ITEM 7 – MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis
of the consolidated financial condition and results of operations should be read in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this report. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. Our actual results could differ materially from the results described in or
implied by these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this
Annual Report on Form 10-K, particularly under the heading “Risk Factors.”
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.
On July 13, 2020, the Company entered into a Share Exchange Agreement (the “Agreement”) with Joy Rich
Enterprises Limited (“Joy Rich”) to acquire 90% of the issued and outstanding shares of NTAM, a Hong Kong-based asset
management company. 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 FTFT’s common stock. The parties
have agreed to renegotiate the purchase price in accordance with a new valuation of NTAM and the recent stock price level of the
Company for the share exchange transaction. 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, the
Company and Future Supply Chain Co., Ltd., a wholly owned subsidiary of the Company and a company incorporated under the laws of
China (“Buyer”) entered into a Share Exchange Agreement (the “Agreement”) with Sichuan Longma Electronic
Technology Co. Ltd. (“Longma”) and Sichuan Ticode Supply Chain Management Co., Ltd. (the “Ticode”) to acquire
a 60% equity interest of Ticode from Longma in exchange for 7,789,882 shares of common stock of the Company. Ticode provides financial services for the supply chain industry and its 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.
Business
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.
CCM
shopping mall membership
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.
Sales
of Goods
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.
Our latest CCM v3.0 creates
a new value cycle system of online shopping mall with the real-name blockchain system with following characteristics:
1. Blockchain anti-counterfeiting
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.
2. Blockchain points settlement leads to secondary data traffic
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 maintaining 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.
3. Points promotion system
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.
4. Member community system to build a high value community
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.
Recent Developments Related
to the COVID-19 Outbreak
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 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.
Discontinued Operations
On September 18, 2019, SkyPeople Foods Holdings
Limited, 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
HK from SkyPeople Foods Holdings Limited, 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 $123.69 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 for the period ended June 30, 2019 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 SkyPeople Foods Holdings Limited 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 July 24, 2020, the Company’s Board
of Directors passed a resolution to sale 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, a subsidiary located in the national kiwifruit Industrial
Park of Baoji City. On July 27,2020, Skypeople Foods Holdings Limited was dissolved;
On July 28, 2020, Digital Online Marketing Limited 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 in Hedetang
Farm Products Trading Markets (Mei county) Co., Ltd.
On November 12, 2020,
CCM Tianjin, a wholly owned subsidiary of the Company entered into an Equity Transfer Agreement with Xi’an Yishengkang Information
Technology, Ltd. (“Xi’an Yishengkang”), an unrelated third party, pursuant to which CCM Tianjin agreed to sell 90%
of total issued and outstanding capital stock of Hedetang Market that it owns to Xi’an Yishengkang for RMB9,000 (approximately
$1,324). On the same date, CCM Logistics entered into another Equity Transfer Agreement with an individual and unrelated third party,
Liyuan Ying, pursuant to which CCM Tianjin agreed to sell 10% of total issued and outstanding capital stock of Hedetang Market that it
owns to Liyuan Ying for RMB1,000 (approximately $147).
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 U.S. GAAP and this requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure at 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 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, valuation of change in fair
value of warrant liability, 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.
Fair Value of Financial
Instruments
On January 1, 2009, the
Company adopted FASB Accounting Standard Codification 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 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair
value hierarchy used to classify the source of the information. In February 2008, FASB deferred the effective date of ASC 820 by
one year for certain non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually). The Company adopted the provisions of ASC 820, except
as it applies to those non-financial assets and non-financial liabilities for which the effective date has been delayed by one
year.
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. Classification within the
hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.
Revenue Recognition
The Company adopted ASC
606, Revenue from Contracts with Customers, from January 1, 2018. The adoption had no impact on the Company’s retained earnings
as of January 1, 2018 as well as the Company’s financial statements for the year ended December 31, 2019. To achieve that
core principle, we apply the five steps defined under Topic 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 is recognized
upon the transfer of control of promised goods or services to a customer. 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 and the distributor still has rights with respect to that product.
