced by an amount equal to the outstanding
balance of the Partitioned Note. The Company and Iliad further agreed to exchange the Eighth Partitioned Note for the delivery
of 193,333 shares of the Company’s Common Stock, according to the terms and conditions of the Exchange Agreement.
On January 15, 2020, the Company entered
into the Ninth Exchange Agreement with the Iliad. Pursuant to the Exchange Agreement, the Company and Iliad agreed to partition
a new Secured Convertible Promissory Note in the original principal amount of $140,000 from the Note issued by the Company on March
26, 2019. The outstanding balance of the Note shall be reduced by an amount equal to the outstanding balance of the Ninth Partitioned
Note. The Company and Iliad further agreed to exchange the Partitioned Note for the delivery of 186,666 shares of the Company’s
Common Stock, according to the terms and conditions of the Exchange Agreement.
On March 11, 2020, the Company entered
into the Tenth Exchange Agreement with the Iliad. Pursuant to the Tenth Exchange Agreement, the Company and Lender agreed to partition
a new Secured Convertible Promissory Note in the original principal amount of $150,000 from the Note issued by the Company on March
26, 2019. The outstanding balance of the Note shall be reduced by an amount equal to the outstanding balance of the Partitioned
Note. The Company and Lender further agreed to exchange the Partitioned Note for the delivery of 200,000 shares of the Company’s
Common Stock, according to the terms and conditions of the Exchange Agreement.
On April 17, 2020, the Company entered
into the Eleventh Exchange Agreement with Iliad. Pursuant to Eleventh Exchange Agreement, the Company and Iliad agreed to partition
a new Secured Convertible Promissory Note in the original principal amount of $153,750 from a Secured Convertible Promissory Note
issued by the Company on March 26, 2019. The outstanding balance of the Note shall be reduced by an amount equal to the outstanding
balance of the Eleventh Partitioned Note. The Company and Iliad further agreed to exchange the Eleventh Partitioned Note for the
delivery of 205,000 shares of the Company’s Common Stock, according to the terms and conditions of the Eleventh Exchange
Agreement.
On June 10, 2020, the Company entered into
the Twelfth Exchange Agreement with the Iliad. Pursuant to the Twelfth Exchange Agreement, the Company and Iliad agreed to partition
a new Secured Convertible Promissory Note in the original principal amount of $111,486 from the Note issued by the Company on March
26, 2019. The outstanding balance of the Note shall be reduced by an amount equal to the outstanding balance of the Partitioned
Note. The Company and Iliad further agreed to exchange the Twelfth Partitioned Note for the delivery of 148,648 shares of the Company’s
Common Stock, according to the terms and conditions of the Twelfth Exchange Agreement.
On July 28, 2020, the Company, entered into
a Standstill Agreement with the Iliad. Pursuant to the Standstill Agreement, Iliad agreed to refrain and forbear temporarily from
making redemptions under certain Secured Promissory Note (the “Second Note”) that was sold and issued by the Company to
Iliad on December 19, 2019 in the original principal amount of $1,060,000. Iliad agreed not to redeem any portion of the Second Note
(the “Standstill”) for a period beginning on the date of the Agreement and ending on the date that is ninety (90) days
from the date of the Agreement. As a material inducement and partial consideration for Iliad’s agreement to enter into the
Agreement, the Company agreed that the outstanding balance of the Second Note shall be increased by nine percent (9%) on the date of
the Agreement (the “Standstill Fee”). The Company and Iliad agreed that, following the application of the Standstill
Fee, the outstanding balance of the Note is $1,209,636. The Company has fully paid off the Second Note during the first quarter
of 2021.
Due to the company did not repay the loan in time,
it added 700,235 common shares in total, resulting in a total loss of $616,476
Debt Repayment Agreement
In July 2020, the Company entered a series
of loan agreements with fourteen individuals for a total amount of $4.96 million. On August 4, 2020, the Company entered into a debt
repayment agreement with these individuals, pursuant to which the Company agreed to repay $4.96 million debt owed to the
Creditors in the form of shares of Common Stock of the Company for an aggregate of 2,740,883 shares at a price of $1.81 per share.
As the closing price of the Company stock was $2.52 on August 4, 2020, the Company recognized loss of $1.95
million in loss on debt settlement. The Debt Repayment completed pursuant to the exemption from registration provided by
Regulation S promulgated under the Securities Act of 1933, as amended. The Company issued 2,740,883 shares of its Common Stock to
the Creditors on August 12, 2020.
On October 27, 2020, the Company entered
into a series of debt repayment agreements with certain creditors identified on the signature pages thereto, pursuant
to which the Company agreed to repay $320,000 debt owed to the Creditors in the form of shares of Common Stock of the Company for
an aggregate of 160,000 shares at a price of $2.00 per share. As the closing price of the Company stock was $2.23 on
October 27, 2020, the Company recognized loss of $36,800 in loss on debt settlement in 2020. The debt repayment completed pursuant
to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.
Securities Purchase Agreement
On June 16, 2020, the Company entered into
a securities purchase agreement with Qun Xie pursuant to which the Company agreed to sell to the purchaser in a private
placement 500,000 shares of the Company’s Common Stock, purchase price of $1.00 per share for an aggregate offering price
of $500,000. The Private Placement completed pursuant to the exemption from registration provided by Regulation S promulgated under
the Securities Act of 1933, as amended. On June 30, 2020, Qun Xie paid $500,000, and on August 7, 2020, the Company issued 500,000
Shares pursuant to this Agreement.
On September 16, 2020, the Company entered
into a securities purchase agreement with Houwu Huang, pursuant to which the Company agreed to sell to the purchaser
in a private placement 224,599 shares of the Company’s common stock, at a purchase price of $1.87 per share for
an aggregate offering price of $420,000. The private placement completed pursuant to the exemption from registration
provided by Regulation S promulgated under the Securities Act of 1933, as amended. The Company issued 224,599 shares of its Common
Stock to the purchaser on September 24, 2020.
On November 2, 2020, the Company
entered into a securities purchase agreement with certain investors, pursuant to which the Company agreed to sell to the purchasers
in a private placement 167,034 shares of the Company’s common stock, at a purchase price of $1.87 per share for an aggregate
offering price of $312,352. The private placement will be completed pursuant to the exemption from registration provided by Regulation
S promulgated under the Securities Act of 1933, as amended.
On December 2, 2020, the Company
entered into a securities purchase agreement with certain investors, pursuant to which the Company agreed to sell to the purchasers
in a private placement 556,497 shares of the Company’s common stock, at a purchase price of $1.84 per share for an aggregate
offering price of $1,023,950. The Private Placement will be completed pursuant to the exemption from registration provided by Regulation
S promulgated under the Securities Act of 1933, as amended.
On December 24, 2020, the Company
entered into a securities purchase agreement with certain purchasers, pursuant to which the Company sold to the purchasers
in a registered direct offering, an aggregate of 4,210,530 units, each consisting of one share of our common stock and a warrant
to purchase 1 share of our Common Stock, at a purchase price of $1.90 per unit, for aggregate gross proceeds to the Company of
$8,000,007, before deducting fees to the placement agent and other estimated offering expenses payable by the Company. On December 29, 2020,
the Company issued Units consisting of an aggregate of 4,210,530 shares of our Common Stock and warrants to purchase up to
an aggregate of 4,210,530 shares of our Common Stock at an exercise price of $2.15 per share (the “Investors’ Warrants”). The Investors’ Warrants have
a term of five years and are exercisable by the holder at any time after the date of issuance. In connection with the offering, the Company also issued placement agent a warrant to purchase 210,526 shares
of our Common Stock (the “Placement Agent Warrant”) on substantially the same terms as the Investors’ Warrants,
except that the Placement Agent Warrant has an exercise price of $2.375 per share and are not exercisable until June 24, 2021
The net proceeds from the December 24, 2020
offering were $7,338,499, after deducting underwriting discounts and commissions and other estimated offering expenses, and were
received in December 2020. During the month ended January 31, 2021, the Investors Warrants to purchase an aggregate of
4,210,530 shares of common stock were fully exercised by the investors.
15. DISCONTINUED OPERATIONS
HeDeTang HK
On September 18, 2019, SkyPeople Foods Holdings Limited (“SkyPeople
Foods”) entered into a Share Transfer Agreement (the “Agreement”) with New Continent International Co., Ltd., (the “Buyer”)
a company incorporated in the British Virgin Islands. Pursuant to the terms of the Agreement, the Buyer purchased 100% ownership of HeDeTang
Holdings (HK) Ltd. (“HeDeTang HK”) from SkyPeople Foods, which value is primarily derived from HeDeTang HK’s wholly-owned
subsidiary HeDeJiaChuan Holdings Co., Ltd. and 73.41% owned subsidiary SkyPeople Juice Group Co., Ltd., for a total price of RMB 600,000
(approximately $85,714) (the “Sale Transaction”). The Sale Transaction was closed on February 27, 2020. In accordance with
ASC Topic 205, Presentation of Financial Statement Discontinued Operations (“ASC Topic 205”), the Company presented
the operation results from HeDeTang HK’s and subsidiaries as a discontinued operation, as the Company believed that no continued
cash flow would be generated by the discontinued component and that the Company would have no significant continuing involvement in the
operations of the discontinued component. The total assets of HeDeTang HK were $106.85 million as of February 27, 2020 and the total liabilities
of HeDeTang HK were $231.21 million as of February 27, 2020, resulting in a gain on disposal of $99.87 million. There was no income or
loss from HeDeTang HK from January 1, 2020 to the sale.
The discontinued operation presented in the financial statement includes
Huludao Wonder operation, a subsidiary which produces concentrated apple juice. In December 2016, the Company established a winding-down
plan to close this operation. Based on the restructuring plan and in accordance with ASC 205-20, the Company presented the operating results
from Huludao Wonder as a discontinued operation, as the Company believed that no continued cash flow would be generated by the disposed
component (Huludao Wonder) and that the Company would have no significant continuing involvement in the operation of the discontinued
component. Management of the Company initiated a plan to sell the property located in Huludao in December 2016, and ceased the depreciation
of the property in accordance with ASC 205-20. In accordance with the restructuring plan, the Company intended to transfer the concentrated
fruit juice production equipment in Huludao Wonder to another subsidiary and to sell the land use right and facilities upon favorable
circumstances. On February 27, 2020 pursuant to a Share Transfer Agreement entered into by SkyPeople Foods and New Continent International
Co., Ltd. on September 18, 2019, the ownership of Huludao Wonder was transferred as a subsidiary of HeDeTang HK to New Continent International
Co., Ltd.
On March 11, 2020, the Company’s Board
of Directors passed a resolution to sell the operation of Globalkey Supply Chain limited and Zhonglian Hengxin Assets Management
Co., Ltd (“Zhonglian Hengxin”) and close the operation of Digital Online Marketing Limited, Future Digital Fintech
(Xi’an) Co., Ltd., SkyPeople Foods Holding Ltd. and Chain Future Digital Tech (Beijing) Co., Ltd. Based on the disposal plan
and in accordance with ASC 205-20, the Company presented the operating results from these operations as a discontinued operation. On
October 31, 2020, the transfer of ownership of Globalkey Supply Chain Limited and Zhonglian Hengxin was completed with a disposal
gain of $181,741.
On July 24, 2020, the Company’s Board of Directors passed a resolution
to sell the operation of Hedetang Farm Products Trading Markets (Mei County) Co., Ltd. and close the operation of Chain Cloud Mall Logistics
Center (Shaanxi) Co., Ltd. On July 27,2020, Skypeople Foods Holdings Limited Company was dissolved; On July 28, 2020 digital online marketing
limited company was dissolved; On October 31, 2020, Chain Cloud Mall Network and Technology (Tianjin) Co., Limited and Chain Cloud Mall
Logistics Center (Shanxi) Co., Ltd. completed the transfer of its ownership of Hedetang Farm Products Trading Markets (Mei county) Co.,
Ltd with a disposal gain of $18,191,960.
Loss from discontinued
operations for fiscal years 2020 and 2019 was as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
REVENUES
|
|
$
|
-
|
|
|
$
|
344,250
|
|
COST OF SALES
|
|
|
-
|
|
|
|
316,162
|
|
GROSS PROFIT
|
|
|
-
|
|
|
|
28,088
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
274,370
|
|
|
|
5,476,173
|
|
Selling expenses
|
|
|
-
|
|
|
|
231,519
|
|
Bad debt expenses
|
|
|
202,679
|
|
|
|
3,101,859
|
|
Total
|
|
|
477,049
|
|
|
|
8,809,551
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
189
|
|
|
|
209
|
|
Interest expense
|
|
|
-
|
|
|
|
(7,300,188
|
)
|
other income (expenses)
|
|
|
(1,197
|
)
|
|
|
116,917
|
|
Total
|
|
|
(1,008
|
)
|
|
|
(7,183,062
|
)
|
Loss from discontinued operations before income tax
|
|
|
(478,057
|
)
|
|
|
(15,964,525
|
)
|
Income tax provision
|
|
|
-
|
|
|
|
-
|
|
Loss from discontinued operation before noncontrolling interest
|
|
$
|
(478,057
|
)
|
|
|
(15,964,525
|
)
|
Gain on disposal of discontinued operations
|
|
|
145
|
|
|
|
|
|
Less: Net loss attributable to non-controlling interests
|
|
|
|
|
|
|
(1,681,739
|
)
|
LOSS FROM DISCONTINUED OPERATION
|
|
$
|
(477,912
|
)
|
|
$
|
(14,282,786
|
)
|
The major components of assets and liabilities
related to discontinued operations are summarized below:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Cash
|
|
$
|
2,985
|
|
|
$
|
471,536
|
|
Accounts receivable
|
|
|
-
|
|
|
|
11,720
|
|
Other receivables
|
|
|
-
|
|
|
|
1,861
|
|
Inventory
|
|
|
-
|
|
|
|
454,269
|
|
Advances to suppliers and other current assets
|
|
|
-
|
|
|
|
167,831
|
|
Property and equipment, net
|
|
|
-
|
|
|
|
1,176,163
|
|
Right of use assets
|
|
|
-
|
|
|
|
57,571,254
|
|
Intangible assets, net
|
|
|
-
|
|
|
|
20,619,588
|
|
Amount due from related parties
|
|
|
32,097
|
|
|
|
18,054,736
|
|
Total assets related to discontinued operations
|
|
$
|
35,082
|
|
|
|
98,528,958
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
-
|
|
|
$
|
2,156,219
|
|
Accrued expenses
|
|
|
431,011
|
|
|
|
84,567,693
|
|
Advances from customers
|
|
|
-
|
|
|
|
983,472
|
|
Short-term bank loans
|
|
|
-
|
|
|
|
37,245,139
|
|
Lease liabilities
|
|
|
-
|
|
|
|
60,613,970
|
|
Amount due from related parties
|
|
|
434,557
|
|
|
|
14,768,360
|
|
Total liabilities related to discontinued operations
|
|
$
|
865,568
|
|
|
$
|
200,334,853
|
|
16. SEGMENT REPORTING
In its operation of the business, management,
including our chief operating decision maker, who is also our Chief Executive Officer, reviews certain financial information, including
segmented internal profit and loss statements prepared on a basis not consistent with GAAP. The Company operates in four segments
starting in fiscal 2019: shared shopping mall membership fee, fruit related products, sales of goods and others. Our concentrated
juice and juice beverages are primarily produced by the Company’s Jingyang factory. The operation of fruit related products
is classified as discontinued operation as disclosed in Note 15.