Foreign Currency and Other
Comprehensive Income
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 United States dollar (“USD”). Assets and liabilities of the Company’s foreign
subsidiaries have been translated into USD using the exchange rate at the balance sheet date, while equity accounts are translated
using historical exchange rate. The average exchange rate for the period has been used to translate revenues and expenses. Translation
adjustments are reported separately and accumulated in a separate component of equity (cumulative translation adjustment).
Other comprehensive income
for the years ended December 31, 2020 and 2019 represented foreign currency translation adjustments and were included in the consolidated
statements of comprehensive income.
There is no guarantee the RMB
amounts could have been, or could be, converted into USD at rates used in translation.
Income Taxes
Income taxes are provided
on an asset and liability approach for financial accounting and reporting of income taxes. Any tax paid by subsidiaries during
the year is recorded. Current tax is based on the profit or loss from ordinary activities adjusted for items that are non-assessable
or disallowable for income tax purpose and is calculated using tax rates that have been enacted at the balance sheet date. Deferred
income tax liabilities or assets are recorded to reflect the tax consequences in future years of differences between the tax basis
of assets and liabilities and the financial reporting amounts at each period end. A valuation allowance is recognized if it is
more likely than not that some portion, or all, of a deferred tax asset will not be realized.
ASC 740 provides guidance
for recognizing and measuring uncertain tax positions, and it prescribes a threshold condition that a tax position must meet for
any of the benefits of the uncertain tax position to be recognized in the financial statements. ASC 740 also provides accounting
guidance on derecognizing, classification and disclosure of these uncertain tax positions.
Impairment of Long-Lived
Assets
In accordance with the
FASB 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. It is reasonably possible that these assets could become impaired
as a result of technological or other industrial changes. Determination of recoverability of assets to be held and used is by comparing
the carrying amount of an asset to future net 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 costs to sell.
Recent 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 December 2019, the FASB
issued the amendments in ASU 2019-12 ASC Topic 740, Income Taxes: Simplifying Accounting for Income Taxes, which removes
specific exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles (GAAP). The amendments eliminate
the need for an organization to analyze whether the specific exceptions apply in a given period, improve financial statement preparers’
application of income tax-related guidance and simplify GAAP. The amendments are effective for all entities for fiscal years beginning
after December 15, 2020, and interim periods within those fiscal years. While early application is permitted, including adoption
in an interim period, the Company has not elected to early adopt. The effectiveness of this update is not expected to have a significant
effect on the Company’s consolidated financial position or results of operations.
We have reviewed all the
recently issued, but not yet effective, accounting pronouncements and we do not believe any of these pronouncements will have a
material impact on the Company.
Comparison of Operation
Results of years ended December 31, 2020 and 2019
Revenue
The following table presents
our consolidated revenues for our main products for the fiscal years 2020 and 2019, respectively, (in thousands):
Year ended December 31, % of
CCM Shopping Mall Membership 338 542 38 %
In 2019, the Company started to sell products
on its on-line shopping platform, Chain Cloud Mall (CCM) based on blockchain technology to its members or non- members.
In fiscal year 2020, the Company’s main
business was on-line shopping platform, Chain Cloud Mall (CCM) based on blockchain technology to its members or non- members.
In order to increase the repeat sales from customers
and drive sales growth, the Company also subscribes members on its sales platform. Currently, there are three kinds of membership programs,
Diamond Elite, Gold Elite and Silver Elite, with different membership fees and benefits. The higher membership fee provides more benefits
to the members. Members can earn points on the Company’s sales platform and enjoy discounts on their purchases. 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 the Company’s products. Membership revenue is recognized when member registers and makes his/her first order
on our sales platform. Due to the Covid-19 and change of marketing and business development model due to the restriction of large gathering
for meetings and conference which primarily used by us before the pandemic, the Company had less new member subscription in 2020.
Revenue decreased from $0.94 million in 2019 to $0.37
million in 2020, decrease of $0.57 million or 61%. The decrease in revenue was mainly due to a decrease in sales through the e-commerce
business.
The revenue generated by the CCM Shopping Mall Membership
segment in fiscal year 2020 was $0.34 million, which accounted for 91% of total revenue. Decrease in revenue is due to less new member
subscription.
The revenue generated by the sale of goods segment
in fiscal year 2020 was $0.009 million, which accounted for 2% of total revenue, due to the business is mainly fruit juice related goods
and ceased to operate in 2020.