In compliance with the Company’s
business transformation strategy, membership fees from the shared shopping mall and sales of goods through the shared shopping
mall platform started to generate the main revenues for the Company and became more and more important business sections of the
Company since fiscal year 2019, while its traditional business section of seasonal fruit related products continued to shrink in
fiscal year 2019.
Some of our operation might not individually
meet the quantitative thresholds for determining reportable segments and we determine the reportable segments based on the discrete
financial information provided to the chief operating decision maker. The chief operating decision maker evaluates the results
of each segment in assessing performance and allocating resources among the segments. Since there is an overlap of services provided
and products manufactured between different subsidiaries of the Company, the Company does not allocate operating expenses and assets
based on the product segments. Therefore, operating expenses and asset information by segment are not presented. Segment profit
represents the gross profit of each reportable segment.
For fiscal year 2020:
|
|
CCM Shopping
Mall Membership
|
|
|
Sales of Goods
|
|
|
Others
|
|
|
Total
|
|
Reportable segment revenue
|
|
$
|
338,288
|
|
|
$
|
9,991
|
|
|
$
|
23,210
|
|
|
$
|
371,489
|
|
Inter-segment loss
|
|
|
-
|
|
|
|
833
|
|
|
|
-
|
|
|
|
833
|
|
Revenue from external customers
|
|
$
|
338,288
|
|
|
|
9,159
|
|
|
|
23,210
|
|
|
|
370,656
|
|
Segment gross profit
|
|
$
|
333,971
|
|
|
$
|
1,668
|
|
|
$
|
(269
|
)
|
|
$
|
335,370
|
|
For fiscal year 2019:
|
|
CCM Shopping
Mall Membership
|
|
|
Sales of Goods
|
|
|
Others
|
|
|
Total
|
|
Reportable segment revenue
|
|
$
|
541,740
|
|
|
$
|
371,623
|
|
|
$
|
404,344
|
|
|
$
|
1,317,707
|
|
Inter-segment loss
|
|
|
-
|
|
|
|
-
|
|
|
|
376,591
|
|
|
|
376,591
|
|
Revenue from external customers
|
|
|
541,740
|
|
|
|
371,623
|
|
|
|
27,754
|
|
|
|
941,117
|
|
Segment gross profit
|
|
$
|
400,282
|
|
|
$
|
48,243
|
|
|
$
|
1,465
|
|
|
$
|
449,989
|
|
17. COMMITMENTS AND CONTINGENCIES
Litigation
Legal case with Beijing Bank
On June 29, 2015, SkyPeople China entered into a loan agreement with
Beijing Bank. Pursuant to the loan agreement, SkyPeople China borrowed RMB 30 million (approximately $4.36 million) from Beijing Bank.
Hongke Xue, Yongke Xue and Xiujun Wang provided guarantees for the loan and Shaanxi Boai Medical Technology Development Co., Ltd. (“Shaanxi
Boai”) provided certain real estate property as a pledge for the loan. SkyPeople China did not repay the loan on time and Beijing
Bank filed an enforcement request with Xi’an Intermediate People’s Court in June 2017. The Xi’an Intermediate People’s
Court seized real estate properties pledged by Shaanxi Boai and Xiujun Wang. In November 2018, the Court sold the real estate property
pledged by Xiujun Wang for RMB 1.17 million. Because the real estate property is Xiujun Wang’s primary home, the Court allocated
RMB 0.12 million to Xiujun Wang as transition home leasing fee and deducted outstanding mortgage payments, and the remaining amount was
delivered to Beijing Bank as the repayment. The Court has also made inquiries to Beijing Bank as to whether it is willing to accept the
pledged real estate property of Shaanxi Boai as the repayment of the outstanding loan for the amount of RMB 27.93 million but Beijing
Bank has refused to take the real property as repayment of the loan and the enforcement action has been terminated by the Court on December
18, 2018. As of February 27, 2020, SkyPeople China still owe the unpaid amount. SkyPeople China was one of the subsidiaries
transferred along with HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020. The creditors have no recourse to
the current Company.
Legal case with Ningxia Bank
On March 8, 2016, SkyPeople China entered into a loan agreement with
Ningxia Bank. Pursuant to the loan agreement, SkyPeople China borrowed RMB 25 million (approximately $3.63 million) from Ningxia Bank.
Hongke Xue, Yongke Xue, Lake Chen, Shaanxi Boai Medical Technology Development Co., Ltd. and Shaanxi Qiyiwangguo provided guarantees for
the loan. SkyPeople China also pledged 37 pieces of equipment and the related trademarks to Ningxia Bank for the loan. SkyPeople China
has not repaid the loan and Ningxia Bank filed an enforcement action with Xi’an Intermediate people’s court in August 2017.
The Court has frozen the assets of SkyPeople China that were pledged as guarantee for the loan from being transferred to any third-party,
but the freeze does not limit or affect the use of these properties by SkyPeople China for its business. In July 2018, Shaanxi Qiyiwangguo
filed a petition to the Court and requested the termination of the enforcement action on the basis that its guarantee of the loan was
not valid because the seal used on the guarantee agreement was not authentic and the guarantee was not approved by the shareholders of
Shaanxi Qiyiwangguo. On November 27, 2018 Shaanxi Qiyiwangguo withdrew its petition and the Court agreed to such withdrawal and there
has been no other progress of this case. As of February 27, 2020, SkyPeople China still owe the unpaid amount. SkyPeople China was
one of the subsidiaries transferred along with HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020. The
creditors have no recourse to the current Company.
Legal case with China Construction Bank
On December 23, 2015, SkyPeople China entered
into two loan agreements with China Construction Bank. Pursuant to the loan agreements, SkyPeople China borrowed RMB 13.90 million
(approximately $2.13 million), and RMB 30 million (approximately $4.59 million) from China Construction Bank, respectively. Shaanxi
Boai Medical Technology Development Co., Ltd. (“Boai”), Hongke Xue, Yongke Xue, Xiujun Wang and Yingkou Trusty Fruits
Co., Ltd. (“Yingkou”) provided pledges for the loans. SkyPeople China has not repaid the loans and China Construction
Bank filed an enforcement action with Xi’an Intermediate People’s Court in March 2017. In December 2017, SkyPeople
China received the enforcement notice from the Court. The Court has seized certain parking space and land use rights pledged by
Xiujun Wang and Boai and sold the land use right pledged by Boai in auction for approximately RMB 24,835,790 as repayment to China
Construction Bank. The Court also seized certain land use rights pledged by Yingkou Trusty Fruits Co., Ltd., but the auction sale
for those rights was not successful. As of December 31, 2020, SkyPeople China still owe the unpaid amount. SkyPeople China
was one of the subsidiaries transferred along with HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020.
The creditors have no recourse to the current Company.
On May 9, 2016, SkyPeople China entered into loan agreements with China
Construction Bank. Pursuant to the loan agreements, SkyPeople China borrowed RMB 22.9 million (approximately $3.50 million) from China
Construction Bank. Shaanxi Province Credit Reassurance Company (“Credit Reassurance Company”) provided a guarantee to China
Construction Bank for the loan, Hongke Xue and Yongke Xue provided their guarantees, and SkyPeople China provided an office space that
it owned to Credit Reassurance Company as a pledge. SkyPeople China has not repaid the loan and Credit Reassurance Company repaid the
loan for SkyPeople China. In June 2017, Credit Reassurance filed an enforcement action request with Xi’an Intermediate People’s
Court (the “Court”) in June 2017. In December 2017, SkyPeople China received the enforcement notice from the Court. The Court
issued a verdict to seize the office space of SkyPeople China for auction sale on December 26, 2017. In February 2018, the auction sale
was conducted but not successful. In June 2018, the Court decided to use the pledge property as the repayment for the outstanding loan
of RMB 12.21 million (approximately $1.78 million). The Company has transferred the ownership of the pledge property to China Construction
Bank and the assets were written off.
Legal case with China Cinda Asset Management
Co., Ltd
In April 2015, China Cinda Asset Management
Co., Ltd. Shaanxi Branch (“Cinda Shaanxi Branch”) filed two enforcement proceedings with Xi’an Intermediate People’s
Court (the “Court”) against SkyPeople China for alleged defaults pursuant to guarantees by the SkyPeople China to its
suppliers for a total amount of RMB 39.60 million or approximately $5.80 million.
In September 2014, two long term suppliers of pear, mulberry, and kiwi
fruits to the SkyPeople China requested that SkyPeople China provide guarantees for their loans with Cinda Shaanxi Branch. Considering
the long term business relationship and to ensure the timely supply of raw materials, the SkyPeople China agreed to provide guarantees
on the value of the raw materials supplied to the SkyPeople China. Because Cinda Shaanxi Branch is not a bank authorized to provide loans,
it eventually provided financing to the two suppliers through the purchase of accounts receivables of the two suppliers with the SkyPeople
China. In July 2014, the parties entered into two agreements – an Accounts Receivables Purchase and Debt Restructure Agreement,
and Guarantee Agreements for Accounts Receivables Purchase and Debt Restructure. Pursuant to the agreements, Cinda Shaanxi Branch agreed
to provide a RMB 100 million credit line on a rolling basis to the two suppliers and SkyPeople China agreed to pay its accounts payables
to the two suppliers directly to Cinda Shaanxi Branch and provided guarantees for the two suppliers. In April 2015, Cinda Shaanxi Branch
stopped providing financing to the two suppliers and the two suppliers were unable to continue the supply of raw materials to the SkyPeople
China. Consequently, the SkyPeople China stopped making any payment to Cinda Shaanxi Branch.
The SkyPeople China has responded to the
Court and taken the position that the financings under the agreements are essentially the loans from Cinda Shaanxi Branch to the
two suppliers, and because Cinda Shaanxi Branch does not have permits to make loans in China, the agreements are invalid, void
and had no legal effect from the beginning. Therefore, SkyPeople China has no obligation to repay the debts owed by the two suppliers
to Cinda Shaanxi Branch.
Upon the Court’s suggestion, the parties agreed to a settlement
discussion in April 2017. As a part of the settlement discussion, on April 18, 2017, SkyPeople China withdrew its non-enforcement request
from the Court without prejudice. As SkyPeople China may is liable for this loan, SkyPeople China recorded expenses of $5.80 million in
the third quarter of 2018 as the result of these two enforcement proceedings. As of February 27, 2020, SkyPeople China still have liability
of $5.8 million related with these two enforcement proceedings. SkyPeople China was one of the subsidiaries transferred along with HeDengTang
HK to New Continent International Co., Ltd. on February 27, 2020. The creditors have no recourse to the current Company.
Legal case with Cinda Capital Financing
Co. Ltd
In August 2017, Cinda Capital Financing Co. Ltd. (“Cinda”)
filed a lawsuit with Beijing 2nd Intermediate People’s Court (the “Beijing Intermediate Court”) against the Company’s
indirectly wholly-owned subsidiaries Shaanxi Guoweimei Kiwi Deep Processing Company, Ltd. (“Guoweimei”) and Hedetang Farm
Products Trading Market (Mei County) Co., Ltd. (“Trading Market Mei County Co”, and together with Guoweimei, “Lessees”)
requested that Lessees repay RMB 50 million (approximately $7.27 million) in capital lease fees, plus interest. Cinda has purchased or
paid for refrigerant warehouse and trading hall to the suppliers and vendors and agreed to lease them to the Lessees for a leasing fee
of RMB 50 million in December 2016. The capital leasing fee became due on its maturity date of June 2017, with certain land use rights
of Lessees in Mei County and equity of Guoweimei as a pledge. The Company has disputed that the land use rights for the refrigerant warehouse
and trading hall were never sold to or transferred to Cinda, therefore it is loan agreement and not capital lease agreement among the
parties. Lessees have taken the position that Cinda is not a bank and does not have government permits required to make loans in China,
and the agreements including pledge agreement were invalid, void and without legal effect from the beginning. Therefore, the lessees only
has the obligations to repay principal but not the interest. In November 2017, Beijing Intermediate Court ruled in favor of Cinda and
the Lessees appealed the case to the Beijing Supreme Court. The Beijing Supreme Court held a hearing at the end of July 2018. On December
4, 2018, the Beijing Supreme Court upheld the lower court’s decision. On April 8, 2019, Beijing Intermediate Court issued the verdict
for enforcement of the judgment and the plaintiff has the priority rights for the repayment for the pledged land use rights of Lessees
in Mei County and equity of Guoweimei. The case is under enforcement procedure and Cinda is in the process of sale the land use rights.