As a percentage of total revenue, the revenue generated
by others was 6% of total revenue in fiscal years 2020, and the revenue was mainly services charge for companies to use the CCM platform.
Gross Margin
(in thousands)
Gross profit Gross margin Gross profit Gross margin
Others (1) (4) % 2 7 %
Overall gross margin as a percentage of revenue was
90% in fiscal year 2020, an increase of 42% compared to gross margin 49% in fiscal year 2019. The increase in gross margin as a percentage
of revenue was mainly attributable to the CCM Shopping Mall Membership segments, which has high gross margin. In terms of dollar value,
the overall gross profit for fiscal year 2020 was $0.36 million, a decrease of $0.13 million, compared to gross profit of $0.49 million
for fiscal year 2019. The decrease in the dollar value of overall gross profit was mainly due to the change of marketing and business
development model caused by Covid-19 pandemic resulting less new member subscription.
The gross margin as a percentage
of revenue in the CCM Shopping Mall Membership segment was 99.0% in fiscal year 2020, this is mainly due to there is very minimal
costs related to the revenue.
The gross margin as a percentage
of revenue in the sale of goods segment was 22.0% in the fiscal year 2020. There is no significant changes in margin as the business
is mostly fruit juice related goods and it ceased to operate in 2020.
The gross margin as a percentage
of revenue in the other revenue segment was (4) % in fiscal year 2020, as compared to gross margin of 7% in fiscal year 2019. The
decrease in gross margin percentage was due to increase in labor costs.
Operating Expenses
The following table presents
consolidated operating expenses and operating expenses as a percentage of revenue for 2020 and 2019, respectively, (in thousands):
Amount % of revenue Amount % of revenue
General and administrative
expenses remained stable as there is no significant changes to the overhead structure, changes in general expenses are mainly due to reclassification
of discontinued operation related costs.
Selling expenses decreased
by $0.40 million to $0.04 million in 2020 as compared to $0.44 million in 2019, mainly due to a decrease in selling expenses from
our E-commerce business.
The Company recorded $1.76 million of impairment loss
in fiscal year 2020 related with the equity investment in INU 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 fully impair the investment in fiscal year 2020. In addition, the intangible assets include patent rights, software
and e-platform, of which $1.86 million 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 of the assets in fiscal year 2020.
Loss from Operations
Loss from operations increased by $7.44 million to
$15.02 million for 2020 from $7.58 million for 2019, mainly due to an increase in stock compensation expenses and reclassification
of operating expenses to discontinued operation.
Noncontrolling Interests
As of December 31, 2020, Shaanxi Chunlv Ecological
Agriculture Co., Ltd. (“Shaanxi Chunlv”) holds 20.0% interest in CCM logistics, Nature Worldwide Resources Ltd. holds
40% interest in DCON DigiPay Limited (“DCON Digipay”).
Loss from Continuing Operations
Loss from continuing operations increased by
$42.53 million from $10.95 million in 2019 to $53.48 million in 2020 as the result a decrease in revenue and an increase in bad
debt and Impairment Loss.
Loss per Share
Basic and diluted loss per share from continuing
operations were $1.41 and $1.41 in fiscal 2020, as compared to $0.35 and $0.35 in fiscal 2019, respectively. Basic and diluted income
per share attributable to discontinued operations was $3.75 and $3.32 for fiscal year 2019 as compared to $0.45 and $0.45 for fiscal year
2019, respectively.
Liquidity and Capital Resources
As of December 31, 2020, we had cash and cash equivalents
of $9.79 million, an increase of $9.6 million, from $0.19 million as of December 31, 2019. The increase in cash, cash equivalents and
restricted cash was mainly due to financing from the issuance of shares of common stock and issuance of debt instruments.
Our working capital has historically been generated
from our operating cash flows, advances from our customers and loans from bank facilities. Our working capital was positive $10.34 million
as of December 31, 2020, an increase of $113.21 million from negative $102.87 million as of December 31, 2019, mainly due to a decrease
in current liabilities.