Before the land use right is sold, the subsidiaries of SkyPeople China still owns the seized properties and the liabilities to Cinda.
As of February 27, 2020, SkyPeople China has not repaid the amount. SkyPeople China was one of the subsidiaries transferred along with
HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020.
In August 2017, Cinda filed another lawsuit with Beijing Intermediate
Court against the Company’s indirectly wholly-owned subsidiaries Guoweimei and SkyPeople China for repayment of leasing fee of RMB
84.97 million (approximately $12.35 million) plus interest. In January 2014, Guoweimei and SkyPeople China (the “Equipment Lessees”)
signed an Equipment Financial Lease Purchase Agreement with Cinda and an equipment supplier pursuant to which Cinda would provide funds
to purchase equipment and the Equipment Lessees would lease the equipment from Cinda. Guoweimei pledged certain land use rights in Mei
County to Cinda and Xi’an Hedetang and Hedetang Holding pledged their equities in Guoweimei to Cinda to secure the repayment. Mr.
Hongke Xue also provided a personal guarantee for the payment of the leasing fee. Beijing Intermediate Court had two hearings of the case
and on March 21, 2018 it ruled in favor of Cinda to the effect that SkyPeople China and Guoweimei shall pay leasing fees due in the amount
of RMB 21.00 million (approximately $3.05 million), as well as leasing fees not yet due in the amount of RMB 63.98 million (approximately
$9.30 million), plus attorney’s fees and expenses. Beijing Intermediate Court also ruled that Mr. Hongke Xue is jointly liable for
the debt as the guarantor, and that Cinda has priority rights to the pledged land use rights in Mei County and the pledged equities of
Guoweimei as well as the ownership of the leasing properties until the leasing fees are paid. SkyPeople China appealed the decision to
the Beijing Supreme Court. The Beijing Supreme Court rejected the appeal and upheld the original verdict on September 7, 2018. The case
is under enforcement procedure and Cinda is in the process of sale the seized properties. Before they are sold, the subsidiaries of SkyPeople
China still owns the seized properties and the liabilities to Cinda. As of February 27, 2020, SkyPeople China has not repaid the amount.
SkyPeople China was one of the subsidiaries transferred along with HeDengTang HK to New Continent International Co., Ltd. on February
27, 2020
Legal case with Shaanxi Fangtian Decoration
Co. Ltd
In April 2015, SkyPeople China entered into a loan agreement with (“Fangtian”).
Pursuant to the loan agreement, SkyPeople China borrowed RMB 3.50 million (approximately $0.51 million) from Fangtian. SkyPeople China
has not repaid the loan and Fangtian filed a lawsuit with Xi’an Yanta District People’s Court (“Yanta District Court”).
On August 10, 2017, Yanta District Court ruled against SkyPeople China and determined that SkyPeople China must repay the loan of RMB
3.50 million plus interest RMB of 0.40 million (approximately $0.59 million) Fangtian has requested that the Yanta District Court enter
into enforcement procedures for the case. As of February 27, 2020, SkyPeople China has not repaid the amount. SkyPeople China
was one of the subsidiaries transferred along with HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020. The creditors
have no recourse to the current Company.
Legal case with Shanghai Pudong Development
Bank
On May 4, 2015, SkyPeople China and Xi’an
Branch of Shanghai Pudong Development Bank (SPD Bank Xi’an Branch) renewed a Working Capital Loan Contract and Repayment
Schedule, according to which both parties agreed that SPD Bank Xi’an Branch loaned RMB 26.90 million (approximately $3.92
million) to SkyPeople China with a term of one year. On the signing date of the Loan Contract, Hongke Xue, Yongke Xue, Xiujun Wang
and SPD Bank Xi’an Branch signed a Contract of Guaranty, guaranteeing the repayment of loan and undertaking joint liability.
According to a Mortgage Contract of Maximum Amount signed between SkyPeople China and SPD Bank Xi’an Branch on April 2, 2013,
SkyPeople China provided the property and land use rights of Jingyang factory as the pledge. In October 2015, SPD Bank Xi’an
Branch filed an enforcement request with the Intermediate Court of Xi’an and the Court seized the property and the land use
rights of Jingyang factory. During the enforcement procedure, SPD Bank Xi’an Branch transferred its creditor’s rights
to China Huarong Asset Management Co., Ltd. (“China Huarong”). The Court changed the execution applicant to China Huarong.
In March 2019, the Intermediate Court of Xi’an issued a verdict for the transfer of the pledged property and land use rights
of Jingyang factory to China Huarong as the repayment of the loan.
Legal case with Shaanxi Fangyuan Construction
Co., Ltd.
Shaanxi Guoweimei Kiwi Deep Processing Co. Ltd (“Guoweimei”),
entered into a construction agreement with Shaanxi Fangyuan construction co., Ltd. (“Fangyuan”) in July 2013. On October 8,
2018, Fangyuan filed a lawsuit and requested that Guoweimei pay a project construction fee plus penalty of RMB 56.32 million (approximately
$8.22 million). On June 10, 2019, Baoji Intermediate People’s Court issued a verdict that Guoweimei just pay RMB 41.58 million (approximately
$6.07 million) plus penalty to Fangyuan, and Fangyuan will enjoy preferential right for the projects in processing zone of National Wholesale
and Trading Center in Mei County for Kiwi Fruits developed by Guoweimei. As of February 27, 2020, Guoweimei has not repaid the amount.
Guoweimei was one of the subsidiaries transferred along with HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020.
Legal case with Shaanxi Zhongkun Construction
Co., Ltd.
In May 2015, Hedetang Farm Products Trading
Markets (Mei County) Co., Ltd. (“Hedetang”) and Shaanxi Zhongkun Construction Co., Ltd. (“Zhongkun”) entered
into a construction and decoration agreement. On September 5, 2018, Zhongkun filed the lawsuit with Mei County People’s Court
(the “Court”) for repayment of construction and decoration fees. The Court issued a civil judgement in November 2018,
ordering Hedetang to pay project funds of RMB 1.65 million (approximately $0.24 million) to Zhongkun, plus interest. On April 19,
2020, the Court issued a verdict to terminate the enforcement because assets of Hedetang had already been seized by Xi’an
Yanta District People’s Court and Baoji Intermediate People’s Court, and there were no other assets for enforcement.
Currently the Company is still liable for the unpaid amount and the interest.
Legal case with Xi’an Shanmei
Food Co. Ltd.