In 2020, net cash generated in our operating activities
was $3.98 million compared to net cash used in operating activities of $26.32.84 million in 2019. The decrease in net cash used in our
operating activities was primarily due to a decrease in gain on sale of discontinued operations in the fiscal year 2020 as compared
to the fiscal year 2019. In additions, as the fruit juice business is causing cash loss, the business was transferred in operation in beginning
of 2020 also reflected positive in the operating cash.
In 2020, net cash used in our investing activities
was $7.36 million compared to net cash used in operating activities of $0.05 million in 2019. The increase in net cash used in our investing
activities was primarily due to an increase in short-term loan investment and intangible assets in the fiscal year 2020 as compared to
the fiscal year 2019.
In 2020, cash provided by financing activities was
$16.71 million as compared to cash used in financing activities $0.63 million in 2019. In 2020, we issued shares of common stock, promissory
note and impairment of long-term investment.
Off-Balance Sheet Arrangements
As of December 31, 2020, we
did not have any off-balance sheet arrangements.
ITEM 7A – QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8 – FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The information called for by
this item is included in the Company’s consolidated financial statements beginning on page F-1 of this Annual Report on Form
10-K.
ITEM 9 – CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A – CONTROLS
AND PROCEDURES
Evaluation of Disclosure
Controls and Procedures
Our management, with the
participation of our CEO and CFO, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as
defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act, as of December 31, 2020
The term “disclosure
controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) means controls and other procedures of the Company that
are designed to ensure that information required to be disclosed by a company in reports, such as this report, that it files or
submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules
and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated
to the company’s management, including its principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment
in evaluating the cost-benefit relationship of possible controls and procedures.
Based on that evaluation, our
CEO and CFO concluded that our disclosure controls and procedures were not effective as of December 31, 2020, due to a material
weakness in our internal control over financial reporting. Specifically, we currently lack sufficient accounting personnel with
the appropriate level of knowledge, experience and training in U.S. GAAP and SEC reporting requirements.
Management’s Report
on Internal Controls Over Financial Reporting
Our management is responsible
for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting
is designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of our consolidated
financial statements in accordance with U.S. GAAP. Our accounting policies and internal controls over financial reporting, established
and maintained by management, are under the general oversight of the Board’s audit committee.
Our internal control over financial
reporting includes those policies and procedures that:
Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree or compliance with the policies or procedures may deteriorate.
Management assessed our
internal control over financial reporting as of December 31, 2020.
The standard measures adopted
by management in making its evaluation are the measures in the Internal-Control Integrated Framework published by the Committee
of Sponsoring Organizations of the Treadway Commission.
Based on management’s
assessment using the COSO criteria, our CEO and CFO concluded that our internal control over financial reporting as of December
31, 2020 was ineffective. We have taken, and are taking, certain actions to remediate the material weakness related to our
lack of U.S. GAAP experience. We engaged consultants with U.S. GAAP knowledge and experience to supplement our current internal
accounting personnel and assist us in the preparation of our financial statements to ensure that our financial statements are prepared
in accordance with U.S. GAAP in 2020 and we also hired a new CFO who has more SEC reporting experience.
The Company continues to
make efforts to implementing our existing and newly adopted procedures to improve our disclosure controls and internal controls
over financing reporting.
Changes to Internal Control
over Financial Reporting
Other than discussed above, there has been
no change to our internal control over financial reporting that occurred during the period covered by this annual report on Form
10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B – OTHER INFORMATION
None
PART III
ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Directors and Executive Officers
The following table sets forth as of April 15, 2021,
the names, positions and ages of our current executive officers and directors. Our directors serve until the next annual meeting of shareholders
or until their successors are elected and qualified. Our officers are elected by the Board and their terms of office are, except to the
extent governed by an employment contract, at the discretion of the Board.
Name of Current Director and/or Executive Officer Age Position(s)
Yongke Xue (1) 53 Chairman of the Board of Directors
Shanchun Huang (2) 55 Chief Executive Officer (“CEO”) and Director
Ming Yi (3) 40 Chief Financial Officer (“CFO”)
Yang Liu (4) 41 Chief Operating Officer (“COO”)
Johnson Lau (5)(6) 47 Independent Director
Fuyou Li (5)(7) 67 Independent Director
Mingjie Zhao (5)(8) 55 Independent Director
(3) Ming Yi was appointed as CFO on November 30, 2020.
(5) Member of the audit committee and compensation committee.
Yongke Xue, Chairman of Board of Directors
Mr. Yongke Xue served as our CEO from January
31, 2018 to March 4, 2020. Mr. Xue also served in that position from February 26, 2008 to February 18, 2013, and from December
24, 2014 to September 2, 2016. Mr. Yongke Xue currently serves as the Chairman of the Board. Mr. Yongke Xue has served as the director
of SkyPeople (China) from December 2005 to February 2020. Mr. Xue served as the general manager of Hede from December 2005 to June
2007. Prior to that, he served as the business director of the investment banking division of Hualong Securities Co., Ltd. from
April 2001 to December 2005. He also acted as the vice general manager of Shaanxi Huaye Foods Co., Ltd. from July 1998 to March
2001. Mr. Xue graduated from Xi’an Jiaotong University with an MBA in 2000. Mr. Xue graduated with a Bachelor’s degree
in Metal Material & Heat Treatment from National University of Defense Technology in July 1989. The Board believes that Mr.
Xue’s vision, leadership and extensive knowledge of the Company is essential to the development of its strategic vision.
Shanchun Huang, Chief Executive officer and Director of the
Board
Mr. Huang was appointed as our CEO and
director of the Board on March 4, 2020. Mr. Huang served as the president of Wealth Index (Beijing) Fund Management Co., Ltd.,
which provides private equity fund management service, from March 2011 to March 2020, and as the president of Wealth Index (Beijing)
International Investment Consulting Co., Ltd., which provides investment management and consulting services for non-securities
related business, from August 2004 to March 2020. From May 2001 to June 2004, Mr. Huang was the vice president of Zhejiang Geely
Holding Group Corporation, a global automobile company headquartered in Hangzhou, China. Mr. Huang graduated from Hefei Staff University
of Science and Technology in July 1986, majoring in news collection and editing. The Board believes that Mr. Huang’s extensive
business and operational knowledge and expertise qualifies him to serve the CEO of the Company and as a member of the Board.
Ming Yi, Chief Financial Officer
On November 30, 2020, the Board of the
Directors appointed Mr. Ming Yi as the CFO of the Company.
Mr. Yi has served as an independent director
of Hudson Capital Inc. (Nasdaq: HUSN) since March 31, 2020. Mr. Yi was the CFO of SSLJ.com Limited from July 2018 to July
2019. From June 2011 to August 2018, Mr. Yi was the CFO and a board member of Wave Sync Corp. (formerly known as China Bio-Energy
Corp). From September 2009 to April 2011, he served as a senior manager at Qi He Certified Public Accountants Co. Ltd. Form July
2007 to August 2010, Mr. Yi was a senior auditor at Ernst & Young. Mr. Yi received his Bachelor of Science degree in Accounting
from School of Business Administrations of Liaoning University in 2004 and his Master of Science degree in Accounting and Finance
from Victory University, Australia in 2006. Mr. Yi is a Certified Public Accountant in Australia. The Board believes that Mr. Yi’s
significant accounting and public company experience will be important to the Company and the Board.
Yang Liu, Chief Operating Officer
On November 16, 2020, the board of directors
appointed Mr. Yang Liu as the COO of the Company.
Mr. Liu served as Chairman and CEO of Color
Star Technology Co. Ltd. (Nasdaq: HHT) from March 2019 to July 2020. Mr. Liu served as President of MagniFinTech from May 2017
to March 2019 and served as CEO of Wave Sync Corporation from July 2017 to August 2018. Mr. Liu served as the Murex Regional Manager
at UBS from November 2015 to May 2017. From June 2008 to November 2015, Mr. Liu served as a Senior Consultant, Client Coordinator
and Single-point of Contact at Murex North America. Mr. Liu holds a Bachelor of Science degree in Electric Engineering from Tsinghua
University in China and two Master’s degrees in Financial Mathematics and Electrical Engineering from New Mexico State University.
Mr. Liu’s significant financial, operational and management expertise qualifies him to serve as the COO of the Company.
Johnson Lau,
Director
On December 23, 2014, the Board appointed
Johnson Lau as a member of the Board of Directors of the Company and he also serves as the Chairman of Audit committee and a member
of the Compensation Committee of the Board.