On October 31, 2017, Xi’an Shanmei Food Co. Ltd. filed a lawsuit
against Shaanxi Qiyiwangguo, a majority-owned subsidiary of the Company, with Zhouzhi County People’s Court in connection with a
Land Lease Agreement entered into by the parties on October 1, 2013. On March 2, 2018, Zhouzhi County People’s Court issued a verdict
that: (i) the Land Lease Agreement was thereby terminated; (ii) Shaanxi Qiyiwangguo shall pay Xi’an Shanmei the outstanding leasing
fee RMB 0.21 million (approximately $0.03 million) and (iii) Shaanxi Qiyiwangguo shall return the 29.30 mu industrial use land to Xi’an
Shanmei. Shaanxi Qiyiwangguo appealed the decision to the Xi’an Intermediate People’s Court on the basis that: (x) the land
use right was a capital contribution by Xi’an Shanmei for a shareholder of Shaanxi Qiyiwangguo who is also the sole shareholder
of Xi’an Shanmei and the Land Lease Agreement was invalid and has no legal effect; (y) Zhouzhi Court did not schedule the hearing
for the count claims filed by Shaanxi Qiyiwangguo; and (z) Zhouzhi Court violated certain civil procedures during the trial of the case.
Due to the late notice to Zhouzhi Court, the case file was not timely transferred to Xi’an Intermediate Court and no appeal hearing
was scheduled. Zhouzhi Court has issued verdict for enforcement procedure and Qiyiwangguo has filed petition of disagreement for the enforcement
which is still under Zhouzhi Court’s review. On January 23, 2019, the Court rejected the petition of disagreement and the case has
been under enforcement procedure. As of February 27, 2020, Shaanxi Qiyiwanggu has not repaid the amount. Shaanxi Qiyiwanggu was
one of the subsidiaries transferred along with HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020.
Legal case with Nanjing Bailuotong Logistics
Services Co., Ltd.
In January 2016 Shaanxi Qiyiwangguo Modern
Organic Agriculture Co., Ltd (“Shaanxi Qiyiwangguo”) and Nanjing Bailuotong Logistics Services Co., Ltd (“Bailutong”)
entered into a transportation agreement to ship fruit juices. Bailutong failed to deliver the juice products and held them after
their expiration date. Shaanxi Qiyiwangguo filed a lawsuit against Bailutong with Zhouzhi county People’s Court, and the
Court issue the verdict in February 2018 that: (1) the transportation contract between Shaanxi Qiyiwangguo and Bailutong was terminated;
and (2) Bailutong owed RMB 0.20 million (approximately $0.03 million) to Qiyiwangguo for the loss of Shaanxi Qiyiwangguo. Bailutong
appealed the case to Xi’an Intermediate People’s Court. Xi’an Intermediate People’s Court rejected the
appeal and upheld the original verdict. As of the date of this report, Shaanxi Qiyiwangguo has not received the payment of RMB0.20
million from Bailutong.
Legal case with Henan Huaxing Glass
Co., Ltd.
Qiyiwangguo entered into an agreement with Henan Huaxing Glass Co.,
Ltd. (“Huaxing”) in May 2014 for Huaxing to supply glass bottles to Qiyiwangguo. However, due to the disputes regarding the
quality of products supplied by Huaxing, Qiyiwangguo did not pay the prices for certain glass bottles. In August 2017, Huaxing filed a
lawsuit and the court ruled Shaanxi Qiyiwangguo was required to pay Huaxing RMB 203,742 (approximately $29,743) in July 2018. During the
enforcement process, the parties reached a settlement agreement but Shaanxi Qiyiwangguo failed to pay the amount due and now the case
is still in the court enforcement process. As of February 27, 2020, Shaanxi Qiyiwanggu has not repaid the amount. Shaanxi Qiyiwanggu was
one of the subsidiaries transferred along with HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020.
Legal case with Huludao Banking Co.
Ltd.
In September 2016, the Suizhong Branch of Huludao Banking Co. Ltd.
(“Suizhong Branch”) filed a lawsuit with Huludao Intermediate People’s Court (the “Huludao Court”) against
the Company’s indirectly wholly-owned subsidiary Huludao Wonder Fruit Co., Ltd. (“Wonder Fruit”) and requested that
Wonder Fruit repay a RMB 40 million (approximately $5.81 million) bank loan, plus interest. The loan became due on its maturity date of
December 9, 2016. On December 19, 2016, the Huludao Court accepted the case. The Company has been disputing the interest rate of the loan
with Suizhong Branch, and has not repaid the loan to date. Wonder Fruit believes that the interest charged by Suizhong Branch is 100.00%
higher than the base rate set by People’s Bank of China and is not consistent with the China People’s Bank’s base interest
and floating rate. The Huludao Court has seized land use rights, buildings and equipment of Wonder Fruit that were pledged as guarantee
for the loan and organized two auction sales for these assets in January and February of 2018, but both auction sales were unsuccessful
in finding a buyer. On July 19, 2018, the Court issued a verdict ordering Huludao Wonder to transfer its land use rights, building, equipment,
electronic and transportation assets to Zuizhong Branch as payment of the outstanding principal, auction and evaluation fees and some
interest of the loan for RMB 42.64 million (approximately $6.22 million). As of February 27, 2020, there was RMB 11.95 million (approximately
$1.74 million) in interest on the loan unpaid. Huludao Wonder was one of the subsidiaries transferred along with HeDengTang HK to New
Continent International Co., Ltd. on February 27, 2020.
Legal case with Andrew Chien
In September 2017, Andrew Chien, a former
consultant of SkyPeople China, brought a lawsuit against the Company and Mr. Hongke Xue in the District Court of Connecticut (the
“Court”). The complaint was not properly served and the Company learned of the litigation in December 2017. In the
complaint, Mr. Chien made several claims, most of which attempt to hold the Company liable under novel legal theories that relate
back to an alleged breach of a consulting agreement between SkyPeople China and Chien from August 2006. Mr. Chien claimed approximately
$257,000 damages and interest plus 2.00% of the Company’s then-outstanding shares. Mr. Chien has as-yet unsuccessfully attempted
to sue the Company on the breach of the same consulting agreement several times in the courts of Connecticut and New York, and
these cases have been dismissed. The Company has filed a motion to dismiss (“MTD”) and all proceedings are stayed pending
determination of the MTD. On August 31, 2018, the Court granted our MTD. On September 10, 2018, Mr. Chien filed a motion for reconsideration.
On September 28, 2018, the Court denied Mr. Chien’s motion for reconsideration. On October 26, 2018, Mr. Chien appealed the
case to the United States Court of Appeals for the Second Circuit. The Court of Appeals affirmed the trial court’s dismissal
of the action on January 22, 2020, and denied Mr. Chien’s petition for en banc rehearing on March 27, 2020. Mr. Chien’s
time to pursue a discretionary appeal to the Supreme Court of the United States has lapsed and the case is closed.