Mr. Lau is the CFO of Precious Fresh Limited,
a private company since November 2019. Mr. Lau is a Certified Public Accountant of the Hong Kong Institute of Certified Public
Accountants and CPA Australia. Mr. Lau has over 20 years of experience in the accounting profession. Mr. Lau started his career
in Deloitte in Hong Kong and Beijing from 1997 to 2004. Prior to joining Precious Fresh Limited in 2019, Mr. Lau worked in various
public companies in the United States, England and Hong Kong as director of finance and CFO for over ten years. He holds a bachelor
degree in commerce from Monash University, Australia. The Board believes that Mr. Lau’s extensive knowledge and experience
in accounting and his public company experience is important to the Company’s internal controls and financial reporting and
its status as a US traded public company. During the period between 2004 and 2019, Mr. Lau worked in various public companies listed
in the United States, England and Hong Kong as director of finance and CFO. Mr. Lau was the CFO and was subsequently an executive
director of Haike Chemical Group Limited, a company listed on the London Stock Exchange (LSE: HAIK.L), from December 2006 to March
2009. Mr. Lau subsequently resigned as CFO and was redesignated as a non-executive director of Haike Chemical Group Limited in
March 2009. He retired as a non-executive director in January 2010. From April 2009, Mr. Lau was employed by AutoChina International
Limited, a company listed on the NASDAQ Capital Market and subsequently quoted on the OTC Bulletin Board (Nasdaq/OTC: AUTCF) as
CFO. He was redesignated as the director of finance in July 2009 and subsequently departed in June 2013. From June 2010 to January
2013, Mr. Lau was an independent director of Lizhan Environmental Corporation (Nasdaq: LZEN). Mr. Lau was the CFO of SGOCO Group,
Ltd. (Nasdaq: SGOC), from July 2013 to June 2015. Mr. Lau was the CFO of China Golden Classic Group Limited (HKEX: 8281.HK) from
July 2015 to July 2018. Mr. Lau was the CFO of Dafy Holdings Limited. (HKEX: 1826.HK) from August 2018 to October 2019. He was
an independent non-executive director of Winshine Science Company Limited (HKEX: 209.HK) from October 2017 to April 2019. The Board
believes that Mr. Lau’s qualifications and strong experience stated above is sufficient and helpful to our Company’s
future development and serve as a member of the Board.
Fuyou Li, Director
On May 8, 2015, the Company’s Board
of Directors appointed Mr. Fuyou Li as a member of the Company’s Board of Directors and a member of Compensation Committee
and Audit Committee of the Board. The Board of Directors also appointed Mr. Li as a member of both the audit and compensation committees
of the Board. Mr. Li graduated from Xi’an Jiaotong University with a doctor’s degree in economics. He has taught international
finance as a professor at Xi’an Jiaotong University since 2000. The Board believes his professional background and expertise
in international finance qualifies him to serve as a member of the Board.
Mingjie Zhao, Director
On July 15, 2020, the Board appointed Mr.
Mingjie Zhao as a member of the Board and Chairman of the Compensation Committee and a member of Audit Committee of the Board.
Mr. Zhao has served as a director of New York Hua Yang, Inc. since April 2018. From July 2016 to March 2018, Mr. Zhao served as
CEO of TD Holdings, Inc. (formerly known as China Commercial Credit Inc. and Nasdaq: CLG). Mr. Zhao was the COO and a director
of New York Hua Yang, Inc. from September 2011 to July 2016. Mr. Zhao obtained his Master of Business Administration degree from
University of Bridgeport in Connecticut in May 2003 and his Bachelor of Science degree from China Eastern Normal University in
Shanghai, China in July 1985. The Board believes that Mr. Zhao’s extensive business expertise and public companies experience qualify
him to serve as a member of the Board.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section 16(a) of the Exchange Act requires
that directors, certain officers of the Company and ten percent shareholders file reports of ownership and changes in ownership
with the Commission as to the Company’s securities beneficially owned by them. Such persons are also required by SEC rules
to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on its review of copies of
such forms received by the Company, or on written representations from certain reporting persons, the Company believes that, all