Legal case with Luwei
In 2018, Mr. Luwei, an individual, filed a claim for arbitration against
SkyPeople China in Xi’an Arbitration Commission for breach of contract pursuant to a new share purchase agreement and a share redemption
agreement. On April, 11, 2019, Xi’an Arbitration Commission made its decision and ordered SkyPeople China to repay RMB 3 million
investment to Luwei. Mr. Luwei applied with Intermediate Court of Xi’an (the “Court”) for enforcement of the arbitration
award which process was terminated by the Court due to no assets for enforcement. As of February 27, 2020, SkyPeople China has not repaid
the amount. SkyPeople China was one of the subsidiaries transferred along with HeDengTang HK to New Continent International Co., Ltd.
on February 27, 2020.
Legal case with Shaanxi Overseas Investment
Development Corp.
In November 2019, Shaanxi Overseas Investment Development Corp (“Shaanxi
Overseas Investment”) filed a lawsuit against SkyPeople China, Hongke Xue and Shenzhen Tian Shun Da Equity Investment Fund Management
Co., Ltd. (“Shenzhen Tian Shun Da”) pursuant to an investment agreement entered in March, 2016. According to the agreement,
Shaanxi Overseas Investment agreed to invest RMB 5 million for the preferred shares of SkyPeople China with an annual interest rate of
2.38%. Shenzhen Tian Shun Da pledged 1.17% of the shares SkyPeople China that it owned and Hongke Xue provided guarantee for the performance
of agreement by SkyPeople China. SkyPeople China failed to make the interests payment and Shaanxi Overseas Investment filed the lawsuit
for breach of agreement. On December 26, 2019, Yanta District Court of Xi’an City (the “Court”) ordered SkyPeople China
to pay Shaanxi Overseas Investment the preferred share redemption amount of RMB 5 million plus penalty which is calculated based upon
the RMB 5 million at a rate of 24% a year. The Court also ruled that Shaanxi Overseas Investment may sell the pledged shares owned by
Shenzhen Tianshun Da as the repayment for SkyPeople China and Hongkong Xue shall also assume the repayment obligation as guarantor. As
of February 27, 2020, SkyPeople China has not repaid the amount. SkyPeople China was one of the subsidiaries transferred along with HeDengTang
HK to New Continent International Co., Ltd. on February 27, 2020.
Legal case with Shaanxi Wanyuan Construction
Co., Ltd.
On July 2017, Shaanxi Wanyuan Construction Co., Ltd. (“Wanyuan”)
filed a lawsuit with Shaanxi Baoji Municipal Intermediate People’s Court (the “Baoji Court”) against Guoweimei for repayment
of construction and decoration costs of RMB 55.07 million pursuant to a Construction and Decoration Agreement entered by the parties in
May 2017. In July, 2019, the Baoji Court ordered Guoweimei to pay construction and decoration costs of RMB 55.07 million (approximately
$7.98 million) to Wanyuan, plus interest. As of February 27, 2020, Guoweimei has not repaid the amount. Guoweimei was one of the subsidiaries
transferred along with HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020.
Legal case with FT Global Litigation
In January 2021, FT Global Capital, Inc. (“FT
Global”), a former placement agent of the Company filed a lawsuit against the Company in the Superior Court of Fulton County, Georgia.
FT Global served the complaint upon the Company in January 2021. In the complaint, FT Global alleges claims, most of which
attempt to hold the Company liable under legal theories that relate back to an alleged breach of an exclusive placement agent agreement
between FT Global and the Company in July 2020 which had a term of three months. FT Global claims that the Company failed to compensate
FT Global for securities purchase transactions between December 2020 and April 2021, pursuant to the terms of the expired exclusive placement
agent agreement. Allegedly, the exclusive placement agent agreement required the Company to pay FT Global for capital received during
the term of the agreement and for the 12-month period following the termination of the agreement involving any investors that FT Global
introduced and/or wall-crossed to the Company. However, the Company believes the securities purchase transactions at issue did not
involve the one investor which FT Global introduced or wall-crossed to the Company during the term of the agreement. FT Global claims
approximately $7,000,000 in damages and attorneys’ fees.
The Company timely removed the case to the United
States District Court for the Northern District of Georgia (the (“Court) on February 9, 2021 based on diversity of jurisdiction.
On March 9, 2021, the Company filed a motion to dismiss based on FT Global’s failure to state a claim which is pending before the
Court. On March 23, 2021, FT Global filed its response to the Company’s motion to dismiss. FT Global argues that the Court
should deny the Company’s motion to dismiss. However, if the Court is inclined to grant the Company’s motion to dismiss,
FT Global requested that the Court permit it to file an amended complaint. On April 8, 2021, the parties filed a Joint Preliminary
Report and Discovery Plan. On April 12, 2021, the Court approved the Joint Preliminary Report and Discovery Plan and issued a Scheduling
Order placing this case on a six-month discovery tract. The Company will continue to vigorously defend the action against FT Global.
RISKS AND UNCERTAINTIES
Impact of COVID 19
In December 2019, a novel strain of coronavirus
was reported to have surfaced in Wuhan, China, which has and is continuing to spread throughout China and other parts of the world.
Substantially all of our revenues are generated in China. The Company’s results of operations were affected by the outbreak
of COVID-19 in China. In early 2020, Chinese government took emergency measures to combat the spread of the virus, including
quarantines, travel restrictions, and the temporary closure of office buildings and facilities in China, which has adversely affected
the Company’s business and services and results of operations. Our suppliers have negatively been affected, and could continue
to be negatively affected in their ability to supply and ship products to our customers. Our customers that are negatively impacted
by the outbreak of COVID-19 may reduce their budgets to purchase products and services from us, which may materially adversely
impact our revenue. The business operations of the third parties’ stores on our platform have been and could continue to
be negatively impacted by the outbreak, which may negatively impact their operations and business, which may in turn adversely
affect the business of our platform as a whole as well as our financial condition and operating results. Some of our customers,
contractors, suppliers and other business partners are small and medium-sized enterprises (SMEs), which may not have strong cash
flows or be well capitalized, and may be vulnerable to an epidemic outbreak and slowing macroeconomic conditions, Further, as we
do not have access to a revolving credit facility, there can be no assurance that we would be able to secure commercial debt financing
in the future in the event that we require additional capital.
The Company’s promotion strategy
of the CCM Shopping Mall previously mainly relied on the training of members and distributors through meetings and conferences.
Although China has already begun to recover from the outbreak of COVID-19, the Chinese government still put a restriction
on large gatherings. These restrictions made the promotion strategy for CCM Shopping Mall difficult to implement.
Consequently, our results of operations
have been adversely, and may be materially, affected, to the extent that the COVID-19 harms the Chinese and global economy. Any
potential impact to our results will depend on, to a large extent, future developments and new information that may emerge regarding
the duration and severity of the COVID-19 and the actions taken by government authorities and other entities to contain the COVID-19
or treat its impact, almost all of which are beyond our control.
a) PRC Regulations
There are substantial uncertainties regarding
the interpretation and application of PRC laws and regulations including, but not limited to, the laws and regulations governing
our business and the enforcement and performance of our arrangements with customers in certain circumstances. We are considered
foreign persons or foreign funded enterprises under PRC laws and, as a result, we are required to comply with PRC laws and regulations
related to foreign persons and foreign funded enterprises. These laws and regulations are sometimes vague and may be subject to
future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly
enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance. New laws and regulations that affect
existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation of
existing or new PRC laws or regulations may have on our business.
b) Major customers and suppliers
No customer accounted for more than 10%
of the Company’s sales for the years ended December 31, 2020 and 2019.
Sales to our five largest customers accounted
for approximately 9.3% and 15.6% of our net sales during the years ended December 31, 2020 and 2019, respectively.
There was two suppliers accounted for more
than 10% of our purchase during the year ended December 31, 2020. Five top suppliers accounted for 100% of our purchases during
the year ended December 31, 2020.
There was no supplier accounted for more than
10% of our purchase during the year ended December 31, 2019. Five top suppliers accounted for 14.42% of our purchases during the year
ended December 31, 2019.
19. SUBSEQUENT EVENTS
On January 11, 2021, the Company entered
into a securities purchase agreement with certain purchasers identified on the signature page thereto, pursuant to which the
Company sold to the Purchasers in a registered direct offering, an aggregate of 3,000,000 share of its common stock, par value $0.001
per share at a purchase price of $5.00 per share, for aggregate gross proceeds to the Company of $15,000,000, before deducting fees to
the placement agent and other estimated offering expenses payable by the Company. As of this report day, the transaction has completed.
On February 9, 2021, the Company entered into
a securities purchase agreement with certain purchasers identified on the signature page thereto, pursuant to which the Company
sold to the Purchasers in a registered direct offering, an aggregate of 2,000,000 shares of its common stock, par value $0.001 per share
at a purchase price of $5.95 per share, for aggregate gross proceeds to the Company of $11,900,000, before deducting fees to the placement
agent and other estimated offering expenses payable by the Company. As of this report day, the transaction has completed.
On February 26, 2021, the Company terminated a
Share Exchange Agreement, which was originally entered into by and among the Company, Future FinTech Limited, a wholly owned subsidiary
of the Company and a limited company organized under the laws of Hong Kong, Asiasens Investment Holding Pte. Ltd., a company incorporated
under the laws of Singapore and Asen Maneuvre Group Limited, a limited company organized under the laws of British Virgin Islands on December
18, 2020. As the closing conditions to the Agreement were not satisfied on January 31, 2021, and the parties were unable to agree on new
terms to extend the closing period subsequent to February 1, 2021, the Company has notified Asen Maneuvre and Asiasens the termination
of the Agreement on February 26, 2021.
On February 26, 2021, the Company and Future Supply
Chain Co., Ltd., a wholly owned subsidiary of the Company and a company incorporated under the laws of China entered into a Share Exchange
Agreement with Sichuan Longma Electronic Technology Co. Ltd., a company incorporated under the laws of China (the “Seller”)
and Sichuan Ticode Supply Chain Management Co., Ltd., a company incorporated under the laws of China (the “Ticode”). Pursuant
to the Agreement, the Company, through the Buyer will acquire 60% of the equity interest of Ticode from the Seller in exchange for 7,789,882
shares of common stock of the Company.
On March 18, 2021, the Company filed Articles
of Amendment (the “Amendment”) with the Secretary of State for the State of Florida to amend its Second Amended and Restated
Articles of Incorporation to increase the amount of authorized shares of its common stock, par value $0.001 per share, from 60,000,000
to 300,000,000. The Amendment was approved by the Company’s Board of Directors (the “Board”) on February 12, 2021 and
by shareholders holding a majority of the Company’s issued and outstanding capital stock on February 12, 2021. The Amendment
does not affect the rights of the Company’s shareholders and was effective immediately upon filing.
On April 1, 2021, the Company entered into a Securities
Purchase Agreement (the “Purchase Agreement”) with certain purchasers identified on the signature page thereto (the “Purchasers”),
pursuant to which the Company sold to the Purchasers in a registered direct offering, an aggregate of 5,737,706 shares (the “Shares”)
of its common stock, par value $0.001 per share (“Common Stock”) at a purchase price of $6.10 per share, for aggregate gross
proceeds to the Company of approximately $35 million, before deducting fees to the placement agent and other estimated offering expenses
payable by the Company. As of this report day, the transaction has completed.
On April 9, 2021, the Company, Future FinTech
(Hong Kong) Limited., a limited company organized under the laws of Hong Kong and a wholly owned subsidiary of the Company (“Buyer”), Nice
Talent Asset Management Limited, a limited company organized under the laws of Hong Kong (“Nice”) and Joy Rich Enterprises
Limited, a limited company organized under the laws of Hong Kong and 90% shareholder of Nice (“Joy Rich” or the “Seller”)
entered into the First Amendment (the “Amendment”) to the Share Exchange Agreement (the “Agreement”), which was
originally entered into by the parties on July 13, 2020. Pursuant to the Agreement, the Buyer agreed to acquire 90% of the issued and
outstanding ordinary shares of Nice (the “Nice Shares”) from the Seller in exchange for the shares of common stock of the
Company, as disclosed in the Form 8-K filed on July 16, 2020.Pursuant to the Amendment, the parties agree to amend the purchase price
and certain earn-out terms as follows: (i) the aggregate purchase price for Nice Shares shall be HK$144,000,000 (the “Purchase Price”)
and it shall be paid in the shares of common stock of the Company (the “Company Shares”); (ii) 60% of the Purchase Price or
HK$86,400,000 shall be paid in the shares of common stock of the Company based on 95% of the closing price of the Company’s common
stock listed on Nasdaq Stock Exchange on the date prior to the date of the Amendment and the foreign exchange rate between HK$ and US$
shall be 7.7:1; (iii) 20% of Purchase Price shall be paid in the shares of common stock of the Company if Nice achieves an Earnings Before
Interest and Taxes (the “EBIT”) of HK$14,000,000 (the “2021 EBIT Goal”), as evidenced in its 2021 audited financial
statements for fiscal year ended December 31, 2021 audited by the auditor of the Company (the “2021 Earn-Out Shares”); (iv)
the final 20% of Purchase Price shall be paid in the shares of common stock of the Company if Nice achieves an EBIT of HK$20,000,000 (the
“2022 EBIT Goal”), as evidenced in its 2022 audited financial statements for fiscal year ended December 31, 2022 audited by
the auditor of the Company (the “2022 Earn-Out Shares”); (v) if Nice does not achieve the EBIT Goal for a given year, the
shortfall between EBIT Goal and the actual EBIT for that year shall be the EBIT Shortfall (the “EBIT Shortfall”) and the amount
of an EBIT Shortfall Fee that equals to 10 (ten) times of the EBIT Shortfall amount (the “EBIT Shortfall Fee”) shall be paid
in cash by the Seller to the Buyer even though such year’s Earn-Out Shares shall still be issued in full to the Seller.
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